-----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, Tab5+YYc9n+V6Wcv4iPkynRUJldQ2TEEIke8TEt/jhRU/wFnaG1wiDAaoGRLthNz F2iftr+mB2LIGIb+8Y/I8Q== 0001104659-04-022328.txt : 20040804 0001104659-04-022328.hdr.sgml : 20040804 20040804172810 ACCESSION NUMBER: 0001104659-04-022328 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040804 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: 04952542 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: 04952539 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: 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: 04952540 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 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: 04952541 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 10-Q 1 a04-8694_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 June 30, 2004

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 each registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

Cinergy Corp.

 

Yes ý

 

No o

 

The Cincinnati Gas & Electric Company

 

Yes o

 

No ý

 

PSI Energy, Inc.

 

Yes o

 

No ý

 

The Union Light, Heat and Power Company

 

Yes o

 

No ý

 

 


 

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 July 31, 2004, shares of common stock outstanding for each registrant were as listed:

 

Registrant

 

Description

 

Shares

 

 

 

 

 

Cinergy Corp.

 

Par value $.01 per share

 

180,577,342

 

 

 

 

 

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

 


 

 



 

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

 

 

 

 

2004 Quarterly Results of Operations - Historical

 

 

 

 

2004 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

 

 

 

 

 

 

 

2

 

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

6

 

Exhibits and Reports on Form 8-K

 

 

 

 

 

 

 

 

 

Signatures

 

 

 

2



 

CINERGY CORP.

AND SUBSIDIARY COMPANIES

 

3



 

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Quarter Ended
June 30

 

Year to Date
June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(in thousands, except per share amounts)

 

 

 

(unaudited)

 

Operating Revenues

 

 

 

 

 

 

 

 

 

Electric

 

$892,266

 

$769,258

 

$1,770,394

 

$1,592,316

 

Gas

 

108,082

 

114,932

 

458,928

 

513,845

 

Other

 

53,389

 

49,733

 

113,073

 

95,719

 

Total Operating Revenues

 

1,053,737

 

933,923

 

2,342,395

 

2,201,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel and purchased power

 

293,719

 

240,470

 

580,633

 

510,335

 

Gas purchased

 

47,420

 

53,319

 

270,936

 

289,314

 

Operation and maintenance

 

396,457

 

334,073

 

771,731

 

662,127

 

Depreciation

 

114,331

 

101,018

 

219,188

 

201,623

 

Taxes other than income taxes

 

65,072

 

66,958

 

147,319

 

144,707

 

Total Operating Expenses

 

916,999

 

795,838

 

1,989,807

 

1,808,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

136,738

 

138,085

 

352,588

 

393,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in Earnings of Unconsolidated Subsidiaries

 

7,331

 

6,104

 

10,079

 

6,696

 

Miscellaneous Income (Expense) – Net

 

5,033

 

7,767

 

(10,475

)

15,382

 

Interest Expense

 

70,276

 

60,537

 

137,671

 

119,829

 

Preferred Dividend Requirement of Subsidiary Trust

 

 

5,970

 

 

11,940

 

Preferred Dividend Requirements of Subsidiaries

 

858

 

858

 

1,716

 

1,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Taxes

 

77,968

 

84,591

 

212,805

 

282,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

19,464

 

8,983

 

51,286

 

66,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

58,504

 

75,608

 

161,519

 

215,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

 

9,045

 

 

8,875

 

Cumulative effect of changes in accounting principles, net of tax (Note 1(c)(ii))

 

 

 

 

26,462

 

Net Income

 

$58,504

 

$84,653

 

$161,519

 

$250,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Shares Outstanding

 

180,236

 

176,645

 

179,749

 

175,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share – Basic (Note 10)

 

 

 

 

 

 

 

 

 

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

 

$0.33

 

$0.42

 

$0.90

 

$1.23

 

Discontinued operations, net of tax

 

 

0.05

 

 

0.05

 

Cumulative effect of changes in accounting principles, net of tax

 

 

 

 

0.15

 

Net income

 

$0.33

 

$0.47

 

$0.90

 

$1.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share – Assuming Dilution (Note 10)

 

 

 

 

 

 

 

 

 

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

 

$0.32

 

$0.42

 

$0.89

 

$1.22

 

Discontinued operations, net of tax

 

 

0.05

 

 

0.05

 

Cumulative effect of changes in accounting principles, net of tax

 

 

 

 

0.15

 

Net income

 

$0.32

 

$0.47

 

$0.89

 

$1.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$0.47

 

$0.46

 

$0.94

 

$0.92

 

 

 

 

 

 

 

 

 

 

 

 

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

 

4



 

CINERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

 

 

June 30
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

173,818

 

$

169,120

 

Restricted deposits

 

88,498

 

92,813

 

Notes receivable, current

 

125,177

 

189,854

 

Accounts receivable less accumulated provision for doubtful accounts of $7,506 at June 30, 2004, and $7,884 at December 31, 2003

 

719,700

 

1,074,518

 

Fuel, emission allowances, and supplies

 

401,310

 

357,625

 

Energy risk management current assets

 

425,196

 

305,058

 

Prepayments and other

 

84,578

 

53,609

 

Total Current Assets

 

2,018,277

 

2,242,597

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, Plant, and Equipment – at Cost

 

 

 

 

 

Utility plant in service

 

9,986,311

 

9,732,123

 

Construction work in progress

 

244,831

 

275,459

 

Total Utility Plant

 

10,231,142

 

10,007,582

 

Non-regulated property, plant, and equipment

 

4,587,951

 

4,527,943

 

Accumulated depreciation

 

5,069,030

 

4,908,019

 

Net Property, Plant, and Equipment

 

9,750,063

 

9,627,506

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

1,001,148

 

1,012,151

 

Investments in unconsolidated subsidiaries

 

509,453

 

494,520

 

Energy risk management non-current assets

 

137,944

 

97,334

 

Notes receivable, non-current

 

204,053

 

213,853

 

Other investments

 

140,514

 

184,044

 

Goodwill and other intangible assets

 

61,463

 

45,349

 

Other

 

167,854

 

197,351

 

Total Other Assets

 

2,222,429

 

2,244,602

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets of Discontinued Operations

 

 

4,501

 

 

 

 

 

 

 

Total Assets

 

$

13,990,769

 

$

14,119,206

 

 

 

 

 

 

 

 

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

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

June 30
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

1,026,920

 

$

1,240,423

 

Accrued taxes

 

174,120

 

217,993

 

Accrued interest

 

67,892

 

68,952

 

Notes payable and other short-term obligations (Note 4)

 

496,337

 

351,412

 

Long-term debt due within one year

 

670,764

 

839,103

 

Energy risk management current liabilities

 

384,024

 

296,122

 

Other

 

110,822

 

107,438

 

Total Current Liabilities

 

2,930,879

 

3,121,443

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt (Note 3)

 

3,986,191

 

4,131,909

 

Deferred income taxes

 

1,609,726

 

1,557,981

 

Unamortized investment tax credits

 

104,357

 

108,884

 

Accrued pension and other postretirement benefit costs

 

698,260

 

662,834

 

Accrued cost of removal

 

510,555

 

490,856

 

Energy risk management non-current liabilities

 

114,038

 

64,861

 

Other

 

223,944

 

205,344

 

Total Non-Current Liabilities

 

7,247,071

 

7,222,669

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities of Discontinued Operations

 

 

11,594

 

 

 

 

 

 

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

10,177,950

 

10,355,706

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Preferred Stock of Subsidiaries

 

 

 

 

 

Not subject to mandatory redemption

 

62,818

 

62,818

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Equity (Note 2)

 

 

 

 

 

Common stock - $.01 par value; authorized shares – 600,000,000; issued shares – 180,446,792 at June 30, 2004, and 178,438,369 at December 31, 2003; outstanding shares – 180,323,246 at June 30, 2004, and 178,336,854 at December 31, 2003

 

1,804

 

1,784

 

Paid-in capital

 

2,248,084

 

2,195,985

 

Retained earnings

 

1,543,883

 

1,551,003

 

Treasury shares at cost – 123,546 shares at June 30, 2004, and 101,515 shares at December 31, 2003

 

(3,966

)

(3,255

)

Accumulated other comprehensive loss

 

(39,804

)

(44,835

)

Total Common Stock Equity

 

3,750,001

 

3,700,682

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

13,990,769

 

$

14,119,206

 

 

 

 

 

 

 

 

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

 

6



 

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

 

 

 

Common
Stock

 

Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Common
Stock
Equity

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2004 (179,544,917 shares)

 

$

1,797

 

$

2,220,748

 

$

1,569,995

 

$

(3,862

)

$

(43,369

)

$

3,745,309

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

58,504

 

 

 

 

 

58,504

 

Other comprehensive income (loss), net of tax effect of $(2,176)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

446

 

446

 

Unrealized loss on investment trusts

 

 

 

 

 

 

 

 

 

(259

)

(259

)

Cash flow hedges

 

 

 

 

 

 

 

 

 

3,378

 

3,378

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

62,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock – net (781,507 shares)

 

7

 

25,129

 

 

 

 

 

 

 

25,136

 

Treasury shares purchased (3,178 shares)

 

 

 

 

 

 

 

(104

)

 

 

(104

)

Dividends on common stock ($0.47 per share)

 

 

 

 

 

(84,558

)

 

 

 

 

(84,558

)

Other

 

 

 

2,207

 

(58

)

 

 

 

 

2,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at June 30, 2004 (180,323,246 shares)

 

$

1,804

 

$

2,248,084

 

$

1,543,883

 

$

(3,966

)

$

(39,804

)

$

3,750,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2003 (175,876,919 shares)

 

$

1,759

 

$

2,116,222

 

$

1,491,861

 

$

 

$

(29,013

)

$

3,580,829

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

84,653

 

 

 

 

 

84,653

 

Other comprehensive income (loss), net of tax effect of $(2,284)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

3,963

 

3,963

 

Unrealized gain on investment trusts

 

 

 

 

 

 

 

 

 

3,370

 

3,370

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

(2,743

)

(2,743

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

89,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock – net (1,070,199 shares)

 

10

 

25,459

 

 

 

 

 

 

25,469

 

Dividends on common stock ($0.46 per share)

 

 

 

 

 

(80,992

)

 

 

 

 

(80,992

)

Other

 

 

 

(5,713

)

(20

)

 

 

 

 

(5,733

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at June 30, 2003 (176,947,118 shares)

 

$

1,769

 

$

2,135,968

 

$

1,495,502

 

$

 

$

(24,423

)

$

3,608,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

(Continued)

 

 

 

Common
Stock

 

Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Common
Stock
Equity

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2004 (178,336,854 shares)

 

$

1,784

 

$

2,195,985

 

$

1,551,003

 

$

(3,255

)

$

(44,835

)

$

3,700,682

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

161,519

 

 

 

 

 

161,519

 

Other comprehensive income, net of tax effect of $(3,090)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

1,432

 

1,432

 

Unrealized gain on investment trusts

 

 

 

 

 

 

 

 

 

496

 

496

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

3,103

 

3,103

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

166,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock – net (2,008,423 shares)

 

20

 

46,211

 

 

 

 

 

 

 

46,231

 

Treasury shares purchased (22,031 shares)

 

 

 

 

 

 

 

(711

)

 

 

(711

)

Dividends on common stock ($0.94 per share)

 

 

 

 

 

(168,545

)

 

 

 

 

(168,545

)

Other

 

 

 

5,888

 

(94

)

 

 

 

 

5,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at June 30, 2004 (180,323,246 shares)

 

$

1,804

 

$

2,248,084

 

$

1,543,883

 

$

(3,966

)

$

(39,804

)

$

3,750,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date June 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

 

 

 

 

 

250,738

 

 

 

 

 

250,738

 

Other comprehensive income (loss), net of tax effect of $(2,558)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

6,054

 

6,054

 

Unrealized gain on investment trusts

 

 

 

 

 

 

 

 

 

2,518

 

2,518

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

(3,195

)

(3,195

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

256,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock – net (8,284,003 shares)

 

82

 

219,355

 

 

 

 

 

 

219,437

 

Dividends on common stock ($0.92 per share)

 

 

 

 

 

(158,677

)

 

 

 

 

(158,677

)

Other

 

 

 

(1,523

)

(12

)

 

 

 

 

(1,535

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at June 30, 2003 (176,947,118 shares)

 

$

1,769

 

$

2,135,968

 

$

1,495,502

 

$

 

$

(24,423

)

$

3,608,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 CASH FLOWS

 

 

 

Year to Date June 30

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

Cash Flows from Continuing Operations

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

161,519

 

$

250,738

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

219,188

 

201,623

 

Income of discontinued operations, net of tax

 

 

(8,875

)

Loss on impairment or disposal of investments

 

29,362

 

 

Cumulative effect of changes in accounting principles, net of tax

 

 

(26,462

)

Change in net position of energy risk management activities

 

(23,669

)

12,421

 

Deferred income taxes and investment tax credits - net

 

41,938

 

24,315

 

Equity in earnings of unconsolidated subsidiaries

 

(10,079

)

(6,696

)

Allowance for equity funds used during construction

 

(976

)

(6,191

)

Regulatory assets deferrals

 

(36,205

)

(32,571

)

Regulatory assets amortization

 

48,302

 

52,000

 

Accrued pension and other postretirement benefit costs

 

35,426

 

34,755

 

Deferred costs under gas cost recovery mechanism

 

21,311

 

(36,422

)

Cost of removal

 

(9,118

)

(7,098

)

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

(5,918

)

(517

)

Accounts and notes receivable

 

420,693

 

169,107

 

Fuel, emission allowances, and supplies

 

(44,545

)

(4,414

)

Prepayments

 

(31,762

)

(17,642

)

Accounts payable

 

(213,787

)

(209,005

)

Accrued taxes and interest

 

(44,933

)

(59,226

)

Other assets

 

10,828

 

(4,735

)

Other liabilities

 

28,788

 

57,715

 

Net cash provided by operating activities

 

596,363

 

382,820

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt

 

137,832

 

(258,714

)

Issuance of long-term debt

 

 

291,198

 

Redemption of long-term debt

 

(319,511

)

(127,896

)

Issuance of common stock

 

46,231

 

219,437

 

Dividends on common stock

 

(168,545

)

(158,677

)

Net cash used in financing activities

 

(303,993

)

(34,652

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

(309,699

)

(327,424

)

Proceeds from notes receivable

 

8,559

 

 

Acquisitions and other investments

 

(11,350

)

(23,092

)

Proceeds from disposition of subsidiaries and investments

 

14,405

 

51,252

 

Withdrawal of restricted cash held on deposit

 

10,413

 

 

Net cash used in investing activities

 

(287,672

)

(299,264

)

 

 

 

 

 

 

Net increase in cash and cash equivalents from continuing operations

 

4,698

 

48,904

 

Cash and cash equivalents from continuing operations at beginning of period

 

169,120

 

200,112

 

Cash and cash equivalents from continuing operations at end of period

 

$

173,818

 

$

249,016

 

 

 

 

 

 

 

Cash Flows from Discontinued Operations

 

 

 

 

 

Operating activities

 

$

(7,093

)

$

(7,108

)

Financing activities

 

7,093

 

(13,863

)

Investing activities

 

 

 

Net decrease in cash and cash equivalents from discontinued operations

 

 

(20,971

)

Cash and cash equivalents from discontinued operations at beginning of period

 

 

20,971

 

Cash and cash equivalents from discontinued operations at end of period

 

$

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

139,868

 

$

117,496

 

Income taxes

 

$

32,123

 

$

96,696

 

 

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

 

9



 

THE CINCINNATI GAS & ELECTRIC COMPANY

AND SUBSIDIARY COMPANIES

 

10



 

THE CINCINNATI GAS & ELECTRIC COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

 

 

Quarter Ended
June 30

 

Year to Date
June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

 

 

Electric

 

$

455,276

 

$

397,455

 

$

892,883

 

$

826,019

 

Gas

 

90,651

 

85,311

 

418,303

 

360,587

 

Total Operating Revenues

 

545,927

 

482,766

 

1,311,186

 

1,186,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel and purchased power

 

137,999

 

106,267

 

270,791

 

236,821

 

Gas purchased

 

47,418

 

48,086

 

270,935

 

219,851

 

Operation and maintenance

 

159,284

 

125,932

 

315,659

 

260,690

 

Depreciation

 

45,477

 

50,313

 

89,863

 

99,577

 

Taxes other than income taxes

 

49,305

 

49,739

 

113,500

 

110,257

 

Total Operating Expenses

 

439,483

 

380,337

 

1,060,748

 

927,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

106,444

 

102,429

 

250,438

 

259,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous Income – Net

 

3,189

 

6,899

 

6,043

 

13,483

 

Interest Expense

 

22,415

 

29,424

 

44,851

 

55,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Taxes

 

87,218

 

79,904

 

211,630

 

217,626

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

31,909

 

28,985

 

78,866

 

80,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Cumulative Effect of Changes in Accounting Principles

 

55,309

 

50,919

 

132,764

 

137,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of changes in accounting principles, net of tax (Note 1(c)(ii))

 

 

 

 

30,938

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

55,309

 

$

50,919

 

$

132,764

 

$

168,155

 

 

 

 

 

 

 

 

 

 

 

Preferred Dividend Requirement

 

212

 

212

 

423

 

423

 

 

 

 

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

$

55,097

 

$

50,707

 

$

132,341

 

$

167,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

55,309

 

$

50,919

 

$

132,764

 

$

168,155

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax

 

3,207

 

(2,721

)

2,883

 

(3,027

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

$

58,516

 

$

48,198

 

$

135,647

 

$

165,128

 

 

 

 

 

 

 

 

 

 

