-----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, I8IHcSj7T4sxnHoG1Oe2o+o+j3HbXsXRzbFYanQqM8TgS79zzQyhiCm9p3hWHEyx POrZP1xSlq4ngtg8qMEHQw== 0001104659-04-013273.txt : 20040507 0001104659-04-013273.hdr.sgml : 20040507 20040507172629 ACCESSION NUMBER: 0001104659-04-013273 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 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: 04790280 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: 04790279 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5132872644 MAIL ADDRESS: STREET 1: 139 E FOURTH STREET STREET 2: P.O BOX 960 CITY: CINCINATI STATE: OH ZIP: 45202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINCINNATI GAS & ELECTRIC CO CENTRAL INDEX KEY: 0000020290 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 310240030 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01232 FILM NUMBER: 04790282 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST ROOM 362-ANNEX STREET 2: PO BOX 960 CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5132872291 MAIL ADDRESS: STREET 1: 139 E. FOURTH ST. STREET 2: PO BOX 960 CITY: CINCINNATTI STATE: OH ZIP: 45202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSI ENERGY INC CENTRAL INDEX KEY: 0000081020 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 350594457 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03543 FILM NUMBER: 04790281 BUSINESS ADDRESS: STREET 1: 1000 EAST MAIN STREET STREET 2: PO BOX 960 CITY: PLAINFIELD STATE: IN ZIP: 46168 BUSINESS PHONE: 3178399611 MAIL ADDRESS: STREET 1: 1000 EAST MAIN STREET STREET 2: PO BOX 960 CITY: PLAINFIELD STATE: IN ZIP: 46168 FORMER COMPANY: FORMER CONFORMED NAME: PUBLIC SERVICE CO OF INDIANA INC DATE OF NAME CHANGE: 19900509 10-Q 1 a04-5115_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 March 31, 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.
(A Delaware Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

 

31-1385023

 

 

 

 

 

1-1232

 

THE CINCINNATI GAS & ELECTRIC COMPANY
(An Ohio Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

 

31-0240030

 

 

 

 

 

1-3543

 

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

 

35-0594457

 

 

 

 

 

2-7793

 

THE UNION LIGHT, HEAT AND POWER COMPANY
(A Kentucky Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500

 

31-0473080

 


 

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 April 30, 2004, shares of common stock outstanding for each registrant were as listed:

 

Registrant

 

Description

 

Shares

 

 

 

 

 

Cinergy Corp.

 

Par value $.01 per share

 

179,900,405

 

 

 

 

 

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

 

 

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

 

 

 

 

4

Submission of Matters to a Vote of Security Holders

 

 

 

 

6

Exhibits and Reports on Form 8-K

 

 

 

 

 

Signatures

 

 

3



 

CINERGY CORP.

AND SUBSIDIARY COMPANIES

 

4



 

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Quarter Ended
March 31

 

 

 

2004

 

2003

 

 

 

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

 

Operating Revenues

 

 

 

 

 

Electric

 

$

878,128

 

$

823,059

 

Gas

 

350,846

 

398,913

 

Other

 

59,684

 

45,986

 

Total Operating Revenues

 

1,288,658

 

1,267,958

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Fuel and purchased power

 

286,914

 

269,866

 

Gas purchased

 

223,516

 

235,995

 

Operation and maintenance

 

375,274

 

328,055

 

Depreciation

 

104,857

 

100,605

 

Taxes other than income taxes

 

82,247

 

77,749

 

Total Operating Expenses

 

1,072,808

 

1,012,270

 

 

 

 

 

 

 

Operating Income

 

215,850

 

255,688

 

 

 

 

 

 

 

Equity in Earnings of Unconsolidated Subsidiaries

 

2,748

 

592

 

Miscellaneous (Expense) Income – Net (Note 8)

 

(15,508

)

7,492

 

Interest Expense

 

67,395

 

59,169

 

Preferred Dividend Requirement of Subsidiary Trust

 

 

5,970

 

Preferred Dividend Requirements of Subsidiaries

 

858

 

858

 

 

 

 

 

 

 

Income Before Taxes

 

134,837

 

197,775

 

 

 

 

 

 

 

Income Taxes

 

31,822

 

57,982

 

 

 

 

 

 

 

Income Before Discontinued Operations and Cumulative

 

 

 

 

 

Effect of Changes in Accounting Principles

 

103,015

 

139,793

 

 

 

 

 

 

 

Discontinued operations, net of tax (Note 8)

 

 

(170

)

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

 

 

26,462

 

Net Income

 

$

103,015

 

$

166,085

 

 

 

 

 

 

 

Average Common Shares Outstanding

 

179,261

 

173,387

 

 

 

 

 

 

 