 

 

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

 

11



 

THE CINCINNATI GAS & ELECTRIC COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

 

 

June 30
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

8,850

 

$

15,842

 

Restricted deposits

 

137

 

137

 

Notes receivable from affiliated companies

 

55,464

 

110,149

 

Accounts receivable less accumulated provision for doubtful accounts of $1,273 at June 30, 2004, and $1,602 at December 31, 2003

 

99,558

 

107,733

 

Accounts receivable from affiliated companies

 

29,789

 

58,406

 

Fuel, emission allowances, and supplies

 

166,053

 

135,948

 

Energy risk management current assets

 

155,876

 

72,830

 

Prepayments and other

 

22,490

 

15,049

 

Total Current Assets

 

538,217

 

516,094

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, Plant, and Equipment – at Cost

 

 

 

 

 

Utility plant in service

 

 

 

 

 

Electric

 

2,215,001

 

2,155,457

 

Gas

 

1,146,542

 

1,104,797

 

Common

 

290,750

 

288,394

 

Total Utility Plant In Service

 

3,652,293

 

3,548,648

 

Construction work in progress

 

61,522

 

71,947

 

Total Utility Plant

 

3,713,815

 

3,620,595

 

Non-regulated property, plant, and equipment

 

3,613,834

 

3,576,187

 

Accumulated depreciation

 

2,688,118

 

2,625,568

 

Net Property, Plant, and Equipment

 

4,639,531

 

4,571,214

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

579,652

 

594,764

 

Energy risk management non-current assets

 

58,338

 

36,583

 

Other

 

75,168

 

90,824

 

Total Other Assets

 

713,158

 

722,171

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

5,890,906

 

$

5,809,479

 

 

 

 

 

 

 

 

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

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

June 30
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

252,591

 

$

217,652

 

Accounts payable to affiliated companies

 

46,355

 

136,470

 

Accrued taxes

 

171,743

 

146,216

 

Accrued interest

 

19,039

 

21,572

 

Notes payable and other short-term obligations (Note 4)

 

112,100

 

112,100

 

Notes payable to affiliated companies (Note 4)

 

126,768

 

49,126

 

Long-term debt due within one year

 

150,000

 

110,000

 

Energy risk management current liabilities

 

133,900

 

77,791

 

Other

 

35,568

 

32,319

 

Total Current Liabilities

 

1,048,064

 

903,246

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt (Note 3)

 

1,309,432

 

1,458,807

 

Deferred income taxes

 

1,007,697

 

985,481

 

Unamortized investment tax credits

 

76,216

 

79,186

 

Accrued pension and other postretirement benefit costs

 

226,031

 

219,393

 

Accrued cost of removal

 

160,654

 

155,336

 

Energy risk management non-current liabilities

 

37,077

 

11,665

 

Other

 

74,371

 

69,687

 

Total Non-Current Liabilities

 

2,891,478

 

2,979,555

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

3,939,542

 

3,882,801

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2004 and December 31, 2003

 

762,136

 

762,136

 

Paid-in capital

 

586,528

 

586,528

 

Retained earnings

 

611,796

 

589,993

 

Accumulated other comprehensive loss

 

(29,581

)

(32,464

)

Total Common Stock Equity

 

1,930,879

 

1,906,193

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

5,890,906

 

$

5,809,479

 

 

 

 

 

 

 

 

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 STATEMENTS OF CASH FLOWS

 

 

 

Year to Date
June 30

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

132,764

 

$

168,155

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

89,863

 

99,577

 

Deferred income taxes and investment tax credits – net

 

16,294

 

12,144

 

Cumulative effect of changes in accounting principles, net of tax

 

 

(30,938

)

Change in net position of energy risk management activities

 

(23,280

)

1,161

 

Allowance for equity funds used during construction

 

(719

)

(1,841

)

Regulatory assets deferrals

 

(13,753

)

(12,725

)

Regulatory assets amortization

 

27,022

 

19,654

 

Accrued pension and other postretirement benefit costs

 

6,638

 

6,876

 

Deferred costs under gas cost recovery mechanism

 

21,311

 

(36,422

)

Cost of removal

 

(3,774

)

 

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

 

34

 

Accounts and notes receivable

 

88,007

 

131,511

 

Fuel, emission allowances, and supplies

 

(30,965

)

(7,714

)

Prepayments

 

(7,544

)

(7,962

)

Accounts payable

 

(55,176

)

(138,911

)

Accrued taxes and interest

 

22,994

 

9,926

 

Other assets

 

1,858

 

6,930

 

Other liabilities

 

10,081

 

(5,635

)

 

 

 

 

 

 

Net cash provided by operating activities

 

281,621

 

213,820

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

81,112

 

(90,887

)

Issuance of long-term debt

 

 

256,198

 

Redemption of long-term debt

 

(110,000

)

(100,000

)

Dividends on preferred stock

 

(423

)

(423

)

Dividends on common stock

 

(110,538

)

(110,182

)

 

 

 

 

 

 

Net cash used in financing activities

 

(139,849

)

(45,294

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

(148,762

)

(150,672

)

Other investments

 

(2

)

2

 

 

 

 

 

 

 

Net cash used in investing activities

 

(148,764

)

(150,670

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(6,992

)

17,856

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

15,842

 

45,336

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

8,850

 

$

63,192

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

45,345

 

$

30,010

 

Income taxes

 

$

11,264

 

$

37,155

 

 

 

 

 

 

 

 

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

 

14



 

PSI ENERGY, INC.

AND SUBSIDIARY COMPANY

 

15



 

PSI ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

 

 

Quarter Ended
June 30

 

Year to Date
June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

 

 

Electric

 

$

414,444

 

$

361,385

 

$

830,723

 

$

773,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel and purchased power

 

139,600

 

121,998

 

276,396

 

288,870

 

Operation and maintenance

 

138,291

 

127,020

 

265,202

 

242,298

 

Depreciation

 

55,059

 

40,735

 

103,890

 

80,416

 

Taxes other than income taxes

 

14,121

 

16,150

 

30,533

 

32,032

 

Total Operating Expenses

 

347,071

 

305,903

 

676,021

 

643,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

67,373

 

55,482

 

154,702

 

129,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous Income – Net

 

3,017

 

5,411

 

3,564

 

7,569

 

Interest Expense

 

21,701

 

22,174

 

41,625

 

42,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Taxes

 

48,689

 

38,719

 

116,641

 

94,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

23,243

 

15,640

 

50,389

 

37,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Cumulative Effect of a Change in Accounting Principle

 

25,446

 

23,079

 

66,252

 

57,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of a change in accounting principle, net of tax (Note 1(c)(ii))

 

 

 

 

(494

)

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

25,446

 

$

23,079

 

$

66,252

 

$

56,806

 

 

 

 

 

 

 

 

 

 

 

Preferred Dividend Requirement

 

646

 

646

 

1,293

 

1,293

 

 

 

 

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

$

24,800

 

$

22,433

 

$

64,959

 

$

55,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

25,446

 

$

23,079

 

$

66,252

 

$

56,806

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax

 

(118

)

2,954

 

366

 

2,324

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

$

25,328

 

$

26,033

 

$

66,618

 

$

59,130

 

 

 

 

 

 

 

 

 

 

 

 

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

 

16



 

PSI ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

 

 

June 30
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

24,695

 

$

6,565

 

Restricted deposits

 

88,180

 

92,675

 

Notes receivable from affiliated companies

 

51,011

 

65,715

 

Accounts receivable less accumulated provision for doubtful accounts of $408 at June 30, 2004, and $1,110 at December 31, 2003

 

37,966

 

37,194

 

Accounts receivable from affiliated companies

 

7,273

 

459

 

Fuel, emission allowances, and supplies

 

145,529

 

149,392

 

Energy risk management current assets

 

6,714

 

7,959

 

Prepayments and other

 

4,642

 

5,303

 

Total Current Assets

 

366,010

 

365,262

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, Plant, and Equipment – at Cost

 

 

 

 

 

Utility plant in service

 

6,334,018

 

6,183,475

 

Construction work in progress

 

183,309

 

203,512

 

Total Utility Plant

 

6,517,327

 

6,386,987

 

Accumulated depreciation

 

2,211,926

 

2,133,235

 

Net Property, Plant, and Equipment

 

4,305,401

 

4,253,752

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

421,496

 

417,387

 

Energy risk management non-current assets

 

3,348

 

7,061

 

Other investments

 

68,763

 

66,803

 

Other

 

31,552

 

29,372

 

Total Other Assets

 

525,159

 

520,623

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

5,196,570

 

$

5,139,637

 

 

 

 

 

 

 

 

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

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

June 30
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

54,354

 

$

58,286

 

Accounts payable to affiliated companies

 

32,170

 

69,746

 

Accrued taxes

 

63,760

 

69,419

 

Accrued interest

 

29,595

 

26,615

 

Notes payable and other short-term obligations (Note 4)

 

80,500

 

80,500

 

Notes payable to affiliated companies (Note 4)

 

218,783

 

188,446

 

Long-term debt due within one year

 

1,100

 

 

Energy risk management current liabilities

 

15,631

 

14,744

 

Other

 

24,642

 

25,636

 

Total Current Liabilities

 

520,535

 

533,392

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt

 

1,719,673

 

1,720,476

 

Deferred income taxes

 

610,801

 

573,946

 

Unamortized investment tax credits

 

28,141

 

29,698

 

Accrued pension and other postretirement benefit costs

 

203,596

 

193,336

 

Accrued cost of removal

 

349,901

 

335,520

 

Energy risk management non-current liabilities

 

1,664

 

2,796

 

Other

 

79,289

 

74,958

 

Total Non-Current Liabilities

 

2,993,065

 

2,930,730

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

3,513,600

 

3,464,122

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Preferred Stock

 

 

 

 

 

Not subject to mandatory redemption

 

42,333

 

42,333

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Equity

 

 

 

 

 

Common stock – without par value; $.01 stated value; authorized shares – 60,000,000; outstanding shares – 53,913,701 at June 30, 2004, and December 31, 2003

 

539

 

539

 

Paid-in capital

 

627,274

 

627,274

 

Retained earnings

 

1,025,879

 

1,018,790

 

Accumulated other comprehensive loss

 

(13,055

)

(13,421

)

Total Common Stock Equity

 

1,640,637

 

1,633,182

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

5,196,570

 

$

5,139,637

 

 

 

 

 

 

 

 

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 STATEMENTS OF CASH FLOWS

 

 

 

Year to Date
June 30

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

66,252

 

$

56,806

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

103,890

 

80,416

 

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

 

 

494

 

Deferred income taxes and investment tax credits – net

 

35,052

 

(937

)

Change in net position of energy risk management activities

 

4,713

 

635

 

Allowance for equity funds used during construction

 

(257

)

(4,350

)

Regulatory assets deferrals

 

(22,452

)

(19,846

)

Regulatory assets amortization

 

21,280

 

32,346

 

Accrued pension and other postretirement benefit costs

 

10,260

 

7,480

 

Cost of removal

 

(5,344

)

(7,098

)

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

(5,918

)

(551

)

Accounts and notes receivable

 

7,118

 

28,201

 

Fuel, emission allowances, and supplies

 

3,863

 

2,702

 

Prepayments

 

(32

)

(406

)

Accounts payable

 

(41,508

)

(136,320

)

Accrued taxes and interest

 

(2,679

)

491

 

Other assets

 

177

 

(2,353

)

Other liabilities

 

4,080

 

(1,755

)

 

 

 

 

 

 

Net cash provided by operating activities

 

178,495

 

35,955

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

30,337

 

63,523

 

Issuance of long-term debt

 

 

35,000

 

Redemption of long-term debt

 

 

(27,896

)

Contribution from parent

 

 

100,000

 

Dividends on preferred stock

 

(1,293

)

(1,293

)

Dividends on common stock

 

(57,870

)

(48,340

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

(28,826

)

120,994

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

(140,606

)

(156,984

)

Withdrawal of restricted cash held on deposit

 

10,413

 

 

Other investments

 

(1,346

)

(1,066

)

 

 

 

 

 

 

Net cash used in investing activities

 

(131,539

)

(158,050

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

18,130

 

(1,101

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

6,565

 

2,007

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

24,695

 

$

906

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

43,894

 

$

20,465

 

Income taxes

 

$

19,502

 

$

55,919

 

 

 

 

 

 

 

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.

 

19



 

THE UNION LIGHT, HEAT

AND POWER COMPANY

 

20



 

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED STATEMENTS OF INCOME

 

 

 

Quarter Ended
June 30

 

Year to Date
June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

 

 

Electric

 

$

56,732

 

$

51,096

 

$

112,947

 

$

106,025

 

Gas

 

15,985

 

14,383

 

74,124

 

63,767

 

Total Operating Revenues

 

72,717

 

65,479

 

187,071

 

169,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Electricity purchased from parent company for resale

 

39,854

 

37,136

 

79,307

 

76,259

 

Gas purchased

 

7,481

 

9,450

 

48,314

 

40,950

 

Operation and maintenance

 

13,795

 

13,794

 

27,555

 

26,379

 

Depreciation

 

5,027

 

4,583

 

9,952

 

9,028

 

Taxes other than income taxes

 

1,239

 

1,121

 

2,677

 

2,282

 

Total Operating Expenses

 

67,396

 

66,084

 

167,805

 

154,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

5,321

 

(605

)

19,266

 

14,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous Income – Net

 

242

 

901

 

741

 

2,380

 

Interest Expense

 

1,270

 

1,470

 

2,497

 

2,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Taxes

 

4,293

 

(1,174

)

17,510

 

14,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

1,202

 

(679

)

6,531

 

5,391

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

3,091

 

$

(495

)

$

10,979

 

$

8,911

 

 

 

 

 

 

 

 

 

 

 

 

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

 

21



 

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED BALANCE SHEETS

 

ASSETS

 

 

 

June 30
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

6,994

 

$

1,899

 

Notes receivable from affiliated companies

 

9,141

 

17,906

 

Accounts receivable less accumulated provision for doubtful accounts of $286 at June 30, 2004, and $192 at December 31, 2003

 

1,329

 

2,458

 

Accounts receivable from affiliated companies

 

167

 

4,407

 

Fuel and supplies

 

7,794

 

7,936

 

Prepayments and other

 

 

279

 

Total Current Assets

 

25,425

 

34,885

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, Plant, and Equipment – at Cost

 

 

 

 

 

Utility plant in service

 

 

 

 

 

Electric

 

281,475

 

273,895

 

Gas

 

245,423

 

239,670

 

Common

 

53,552

 

53,297

 

Total Utility Plant In Service

 

580,450

 

566,862

 

Construction work in progress

 

7,583

 

6,165

 

Total Utility Plant

 

588,033

 

573,027

 

Accumulated depreciation

 

183,275

 

176,368

 

Net Property, Plant, and Equipment

 

404,758

 

396,659

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

13,072

 

13,224

 

Other

 

776

 

3,903

 

Total Other Assets

 

13,848

 

17,127

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

444,031

 

$

448,671

 

 

 

 

 

 

 

 

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

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

June 30
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

4,441

 

$

13,431

 

Accounts payable to affiliated companies

 

20,914

 

21,131

 

Accrued taxes

 

8,487

 

298

 

Accrued interest

 

1,314

 

1,230

 

Notes payable to affiliated companies (Note 4)

 

29,098

 

45,233

 

Other

 

6,623

 

6,815

 

Total Current Liabilities

 

70,877

 

88,138

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt

 

54,701

 

54,685

 

Deferred income taxes

 

56,009

 

55,488

 

Unamortized investment tax credits

 

2,751

 

2,879

 

Accrued pension and other postretirement benefit costs

 

17,709

 

16,953

 

Accrued cost of removal

 

28,500

 

27,443

 

Other

 

13,149

 

13,729

 

Total Non-Current Liabilities

 

172,819

 

171,177

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

243,696

 

259,315

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Equity

 

 

 

 

 

Common stock – $15.00 par value; authorized shares – 1,000,000; outstanding shares – 585,333 at June 30, 2004, and December 31, 2003

 

8,780

 

8,780

 

Paid-in capital

 

23,541

 

23,541

 

Retained earnings

 

168,503

 

157,524

 

Accumulated other comprehensive income (loss)

 

(489

)

(489

)

Total Common Stock Equity

 

200,335

 

189,356

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholder’s Equity

 

$

444,031

 

$

448,671

 

 

 

 

 

 

 

 

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 STATEMENTS OF CASH FLOWS

 

 

 

Year to Date
June 30

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

10,979

 

$

8,911

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

9,952

 

9,028

 

Deferred income taxes and investment tax credits – net

 

393

 

4,737

 

Allowance for equity funds used during construction

 

9

 

(287

)

Regulatory assets deferrals

 

(555

)

(197

)

Regulatory assets amortization

 

617

 

209

 

Accrued pension and other postretirement benefit costs

 

756

 

593

 

Deferred costs under gas cost recovery mechanism

 

2,925

 

(8,375

)

Cost of removal

 

(852

)

 

Changes in current assets and current liabilities:

 

 

 

 

 

Accounts and notes receivable

 

14,134

 

8,374

 

Fuel and supplies

 

142

 

1,549

 

Prepayments

 

279

 

(242

)

Accounts payable

 

(9,207

)

(7,645

)

Accrued taxes and interest

 

8,273

 

(598

)

Other assets

 

301

 

598

 

Other liabilities

 

(769

)

(630

)

 

 

 

 

 

 

Net cash provided by operating activities

 

37,377

 

16,025

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

(16,135

)

6,876

 

Dividends on common stock

 

 

(6,305

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

(16,135

)

571

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

(16,147

)

(16,587

)

 

 

 

 

 

 

Net cash used in investing activities

 

(16,147

)

(16,587

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

5,095

 

9

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,899

 

3,926

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

6,994

 

$

3,935

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

2,295

 

$

1,437

 

Income taxes

 

$

4

 

$

3,001

 

 

 

 

 

 

 

 

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

 

24



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

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”.  In addition, when discussing Cinergy’s financial information, it necessarily includes the results of The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), The Union Light, Heat and Power Company (ULH&P) and all of Cinergy’s other consolidated subsidiaries.  When discussing CG&E’s financial information, it necessarily includes the results of ULH&P and all of CG&E’s other consolidated subsidiaries.