Earnings Per Common Share (Note 10)

 

 

 

 

 

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

 

$

0.57

 

$

0.81

 

Discontinued operations, net of tax

 

 

 

Cumulative effect of changes in accounting principles, net of tax

 

 

0.15

 

Net income

 

$

0.57

 

$

0.96

 

 

 

 

 

 

 

Earnings Per Common Share - Assuming Dilution (Note 10)

 

 

 

 

 

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

 

$

0.57

 

$

0.80

 

Discontinued operations, net of tax

 

 

 

Cumulative effect of changes in accounting principles, net of tax

 

 

0.15

 

Net income

 

$

0.57

 

$

0.95

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.47

 

$

0.46

 

 

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

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

218,541

 

$

169,120

 

Restricted deposits

 

94,659

 

92,813

 

Notes receivable, current

 

74,916

 

189,854

 

Accounts receivable less accumulated provision for doubtful accounts of $ 7,853 at March 31, 2004, and $7,884 at December 31, 2003

 

1,162,871

 

1,074,518

 

Fuel, emission allowances, and supplies

 

275,372

 

357,625

 

Energy risk management current assets

 

352,235

 

305,058

 

Prepayments and other

 

88,022

 

53,609

 

Total Current Assets

 

2,266,616

 

2,242,597

 

 

 

 

 

 

 

Property, Plant, and Equipment - at Cost

 

 

 

 

 

Utility plant in service

 

9,835,661

 

9,732,123

 

Construction work in progress

 

279,782

 

275,459

 

Total Utility Plant

 

10,115,443

 

10,007,582

 

Non-regulated property, plant, and equipment

 

4,561,449

 

4,527,943

 

Accumulated depreciation

 

4,994,540

 

4,908,019

 

Net Property, Plant, and Equipment

 

9,682,352

 

9,627,506

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

1,006,879

 

1,012,151

 

Investments in unconsolidated subsidiaries

 

489,482

 

494,520

 

Energy risk management non-current assets

 

113,921

 

97,334

 

Notes receivable, non-current

 

209,001

 

213,853

 

Other investments

 

161,624

 

184,044

 

Goodwill and other intangible assets

 

53,041

 

45,349

 

Other

 

197,351

 

197,351

 

Total Other Assets

 

2,231,299

 

2,244,602

 

 

 

 

 

 

 

Assets of Discontinued Operations (Note 8)

 

4,343

 

4,501

 

 

 

 

 

 

 

Total Assets

 

$

14,184,610

 

$

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 BALANCE SHEETS

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

1,364,327

 

$

1,240,423

 

Accrued taxes

 

228,798

 

217,993

 

Accrued interest

 

68,194

 

68,952

 

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

 

236,936

 

351,412

 

Long-term debt due within one year

 

729,793

 

839,103

 

Energy risk management current liabilities

 

329,496

 

296,122

 

Other

 

106,170

 

107,438

 

Total Current Liabilities

 

3,063,714

 

3,121,443

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt (Note 3)

 

4,133,169

 

4,131,909

 

Deferred income taxes

 

1,583,035

 

1,557,981

 

Unamortized investment tax credits

 

106,616

 

108,884

 

Accrued pension and other postretirement benefit costs

 

681,916

 

662,834

 

Accrued cost of removal

 

501,025

 

490,856

 

Energy risk management non-current liabilities

 

88,221

 

64,861

 

Other

 

209,094

 

205,344

 

Total Non-Current Liabilities

 

7,303,076

 

7,222,669

 

 

 

 

 

 

 

Liabilities of Discontinued Operations (Note 8)

 

9,693

 

11,594

 

 

 

 

 

 

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

10,376,483

 

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 – 179,665,285 at March 31, 2004, and 178,438,369 at December 31, 2003; outstanding shares – 179,544,917 at March 31, 2004, and 178,336,854 at December 31, 2003

 

1,797

 

1,784

 

Paid-in capital

 

2,220,748

 

2,195,985

 

Retained earnings

 

1,569,995

 

1,551,003

 

Treasury shares at cost – 120,368 shares at March 31, 2004, and 101,515 shares at December 31, 2003

 

(3,862

)

(3,255

)

Accumulated other comprehensive income (loss)

 

(43,369

)

(44,835

)

Total Common Stock Equity

 

3,745,309

 

3,700,682

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

14,184,610

 

$

14,119,206

 

 

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

 

7



 

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

 

 

 

Common
Stock

 

Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Common
Stock
Equity

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 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

 

 

 

 

 

103,015

 

 

 

 

 

103,015

 

Other comprehensive income (loss), net of tax effect of $(914)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

986

 

986

 

Unrealized gain (loss) on investment trusts

 

 

 

 

 

 

 

 

 

755

 

755

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

(275

)

(275

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

104,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock - net (1,226,916 shares)

 

13

 

21,082

 

 

 

 

 

 

 

21,095

 

Treasury shares purchased (18,853 shares)

 

 

 

 

 

 

 

(607

)

 

 

(607

)

Dividends on common stock ($0.47 per share)

 

 

 

 

 

(83,987

)

 

 

 

 

(83,987

)

Other

 

 

 

3,681

 

(36

)

 

 

 

 

3,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance at March 31, 2004 (179,544,917 shares)

 

$

1,797

 

$

2,220,748

 

$

1,569,995

 

$

(3,862

)

$

(43,369

)

$

3,745,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 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

 

 

 

 

 

166,085

 

 

 

 

 

166,085

 

Other comprehensive income (loss), net of tax effect of $(275)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

2,090

 

2,090

 

Unrealized gain (loss) on investment trusts

 

 

 

 

 

 

 

 

 

(851

)

(851

)

Cash flow hedges

 

 

 

 

 

 

 

 

 

(452

)

(452

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

166,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock - net (7,213,804 shares)

 

72

 

193,896

 

 

 

 

 

 

193,968

 

Dividends on common stock ($0.46 per share)

 

 

 

 

 

(77,685

)

 

 

 

 

(77,685

)

Other

 

 

 

4,190

 

8

 

 

 

 

4,198

 

Ending balance at March 31, 2003 (175,876,919 shares)

 

$

1,759

 

$

2,116,222

 

$

1,491,861

 

$

 

$

(29,013

)

$

3,580,829

 

 

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

 

 

 

Quarter Ended
March 31

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Cash Flows from Continuing Operations

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

103,015

 

$

166,085

 

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

 

 

 

 

 

Depreciation

 

104,857

 

100,605

 

Loss on discontinued operations, net of tax

 

 

170

 

Loss on impairment or disposal of investments

 

22,766

 

 

Cumulative effect of changes in accounting principles, net of tax

 

 

(26,462

)

Change in net position of energy risk management activities

 

(7,030

)

9,730

 

Deferred income taxes and investment tax credits - net

 

11,627

 

18,013

 

Equity in earnings of unconsolidated subsidiaries

 

(2,748

)

(592

)

Allowance for equity funds used during construction

 

(254

)

(3,579

)

Regulatory assets deferrals

 

(18,377

)

(17,422

)

Regulatory assets amortization

 

25,367

 

27,830

 

Accrued pension and other postretirement benefit costs

 

19,082

 

15,954

 

Deferred costs under gas cost recovery mechanism

 

25,728

 

(38,659

)

Cost of removal

 

(3,805

)

(3,252

)

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

(1,666

)

35

 

Accounts and notes receivable

 

27,156

 

(57,486

)

Fuel, emission allowances, and supplies

 

82,044

 

76,756

 

Prepayments

 

(35,336

)

(4,261

)

Accounts payable

 

123,620

 

135,435

 

Accrued taxes and interest

 

10,047

 

(22,464

)

Other assets

 

(7,943

)

(3,111

)

Other liabilities

 

4,555

 

3,375

 

 

 

 

 

 

 

Net cash provided by operating activities

 

482,705

 

376,700

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt

 

(114,318

)

(341,475

)

Issuance of long-term debt

 

 

35,000

 

Redemption of long-term debt

 

(114,652

)

 

Issuance of common stock

 

21,095

 

193,968

 

Dividends on common stock

 

(83,987

)

(77,685

)

 

 

 

 

 

 

Net cash used in financing activities

 

(291,862

)

(190,192

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

(145,748

)

(147,733

)

Proceeds from notes receivable

 

4,238

 

 

Acquisitions and other investments

 

(14,317

)

(7,858

)

Proceeds from disposition of subsidiaries and investments

 

14,405

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(141,422

)

(155,591

)

 

 

 

 

 

 

Net increase in cash and cash equivalents from continuing operations

 

49,421

 

30,917

 

 

 

 

 

 

 

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

 

$

218,541

 

$

231,029

 

 

 

 

 

 

 

Cash Flows from Discontinued Operations

 

 

 

 

 

Operating activities

 

$

158

 

$

17,513

 

Financing activities

 

(158

)

(10,152

)

Investing activities

 

 

(202

)

 

 

 

 

 

 

Net increase in cash and cash equivalents from discontinued operations

 

 

7,159

 

Cash and cash equivalents from discontinued operations at beginning of period

 

 

20,971

 

Cash and cash equivalents from discontinued operations at end of period

 

$

 

$

28,130

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

68,397

 

$

67,259

 

Income taxes

 

$

7,057

 

$

67,384

 