 

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, 2003 (2003 10-K).  Certain amounts in the 2003 Condensed Financial Statements have been reclassified to conform to the 2004 presentation.

 

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

 

(b)                                  Revenue Recognition

 

(i)           Utility Revenues

 

CG&E, PSI, and ULH&P (collectively, our utility 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 revenues” and is a widely recognized and accepted practice for utilities.  In making our estimates of unbilled revenues, 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.

 

25



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

The amount of unbilled revenues for Cinergy, CG&E, PSI, and ULH&P as of June 30, 2004 and 2003, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2004

 

2003

 

 

 

(in millions)

 

 

 

 

 

 

 

Cinergy

 

$

135

 

$

123

 

CG&E and subsidiaries

 

70

 

64

 

PSI

 

65

 

59

 

ULH&P

 

12

 

10

 

 

 

 

 

 

 

 

(ii)          Energy Marketing and Trading Revenues

 

We market and trade electricity, natural gas, 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.  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.  Generally, trading contracts are reported on a net basis and non-trading contracts are reported on a gross basis.  Net reporting requires presentation of realized and unrealized gains and losses on trading derivatives on a net basis in Operating Revenues.  Gross reporting requires presentation of sales contracts in Operating Revenues and purchase contracts in Fuel and purchased power expense or Gas purchased expense.

 

(c)                                  Accounting Changes

 

(i)           Consolidation of Variable Interest Entities (VIE)

 

In January 2003, the Financial Accounting Standards Board (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) any entity that has equity investors that do not have voting rights, do not absorb first dollar 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 traditional SPEs and to March 31, 2004, for all other entities subject to the scope of Interpretation 46.  We elected to implement Interpretation 46 for traditional SPEs in accordance with the original implementation date of July 1, 2003, and for all other entities, including certain operating joint ventures, as of March 31, 2004.  The consolidation of certain operating joint ventures as of March 31, 2004, did not have a material impact on our financial position or results of operations.

 

Cinergy also holds interests in several joint ventures that are considered VIEs which do not require consolidation.  If all these entities were consolidated, their total assets and liabilities would be immaterial to our Condensed Consolidated Balance Sheets.

 

26



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

(ii)          Cumulative Effect of Changes in Accounting Principles

 

In 2003, Cinergy, CG&E, and PSI recognized 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 of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations and the rescission of EITF Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities as discussed in the 2003 10-K.

 

2.     Common Stock

 

As discussed in the 2003 10-K, Cinergy issues new Cinergy Corp. common stock shares to satisfy obligations under certain of its employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan.  During the six months ended June 30, 2004, Cinergy issued approximately 2.0 million shares under these plans.

 

3.     Long-term Debt

 

In February 2004, CG&E repaid at maturity $110 million of its 6.45% First Mortgage Bonds.

 

In April 2004, Cinergy Corp. repaid at maturity $200 million of its 6.125% Debentures.

 

4.     Notes Payable and Other Short-term Obligations

 

In April 2004, Cinergy Corp. successfully placed two senior unsecured revolving credit facilities with an aggregate borrowing capacity of $1.5 billion, comprised of a $500 million 364-day facility and a $1 billion three-year facility.  These facilities replaced two facilities that were scheduled to expire in April and May of 2004, respectively.

 

At June 30, 2004, Cinergy Corp. had approximately $1.2 billion remaining unused and available capacity relating to its $1.5 billion revolving credit facilities.  These revolving credit facilities include the following:

 

 

 

 

 

 

 

 

 

 

 

Credit Facility

 

Expiration

 

Established
Lines

 

Outstanding
and
Committed

 

Unused and
Available

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

364-day senior revolving

 

April 2005

 

 

 

 

 

 

 

Direct borrowing

 

 

 

$

 

 

$

 

$

 

 

Commercial paper support

 

 

 

 

 

267

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 364-day facility

 

 

 

500

 

267

 

233

 

 

 

 

 

 

 

 

 

 

 

Three-year senior revolving

 

April 2007

 

 

 

 

 

 

 

Direct borrowing

 

 

 

 

 

 

 

 

Commercial paper support

 

 

 

 

 

 

 

 

Letter of credit support

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Total three-year facility

 

 

 

1,000

 

4

 

996

 

 

 

 

 

 

 

 

 

 

 

Total Credit Facilities

 

 

 

$

1,500

 

$

271

 

$

1,229

 

 

 

 

 

 

 

 

 

 

 

 

27



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2004

 

December 31, 2003

 

 

 

Established Lines

 

Outstanding

 

Established Lines

 

Outstanding

 

 

 

(in millions)

 

Cinergy

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

 

 

Revolving lines

 

$

1,500

 

$

 

$

1,000

 

$

 

Uncommitted lines(1)

 

40

 

 

40

 

 

Commercial paper(2)

 

 

 

267

 

 

 

146

 

 

 

 

 

 

 

 

 

 

 

Utility operating companies

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

75

 

 

75

 

 

Pollution control notes

 

 

 

193

 

 

 

193

 

 

 

 

 

 

 

 

 

 

 

Non-regulated subsidiaries

 

 

 

 

 

 

 

 

 

Revolving lines

 

18

 

9

 

19

 

10

 

Short-term debt

 

 

 

2

 

 

 

2

 

Pollution control notes(3)

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy Total

 

 

 

$

496

 

 

 

$

351

 

 

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

15

 

$

 

$

15

 

$

 

Pollution control notes

 

 

 

112

 

 

 

112

 

Money pool

 

 

 

127

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

CG&E Total

 

 

 

$

239

 

 

 

$

161

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

60

 

$

 

$

60

 

$

 

Pollution control notes

 

 

 

81

 

 

 

81

 

Money pool

 

 

 

219

 

 

 

188

 

 

 

 

 

 

 

 

 

 

 

PSI Total

 

 

 

$

300

 

 

 

$

269

 

 

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

 

 

 

 

 

 

Money pool

 

 

 

$

29

 

 

 

$

45

 

 

 

 

 

 

 

 

 

 

 

ULH&P Total

 

 

 

$

29

 

 

 

$

45

 

 

 

(1)

These facilities are not guaranteed sources of capital and represent an informal agreement to lend money, subject to availability, with pricing to be determined at the time of advance.

 

 

(2)

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

 

 

(3)

In May 2004, Cinergy, through a subsidiary, borrowed the proceeds from the issuance by the Gulf Coast Industrial Development Authority of $25 million principal amount of its Gulf Coast Industrial Development Exempt Facilities Industrial Revenue Bonds Series 2004, due April 1, 2039. These bonds bear interest in a weekly interest rate mode. 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.

 

 

 

28



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

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.

 

5.     Energy Trading Credit Risk

 

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy.  Written guidelines approved by Cinergy’s Risk Policy Committee document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are monitored daily by the Corporate Credit Risk function, which is independent of all trading operations.  As of June 30, 2004, approximately 92 percent of the credit exposure, net of credit collateral, 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.  The majority of these investment grade counterparties are externally rated.  If a counterparty has an external rating, the lower of Standard & Poor’s or Moody’s Investors Service is used; otherwise, Cinergy’s internal rating of the counterparty is used.  The remaining eight percent represents $53 million with counterparties rated non-investment grade.

 

As of June 30, 2004, CG&E had a concentration of trading credit exposure of approximately $13 million with one counterparty accounting for greater than 10 percent of CG&E’s total trading credit exposure.  This counterparty is rated investment grade.

 

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.

 

29


NOTES TO CONDENSED FINANCIAL STATEMENTS

 

6.              Commitments and Contingencies

 

(a)                                  Environmental

 

(i)                                  Ozone Transport Rulemakings

 

In October 1998, the United States Environmental Protection Agency (EPA) finalized its ozone transport rule, also known as the Nitrogen Oxide (NOX) State Implementation Plan (SIP) Call, which addresses wind-blown ozone and ozone precursors that impact air quality in downwind states.  The EPA’s final rule, which applies to 22 states in the eastern United States including the three states in which our electric utilities operate, required states to develop rules to reduce NOX emissions from utility and industrial sources.  In a related matter, in response to petitions filed by several states alleging air quality impacts from upwind sources located in other states, the EPA issued a rule pursuant to Section 126 of the Clean Air Act (CAA) that required reductions similar to those required under the NOX SIP Call.  Various states and industry groups challenged the final rules in the Court of Appeals for the District of Columbia Circuit, but the court upheld the key provisions of the rules.

 

The EPA has proposed withdrawal of the Section 126 rule in states with approved rules under the final NOX SIP Call, which includes Indiana, Kentucky, and Ohio.  All three states have adopted a cap and trade program as the mechanism to achieve the required reductions.  In September 2000, Cinergy announced a plan for its subsidiaries, CG&E and PSI, to invest in pollution control and other equipment to reduce NOX emissions.  We have installed selective catalytic reduction units and other pollution controls and implemented certain combustion improvements at various generating stations to meet the May 2004 compliance deadline under the NOX SIP Call.  Cinergy will also utilize the NOX emission allowance market to buy or sell NOX emission allowances as appropriate.  We currently estimate that we will incur costs of approximately $60 million in addition to $735 million already incurred to comply with this program.

 

(ii)                              Section 126 Petitions

 

In March 2004, the state of North Carolina filed a petition under Section 126 of the CAA in which it alleges that sources in 13 upwind states including Ohio, Indiana, and Kentucky, significantly contribute to North Carolina’s non-attainment with certain ambient air quality standards.  Depending on the EPA’s final disposition of the pending petition, Cinergy’s generating stations could become subject to requirements for additional sulfur dioxide and NOX emissions reductions.  It is unclear at this time whether any additional reductions would be necessary beyond those required under the CAA.

 

(iii)                          Clean Air Act Lawsuit

 

In November 1999, and through subsequent amendments, the United States brought a lawsuit in the United States Federal District Court for the Southern District of Indiana (District Court) against Cinergy, CG&E, and PSI alleging various violations of the CAA.  Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana SIP permits for various projects at our owned and co-owned generating stations.  Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the EPA and Cinergy relating to alleged

 

30



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Generating Station (Beckjord Station).  The suit seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s Beckjord Station and Miami Fort Generating Station, and PSI’s Cayuga Generating Station, Gallagher Generating Station (Gallagher Station), Wabash River Generating Station, and Gibson Generating Station, and (2) civil penalties in amounts of up to $27,500 per day for each violation.  In addition, three northeast states and two environmental groups have intervened in the case.  In May 2004, the City of Louisville, Kentucky filed a motion to intervene in the case with respect to all claims made by the United States against PSI and Cinergy regarding the Gallagher Station.  The court denied Louisville’s motion in June 2004.  The case is currently in discovery, and the District Court has set the case for trial by jury commencing in August 2005.

 

In March 2000, the United States also filed in the District Court an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by 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.  In April 2001, the District Court in that case ruled that the Government and the intervening plaintiff environmental groups cannot seek monetary damages for alleged violations that occurred prior to November 3, 1994; however, they are entitled to seek injunctive relief for such alleged violations.  Neither party appealed that decision.

 

In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a Notice of Violation (NOV) to DP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at a generating station operated by DP&L and jointly-owned by CG&E.  The NOV indicated the EPA may (1) issue an order requiring compliance with the requirements of the Ohio SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  In July 2004, the Sierra Club sent Cinergy a notice of intent to sue for alleged violations of the CAA at this same generating station.

 

It is not possible to predict whether resolution of these matters would have a material effect on our financial position or results of operations.  We intend to defend against the allegations, discussed above, vigorously in court.

 

(iv)                            Carbon Dioxide (CO2) Lawsuit

 

In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York brought a lawsuit in the United States District Court for the Southern District of New York against Cinergy and American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’ emissions of CO2 from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance.  The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO2.  Plaintiffs are seeking an injunction requiring each defendant to cap its CO2 emissions and then reduce them by a specified percentage each year for at

 

31



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

least a decade.  Cinergy intends to defend this lawsuit vigorously in court; however, we are not able to predict whether resolution of these matters would have a material effect on our financial position or results of operations.

 

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

 

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 oversees investigation and cleanup of all of these sites.  Thus far, PSI has primary responsibility for investigating, monitoring and, if necessary, remediating nine of these sites.  In December 2003, PSI entered into a voluntary remediation plan with the state of Indiana, providing a formal framework for the investigation and cleanup of the sites for which PSI has primary responsibility.

 

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 and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites; or (2) pay PSI’s cost of defense.  The trial court issued a variety of rulings with respect to the claims and defenses in the litigation.  PSI appealed certain adverse rulings to the Indiana Court of Appeals and the appellate court has remanded the case to the trial court.  The court has set the case for trial commencing in January 2005.  At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeals.

 

PSI has accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated.  We will continue to investigate and remediate the sites as outlined in the voluntary remediation plan.  As additional facts become known and investigation is completed, we will assess whether the likelihood of incurring additional costs becomes probable.  Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

 

CG&E and ULH&P have performed site assessments on certain of their sites where we believe MGP activities have occurred at some point in the past and have found no imminent risk to the environment.  At the present time, CG&E and ULH&P cannot predict whether investigation and/or remediation will be required in the future at any of these sites.

 

32



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

(vi)                            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 85 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 a verdict for PSI on punitive damages.  PSI received an adverse ruling in an initial appeal of that verdict, but the Indiana Supreme Court accepted the transfer of the case, and heard oral argument in June 2004.  In addition, PSI has settled a number of other lawsuits for amounts, which neither individually nor in the aggregate, are material to PSI’s financial position or results of operations.

 

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.

 

(b)                                  Regulatory

 

(i)                                  PSI Retail Electric Rate Case

 

In December 2002, PSI filed a petition with the Indiana Utility Regulatory Commission (IURC) seeking approval of an increase in base retail electric rates and approval of certain rate recovery mechanisms.  In May 2004, the IURC issued an order in this case.  When combined with revenue increases attributable to PSI’s environmental construction-work-in-progress tracking mechanism, the order results in an approximate $140 million increase in annual revenues.  PSI’s original request for an approximate $180 million annual revenue increase was reduced by approximately $20 million for a lower return on equity, approximately $15 million related to profits from off-system sales (subject to future adjustment through a tracking mechanism and a 50/50 sharing agreement), and approximately $5 million of additional items.  The order authorizes full recovery of all requested regulatory assets and an overall 7.3 percent return, including a 10.5 percent return on equity.  In addition, the IURC’s order provides PSI the continuation of a purchased power tracker and the establishment of new trackers for future NOX emission allowance costs and certain costs related to the Midwest Independent System Operator, Inc.

 

(ii)                              CG&E Rate Filings

 

As discussed in more detail in the 2003 10-K, CG&E made multiple rate filings in 2003 with the Public Utilities Commission of Ohio (PUCO) seeking to establish market-based rates for generation service at the end of the market development period and to recover investments made in the transmission and distribution system.  In December 2003, these filings, and CG&E’s proposal for establishing its post-market development period market pricing methodology, were consolidated for hearing before the PUCO.  In addition, the PUCO requested that CG&E propose a rate stabilization

 

33



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

plan in these same proceedings.  In January 2004, CG&E filed its proposed rate stabilization plan.  In May 2004, CG&E entered into a settlement agreement with most of the parties to these proceedings requesting that the PUCO approve a modified version of the rate stabilization plan.

 

The major features of the modified plan are as follows (some of these features revise provisions of the CG&E transition plan discussed more fully in the 2003 10-K):

 

                  CG&E would begin to collect a Provider of Last Resort (POLR) charge from non-residential customers effective January 1, 2005, and from residential customers effective January 1, 2006.  The POLR charge, which consists of a fixed and variable component, is intended to provide cost recovery primarily for increased capacity reserves, environmental compliance and emission allowance expenditures.  The fixed component, which is 15 percent of current generation rates, is not charged to the first 25 percent of customers in each customer class who switch to an alternative supplier.  The variable component, which is charged to all customers, could be increased by up to eight percent of CG&E’s generation rate each year from 2005 through 2008.  If the settlement is approved, revenues are expected to increase approximately $40 million in 2005 and $98 million in 2006 for the POLR charge;

                  Customers receiving generation from CG&E would be charged CG&E’s existing generation rates, less the 15 percent recovered through the POLR charge discussed above.  A fuel cost recovery mechanism would be established to recover costs for fuel that exceed the amount originally included in the rates frozen in the CG&E transition plan.  These new rates would apply to non-residential customers beginning January 1, 2005 and to residential customers beginning January 1, 2006;

                  The five percent generation rate reduction for residential customers currently in effect through 2005 would be extended to 2008;

                  The recovery of the residential regulatory transition charge currently in effect through 2008 would be extended to 2010;

                  Transmission cost recovery mechanisms would be established beginning January 1, 2005 for non-residential customers and January 1, 2006 for residential customers;

                  CG&E would have the ability to defer certain capital-related distribution costs from July 1, 2004 through December 31, 2005 (we currently estimate that approximately $70 million would be deferred during this period) with recovery to be provided through riders beginning January 1, 2006 through December 31, 2010.

 

Evidentiary hearings addressing the issues described above took place during May and June 2004.  We cannot predict the outcome of these proceedings.