 

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
March 31

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

Electric

 

$

437,607

 

$

428,564

 

Gas

 

327,652

 

275,276

 

Total Operating Revenues

 

765,259

 

703,840

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Fuel and purchased power

 

132,792

 

130,554

 

Gas purchased

 

223,517

 

171,765

 

Operation and maintenance

 

156,375

 

134,758

 

Depreciation

 

44,386

 

49,264

 

Taxes other than income taxes

 

64,195

 

60,518

 

Total Operating Expenses

 

621,265

 

546,859

 

 

 

 

 

 

 

Operating Income

 

143,994

 

156,981

 

 

 

 

 

 

 

Miscellaneous Income - Net

 

2,854

 

6,584

 

Interest Expense

 

22,436

 

25,843

 

 

 

 

 

 

 

Income Before Taxes

 

124,412

 

137,722

 

 

 

 

 

 

 

Income Taxes

 

46,957

 

51,424

 

 

 

 

 

 

 

Income Before Cumulative Effect of Changes in Accounting Principles

 

77,455

 

86,298

 

 

 

 

 

 

 

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

 

 

30,938

 

 

 

 

 

 

 

Net Income

 

$

77,455

 

$

117,236

 

 

 

 

 

 

 

Preferred Dividend Requirement

 

211

 

211

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

$

77,244

 

$

117,025

 

 

 

 

 

 

 

Net Income

 

$

77,455

 

$

117,236

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax

 

(324

)

(306

)

 

 

 

 

 

 

Comprehensive Income

 

$

77,131

 

$

116,930

 

 

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

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

22,781

 

$

15,842

 

Restricted deposits

 

137

 

137

 

Notes receivable from affiliated companies

 

35,431

 

110,149

 

Accounts receivable less accumulated provision for doubtful accounts of $ 997 at March 31, 2004, and $1,602 at December 31, 2003

 

97,134

 

107,733

 

Accounts receivable from affiliated companies

 

33,090

 

58,406

 

Fuel, emission allowances, and supplies

 

116,446

 

135,948

 

Energy risk management current assets

 

121,606

 

72,830

 

Prepayments and other

 

17,694

 

15,049

 

Total Current Assets

 

444,319

 

516,094

 

 

 

 

 

 

 

Property, Plant, and Equipment - at Cost

 

 

 

 

 

Utility plant in service

 

 

 

 

 

Electric

 

2,185,391

 

2,155,457

 

Gas

 

1,127,129

 

1,104,797

 

Common

 

291,081

 

288,394

 

Total Utility Plant In Service

 

3,603,601

 

3,548,648

 

Construction work in progress

 

61,202

 

71,947

 

Total Utility Plant

 

3,664,803

 

3,620,595

 

Non-regulated property, plant, and equipment

 

3,595,575

 

3,576,187

 

Accumulated depreciation

 

2,659,140

 

2,625,568

 

Net Property, Plant, and Equipment

 

4,601,238

 

4,571,214

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

585,651

 

594,764

 

Energy risk management non-current assets

 

48,955

 

36,583

 

Other investments

 

1,294

 

1,083

 

Other

 

69,329

 

89,741

 

Total Other Assets

 

705,229

 

722,171

 

 

 

 

 

 

 

Total Assets

 

$

5,750,786

 

$

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

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

226,138

 

$

217,652

 

Accounts payable to affiliated companies

 

53,425

 

136,470

 

Accrued taxes

 

177,933

 

146,216

 

Accrued interest

 

21,667

 

21,572

 

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

 

112,100

 

112,100

 

Notes payable to affiliated companies (Note 4)

 

55,013

 

49,126

 

Long-term debt due within one year

 

 

110,000

 

Energy risk management current liabilities

 

107,861

 

77,791

 

Other

 

33,799

 

32,319

 

Total Current Liabilities

 

787,936

 

903,246

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt (Note 3)

 

1,459,125

 

1,458,807

 

Deferred income taxes

 

992,767

 

985,481

 

Unamortized investment tax credits

 

77,701

 

79,186

 

Accrued pension and other postretirement benefit costs

 

223,717

 

219,393

 

Accrued cost of removal

 

158,141

 

155,336

 

Energy risk management non-current liabilities

 

24,387

 

11,665

 

Other

 

78,341

 

69,687

 

Total Non-Current Liabilities

 

3,014,179

 

2,979,555

 

 

 

 

 

 

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

3,802,115

 

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 March 31, 2004 and December 31, 2003

 

762,136

 

762,136

 

Paid-in capital

 

586,528

 

586,528

 

Retained earnings

 

612,310

 

589,993

 

Accumulated other comprehensive income (loss)

 

(32,788

)

(32,464

)