 

CG&E has also filed an application for an annual increase of approximately $78 million in electric distribution base rates, to be effective in the first quarter of 2005 for non-residential customers and January 1, 2006 for residential customers.  The rate stabilization plan settlement agreement described above provides for CG&E to withdraw this base rate case upon approval of the rate stabilization plan.  CG&E can then file a new distribution base rate case, with rates to become effective January 1, 2006.

 

34



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

(iii)                          ULH&P Gas Rate Case

 

In the second quarter of 2001, ULH&P filed a retail gas rate case with the Kentucky Public Service Commission (KPSC) requesting, among other things, deferral of costs associated with an accelerated gas main replacement program of up to $112 million over ten years.  The costs would be recovered through a tracking mechanism for an initial three year period, with the possibility of renewal up to ten years.  The tracking mechanism allows ULH&P to recover depreciation costs and rate of return annually over the life of the deferred assets.  Through June 30, 2004, ULH&P has recovered approximately $3.2 million under this tracking mechanism.  The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the new tracking mechanism rates.  At the present time, ULH&P cannot predict the timing or outcome of this litigation.

 

(iv)                            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 required 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 190,000 SHA risers on its distribution system, of which 155,000 are in CG&E’s service area and 31,000 are in ULH&P’s service area.  Further investigation to determine 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, we currently estimate that the replacement cost could be approximately $70 million for CG&E, which includes approximately $10 million for ULH&PCG&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.

 

(c)                                  Other

 

(i)                                  Gas Customer Choice

 

In January 2000, Cinergy Investments, Inc. (Investments) sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing business as The Energy Cooperative.  In February 2001, Cinergy, CG&E, and Resources were named as defendants in three class action lawsuits brought by customers relating to The 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 (Class-action).  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 (Cinergy lawsuit).

 

In March 2001, Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by Energy Cooperative and Resources (Energy Cooperative lawsuit).  This lawsuit concerned any obligations or liabilities Investments may have had to The Energy Cooperative following its sale of Resources.  All three matters were settled in the second quarter of 2004.  In the Energy Cooperative

 

35



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

lawsuit, The Energy Cooperative agreed to indemnify Cinergy, CG&E and Investments for the claims asserted by the former residential customers in the Class-action litigation.  In exchange, Cinergy has agreed to settle claims that it brought in the Cinergy lawsuit.  The settlement is pending final court approval.  None of these settlements are material to Cinergy’s financial position or results of operations.

 

(ii)                              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 for the period May 2000 through January 2001.  Based on an initial review of these matters, we placed one employee on administrative leave and have subsequently terminated his employment.  Cinergy is continuing an investigation of these matters, including whether price reporting inconsistencies occurred in our operations.  We have been cooperating fully with the CFTC, and hope to resolve the investigation in the near future.

 

In August 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.  Two similar lawsuits have subsequently been filed, and these three lawsuits have been consolidated for pretrial purposes.  Plaintiffs filed a consolidated class action complaint in January 2004.  We believe this action is without merit and intend to defend this lawsuit vigorously; however, we cannot predict the outcome of this matter at this time.

 

In the second quarter of 2003, Cinergy received initial and follow-up third-party subpoenas from the Securities and Exchange Commission (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 fully cooperated with the SEC in connection with this matter.  In early 2004, Cinergy received two grand jury subpoenas from the Assistant United States Attorney in the Southern District of Texas for information relating to the same trading activities being investigated by the SEC.  Specifically, the Assistant United States Attorney has requested information relating to communications between some current and former employees and another energy company.  We understand that we are neither a target nor are we under investigation by the Department of Justice in relation to these communications.

 

At this time, we do not believe the outcome of these investigations and litigation will have a material impact on Cinergy’s financial position or results of operations.

 

(iii)                          Patents

 

Ronald A. Katz Technology Licensing, L.P. (RAKTL) has offered us a license to a portfolio of patents claiming that the patents may be infringed by certain products and services utilized by us.  The patents purportedly relate to various aspects of telephone call processing in Cinergy call centers.  As of this date, no legal proceedings have been instituted against us, but if the RAKTL patents are valid, enforceable, and apply to our business, we could be required to seek a license from RAKTL or

 

36



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

to discontinue certain activities.  Based on the information we have at this time, we do not believe resolution of this matter will have a material impact on our financial position or results of operations.

 

(iv)                            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.

 

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 $22 million as of June 30, 2004, 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 certain directors, officers, and key employees.  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, operations 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 liability to be $76 million under these guarantees as of June 30, 2004.  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 agreement, 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 liability is not estimable given that the magnitude of any claims under those indemnifications would be a function of the extent of damages actually incurred.  Cinergy has estimated the maximum potential liability, where estimable, to be $115 million under these

 

37



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

indemnification provisions.  The termination period for the majority of matters provided by indemnification provisions in purchase and sale agreements generally ranges from 2004 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.

 

7.              Pension and Other Postretirement Benefits

 

As discussed in the 2003 10-K, Cinergy Corp. sponsors both pension and other postretirement benefits plans.  Our qualified defined benefit pension plans cover substantially all United States employees meeting certain minimum age and service requirements.  Funding for the qualified defined benefit pension plans is based on actuarially determined contributions, the maximum of which is generally the amount deductible for income tax purposes and the minimum being that required by the Employee Retirement Income Security Act of 1974, as amended.  The pension plans’ assets consist of investments in equity and debt securities.  In addition, we sponsor non-qualified pension plans (plans that do not meet the criteria for tax benefits) that cover officers, certain other key employees, and non-employee directors.  We provide certain health care and life insurance benefits to retired United States employees and their eligible dependents.  These benefits are subject to minimum age and service requirements.  The health care benefits include medical coverage, dental coverage, and prescription drugs and are subject to certain limitations, such as deductibles and co-payments.

 

38



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

Our benefit plans’ costs for the quarter and year to date ended June 30, 2004 and 2003, included the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qualified
Pension Benefits

 

Non-Qualified
Pension Benefits

 

Other
Postretirement
Benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

8.8

 

$

7.8

 

$

1.2

 

$

0.8

 

$

1.2

 

$

1.0

 

Interest cost

 

22.1

 

21.5

 

1.7

 

1.6

 

5.4

 

5.6

 

Expected return on plans’ assets

 

(20.1

)

(20.2

)

 

 

 

 

Amortization of transition (asset) obligation

 

(0.1

)

(0.2

)

 

 

0.1

 

0.9

 

Amortization of prior service cost

 

1.1

 

1.2

 

0.5

 

0.3

 

 

 

Recognized actuarial (gain) loss

 

0.5

 

 

0.7

 

0.5

 

1.9

 

1.3

 

Voluntary early retirement costs (Statement 88)(1)

 

 

2.1

 

 

 

 

 

Net periodic benefit cost

 

$

12.3

 

$

12.2

 

$

4.1

 

$

3.2

 

$

8.6

 

$

8.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date June 30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

17.6

 

$

15.6

 

$

2.4

 

$

1.6

 

$

2.6

 

$

2.0

 

Interest cost

 

44.2

 

43.0

 

3.4

 

3.2

 

11.4

 

11.2

 

Expected return on plans’ assets

 

(40.2

)

(40.4

)

 

 

 

 

Amortization of transition (asset) obligation

 

(0.2

)

(0.4

)

 

 

0.9

 

1.7

 

Amortization of prior service cost

 

2.2

 

2.4

 

1.0

 

0.6

 

 

 

Recognized actuarial (gain) loss

 

1.0

 

 

1.4

 

1.0

 

4.0

 

2.6

 

Voluntary early retirement costs (Statement 88)(1)

 

 

4.2

 

 

 

 

 

Net periodic benefit cost

 

$

24.6

 

$

24.4

 

$

8.2

 

$

6.4

 

$

18.9

 

$

17.5

 

 

 

(1)

Statement of Financial Accounting Standards No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (Statement 88).

 

 

 

The net periodic benefit cost by registrant for the quarter and year to date ended June 30, 2004 and 2003, was as follows:

 

 

 

 

 

 

 

 

 

 

 

Qualified
Pension Benefits

 

Non-Qualified
Pension Benefits

 

Other
Postretirement
Benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

$

12.3

 

$

12.2

 

$

4.1

 

$

3.2

 

$

8.6

 

$

8.8

 

CG&E and subsidiaries

 

3.7

 

2.4

 

0.2

 

0.2

 

2.0

 

2.3

 

PSI

 

3.2

 

2.9

 

0.2

 

0.2

 

4.7

 

4.4

 

ULH&P

 

0.4

 

0.3

 

 

 

0.2

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date June 30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

$

24.6

 

$

24.4

 

$

8.2

 

$

6.4

 

$

18.9

 

$

17.5

 

CG&E and subsidiaries

 

7.4

 

4.8

 

0.4

 

0.4

 

4.6

 

4.6

 

PSI

 

6.4

 

5.8

 

0.4

 

0.4

 

10.0

 

8.8

 

ULH&P

 

0.8

 

0.6

 

 

 

0.4

 

0.4

 

 

 

(1)

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

 

 

 

39



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act).  The Act introduced a prescription drug benefit to retirees as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is actuarially equivalent to the benefit provided by Medicare.  We believe that our coverage for prescription drugs is at least actuarially equivalent to the benefits provided by Medicare for most current retirees because our benefits for that group substantially exceed the benefits provided by Medicare, thereby allowing us to qualify for the subsidy.  We have accounted for the subsidy as a reduction of our accumulated postretirement benefit obligation (APBO).  The APBO was reduced by approximately $17 million and will be amortized as an actuarial gain over future periods, thus reducing future benefit costs.  The impact on 2004 net periodic benefit cost is not material.  Our accounting treatment for the subsidy is consistent with FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

 

8.              Investment Activity

 

(a)                                  Investment Impairment

 

Cinergy holds a portfolio of direct and indirect investments in energy technology companies in the Power Technology and Infrastructure Services (Power Technology and Infrastructure) Business Unit (discussed in Note 9).  During 2004, Cinergy recognized approximately $34 million in impairment charges associated with this portfolio.  The majority of these charges relate to a company in which Cinergy holds a non-controlling interest, that agreed to sell its major assets.  This company is involved in the development and sale of outage management software.  Based on the terms of the transaction, Cinergy concluded that this cost method investment was other-than-temporarily impaired.  These impairment charges are included in Miscellaneous Income (Expense) — Net in Cinergy’s Condensed Consolidated Statements of Income.

 

(b)                                  Subsequent Event

 

Power Technology and Infrastructure holds an investment in a company that develops, owns and operates wireless communication towers.  In July 2004, this company agreed to sell the majority of its assets.  We anticipate recording earnings of approximately $20 million relating to this sale in the fourth quarter of 2004.  These earnings will be reflected in Equity in Earnings of Unconsolidated Subsidiaries in Cinergy’s Condensed Consolidated Statements of Income.

 

9.              Financial Information by Business Segment

 

As discussed in the 2003 10-K, we conduct operations through our subsidiaries, and manage through the following three reportable segments:

 

                  Commercial Business Unit (Commercial);

                  Regulated Businesses Business Unit (Regulated Businesses); and

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

 

The following section describes the activities of our business units as of June 30, 2004.

 

40



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

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, performs energy risk management activities, and provides 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.

 

Power Technology and Infrastructure primarily manages Cinergy Ventures, LLC (Ventures), Cinergy’s venture capital subsidiary.  Ventures identifies, invests in, and integrates new energy technologies into Cinergy’s existing businesses, focused primarily on operational efficiencies and clean energy technologies.  In addition, Power Technology and Infrastructure manages our investments in other energy infrastructure and telecommunication service providers.

 

Following are the financial results by business unit.  Certain prior year amounts have been reclassified to conform to the current presentation.

 

41



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

Financial results by business unit for the quarters ended June 30, 2004, and June 30, 2003, are as indicated below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy Business Units

 

 

 

 

 

 

 

Commercial

 

Regulated
Businesses

 

Power Technology
and Infrastructure

 

Total

 

Reconciling
Eliminations (1)

 

Consolidated

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

390,396

 

$

663,339

 

$

2

 

$

1,053,737

 

$

 

$

1,053,737

 

Intersegment revenues

 

39,854

 

 

 

39,854

 

(39,854

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margins -

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric

 

187,366

 

411,181

 

 

598,547

 

 

598,547

(3)

Gas

 

16,558

 

44,104

 

 

60,662

 

 

60,662

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

29,380

 

35,788

 

(6,664

)

58,504

 

 

58,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

350,198

 

$

583,723

 

$

2

 

$

933,923

 

$

 

$

933,923

 

Intersegment revenues

 

37,156

 

 

 

37,156

 

(37,156

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margins -

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric

 

175,473

 

353,315

 

 

528,788

 

 

528,788

(3)

Gas

 

24,889

 

36,724

 

 

61,613

 

 

61,613

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

9,045

 

 

 

9,045

 

 

9,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

64,332

 

26,105

 

(5,784

)

84,653

 

 

84,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The Reconciling Eliminations category eliminates the intersegment revenues of Commercial.

(2)

Management utilizes segment profit (loss), after taxes, to evaluate segment performance.

(3)

Electric gross margin is calculated as Electric operating revenues less Fuel and purchased power expense from the Condensed Consolidated Statements of Income.

(4)

Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

 

 

 

42



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

Financial results by business unit for year to date June 30, 2004 and June 30, 2003, are as indicated below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy Business Units

 

 

 

 

 

 

 

Commercial

 

Regulated
Businesses

 

Power Technology
and Infrastructure

 

Total

 

Reconciling
Eliminations(1)

 

Consolidated

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

796,103

 

$

1,546,288

 

$

4

 

$

2,342,395

 

$

 

$

2,342,395

 

Intersegment revenues

 

79,307

 

 

 

79,307

 

(79,307

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margins -

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric

 

368,746

 

821,015

 

 

1,189,761

 

 

1,189,761

(3)

Gas

 

39,692

 

148,300

 

 

187,992

 

 

187,992

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

75,472

 

115,293

 

(29,246

)

161,519

 

 

161,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date June 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

783,839

 

$

1,418,038

 

$

3

 

$

2,201,880

 

$

 

$

2,201,880

 

Intersegment revenues

 

76,279

 

 

 

76,279

 

(76,279

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margins -

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric

 

349,680

 

732,301

 

 

1,081,981

 

 

1,081,981

(3)

Gas

 

84,917

 

139,614

 

 

224,531

 

 

224,531

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

8,875

 

 

 

8,875

 

 

8,875

 

Cumulative effect of changes in accounting principle, net of tax

 

26,462

 

 

 

26,462

 

 

26,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

161,437

 

100,174

 

(10,873

)

250,738

 

 

250,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

The Reconciling Eliminations category eliminates the intersegment revenues of Commercial.

(2)

Management utilizes segment profit (loss), after taxes, to evaluate segment performance.

(3)

Electric gross margin is calculated as Electric operating revenues less Fuel and purchased power expense from the Condensed Consolidated Statements of Income.

(4)

Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

 

 

 

43



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

Total segment assets at June 30, 2004, and December 31, 2003, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy Business Units

 

 

 

 

 

 

 

Commercial

 

Regulated
Businesses

 

Power Technology
and Infrastructure

 

Total

 

All
Other (1)

 

Consolidated

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets from continuing operations

 

$

5,262,749

 

$

8,529,017

 

$

145,418

 

$

13,937,184

 

$

53,585

 

$

13,990,769

 

Segment assets from discontinued operations

 

 

 

 

 

 

 

Total segment assets at June 30, 2004

 

$

5,262,749

 

$

8,529,017

 

$

145,418

 

$

13,937,184

 

$

53,585

 

$

13,990,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets from continuing operations

 

$

5,360,886

 

$

8,515,478

 

$

175,619

 

$

14,051,983

 

$

62,722

 

$

14,114,705

 

Segment assets from discontinued operations

 

4,501

 

 

 

4,501

 

 

4,501

 

Total segment assets at December 31, 2003

 

$

5,365,387

 

$

8,515,478

 

$

175,619

 

$

14,056,484

 

$

62,722

 

$

14,119,206

 

 


(1)

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

 

 

 

44



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

10.       Earnings Per Common Share (EPS)

 

A reconciliation of EPS – basic to EPS – assuming dilution is presented below for the quarters ended June 30, 2004 and 2003:

 

 

 

 

 

 

 

 

 

 

 

Income

 

Shares

 

EPS

 

 

 

(in thousands, except per share amounts)

 

Quarter Ended June 30, 2004

 

 

 

 

 

 

 

EPS – basic:

 

 

 

 

 

 

 

Net Income

 

$

58,504

 

180,236

 

$

0.33

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

574

 

 

 

Directors’ compensation plans

 

 

 

155

 

 

 

Contingently issuable common stock

 

 

 

471

 

 

 

Stock purchase contracts

 

 

 

841

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

58,504

 

182,277

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended June 30, 2003

 

 

 

 

 

 

 

EPS – basic:

 

 

 

 

 

 

 

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

 

$

75,608

 

 

 

$

0.42

 

Discontinued operations, net of tax

 

9,045

 

 

 

0.05

 

Net Income

 

$

84,653

 

176,645

 

$

0.47

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

866

 

 

 

Employee stock purchase and savings plan

 

 

 

18

 

 

 

Directors’ compensation plans

 

 

 

145

 

 

 

Contingently issuable common stock

 

 

 

824

 

 

 

Stock purchase contracts

 

 

 

415

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

84,653

 

178,913

 

$

0.47

 

 

 

 

 

 

 

 

 

 

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 is 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 1.2 million and 1.5 million shares were excluded from the EPS - assuming dilution calculation for the quarters ended June 30, 2004 and 2003, respectively.

 

Also excluded from the EPS - assuming dilution calculation for the quarters ended June 30, 2004 and 2003, are up to 10.0 million and 10.4 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.