Total Common Stock Equity

 

1,928,186

 

1,906,193

 

 

 

 

 

 

 

Total Liabilities and Shareholder’s Equity

 

$

5,750,786

 

$

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

 

 

 

Quarter Ended
March 31

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

77,455

 

$

117,236

 

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

 

 

 

 

 

Depreciation

 

44,386

 

49,264

 

Deferred income taxes and investment tax credits - net

 

(2,863

)

13,092

 

Cumulative effect of changes in accounting principles, net of tax

 

 

(30,938

)

Change in net position of energy risk management activities

 

(18,356

)

1,041

 

Allowance for equity funds used during construction

 

(245

)

(719

)

Regulatory assets deferrals

 

(6,446

)

(5,949

)

Regulatory assets amortization

 

14,636

 

16,376

 

Accrued pension and other postretirement benefit costs

 

4,324

 

3,803

 

Deferred costs under gas cost recovery mechanism

 

25,728

 

(38,659

)

Cost of removal

 

(1,736

)

 

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

 

34

 

Accounts and notes receivable

 

107,163

 

103,008

 

Fuel, emission allowances, and supplies

 

19,293

 

21,444

 

Prepayments

 

(2,748

)

361

 

Accounts payable

 

(74,720

)

(60,051

)

Accrued taxes and interest

 

31,812

 

(4,137

)

Other assets

 

4,579

 

1,534

 

Other liabilities

 

10,156

 

(6,924

)

 

 

 

 

 

 

Net cash provided by operating activities

 

232,418

 

179,816

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

9,357

 

(86,487

)

Redemption of long-term debt

 

(110,000

)

 

Dividends on preferred stock

 

(51

)

(211

)

Dividends on common stock

 

(54,926

)

(47,082

)

 

 

 

 

 

 

Net cash used in financing activities

 

(155,620

)

(133,780

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

(69,857

)

(64,501

)

Other investments

 

(2

)

(1

)

 

 

 

 

 

 

Net cash used in investing activities

 

(69,859

)

(64,502

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

6,939

 

(18,466

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

15,842

 

45,336

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

22,781

 

$

26,870

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

21,341

 

$

30,010

 

Income taxes

 

$

3,447

 

$

29,451

 

 

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
March 31

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

Electric

 

$

416,279

 

$

411,688

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Fuel and purchased power

 

136,796

 

166,872

 

Operation and maintenance

 

126,911

 

115,278

 

Depreciation

 

48,831

 

39,681

 

Taxes other than income taxes

 

16,412

 

15,882

 

Total Operating Expenses

 

328,950

 

337,713

 

 

 

 

 

 

 

Operating Income

 

87,329

 

73,975

 

 

 

 

 

 

 

Miscellaneous Income - Net

 

547

 

2,158

 

Interest Expense

 

19,924

 

20,253

 

 

 

 

 

 

 

Income Before Taxes

 

67,952

 

55,880

 

 

 

 

 

 

 

Income Taxes

 

27,146

 

21,659

 

 

 

 

 

 

 

Income Before Cumulative Effect of a Change in Accounting Principle

 

40,806

 

34,221

 

 

 

 

 

 

 

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

 

 

(494

)

 

 

 

 

 

 

Net Income

 

$

40,806

 

$

33,727

 

 

 

 

 

 

 

Preferred Dividend Requirement

 

647

 

647

 

 

 

 

 

 

 

Net Income Applicable to Common Stock

 

$

40,159

 

$

33,080

 

 

 

 

 

 

 

Net Income

 

$

40,806

 

$

33,727

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax

 

484

 

(630

)

 

 

 

 

 

 

Comprehensive Income

 

$

41,290

 

$

33,097

 

 

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

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

16,796

 

$

6,565

 

Restricted deposits

 

94,341

 

92,675

 

Notes receivable from affiliated companies

 

21,411

 

65,715

 

Accounts receivable less accumulated provision for doubtful accounts of $1,185 at March 31, 2004, and $1,110 at December 31, 2003

 

45,752

 

37,194

 

Accounts receivable from affiliated companies

 

21,161

 

459

 

Fuel, emission allowances, and supplies

 

126,245

 

149,392

 

Energy risk management current assets

 

7,881

 

7,959

 

Prepayments and other

 

3,439

 

5,303

 

Total Current Assets

 

337,026

 

365,262

 

 

 

 

 

 

 

Property, Plant, and Equipment - at Cost

 

 

 

 

 

Utility plant in service

 

6,232,060

 

6,183,475

 

Construction work in progress

 

218,580

 

203,512

 

Total Utility Plant

 

6,450,640

 

6,386,987

 

Accumulated depreciation

 

2,175,599

 

2,133,235

 