 

45



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

A reconciliation of EPS – basic to EPS – assuming dilution is presented below for the year to date June 30, 2004 and 2003:

 

 

 

 

 

 

 

 

 

 

 

Income

 

Shares

 

EPS

 

 

 

(in thousands, except per share amounts)

 

Year to Date June 30, 2004

 

 

 

 

 

 

 

EPS – basic:

 

 

 

 

 

 

 

Net Income

 

$

161,519

 

179,749

 

$

0.90

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

702

 

 

 

Directors’ compensation plans

 

 

 

155

 

 

 

Contingently issuable common stock

 

 

 

523

 

 

 

Stock purchase contracts

 

 

 

977

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

161,519

 

182,106

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date June 30, 2003

 

 

 

 

 

 

 

EPS – basic:

 

 

 

 

 

 

 

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

 

$

215,401

 

 

 

$

1.23

 

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

 

$

250,738

 

175,025

 

$

1.43

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

791

 

 

 

Employee stock purchase and savings plan

 

 

 

9

 

 

 

Directors’ compensation plans

 

 

 

145

 

 

 

Contingently issuable common stock

 

 

 

770

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

250,738

 

176,740

 

$

1.42

 

 

 

 

 

 

 

 

 

 

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 is 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 1.2 million and 2.1 million shares were excluded from the EPS - assuming dilution calculation for the year to date June 30, 2004 and 2003, respectively.

 

Also excluded from the EPS - assuming dilution calculation for the year to date June 30, 2004 and 2003, are up to 9.9 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.

 

11.       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 Staff authorizing PSI’s purchases of the Henry County, Indiana and Butler County, Ohio, gas-fired peaking plants from two non-regulated affiliates.  In

 

46



 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

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 tolling order allowing additional time to consider a request for rehearing filed in response to the February 2003 FERC order.  In June 2004, the FERC conducted a technical conference concerning, among other things, PSI’s purchase of the Henry and Butler County plants.  At this time, the rehearing request is still pending before the FERC, and PSI cannot predict the outcome of this matter.

 

47



 

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; 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 including costs of compliance with existing and future environmental requirements.

 

                  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.

 

                  Costs and effects of legal and administrative proceedings, settlements, investigations, and claims.  Examples can be found in Note 6 of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements”.

 

We undertake no obligation to update the information contained herein.

 

48



 

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”.  In addition, when discussing Cinergy’s financial information, it necessarily includes the results of The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), The Union Light, Heat and Power Company (ULH&P), and all of Cinergy’s other consolidated subsidiaries.  When discussing CG&E’s financial information, it necessarily includes the results of ULH&P and all of CG&E’s other consolidated subsidiaries.

 

The following discussion should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report and the combined Form 10-K for the year ended December 31, 2003 (2003 10-K).  The results discussed below are not necessarily indicative of the results to be expected 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, 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 organized in 1993, owns all outstanding common stock of CG&E and PSI, both of which are public utilities.  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 Services, Inc. (Services) and Cinergy Investments, Inc. (Investments).

 

CG&E, an Ohio corporation organized in 1837, is a combination electric and gas public utility company that provides service primarily in the southwestern portion of Ohio and, through ULH&P, in nearby areas of Kentucky.  CG&E is responsible for the majority of our power marketing and trading activity.  CG&E’s principal subsidiary, ULH&P, is a Kentucky corporation organized in 1901, that provides electric and gas service in northern Kentucky.  CG&E’s other subsidiaries are insignificant to its results of operations.

 

PSI, an Indiana corporation organized in 1942, is a vertically integrated and regulated electric utility that provides service in north central, central, and southern Indiana.

 

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MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

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.

 

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

 

Environmental Issues

 

In December 2003, the United States Environmental Protection Agency (EPA) proposed the Clean Air Interstate Rule (CAIR), formerly the Interstate Air Quality Rule, that would require states to revise their State Implementation Plans to address alleged contributions to downwind non-attainment with the revised National Ambient Air Quality Standards for ozone and fine particulate matter.  The proposed rule would establish a two-phase, regional cap and trade program for sulfur dioxide (SO2) and nitrogen oxide (NOX), affecting approximately 30 states, including Ohio, Indiana, and Kentucky, and would require SO2 and NOX emissions to be cut approximately 70 percent and 65 percent, respectively, by 2015.  The EPA is expected to issue final rules by December 2004.

 

In December 2003, the EPA also issued draft regulations regarding required reductions in mercury emissions from coal-fired power plants.  The draft regulations include two possible alternatives to address emissions reductions.  One alternative would include a cap and trade approach to mercury.  The other would be a source specific reduction in emissions, without a cap and trade approach.  The cap and trade approach would provide a longer compliance horizon and provide more flexible compliance options for coal-fired generators.  The cap and trade approach would require a reduction of approximately 30 percent by 2010 and 70 percent by 2018.  The source specific reduction approach would require a reduction of approximately 30 percent by 2008.

 

Over the 2004-2008 time period, estimated capital costs associated with reducing mercury, SO2, and NOX in compliance with the currently proposed CAIR and mercury rule are not expected to exceed approximately $1.65 billion if the EPA approves the mercury cap and trade approach and approximately $2.15 billion if the EPA approves the source specific reduction approach without a cap and trade.  Approximately 55 percent of these estimated environmental costs would be incurred at PSI’s coal-fired plants, for which recovery would be pursued in accordance with regulatory statutes governing environmental cost recovery.  Recovery of depreciation and financing costs for CG&E’s generating units from 2005-2008 is being pursued through the settlement agreement of the CG&E rate stabilization plan.  The settlement agreement allows CG&E to collect a Provider of Last Resort (POLR) charge from customers to cover increased environmental costs, capacity reserves, and emission allowance expenditures.  Further details about the settlement agreement are discussed in Note 6(b)(ii) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements”.

 

The mercury cap and trade approach would provide Cinergy with more flexible compliance options, including the purchase of allowances in lieu of further capital expenditure in these investments.  The above estimates include estimated costs to comply at plants that we own but do not operate (which includes 14 percent and 34 percent of Cinergy’s and CG&E’s megawatt hour (MWh) capacity, respectively).  These costs may change when taking into consideration compliance plans of co-owners

 

50



 

MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

or operators involved.  Additionally, as market conditions change, additional compliance options may become available and our plans will be adjusted accordingly.  Costs associated with mercury reduction may be different than those predicted, depending on the type of program the EPA finalizes and the stringency and timing of the ultimate requirements.

 

In May 2004, the EPA issued proposed revisions to its regional haze rules and implementing guidelines in response to a 2002 judicial ruling overturning key provisions of the original program.  The regional haze program is aimed at reducing certain emissions impacting visibility in national parks and wilderness areas.  The EPA is currently considering whether SO2 and NOX reductions under the CAIR regulation will also satisfy the reduction requirements under the regional haze rule.  However, the regional haze rule, when finalized, could potentially require significant additional SO2 and NOX reductions necessitating the installation of pollution controls for certain generating units at Cinergy’s power plants.  It is not possible to predict whether the regional haze rule will have a material effect on our financial position or results of operations in light of the EPA’s ongoing rulemaking efforts and the fact that the states have yet to announce how they will implement the rule, when finalized.

 

In April 2004, the EPA made final state non-attainment area designations to implement the revised ozone standard.  Several counties in which we operate have been designated as being in non-attainment with the new ozone standard.  The EPA is also under a court ordered deadline to make final non-attainment area designations for the new fine particulate standard by December 15, 2004.  Several counties in which we operate are likely to be designated as non-attainment for the fine particulate standard.  Those counties that are designated as being in non-attainment with the new ozone and/or fine particulate standards are required to develop a plan of compliance.  Although the EPA has attempted to structure the CAIR to resolve purported utility contributions to ozone and fine particulate non-attainment, Cinergy cannot predict the effect of current or future non-attainment designations at this time.

 

Carbon Dioxide (CO2) Lawsuit

 

In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York brought a lawsuit in the United States District Court for the Southern District of New York against Cinergy and American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’ emissions of CO2 from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance.  The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO2.  Plaintiffs are seeking an injunction requiring each defendant to cap its CO2 emissions and then reduce them by a specified percentage each year for at least a decade.  Cinergy intends to defend this lawsuit vigorously in court; however, we are not able to predict whether resolution of these matters would have a material effect on our financial position or results of operations.

 

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MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

Notice of Intent to Sue at Zimmer Generating Station (Zimmer Station)

 

In July 2004, Cinergy received a notice of intent to sue under the Clean Air Act (CAA) from attorneys representing citizens of the Village of Moscow, Ohio, the town adjacent to CG&E’s Zimmer Station, which notice is required as a predicate to a citizen’s enforcement suit under the CAA.  The letter alleges that emissions from Zimmer Station violate the CAA and the Ohio State Implementation Plan (SIP) and are causing a public nuisance.  At this time, we cannot predict whether the outcome of this matter will have a material impact on our financial position or results of operations.

 

Selective Catalytic Reduction Units (SCR) at Gibson Generating Station (Gibson Station)

 

In May 2004, SCRs and other pollution control equipment became operational at Units 4 and 5 of PSI’s Gibson Station in accordance with compliance deadlines under the NOX SIP Call.  In June and July 2004, Gibson Station temporarily shut down the equipment on these units due to a concern over an acid aerosol mist haze sometimes occurring in areas near the plant.  Portions of the plume from those units’ stacks sometimes appeared to break apart and descend to ground level.  As a result, we are developing a protocol working with the City of Mt. Carmel, Illinois; Illinois EPA; Indiana Department of Environmental Management; United States EPA; and the State of Illinois; regarding the use of the SCRs while we explore alternatives to address this issue.  We would seek recovery of any related capital as well as increased emission allowance expenditures through the regulatory process.  Given existing recovery mechanisms, we do not believe costs related to resolving this matter will have a material impact on our financial position or results of operations.

 

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 United States is limited to making only wholesale sales of electricity.  An entity claiming status as an EWG must provide notification thereof to the SEC under PUHCA.

 

A FUCO is a company all of whose utility assets and operations are located outside the United States 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 United

 

52



 

MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

States.  An entity claiming status as a FUCO must provide notification thereof to the SEC under PUHCA.

 

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 June 30, 2004, we had invested or committed to invest approximately $0.8 billion 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), 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 June 30, 2004, we had invested and/or guaranteed approximately $1.0 billion of the $1.3 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 United States, 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 June 30, 2004, 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.

 

53



 

MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

At June 30, 2004, we had invested approximately $29 million in Infrastructure Services companies.

 

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 June 30, 2004, we had $852 million outstanding under the guarantees issued, of which approximately 93 percent represents guarantees of obligations reflected on Cinergy’s Condensed 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 6(c)(iv) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements” 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 June 30, 2004 trading portfolio, if such an event were to occur, Cinergy would be required to issue up to approximately $116 million in collateral related to its gas and power trading operations, of which $65 million is related to CG&E.

 

Capital Resources

 

Cinergy, CG&E, PSI, and ULH&P meet 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, CG&E, PSI, and ULH&P believe that they have adequate financial resources to meet their future needs.

 

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 Public Utilities Commission of Ohio (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.

 

54



 

MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

 

 

 

 

 

 

 

 

Short-term Regulatory Authority
June 30, 2004

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Authority

 

Outstanding

 

 

 

 

 

 

 

Cinergy Corp.

 

$

5,000

(1)

$

267

 

CG&E and subsidiaries

 

671

 

127

 

PSI

 

600

 

219

 

ULH&P

 

65

 

29

 

 

 

(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, to $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.

 

Cinergy Corp.’s short-term borrowings consists primarily of unsecured revolving lines of credit and the sale of commercial paper.  Cinergy Corp.’s $1.5 billion revolving credit facilities and $800 million commercial paper program also support the short-term borrowing needs of CG&E, PSI, and ULH&P.  In addition, Cinergy Corp., 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.

 

55



 

MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

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
June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Established
Lines

 

Outstanding

 

Unused

 

Standby
Liquidity(3)

 

Available
Revolving
Lines of
Credit

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy

 

 

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

 

 

 

 

Revolving lines

 

$

1,500

 

$

 

$

1,500

 

$

271

 

$

1,229

 

Uncommitted lines(1)

 

40

 

 

40

 

 

 

 

 

Commercial paper(2)

 

 

 

267

 

533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Utility operating companies

 

 

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

75

 

 

75

 

 

 

 

 

Pollution control notes

 

 

 

193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-regulated subsidiaries

 

 

 

 

 

 

 

 

 

 

 

Revolving lines

 

18

 

9

 

9

 

 

 

9

 

Short-term debt

 

 

 

2

 

 

 

 

 

 

 

Pollution control notes(4)

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy Total

 

 

 

$

496

 

 

 

 

 

$

1,238

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries

 

 

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

15

 

$

 

$

15

 

 

 

 

 

Pollution control notes

 

 

 

112

 

 

 

 

 

 

 

Money pool

 

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E Total

 

 

 

$

239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

60

 

$

 

$

60

 

 

 

 

 

Pollution control notes

 

 

 

81

 

 

 

 

 

 

 

Money pool

 

 

 

219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSI Total

 

 

 

$

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

 

 

 

 

 

 

 

 

Money pool

 

 

 

$

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ULH&P Total

 

 

 

$

29

 

 

 

 

 

 

 

 


(1)

These facilities are not guaranteed sources of capital and represent an informal agreement to lend money, subject to availability, with pricing to be determined at the time of advance.

(2)

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

(3)

Standby liquidity is reserved against the revolving lines to support the commercial paper program and outstanding letters of credit (currently $267 million and $4 million, respectively).

(4)

In May 2004, Cinergy, through a subsidiary, borrowed the proceeds from the issuance by the Gulf Coast Industrial Development Authority of $25 million principal amount of its Gulf Coast Industrial Development Exempt Facilities Industrial Revenue Bonds Series 2004, due April 1, 2039.  These bonds bear interest in a weekly interest rate mode.  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.

 

 

 

56



 

MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

In April 2004, Cinergy Corp. successfully placed two senior unsecured revolving credit facilities with an aggregate borrowing capacity of $1.5 billion, comprised of a $500 million 364-day facility and a $1 billion three-year facility.  These facilities replaced two facilities that were scheduled to expire in April and May 2004.

 

At June 30, 2004, Cinergy Corp. had approximately $1.2 billion remaining unused and available capacity relating to its $1.5 billion revolving credit facilities.  These revolving credit facilities include the following:

 

 

 

 

 

 

 

 

 

 

 

Credit Facility

 

Expiration

 

Established
Lines

 

Outstanding
and
Committed

 

Unused and
Available

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

364-day senior revolving

 

April 2005

 

 

 

 

 

 

 

Direct borrowing

 

 

 

$

 

 

$

 

$

 

 

Commercial paper support

 

 

 

 

 

267

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 364-day facility

 

 

 

500

 

267

 

233

 

 

 

 

 

 

 

 

 

 

 

Three-year senior revolving

 

April 2007

 

 

 

 

 

 

 

Direct borrowing

 

 

 

 

 

 

 

 

Commercial paper support

 

 

 

 

 

 

 

 

Letter of credit support

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Total three-year facility

 

 

 

1,000

 

4

 

996

 

 

 

 

 

 

 

 

 

 

 

Total Credit Facilities

 

 

 

$

1,500

 

$

271

 

$

1,229

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

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 utility operating companies.

 

57



 

MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

A current summary of our long-term debt authorizations at June 30, 2004, was as follows:

 

 

 

 

 

 

 

 

 

 

 

Authorized

 

Used

 

Available

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

PUHCA total capitalization(1)

 

$

5,000

 

$

1,535

 

$

3,465

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries(2)

 

 

 

 

 

 

 

State Public Utility Commissions

 

$

575

 

$

 

$

575

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

State Public Utility Commission

 

$

500

 

$

 

$

500

 

State Public Utility Commission - Tax-Exempt

 

250

 

 

250

 

 

 

 

 

 

 

 

 

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 $800 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, all of which remains available for issuance.  PSI has an effective shelf registration statement with the SEC relating to the issuance of up to $800 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, all of which 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 Arrangements

 

As discussed in the 2003 10-K, Cinergy uses off-balance sheet arrangements from time to time to facilitate financing of various projects.  Cinergy’s primary off-balance sheet arrangements involve (a) the sale of accounts receivable to a qualifying special purpose entity, and (b) a forward stock contract that will result in the issuances of between 9.2 and 10.8 million Cinergy common shares in February 2005.

 

58



 

MD&A - - LIQUIDITY AND CAPITAL RESOURCES

 

Securities Ratings

 

As of June 30, 2004, the major credit rating 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 Ratings (Fitch)

(2)

Moody’s Investors Service (Moody’s)

(3)

Standard & Poor’s (S&P)

 

 

The highest investment grade credit rating for Fitch is AAA, Moody’s is Aaal, and S&P is AAA.

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

 

 

 

A security rating is not a recommendation to buy, sell, or hold securities.  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 2003 10-K, Cinergy issues new Cinergy Corp. common stock shares to satisfy obligations under certain of its employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan.  During the six months ended June 30, 2004, Cinergy issued approximately 2.0 million shares under these plans.

 

59


MD&A – QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

 

The Results of Operations discussions for Cinergy, CG&E, and PSI are combined within this section.

 

2004 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 June 30, 2004 and 2003 were as follows:

 

 

 

 

Cinergy(1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

58,504

 

$

84,653

 

$

(26,149

)

(31

)

$

55,309

 

$

50,919

 

$

4,390

 

9

 

$

25,446

 

$

23,079

 

$

2,367

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric gross margin(2)

 

598,547

 

528,788

 

69,759

 

13

 

317,277

 

291,188

 

26,089

 

9

 

274,844

 

239,387

 

35,457

 

15

 

Gas gross margin(3)

 

60,662

 

61,613

 

(951

)

(2

)

43,233

 

37,225

 

6,008

 

16

 

 

 

 

 

 

 

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

(2)              Electric gross margin is calculated as Electric operating revenues less Fuel and purchased power expense from the Condensed Consolidated Statements of Income.