Net Property, Plant, and Equipment

 

4,275,041

 

4,253,752

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

421,228

 

417,387

 

Energy risk management non-current assets

 

3,587

 

7,061

 

Other investments

 

68,558

 

66,803

 

Other

 

33,607

 

29,372

 

Total Other Assets

 

526,980

 

520,623

 

 

 

 

 

 

 

Total Assets

 

$

5,139,047

 

$

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

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(dollars in thousands)
(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

53,657

 

$

58,286

 

Accounts payable to affiliated companies

 

21,460

 

69,746

 

Accrued taxes

 

84,376

 

69,419

 

Accrued interest

 

24,228

 

26,615

 

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

 

80,500

 

80,500

 

Notes payable to affiliated companies (Note 4)

 

182,689

 

188,446

 

Long-term debt due within one year

 

1,100

 

 

Energy risk management current liabilities

 

15,007

 

14,744

 

Other

 

24,846

 

25,636

 

Total Current Liabilities

 

487,863

 

533,392

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt (Note 3)

 

1,719,524

 

1,720,476

 

Deferred income taxes

 

595,712

 

573,946

 

Unamortized investment tax credits

 

28,915

 

29,698

 

Accrued pension and other postretirement benefit costs

 

198,526

 

193,336

 

Accrued cost of removal

 

342,884

 

335,520

 

Energy risk management non-current liabilities

 

2,122

 

2,796

 

Other

 

76,300

 

74,958

 

Total Non-Current Liabilities

 

2,963,983

 

2,930,730

 

 

 

 

 

 

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

3,451,846

 

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 March 31, 2004, and December 31, 2003

 

539

 

539

 

Paid-in capital

 

627,274

 

627,274

 

Retained earnings

 

1,029,992

 

1,018,790

 

Accumulated other comprehensive income (loss)

 

(12,937

)

(13,421

)

Total Common Stock Equity

 

1,644,868

 

1,633,182

 

 

 

 

 

 

 

Total Liabilities and Shareholder’s Equity

 

$

5,139,047

 

$

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

 

 

 

Quarter Ended
March 31

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

40,806

 

$

33,727

 

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

 

 

 

 

 

Depreciation

 

48,831

 

39,681

 

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

 

 

494

 

Deferred income taxes and investment tax credits - net

 

20,656

 

(2,654

)

Change in net position of energy risk management activities

 

3,141

 

(1,245

)

Allowance for equity funds used during construction

 

(9

)

(2,860

)

Regulatory assets deferrals

 

(11,931

)

(11,473

)

Regulatory assets amortization

 

10,731

 

11,455

 

Accrued pension and other postretirement benefit costs

 

5,190

 

3,808

 

Cost of removal

 

(2,069

)

(3,252

)

Changes in current assets and current liabilities:

 

 

 

 

 

Restricted deposits

 

(1,666

)

 

Accounts and notes receivable

 

15,044

 

38,520

 

Fuel, emission allowances, and supplies

 

23,147

 

12,907

 

Prepayments

 

1,170

 

1,345

 

Accounts payable

 

(52,915

)

(108,622

)

Accrued taxes and interest

 

12,570

 

5,158

 

Other assets

 

(3,080

)

(1,219

)

Other liabilities

 

1,420

 

1,066

 

 

 

 

 

 

 

Net cash provided by operating activities

 

111,036

 

16,836

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

(5,757

)

56,810

 

Issuance of long-term debt

 

 

35,000

 

Dividends on preferred stock

 

(647

)

(647

)

Dividends on common stock

 

(28,957

)

(30,503

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

(35,361

)

60,660

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

(64,500

)

(74,581

)

Other investments

 

(944

)

(827

)

 

 

 

 

 

 

Net cash used in investing activities

 

(65,444

)

(75,408

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

10,231

 

2,088

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

6,565

 

2,007

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

16,796

 

$

4,095

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

24,743

 

$

20,465

 

Income taxes

 

$

3,132

 

$

36,000

 

 

 

 

 

 

 

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
March 31

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

Electric

 

$

56,215

 

$

54,929

 

Gas

 

58,139

 

49,384

 

Total Operating Revenues

 

114,354

 

104,313

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Electricity purchased from parent company for resale

 

39,453

 

39,123

 

Gas purchased

 

40,833

 

31,500

 

Operation and maintenance

 

13,760

 

12,585

 

Depreciation

 

4,925

 

4,445

 

Taxes other than income taxes

 

1,438

 

1,161

 

Total Operating Expenses

 

100,409

 

88,814

 

 

 

 

 

 

 

Operating Income

 

13,945

 

15,499

 

 

 

 

 

 

 

Miscellaneous Income - Net

 

499

 

1,479

 