(3)              Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

 

 

Cinergy’s net income decreased while CG&E’s and PSI’s increased for the quarter ended June 30, 2004, as compared to the same period last year as a result of a number of factors.  Cinergy’s, CG&E’s, and PSI’s variances were affected by higher electric gross margins discussed below.  CG&E’s variance also includes an increase in gas gross margins discussed below.  Cinergy’s increase in electric gross margins was offset, and CG&E’s and PSI’s were partially offset, by increases in a variety of expenses.  Higher Operation and maintenance expense for all three companies was primarily due to increases in emission allowances expenses and consulting fees for a continuous improvement initiative.  Cinergy’s and PSI’s variances were also impacted by increases in Depreciation expense and effective income tax rates.  Cinergy’s decrease also reflects gains realized in the second quarter of 2003 from the disposal of discontinued operations.

 

Electric Margins

 

Cinergy’s, CG&E’s, and PSI’s electric gross margins increased for the quarter ended June 30, 2004 as compared to the same period last year.  These variances primarily reflect additional MWh sales due to warmer weather in the current period and additional MWhs delivered as a result of an increase in non-weather related demand.  Cinergy’s and CG&E’s variances also reflect, in part, an increase in net revenues on power marketing, trading, and origination contracts.  Cinergy’s and PSI’s variances included a higher price received per MWh primarily due to PSI’s base retail electric rate case and certain rate tariff adjustments.  Cinergy’s and CG&E’s increases were partially offset by an increase in the average price of fuel for the period.

 

60



 

MD&A – QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

 

Electric Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

695

 

$

636

 

$

59

 

9

 

$

340

 

$

319

 

$

21

 

7

 

$

355

 

$

316

 

$

39

 

12

 

Wholesale

 

151

 

111

 

40

 

36

 

74

 

59

 

15

 

25

 

50

 

39

 

11

 

28

 

Other

 

46

 

22

 

24

 

N/M

 

41

 

19

 

22

 

N/M

 

9

 

6

 

3

 

50

 

Total

 

$

892

 

$

769

 

$

123

 

16

 

$

455

 

$

397

 

$

58

 

15

 

$

414

 

$

361

 

$

53

 

15

 

 

 

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

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

 

 

Heating degree-days and cooling degree-days are metrics commonly used in the utility industry as a measure of the impact weather has on results of operations.  Heating degree-days and cooling degree-days in CG&E’s and PSI’s service territories for the quarters ended June 30, 2004 and 2003, were as follows:

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries

 

PSI

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating degree-days(1)

 

414

 

444

 

(30

)

(7

)

404

 

519

 

(115

)

(22

)

Cooling degree-days(2)

 

327

 

166

 

161

 

97

 

342

 

199

 

143

 

72

 

 

 

(1)              Heating degree-days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is less than 65 degrees.

(2)              Cooling degree-days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is greater than 65 degrees.

 

 

Retail electric operating revenues increased for CinergyCG&E, and PSI mainly due to eight percent, seven percent, and nine percent higher amounts of MWhs delivered, respectively, in the quarter ended June 30, 2004, as compared to 2003.  These increases in MWhs delivered resulted in approximately $51 million, $23 million, and $28 million higher retail revenues for Cinergy, CG&E, and PSI, respectively.  The greater amount of MWhs delivered is primarily due to warmer weather in the second quarter of 2004, as compared to 2003, as reflected in the variance in the number of cooling degree-days, and an increase in non-weather related demand.

 

Also contributing to Cinergy’s and PSI’s higher retail electric operating revenues were one and three percent increases, respectively, in the average retail price per MWh.  These average increases resulted in additional retail electric operating revenues of approximately $8 million and $10 million for Cinergy and PSI, respectively.  The higher retail prices per MWh primarily reflect the Indiana Utility Regulatory Commission’s (IURC) approval of a base retail electric rate average increase of eight percent for PSI in May 2004, discussed further in Note 6(b)(i) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements”, and other rate adjustments related to emission allowances and clean coal technology tracking mechanisms.  These increases more than offset a decline in the retail price per MWh due to decreases in rate tariff adjustments associated with PSI’s

 

61



 

MD&A – QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

 

fuel cost recovery mechanism.  The cost of fuel for PSI’s retail customers is passed on dollar-for-dollar under the state mandated fuel cost recovery mechanism.

 

Electric wholesale revenues increased for Cinergy, CG&E, and PSI for the quarter ended June 30, 2004, as compared to 2003.  Cinergy’s increase includes a number of factors.   Net revenues on power marketing, trading, and origination contracts increased approximately $8 million over the second quarter of 2003.  The increase in power trading results is attributable to higher earnings on physical and financial trading primarily within the Midwest and the PJM Interconnection (PJM) markets.  Also, approximately $14 million of Cinergy’s variance includes increases in wholesale revenues from non-regulated energy service subsidiaries that started operations, or became fully consolidated, after the second quarter of 2003.  The majority of the remaining increase was attributable to increases in wholesale sales from generation available after serving regulated retail customers.

 

The variance in CG&E’s wholesale revenues reflects an increase in net revenues on power marketing, trading, and origination contracts.  The increase in power trading results was attributable to higher earnings on physical and financial trading primarily within the Midwest and the PJM markets.  The majority of PSI’s increase was attributable to increases in wholesale sales from generation available after serving regulated retail customers.

 

Other Electric operating revenues increased for Cinergy, CG&E, and PSI for the quarter ended June 30, 2004, as compared to 2003.  Cinergy’s and CG&E’s higher other Electric operating revenues reflect increases in coal origination of approximately $11 million and increases in the sales of emission allowances of approximately $5 million.  Cinergy’s, CG&E’s, and PSI’s increases reflect higher transmission revenues primarily resulting from Midwest Independent System Operator, Inc. (Midwest ISO) operations of approximately $5 million, $2 million, and $3 million, respectively.

 

Fuel and Purchased Power

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

$

250

 

$

219

 

$

31

 

14

 

$

115

 

$

88

 

$

27

 

31

 

$

116

 

$

116

 

$

 

 

Purchased power

 

44

 

21

 

23

 

N/M

 

23

 

18

 

5

 

28

 

24

 

6

 

18

 

N/M

 

Total

 

$

294

 

$

240

 

$

54

 

23

 

$

138

 

$

106

 

$

32

 

30

 

$

140

 

$

122

 

$

18

 

15

 

 

 

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

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

 

 

62



 

MD&A – QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

 

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 June 30, 2003, to the quarter ended June 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

CG&E

 

PSI

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Fuel Expense – June 30, 2003

 

$

219

 

$

88

 

$

116

 

 

 

 

 

 

 

 

 

Increase (Decrease) due to changes in:

 

 

 

 

 

 

 

Price of fuel

 

15

 

12

 

3

 

Deferred fuel cost

 

(13

)

 

(13

)

Fuel consumption

 

15

 

5

 

10

 

Other(2)

 

14

 

10

 

 

 

 

 

 

 

 

 

 

Fuel Expense – June 30, 2004

 

$

250

 

$

115

 

$

116

 

 

 

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

(2)              Includes costs of coal origination and non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

 

 

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.  The fuel adjustment charge is calculated based on the estimated cost of fuel in the next three-month period.  PSI records any under-recovery or over-recovery resulting from these differences as a deferred asset or liability until it is billed or refunded to its customers, at which point it is adjusted through fuel expense.

 

Purchased Power

 

Purchased power expense increased for Cinergy and PSI for the quarter ended June 30, 2004, as compared to 2003.  These increases in Purchased power expense primarily reflect a greater volume of MWhs purchased to serve wholesale full requirements customers and a higher price paid per MWh for these purchases.

 

Gas Margins

 

CG&E’s gas gross margins increased and Cinergy’s remained relatively flat for the quarter ended June 30, 2004, as compared to the same period last year.  CG&E’s gas margins increased by $6 million primarily due to rate tariff adjustments associated with the gas main replacement program, a low-income subsidy program, and Ohio excise taxes.

 

Cinergy’s gas margins remained relatively flat as CG&E’s increase was offset, in part, by lower margins from our gas marketing and trading business.  Our North American gas marketing and trading business experienced a decline in physical and financial trading margins resulting from fewer trading opportunities caused by lower volatility in 2004.

 

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MD&A – QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

 

Other Revenues

 

Other revenues for Cinergy increased for the quarter ended June 30, 2004, as compared to 2003, primarily due to non-regulated energy service subsidiaries that started operations, or became fully consolidated, after June 30, 2003.

 

Operating Expenses

 
Operation and Maintenance

 

Operation and maintenance expense increased for Cinergy, CG&E, and PSI for the quarter ended June 30, 2004, as compared to 2003.  Cinergy’s, CG&E’s, and PSI’s increases include approximately $22 million, $11 million, and $11 million, respectively, of higher expenses related to emissions allowances.  These increases primarily reflect higher expenses due to an increase in the cost of SO2 emission allowances as market prices have increased, timing differences in the recovery of SO2 emission allowances costs under PSI’s emission allowances tracking mechanism authorized by the IURC, and the introduction of the NOX compliance program in the second quarter of 2004.  See Note 6(a)(i) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements” for further information regarding NOX compliance.

 

The higher Operation and maintenance expense also reflects consulting fees related to a continuous improvement initiative of approximately $12 million, $5 million, and $5 million for Cinergy, CG&E, and PSI, respectively, in the current period.  Maintenance expenses, primarily production-related, were higher by approximately $8 million and $7 million for Cinergy and CG&E, respectively.  Employee benefit expenses increased approximately $7 million and $2 million for Cinergy and CG&E, respectively.  Approximately $6 million of Cinergy’s increase relates to non-regulated energy service subsidiaries that started operations, or became fully consolidated, after the second quarter of 2003.  Cinergy’s increases were partially offset by costs associated with employee retirement and severance programs recorded in the second quarter of 2003.

 

Depreciation

 

Depreciation expense increased for Cinergy and PSI and decreased for CG&E for the quarter ended June 30, 2004, as compared to 2003.  Approximately $9 million of Cinergy’s and PSI’s increase was due to the addition of depreciable plant primarily for pollution control equipment.  Partially offsetting Cinergy’s increase and contributing to CG&E’s decrease was an approximate $7.5 million reduction due to longer estimated useful lives of CG&E’s generation assets resulting from a depreciation study completed during the third quarter of 2003.  Approximately $2 million of Cinergy’s increase and partially offsetting CG&E’s decrease was the addition of depreciable plant primarily for pollution control equipment and additions related to the accelerated gas main replacement program.

 

Interest Expense

 

Interest Expense increased for Cinergy and decreased for CG&E for the quarter ended June 30, 2004, as compared to 2003.  Approximately $6 million of Cinergy’s increase reflects the recognition of a note payable to a trust.  Also reflected in Cinergy’s increase is approximately $4 million related to additional debt recorded in accordance with the consolidation of two new entities.  The note

 

64



 

MD&A – QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

 

payable and additional debt were both recorded in the third quarter of 2003 resulting from the adoption of FASB Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation 46), as discussed in the 2003 10-K.  CG&E’s decrease was primarily due to a decrease in average long-term debt and a decrease in the effective interest rate on long-term debt for the quarter ended June 30, 2004, as compared to 2003.  Partially offsetting Cinergy’s increases and contributing to CG&E’s decrease were charges recorded during 2003 associated with the re-financing of certain debt.

 

Preferred Dividend Requirement of Subsidiary Trust

 

Preferred Dividend Requirement of Subsidiary Trust decreased for Cinergy for the quarter ended June 30, 2004, as compared to 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.  However, interest expense is still being incurred on a note payable to this trust as discussed above.

 

Income Taxes

 

The effective income tax rate increased for Cinergy and PSI and remained flat for CG&E for the quarter ended June 30, 2004, as compared to 2003.  Cinergy’s increase reflects a second quarter 2003 adjustment related to the estimated annual effective tax rate that includes a change in the amount of estimated annual tax credits associated with the production and sale of synthetic fuel.  PSI’s increase was primarily a result of an increase in Indiana state income taxes.  Cinergy’s 2004 effective tax rate is expected to be approximately 24 percent.

 

In July 2002, Cinergy Capital & Trading, Inc. (Capital & Trading) acquired a coal-based synthetic fuel production facility.  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 in connection with the acquisition of the facility.  To date, Cinergy has recorded approximately $158 million in tax credits.

 

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.  Pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-lived Assets (Statement 144), these investments have been classified as discontinued operations in our financial statements.

 

65



 

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

 

2004 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 six months ended June 30, 2004 and 2003, were as follows:

 

 

 

 

Cinergy(1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

161,519

 

$

250,738

 

$

(89,219

)

(36

)

$

132,764

 

$

168,155

 

$

(35,391

)

(21

)

$

66,252

 

$

56,806

 

$

9,446

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric gross margin(2)

 

1,189,761

 

1,081,981

 

107,780

 

10

 

622,092

 

589,198

 

32,894

 

6

 

554,327

 

484,203

 

70,124

 

14

 

Gas gross margin(3)

 

187,992

 

224,531

 

(36,539

)

(16

)

147,368

 

140,736

 

6,632

 

5

 

 

 

 

 

 

 

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

(2)              Electric gross margin is calculated as Electric operating revenues less Fuel and purchased power expense from the Condensed Consolidated Statements of Income.

(3)              Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.

 

 

Cinergy’s and CG&E’s net income decreased and PSI’s increased for the six months ended June 30, 2004, as compared to the same period last year as a result of a number of factors.  Cinergy’s, CG&E’s, and PSI’s variances include higher electric gross margins discussed below.  CG&E’s variance also includes an increase in gas gross margins discussed below.  Offsetting Cinergy’s and CG&E’s increases in electric gross margins was higher Operation and maintenance expense primarily due to greater emission allowances expenses, consulting fees for a continuous improvement initiative and higher employee benefit expenses.  Cinergy’s increase in electric gross margins was also offset by lower margins from our gas marketing and trading business, impairment charges on non-controlling interests in investments, higher Depreciation expense, and gains realized in the second quarter of 2003 from the disposal of discontinued operations.  Cinergy’s and CG&E’s increase was also offset by net gains recognized in the first quarter of 2003 resulting from the implementation of certain accounting changes that have been reflected as cumulative effects of changes in accounting principles.

 

Partially offsetting PSI’s increase in electric gross margins was higher Operation and maintenance expense primarily due to greater emission allowances expenses, consulting fees for a continuous improvement initiative, and higher employee benefit expenses.  Higher Depreciation expense and a greater effective income tax rate also partially offset PSI’s increase.

 

Electric Margins

 

Cinergy’s, CG&E’s, and PSI’s electric gross margins increased for the six months ended June 30, 2004 as compared to the same period last year.  These variances primarily reflect additional MWhs delivered due to an increase in non-weather related demand and warmer weather in the current period.  Cinergy’s and CG&E’s variances also reflect in part, an increase in net revenues on power marketing, trading, and origination contracts.  Cinergy’s and PSI’s increases included a higher price received per MWh primarily due to certain rate tariff adjustments and PSI’s base retail electric rate

 

66



 

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

 

case.  Cinergy’s and CG&E’s increases were partially offset by an increase in the average price of fuel for the period.

 

Electric Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

1,366

 

$

1,319

 

$

47

 

4

 

$

674

 

$

653

 

$

21

 

3

 

$

691

 

$

666

 

$

25

 

4

 

Wholesale

 

320

 

223

 

97

 

43

 

145

 

129

 

16

 

12

 

121

 

95

 

26

 

27

 

Other

 

84

 

50

 

34

 

68

 

74

 

44

 

30

 

68

 

19

 

12

 

7

 

58

 

Total

 

$

1,770

 

$

1,592

 

$

178

 

11

 

$

893

 

$

826

 

$

67

 

8

 

$

831

 

$

773

 

$

58

 

8

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating degree-days and cooling degree-days are metrics commonly used in the utility industry as a measure of the impact weather has on results of operations.  Heating degree-days and cooling degree-days in CG&E’s and PSI’s service territories for the six months ended June 30, 2004 and 2003, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries

 

PSI

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating degree-days(1)

 

3,085

 

3,315

 

(230

)

(7

)

3,214

 

3,606

 

(392

)

(11

)

Cooling degree-days(2)

 

327

 

166

 

161

 

97

 

344

 

199

 

145

 

73

 

 

 

(1)              Heating degree-days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is less than 65 degrees.

(2)              Cooling degree-days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is greater than 65 degrees.

 

 

Retail electric operating revenues increased for Cinergy, CG&E,and PSI mainly due to five percent, four percent, and five percent higher amounts of MWhs delivered, respectively, for the six months ended June 30, 2004, as compared to 2003.  These increases in MWhs delivered resulted in approximately $60 million, $26 million, and $34 million higher retail revenues for Cinergy, CG&E, and PSI, respectively.  The greater number of MWhs delivered reflects an increase in non-weather related demand and warmer weather in the second quarter of 2004, as compared to 2003, as reflected in the greater number of cooling degree-days.