Interest Expense

 

1,227

 

1,502

 

 

 

 

 

 

 

Income Before Taxes

 

13,217

 

15,476

 

 

 

 

 

 

 

Income Taxes

 

5,329

 

6,070

 

 

 

 

 

 

 

Net Income

 

$

7,888

 

$

9,406

 

 

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

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

8,020

 

$

1,899

 

Notes receivable from affiliated companies

 

5,881

 

17,906

 

Accounts receivable less accumulated provision for doubtful accounts of $219 at March 31, 2004, and $192 at December 31, 2003

 

3,488

 

2,458

 

Accounts receivable from affiliated companies

 

171

 

4,407

 

Fuel and supplies

 

4,884

 

7,936

 

Prepayments and other

 

140

 

279

 

Total Current Assets

 

22,584

 

34,885

 

 

 

 

 

 

 

Property, Plant, and Equipment - at Cost

 

 

 

 

 

Utility plant in service

 

 

 

 

 

Electric

 

276,724

 

273,895

 

Gas

 

241,892

 

239,670

 

Common

 

53,357

 

53,297

 

Total Utility Plant In Service

 

571,973

 

566,862

 

Construction work in progress

 

8,369

 

6,165

 

Total Utility Plant

 

580,342

 

573,027

 

Accumulated depreciation

 

180,228

 

176,368

 

Net Property, Plant, and Equipment

 

400,114

 

396,659

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Regulatory assets

 

13,240

 

13,224

 

Other

 

1,010

 

3,903

 

Total Other Assets

 

14,250

 

17,127

 

 

 

 

 

 

 

Total Assets

 

$

436,948

 

$

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

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

12,073

 

$

13,431

 

Accounts payable to affiliated companies

 

19,367

 

21,131

 

Accrued taxes

 

8,001

 

298

 

Accrued interest

 

917

 

1,230

 

Notes payable to affiliated companies (Note 4)

 

21,196

 

45,233

 

Other

 

6,673

 

6,815

 

Total Current Liabilities

 

68,227

 

88,138

 

 

 

 

 

 

 

Non-Current Liabilities

 

 

 

 

 

Long-term debt

 

54,693

 

54,685

 

Deferred income taxes

 

54,295

 

55,488

 

Unamortized investment tax credits

 

2,815

 

2,879

 

Accrued pension and other postretirement benefit costs

 

17,458

 

16,953

 

Accrued cost of removal

 

27,968

 

27,443

 

Other

 

14,248

 

13,729

 

Total Non-Current Liabilities

 

171,477

 

171,177

 

 

 

 

 

 

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

239,704

 

259,315

 

 

 

 

 

 

 

Common Stock Equity

 

 

 

 

 

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

 

8,780

 

8,780

 

Paid-in capital

 

23,541

 

23,541

 

Retained earnings

 

165,412

 

157,524

 

Accumulated other comprehensive income (loss)

 

(489

)

(489

)

Total Common Stock Equity

 

197,244

 

189,356

 

 

 

 

 

 

 

Total Liabilities and Shareholder’s Equity

 

$

436,948

 

$

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

 

 

 

Quarter Ended
March 31

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

 

 

(unaudited)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

7,888

 

$

9,406

 

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

 

 

 

 

 

Depreciation

 

4,925

 

4,445

 

Deferred income taxes and investment tax credits - net

 

(1,258

)

4,451

 

Allowance for equity funds used during construction

 

14

 

(85

)

Regulatory assets deferrals

 

(253

)

(33

)

Regulatory assets amortization

 

192

 

(22

)

Accrued pension and other postretirement benefit costs

 

505

 

271

 

Deferred costs under gas cost recovery mechanism

 

3,719

 

(9,372

)

Cost of removal

 

(414

)

 

Changes in current assets and current liabilities:

 

 

 

 

 

Accounts and notes receivable

 

15,231

 

4,417

 

Fuel and supplies

 

3,052

 

4,666

 

Prepayments

 

139

 

158

 

Accounts payable

 

(3,122

)

2,783

 

Accrued taxes and interest

 

7,390

 

(480

)

Other assets

 

18

 

20

 

Other liabilities

 

(408

)

174

 

 

 

 

 

 

 

Net cash provided by operating activities

 

37,618

 

20,799

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Change in short-term debt, including net affiliate notes

 

(24,037

)

(9,533

)

 

 

 

 

 

 

Net cash used in financing activities

 

(24,037

)

(9,533

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

(7,460

)

(7,633

)

 

 

 

 

 

 

Net cash used in investing activities

 

(7,460

)

(7,633

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

6,121

 

3,633

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,899

 

3,926

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

8,020

 

$

7,559

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest (net of amount capitalized)

 