 

Cinergy’s and PSI’s increases in retail electric operating revenues were partially offset by one percent decreases in the average retail price per MWh for the first six months of 2004, as compared to 2003.  These average decreases resulted in approximately $15 million and $9 million lower retail electric operating revenues for Cinergy and PSI, respectively.  These declines in the retail price per MWh were mainly due to decreases in rate tariff adjustments associated with PSI’s fuel cost recovery mechanism.  The cost of fuel for PSI’s retail customers is passed on dollar-for-dollar under the state mandated fuel cost recovery mechanism.  This was partially offset by the IURC’s approval of PSI’s base retail electric rate increase in May 2004, discussed in Note 6(b)(i) of the “Notes to Condensed

 

67



 

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

 

Financial Statements” in “Item 1. Financial Statements”, and approximately $15 million in increases in other rate tariff adjustments related to emission allowances, construction work in progress, and clean coal technologies tracking mechanisms.

 

CG&E’s increase in retail electric operating revenues was partially offset by a $5 million decline due to a reduction in the average retail price per MWh for the six months ended June 30, 2004, as compared to 2003.  This decrease primarily reflects customers switching from full service to transportation only service as a result of deregulation in the state of Ohio.  This switching also contributed to Cinergy’s decrease in the average retail price per MWh.

 

Electric wholesale revenues increased for Cinergy, CG&E, and PSI for the six months ended June 30, 2004, as compared to 2003.  Cinergy’s increase includes a number of factors.  Net revenues on power marketing, trading, and origination contracts increased approximately $27 million over the first half of 2003.  The increase in power trading results is attributable to higher earnings on physical and financial trading primarily within the Midwest and the PJM markets.  Also, approximately $26 million of Cinergy’s variance includes increases in wholesale revenues from non-regulated energy service subsidiaries that started operations, or became fully consolidated, after the second quarter of 2003.  The majority of the remaining increase was attributable to increases in wholesale sales from generation available after serving regulated retail customers.

 

CG&E’s net revenues on power marketing, trading, and origination contracts increased by approximately $30 million over the first six months of 2003.  The increase in power trading results was attributable to higher earnings on physical and financial trading primarily within the Midwest and the PJM markets.  This increase was partially offset by a decrease in MWhs available for wholesale activity due in part to a decrease in generation available for these transactions.

 

The majority of PSI’s increase was attributable to a greater amount of wholesale sales from generation available after serving regulated retail customers.  This increase was partially offset by an approximate $4 million decrease in net revenues on power marketing, trading, and origination contracts, due to PSI’s discontinuation of entering into any new transactions beginning in 2002.  Revenues continue to be affected by changes in the fair value of existing contracts over the remaining duration of the contracts.

 

Other Electric operating revenues increased for Cinergy, CG&E, and PSI for the six months ended June 30, 2004, as compared to 2003.  Cinergy’s and CG&E’s higher Other Electric operating revenues reflect increases in coal origination of approximately $15 million and increases in the sales of emission allowances of approximately $4 million.  Cinergy’s, CG&E’s, and PSI’s increases reflect higher transmission revenues primarily resulting from Midwest ISO operations of approximately $11 million, $5 million, and $6 million, respectively.

 

68



 

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

 

Fuel and Purchased Power

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

CG&E and subsidiaries

 

PSI

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

$

499

 

$

459

 

$

40

 

9

 

$

230

 

$

193

 

$

37

 

19

 

$

231

 

$

251

 

$

(20

)

(8

)

Purchased power

 

82

 

51

 

31

 

61

 

41

 

44

 

(3

)

(7

)

45

 

38

 

7

 

18

 

Total

 

$

581

 

$

510

 

$

71

 

14

 

$

271

 

$

237

 

$

34

 

14

 

$

276

 

$

289

 

$

(13

)

(4

)

 

 

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

 

 

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 six months ended June 30, 2003, to the six months ended June 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

CG&E

 

PSI

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Fuel expense - June 30, 2003

 

$

459

 

$

193

 

$

251

 

 

 

 

 

 

 

 

 

Increase (decrease) due to changes in:

 

 

 

 

 

 

 

Price of fuel

 

28

 

23

 

5

 

Deferred fuel cost

 

(49

)

 

(49

)

Fuel consumption

 

22

 

(2

)

24

 

Other(2)

 

39

 

16

 

 

 

 

 

 

 

 

 

 

Fuel expense - June 30, 2004

 

$

499

 

$

230

 

$

231

 

 

 

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

(2)              Includes costs of coal origination and non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

 

 

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.  The fuel adjustment charge is calculated based on the estimated cost of fuel in the next three-month period.  PSI records any under-recovery or over-recovery resulting from these differences as a deferred asset or liability until it is billed or refunded to its customers, at which point it is adjusted through fuel expense.

 

Purchased Power

 

Purchased power expense increased for Cinergy and PSI and decreased for CG&E for the six months ended June 30, 2004, as compared to 2003.  Cinergy’s increase was primarily due to a significantly greater number of third party purchases by its subsidiaries in 2004.  In 2003, Cinergy’s subsidiaries’ purchased power expense included certain intercompany purchases that were eliminated in consolidation.

 

Also contributing to Cinergy’s increase and primarily causing PSI’s increase were additional purchases made for PSI’s wholesale full requirement customers resulting from both an increase in the

 

69



 

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

 

amount of MWhs purchased for these customers and the price paid per MWh.   Partially offsetting Cinergy’s increase and primarily causing CG&E’s decrease was a reduction in the amount of MWhs purchased to serve CG&E’s wholesale full requirements customers, partially offset by an increase in the price paid per MWh for these purchases.

 

Gas Margins

 

CG&E’s gas gross margins increased and Cinergy’s decreased for the six months ended June 30, 2004, as compared to the same period last year.  CG&E’s gas margins increased by $7 million primarily due to rate tariff adjustments associated with the gas main replacement program, a low-income subsidy program, and Ohio excise taxes.

 

Cinergy’s gas margins fell approximately $43 million due to lower margins from our gas marketing and trading business.  Our North American gas marketing and trading business experienced a $37 million decline in physical and financial trading margins in 2004 primarily resulting from fewer trading opportunities caused by lower volatility, lower price levels, and milder weather in the first quarter of 2004.  Natural gas prices were extremely volatile in the first quarter of 2003.  The remaining decline was due to a drop in our storage and transportation margins.  Our volume sold from storage experienced a 33 percent decline in the first six months of 2004, as compared to 2003, primarily as a result of a reduction in available gas in storage, milder weather, and lower volatility of gas prices in the first quarter of 2004, as compared to the first quarter of 2003.

 

Other Revenues

 

Other revenues for Cinergy increased for the six months ended June 30, 2004, as compared to 2003, primarily due to non-regulated energy service subsidiaries that started operations, or became fully consolidated, after June 30, 2003.

 

Operating Expenses

 

Operation and Maintenance

 

Operation and maintenance expense increased for Cinergy, CG&E, and PSI for the six months ended June 30, 2004, as compared to 2003.  Cinergy’s, CG&E’s, and PSI’s increases include approximately $43 million, $18 million, and $25 million, respectively, of higher expenses related to emissions allowances.  These increases primarily reflect higher expenses due to an increase in the cost of SO2 emission allowances as market prices have increased, timing differences in the recovery of SO2 emission allowances costs under PSI’s emission allowances tracking mechanism authorized by the IURC, the introduction of the NOX compliance program in the second quarter of 2004 (see Note 6(a)(i) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements” for further information regarding NOX compliance), and an increase in the number of SO2 emission allowances used during the period.

 

The higher Operation and maintenance expense also reflects consulting fees related to a continuous improvement initiative of approximately $12 million, $5 million, and $5 million for Cinergy, CG&E, and PSI, respectively, in the current period.  Employee benefit expenses increased approximately $11 million and $4 million for Cinergy and CG&E, respectively.  Approximately $12

 

70



 

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

 

million of Cinergy’s increase is due to non-regulated energy service subsidiaries that started operations, or became fully consolidated, after the second quarter of 2003.  In addition, higher costs of approximately $9 million, $7 million, and $2 million for Cinergy, CG&E, and PSI, respectively, were due to changes in transmission costs largely resulting from changes in the Midwest ISO operations in 2003.  Maintenance expenses, primarily production-related, were higher by approximately $12 million and $11 million for Cinergy and CG&E, respectively.

 

Depreciation

 

Depreciation expense increased for Cinergy and PSI, and decreased for CG&E for the six months ended June 30, 2004, as compared to 2003.  Approximately $19 million of Cinergy’s and PSI’s increase was due to the addition of depreciable plant primarily for pollution control equipment.  Partially offsetting Cinergy’s increase and contributing to CG&E’s decrease was an approximate $15 million reduction due to longer estimated useful lives of CG&E’s generation assets resulting from a depreciation study completed during the third quarter of 2003.  Approximately $4 million of Cinergy’s increase and partially offsetting CG&E’s decrease was the addition of depreciable plant primarily for pollution control equipment and additions related to the accelerated gas main replacement program.

 

Miscellaneous Income (Expense) – Net

 

Miscellaneous Income (Expense) Net decreased for Cinergy for the six months ended June 30, 2004, as compared to 2003, which reflects approximately $34 million in impairment charges on non-controlling interests in investments.  The majority of these charges relate to a company, in which Cinergy holds a non-controlling interest, that agreed to sell its major assets.  This company is involved in the development and sale of outage management software.  This decrease was partially offset by interest income of approximately $10 million on the notes receivable of two subsidiaries consolidated in the third quarter of 2003, as discussed in the 2003 10-K.

 

Interest Expense

 

Interest Expense increased for Cinergy and decreased for CG&E for the six months ended June 30, 2004, as compared to 2003.  Approximately $12 million of Cinergy’s increase reflects the recognition of a note payable to a trust.  Also reflected in Cinergy’s increase is approximately $9 million related to additional debt recorded in accordance with the consolidation of two new entities.  The note payable and additional debt were both recorded in the third quarter of 2003 resulting from the adoption of Interpretation 46, as discussed in the 2003 10-K.  CG&E’s decrease was primarily due to a decrease in average long-term debt and a decrease in the effective interest rate on long-term debt for the six months ended June 30, 2004, as compared to 2003.  Partially offsetting Cinergy’s increases and contributing to CG&E’s decrease were charges recorded during 2003 associated with the re-financing of certain debt.

 

Preferred Dividend Requirement of Subsidiary Trust

 

Preferred Dividend Requirement of Subsidiary Trust decreased for Cinergy for the six months ended June 30, 2004, as compared to 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

 

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Cinergy’s financial statements.  However, interest expense is still being incurred on a note payable to this trust as discussed above.

 

Income Taxes

 

The effective income tax rate for Cinergy and CG&E remained flat for the six-months ended June 30, 2004, as compared to 2003.  PSI’s effective income tax rate increased for the comparative period, primarily a result of an increase in Indiana state income taxes.  Cinergy’s 2004 effective tax rate is expected to be approximately 24 percent.

 

In July 2002, Capital & Trading acquired a coal-based synthetic fuel production facility.  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 in connection with the acquisition of the facility.  To date, Cinergy has recorded approximately $158 million in tax credits.

 

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.  Pursuant to Statement 144, these investments have been classified as discontinued operations in our financial statements.

 

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 of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations and the rescission of Emerging Issues Task Force Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities.

 

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ULH&P

 

The Results of Operations discussion for ULH&P is presented only for the six months ended June 30, 2004, 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 six months ended June 30, 2004 and 2003, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

2004

 

2003

 

Change

 

%
Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Electric gross margin(1)

 

$

33,640

 

$

29,766

 

$

3,874

 

13

 

Gas gross margin(2)

 

25,810

 

22,817

 

2,993

 

13

 

 

 

 

 

 

 

 

 

 

 

Net income

 

10,979

 

8,911

 

2,068

 

23

 

 

 

(1)   Electric gross margin is calculated as Electric operating revenues less Electricity purchased from parent company for resale expense from the Condensed Statements of Income.

(2)   Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Statements of Income.

 

 

Summary of Results

 

Electric and gas gross margins increased for ULH&P for the six months ended June 30, 2004, as compared to 2003.  The increase in electric gross margins reflects a greater amount of MWhs delivered due to increases in non-weather related demand and warmer weather in the current period.  The increase in gas gross margins was due, in part, to rate tariff adjustments associated with the gas main replacement program.

 

The increase in net income for the year was primarily due to the increased electric and gas gross margins discussed above.  These increases were partially offset by higher Depreciation expense primarily related to non-utility property and higher Operation and maintenance expense associated with demand side management programs, maintenance, and employee benefits.

 

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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 financial position and results of operations.

 

ELECTRIC INDUSTRY

 

Ohio

 

As discussed in more detail in the 2003 10-K, CG&E made multiple rate filings in 2003 with the PUCO seeking to establish market-based rates for generation service at the end of the market development period and to recover investments made in the transmission and distribution system.  In December 2003, these filings, and CG&E’s proposal for establishing its post-market development period market pricing methodology, were consolidated for hearing before the PUCO.  In addition, the PUCO requested that CG&E propose a rate stabilization plan in these same proceedings.  In January 2004, CG&E filed its proposed rate stabilization plan.  In May 2004, CG&E entered into a settlement agreement with most of the parties to these proceedings requesting that the PUCO approve a modified version of the rate stabilization plan.

 

The major features of the modified plan are as follows (some of these features revise provisions of the CG&E transition plan discussed more fully in the 2003 10-K):

 

                  CG&E would begin to collect a POLR charge from non-residential customers effective January 1, 2005, and from residential customers effective January 1, 2006.  The POLR charge, which consists of a fixed and variable component, is intended to provide cost recovery primarily for increased capacity reserves, environmental compliance and emission allowance expenditures.  The fixed component, which is 15 percent of current generation rates, is not charged to the first 25 percent of customers in each customer class who switch to an alternative supplier.  The variable component, which is charged to all customers, could be increased by up to eight percent of CG&E’s generation rate each year from 2005 through 2008.  If the settlement is approved, revenues are expected to increase approximately $40 million in 2005 and $98 million in 2006 for the POLR charge;

                  Customers receiving generation from CG&E would be charged CG&E’s existing generation rates, less the 15 percent recovered through the POLR charge discussed above.  A fuel cost recovery mechanism would be established to recover costs for fuel that exceed the amount originally included in the rates frozen in the CG&E transition plan.  These new rates would apply to non-residential customers beginning January 1, 2005 and to residential customers beginning January 1, 2006;

                  The five percent generation rate reduction for residential customers currently in effect through 2005 would be extended to 2008;

                  The recovery of the residential regulatory transition charge currently in effect through 2008 would be extended to 2010;

                  Transmission cost recovery mechanisms would be established beginning January 1, 2005 for non-residential customers and January 1, 2006 for residential customers;

 

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                  CG&E would have the ability to defer certain capital-related distribution costs from July 1, 2004 through December 31, 2005 (we currently estimate that approximately $70 million would be deferred during this period) with recovery to be provided through riders beginning January 1, 2006 through December 31, 2010.

 

Evidentiary hearings addressing the issues described above took place during May and June 2004.  We cannot predict the outcome of these proceedings.

 

CG&E has also filed an application for an annual increase of approximately $78 million in electric distribution base rates, to be effective in the first quarter of 2005 for non-residential customers and January 1, 2006 for residential customers.  The rate stabilization plan settlement agreement described above provides for CG&E to withdraw this base rate case upon approval of the rate stabilization plan.  CG&E can then file a new distribution base rate case, with rates to become effective January 1, 2006.

 

FERC and Midwest ISO

 

Day-Ahead and Real-Time Energy Markets

 

In response to prior FERC orders, in March 2004, the Midwest ISO filed with the FERC proposed changes to its existing transmission tariff to add terms and conditions to implement a centralized security-constrained economic dispatch platform supported by a Day-Ahead and Real-Time Energy Market design, including Locational Marginal Pricing and Financial Transmission Rights (Energy Markets Tariff).  In May 2004, the FERC released an order scheduling the start-up of the Energy Markets Tariff for no earlier than March 1, 2005, and establishing various procedures for resolving outstanding issues, but has not ruled on the filing itself.  At this time, Cinergy cannot predict the effect the Midwest ISO’s Energy Markets Tariff filing will have on our financial position or results of operations.

 

Blackout Report

 

In April 2004, the United States-Canada Power System Outage Task Force issued its Final Report on the August 14, 2003 Blackout in the United States and Canada.  The report reviewed the causes of the Blackout and made 46 recommendations intended to minimize the likelihood and scope of similar events in the future.  One of the recommendations is to make reliability standards mandatory and enforceable with penalties for noncompliance.  In the past, compliance with North Electric Reliability Council’s reliability standards and guidelines has largely been voluntary.  At this time, we do not believe the Final Report will have a material impact on our financial position or results of operations.

 

FERC’s Market Screen Orders

 

In April 2004, FERC issued an order establishing a new, interim set of market power screens for use in evaluating sales of wholesale power at market-based rates.  In July 2004, the FERC issued an order generally affirming that order.  In April 2004, the FERC also commenced a rulemaking to evaluate whether its overall test for market-based rates should be continued, and to determine a permanent market power test to replace the interim test.  That rulemaking process remains pending.  At this

 

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time, we cannot predict the effect the April and July orders and the April rulemaking will have on our financial position or results of operations.

 

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

 

The transactions associated with the Commercial Business Unit’s (Commercial) 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.

 

As discussed in the 2003 10-K, CG&E and PSI executed a new joint operating agreement in April 2002 whereby we choose to originate all new power marketing and trading contracts since April 2002 on behalf of CG&E only.  Historically, such contracts were executed on behalf of PSI and CG&E jointly.  PSI’s remaining contracts, entered into prior to the new joint operating agreement, are not material.  Additionally, we expect that PSI will not enter into new power marketing and trading contracts in the future.  Therefore, we have not presented PSI separately in the fair value and credit risk tables below.

 

Value at Risk (VaR)

 

Commercial measures the market risk inherent in the trading portfolio employing VaR analysis and other methodologies, which utilize forward price curves in electric power and natural gas markets to quantify estimates of the magnitude and probability of future value changes related to open contract positions.  VaR is a statistical measure used to quantify the potential change in fair value of the trading portfolio over a particular period of time, with a specified likelihood of occurrence, due to market movement.  Commercial, through some of our non-regulated subsidiaries, markets physical natural gas and electricity and trades derivative commodity instruments which are usually settled in cash including: forwards, futures, swaps, and options.

 

Any proprietary trading transaction, whether settled physically or financially, is included in the VaR calculation.

 

Our VaR is reported based on a 95 percent confidence interval, utilizing a one-day holding period.  This means that on a given day (one-day holding period) there is a 95 percent chance (confidence level) that our trading portfolio will not lose more than the stated amount.  Prior to March 31, 2004, our VaR model used the Parametric variance-covariance statistical modeling technique and historical volatilities and correlations over the past 21-trading day period.  Beginning with April 1, 2004, we calculate VaR using a Monte Carlo simulation methodology using implied forward-looking volatilities and historical correlations.  Comparisons indicated that the differences in VaR between the Monte Carlo and Parametric calculations were not material and were within expectations.   The primary reason for changing to a Monte Carlo approach is that it offers a more scalable method for handling more complex derivative positions and provides a consistent platform for quantifying both market and credit risk.

 

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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 June 30, 2004 and 2003, are presented in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Fair Value
Year to Date

 

 

 

June 30, 2004

 

June 30, 2003

 

 

 

Cinergy(1)

 

CG&E

 

Cinergy(1)

 

CG&E

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Fair value of contracts outstanding at beginning of year

 

$

41

 

$

20

 

$

75

 

$

42

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value attributable to changes in valuation techniques and assumptions (2)

 

 

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

Other changes in fair value (3)

 

103

 

49

 

82

 

19

 

 

 

 

 

 

 

 

 

 

 

Option premiums paid/(received)

 

(3

)

2

 

(11

)

(2

)

 

 

 

 

 

 

 

 

 

 

Cumulative effect of changes in accounting principle

 

 

 

(20

)

(13

)

 

 

 

 

 

 

 

 

 

 

Contracts settled

 

(76

)

(28

)

(117

)

(49

)

 

 

 

 

 

 

 

 

 

 

Fair value of contracts outstanding at end of period

 

$

65

 

$

43

 

$

10

 

$

(2

)

 

 

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

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

(3)              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.

 

 

The following are the balances at June 30, 2004 and 2003, of our energy risk management assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2004

 

June 30, 2003

 

 

 

Cinergy(1)

 

CG&E

 

Cinergy(1)

 

CG&E

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Energy risk management assets – current

 

$

425

 

$

156

 

$

401

 

$

68

 

Energy risk management assets – non-current

 

138

 

58

 

151

 

63

 

 

 

 

 

 

 

 

 

 

 

Energy risk management liabilities – current

 

384

 

134

 

385

 

79

 

Energy risk management liabilities – non-current

 

114

 

37

 

157

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

$

65

 

$

43

 

$

10

 

$

(2

)

 

 

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

 

 

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The following table presents the expected maturity of the energy risk management assets and liabilities as of June 30, 2004, for Cinergy and CG&E:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Contracts as of June 30, 2004

 

 

 

 

 

 

 

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

 

$

38

 

$

18

 

$

 

$

 

$

56

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices based on models and other valuation methods(3)

 

3

 

11

 

(1

)

(4

)

9

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

41

 

$

29

 

$

(1

)

$

(4

)

$

65

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E

 

 

 

 

 

 

 

 

 

 

 

Prices actively quoted

 

$

15

 

$

15

 

$

 

$

 

$

30

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices based on models and other valuation methods(3)

 

7

 

9

 

(3

)

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

22

 

$

24

 

$

(3

)

$

 

$

43

 

 

 

(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.

(3)

A substantial portion of those amounts include option values.

 

 

 

Energy Trading Credit Risk

 

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy.  Written guidelines approved by Cinergy’s Risk Policy Committee document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures.  Cinergy analyzes net credit exposure and establishes credit reserves based on the counterparties’ credit rating, payment history, and tenor of the outstanding obligation.  Exposures to credit risks are monitored daily by the Corporate Credit Risk function, which is independent of all trading operations.  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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The following tables provide information regarding Cinergy’s and CG&E’s exposure on energy trading contracts as well as the expected maturities of those exposures as of June 30, 2004.  The tables include accounts receivable and energy risk management assets, which are net of accounts payable and energy risk management liabilities with the same counterparties when we have the right of offset.  The credit collateral shown in the following tables includes cash and letters of credit.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating

 

Total
Exposure
Before Credit
Collateral

 

Credit
Collateral

 

Net
Exposure

 

Percentage of
Total
Net Exposure

 

Number of
Counterparties
Greater than 10%
of Total Net Exposure

 

Net Exposure of
Counterparties
Greater than 10% of
Total Net Exposure(4)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade(2)

 

$

519,187

 

$

48,587

 

$

470,600

 

74

%

 

$

 

Internally Rated-Investment Grade(3)

 

119,891

 

6,262

 

113,629

 

18

 

 

 

Non-Investment Grade

 

94,932

 

61,622

 

33,310

 

5

 

 

 

Internally Rated-Non-Investment Grade

 

45,349

 

25,873

 

19,476

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

779,359

 

$

142,344

 

$

637,015

 

100

%

 

$

 

 

 

 

Maturity of Credit Risk Exposure

 

 

 

 

 

Rating

 

Less than
2 Years

 

2-5 Years

 

Exposure
Greater than
5 Years

 

Total Exposure
Before Credit
Collateral

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Investment Grade(2)

 

$

454,917

 

$

47,541

 

$

16,729

 

$

519,187

 

Internally Rated-Investment Grade(3)

 

117,326

 

2,280

 

285

 

119,891

 

Non-Investment Grade

 

94,493

 

439

 

 

94,932

 

Internally Rated-Non-Investment Grade

 

45,064

 

285

 

 

45,349

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

711,800

 

$

50,545

 

$

17,014

 

$

779,359

 

 

 

(1)              Includes amounts related to non-registrants.

(2)              Includes counterparties rated Investment Grade or the counterparties’ obligations are guaranteed or secured by an Investment Grade entity.

(3)              Counterparties include a variety of entities, including investor-owned utilities, privately held companies, cities and municipalities.  Cinergy assigns internal credit ratings to all counterparties within our credit risk portfolio, applying fundamental analytical tools.  Included in this analysis is a review of (but not limited to) counterparty financial statements with consideration given to off-balance sheet obligations and assets, specific business environment, access to capital, and indicators from debt and equity capital markets.

(4)              Exposures, positive or negative, with counterparties that are related to one another are not aggregated when no right of offset exists and as a result, credit is extended and evaluated on a separate basis.

 

 

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CG&E

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating

 

Total
Exposure
Before Credit
Collateral

 

Credit
Collateral

 

Net
Exposure

 

Percentage of
Total
Net Exposure

 

Number of
Counterparties
Greater than 10%
of Total Net Exposure

 

Net Exposure of
Counterparties
Greater than 10% of
Total Net Exposure
(3)

 

 

 

(in thousands)

Investment Grade(1)

 

$

131,405

 

$

37,928

 

$

93,477

 

83

%

1

 

$

12,733

 

Internally Rated-Investment Grade(2)

 

14,160

 

 

14,160

 

13

 

 

 

Non-Investment Grade

 

16,206

 

14,059

 

2,147

 

1

 

 

 

Internally Rated-Non-Investment Grade

 

4,423

 

1,493

 

2,930

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

166,194

 

$

53,480

 

$

112,714

 

100

%

1

 

$

12,733

 

 

 

 

Maturity of Credit Risk Exposure

 

 

 

 

 

Rating

 

Less than
2 Years

 

2-5 Years

 

Exposure
Greater than
5 Years

 

Total Exposure
Before Credit
Collateral

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Investment Grade(1)

 

$

117,004

 

$

14,401

 

$

 

$

131,405

 

Internally Rated-Investment Grade(2)

 

14,160

 

 

 

14,160

 

Non-Investment Grade

 

15,786

 

420

 

 

16,206

 

Internally Rated-Non-Investment Grade

 

4,423

 

 

 

4,423

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

151,373

 

$

14,821

 

$

 

$

166,194

 

 

 

(1)              Includes counterparties rated Investment Grade or the counterparties’ obligations are guaranteed or secured by an Investment Grade entity.

(2)              Counterparties include various cities and municipalities.

(3)              Exposures, positive or negative, with counterparties that are related to one another are not aggregated when no right of offset exists and as a result, credit is extended and evaluated on a separate basis.

 

 

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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 2003 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;

                  Income Taxes;

                  Legal and Environmental Contingencies; and

                  Impairment of Long-lived Assets.

 

Accounting Changes

 

Consolidation of Variable Interest Entities (VIE)

 

In January 2003, the FASB issued 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) any entity that has equity investors that do not have voting rights, do not absorb first dollar 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 traditional SPEs and to March 31, 2004, for all other entities subject to the scope of Interpretation 46.  We elected to implement Interpretation 46 for traditional SPEs in accordance with the original implementation date of July 1, 2003, and for all other entities, including certain operating joint ventures, as of March 31, 2004.  The consolidation of certain operating joint ventures as of March 31, 2004, did not have a material impact on our financial position or results of operations.

 

Cinergy also holds interests in several joint ventures that are considered VIEs which do not require consolidation.  If all these entities were consolidated, their total assets and liabilities would be immaterial to our Condensed Consolidated Balance Sheets.

 

81



 

MD&A - - RESULTS OF OPERATIONS - FUTURE

 

SUBSEQUENT EVENT

 

Cinergy’s Power Technology and Infrastructure Services Business Unit holds an investment in a company that develops, owns and operates wireless communication towers.  In July 2004, this company agreed to sell the majority of its assets.  We anticipate recording earnings of approximately $20 million relating to this sale in the fourth quarter of 2004.  These earnings will be reflected in Equity in Earnings of Unconsolidated Subsidiaries in Cinergy’s Condensed Consolidated Statements of Income.

 

82



 

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”.

 

83



 

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 June 30, 2004, 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 recorded, processed, summarized, 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 June 30, 2004 and found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

84



 

PART II. - - OTHER INFORMATION

 

PART II.  OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

CLEAN AIR ACT (CAA) LAWSUIT

 

In November 1999, and through subsequent amendments, the United States brought a lawsuit in the United States Federal District Court for the Southern District of Indiana (District Court) against Cinergy, The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI) alleging various violations of the CAA.  Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana State Implementation Plan (SIP) permits for various projects at our owned and co-owned generating stations.  Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the United States Environmental Protection Agency (EPA) and Cinergy relating to alleged violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Generating Station (Beckjord Station).  The suit seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s Beckjord Station and Miami Fort Generating Station, and PSI’s Cayuga Generating Station, Gallagher Generating Station (Gallagher Station), Wabash River Generating Station, and Gibson Generating Station, and (2) civil penalties in amounts of up to $27,500 per day for each violation.  In addition, three northeast states and two environmental groups have intervened in the case.  In May 2004, the City of Louisville, Kentucky filed a motion to intervene in the case with respect to all claims made by the United States against PSI and Cinergy regarding the Gallagher Station.  The court denied Louisville’s motion in June 2004.  The case is currently in discovery, and the District Court has set the case for trial by jury commencing in August 2005.

 

In March 2000, the United States also filed in the District Court an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by 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.  In April 2001, the District Court in that case ruled that the Government and the intervening plaintiff environmental groups cannot seek monetary damages for alleged violations that occurred prior to November 3, 1994; however, they are entitled to seek injunctive relief for such alleged violations.  Neither party appealed that decision.

 

In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a Notice of Violation (NOV) to DP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at a generating station operated by DP&L and jointly-owned by CG&E.  The NOV indicated the EPA may (1) issue an order requiring compliance with the requirements of the Ohio SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  In July 2004, the Sierra Club sent Cinergy a notice of intent to sue for alleged violations of the CAA at this same generating station.

 

In December 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the plaintiffs regarding the above matters.  The complete resolution of these issues was contingent upon

 

85



 

Controls and Procedures

 

establishing a final agreement with the EPA and other parties, but the plaintiffs insisted on commitments which went beyond those contained in the agreement in principle.  At this time we believe it is unlikely that a final settlement agreement will be reached on these terms.  It is not possible to predict whether resolution of these matters would have a material effect on our financial position or results of operations.  We intend to defend against the allegations, discussed above, vigorously in court.

 

CARBON DIOXIDE (CO2) LAWSUIT

 

In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York brought a lawsuit in the United States District Court for the Southern District of New York against Cinergy and American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’ emissions of CO2 from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance.  The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO2.  Plaintiffs are seeking an injunction requiring each defendant to cap its CO2 emissions and then reduce them by a specified percentage each year for at least a decade.  Cinergy intends to defend this lawsuit vigorously in court; however, we are not able to predict whether resolution of these matters would have a material effect on our financial position or results of operations.

 

MANUFACTURED GAS PLANT SITES (MGP)

 

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

 

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 oversees investigation and cleanup of all of these sites.  Thus far, PSI has primary responsibility for investigating, monitoring and, if necessary, remediating nine of these sites.  In December 2003, PSI entered into a voluntary remediation plan with the state of Indiana, providing a formal framework for the investigation and cleanup of the sites for which PSI has primary responsibility.

 

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 and compensate PSI for its costs of investigating, preventing, mitigating,

 

86



 

PART II. - - OTHER INFORMATION

 

and remediating damage to property and paying claims related to MGP sites; or (2) pay PSI’s cost of defense.  The trial court issued a variety of rulings with respect to the claims and defenses in the litigation.  PSI appealed certain adverse rulings to the Indiana Court of Appeals and the appellate court has remanded the case to the trial court.  The court has set the case for trial commencing in January 2005.  At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeals.

 

PSI has accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated.  We will continue to investigate and remediate the sites as outlined in the voluntary remediation plan.  As additional facts become known and investigation is completed, we will assess whether the likelihood of incurring additional costs becomes probable.  Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

 

CG&E and ULH&P have performed site assessments on certain of their sites where we believe MGP activities have occurred at some point in the past and have found no imminent risk to the environment.  At the present time, CG&E and ULH&P cannot predict whether investigation and/or remediation will be required in the future at any of these sites.

 

ASBESTOS CLAIM 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 85 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 a verdict for PSI on punitive damages.  PSI received an adverse ruling in an initial appeal of that verdict, but the Indiana Supreme Court accepted the transfer of the case, and heard oral argument in June 2004.  In addition, PSI has settled a number of other lawsuits for amounts, which neither individually nor in the aggregate, are material to PSI’s financial position or results of operations.

 

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.

 

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.

 

87



 

PART II. - - OTHER INFORMATION

 

ITEM 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The number of shares provided in the table below represent shares exchanged in connection with employee option exercises and shares purchased by the plan trustee on behalf of the 401(k) Excess Plan.

 

 

 

 

 

 

 

 

 

 

 

Period

 

(a) Total Number of
Shares (or Units)
Purchased

 

(b) Average Price
Paid per Share
(or Unit)

 

(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs

 

(d) Maximum
Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet
Be Purchased
Under the Plans or
Programs

 

 

 

 

 

 

 

 

 

 

 

April 1 – April 30

 

7,089

 

$

40.34

 

N/A

 

N/A

 

May 1 – May 31

 

47,141

 

$

37.03

 

N/A

 

N/A

 

June 1 – June 30

 

 

$

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

88



 

PART II. - - OTHER INFORMATION

 

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:

 

 

 

 

 

 

 

Certificates

 

 

 

 

 

 

 

 

 

 

 

 

 

31-a

 

Cinergy Corp.
CG&E
PSI
ULH&P

 

Certification by James E. Rogers pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

31-b

 

Cinergy Corp.
CG&E
PSI
ULH&P

 

Certification by R. Foster Duncan pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

32-a

 

Cinergy Corp.
CG&E
PSI
ULH&P

 

Certification by James E. Rogers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

32-b

 

Cinergy Corp.
CG&E
PSI
ULH&P

 

Certification by R. Foster Duncan pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

(b)                       The following reports on Form 8-K were furnished or filed during the quarter ended June 30, 2004.

 

Date of Report

 

Registrant

 

Item Furnished or Filed

 

 

 

 

 

April 27, 2004

 

Cinergy Corp.

 

Item 12. Results of Operations and Financial Condition

 

 

 

 

 

May 6, 2004

 

Cinergy Corp.

 

Item 12. Results of Operations and Financial Condition

 

 

 

 

 

 

89



 

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:  August 4, 2004

    /s/

Lynn J. Good

 

 

 

Lynn J. Good

 

 

(duly authorized officer
and
principal accounting officer)

 

 

90


EX-31.A 2 a04-8694_1ex31da.htm EX-31.A

Exhibit 31.a

 

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: August 4, 2004

 

 

/s/ James E. Rogers

 

James E. Rogers

Chief Executive Officer

 


EX-31.B 3 a04-8694_1ex31db.htm EX-31.B

Exhibit 31.b

 

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: August 4, 2004

 

 

/s/ R. Foster Duncan

 

R. Foster Duncan

Chief Financial Officer

 


EX-32.A 4 a04-8694_1ex32da.htm EX-32.A

Exhibit 32.a

 

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 June 30, 2004 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.

 

Date: August 4, 2004

 

/s/ James E. Rogers

 

James E. Rogers

Chief Executive Officer

 


EX-32.B 5 a04-8694_1ex32db.htm EX-32.B

Exhibit 32.b

 

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 June 30, 2004 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.

 

Date: August 4, 2004

 

/s/ R. Foster Duncan

 

R. Foster Duncan

Chief Financial Officer

 


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