$

1,480

 

$

1,437

 

Income taxes

 

$

3

 

$

3,000

 

 

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

 

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 (GAAP).  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



 

The amount of unbilled revenues for Cinergy, CG&E, PSI, and ULH&P as of March 31, 2004 and 2003, were as follows:

 

 

 

2004

 

2003

 

 

 

(in millions)

 

 

 

 

 

 

 

Cinergy

 

$

133

 

$

119

 

CG&E and subsidiaries

 

80

 

67

 

PSI

 

53

 

52

 

ULH&P

 

14

 

12

 

 

(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)           Derivatives

 

Cinergy designates derivatives as fair value hedges for certain volumes of our natural gas inventory.  Under this accounting election, changes in the fair value of both the derivative as well as the hedged item (the specified inventory) are included in the Condensed Statements of Income.  We assess the effectiveness of the derivatives in offsetting the change in fair value of the inventory on a quarterly basis.  For the three months ended March 31, 2004, the net loss recognized for the hedges’ ineffectiveness was approximately $4 million.

 

(d)           Stock-Based Compensation

 

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

 

26



 

 

 

Quarter Ended March 31

 

 

 

(in millions, except per share
amounts)

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Net income, as reported

 

$

103

 

$

166

 

 

 

 

 

 

 

Add:

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

 

4

 

4

 

 

 

 

 

 

 

Deduct:

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

 

3

 

5

 

 

 

 

 

 

 

Pro-forma net income

 

$

104

 

$

165

 

 

 

 

 

 

 

EPS - as reported

 

$

0.57

 

$

0.96

 

EPS - pro-forma

 

$

0.58

 

$

0.95

 

 

 

 

 

 

 

EPS assuming dilution - as reported

 

$

0.57

 

$

0.95

 

EPS assuming dilution - pro-forma

 

$

0.57

 

$

0.94

 

 

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

 

(e)           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, had an immaterial impact on our financial position.

 

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

 

27



 

(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 first quarter of 2004, Cinergy has issued approximately 1.2 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.

 

28



 

4.             Notes Payable and Other Short-term Obligations

 

At March 31, 2004, Cinergy Corp. had $956 million remaining unused and available capacity relating to its $1 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 2004

 

 

 

 

 

 

 

Direct borrowing

 

 

 

$

 

 

$

 

$

 

 

Commercial paper support

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 364-day facility

 

 

 

600

 

33

 

567

 

 

 

 

 

 

 

 

 

 

 

Three-year senior revolving

 

May 2004

 

 

 

 

 

 

 

Direct borrowing

 

 

 

 

 

 

 

 

Commercial paper support

 

 

 

 

 

 

 

 

Letter of credit support

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Three-year facility

 

 

 

400

 

11

 

389

 

 

 

 

 

 

 

 

 

 

 

Total Credit Facilities

 

 

 

$

1,000

 

$

44

 

$

956

 

 

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 the two facilities that were scheduled to expire in April and May of 2004.

 

In addition to revolving credit facilities, Cinergy Corp., CG&E, and PSI also maintain uncommitted lines of credit.  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.  Cinergy Corp., CG&E, and PSI have established uncommitted lines of $40 million, $15 million, and $60 million, respectively, all of which remained unused as of March 31, 2004.

 

29



 

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

 

 

 

March 31, 2004

 

December 31, 2003

 

 

 

Established
Lines

 

Outstanding

 

Established
Lines

 

Outstanding

 

 

 

(in millions)

 

Cinergy

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

 

 

Revolving lines

 

$

1,000

 

$

 

$

1,000

 

$

 

Uncommitted lines(1)

 

40

 

 

40

 

 

Commercial paper(2)

 

 

 

33

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Cinergy Total

 

 

 

$

237

 

 

 

$

351

 

 

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

15

 

$

 

$

15

 

$

 

Pollution control notes

 

 

 

112

 

 

 

112

 

Money pool

 

 

 

55

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

CG&E Total

 

 

 

$

167

 

 

 

$

161

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

60

 

$

 

$

60

 

$

 

Pollution control notes

 

 

 

81

 

 

 

81

 

Money pool

 

 

 

183

 

 

 

188

 

 

 

 

 

 

 

 

 

 

 

PSI Total

 

 

 

$

264

 

 

 

$

269

 

 

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

 

 

 

 

 

 

Money pool

 

 

 

$

21

 

 

 

$

45

 

 

 

 

 

 

 

 

 

 

 

ULH&P Total

 

 

 

$

21

 

 

 

$

45

 

 


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

 

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

 

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.

 

30



 

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 the Company’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 March 31, 2004, approximately 93 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 and Moody’s Investors Service is used.  An internal rating system is used when a counterparty is not rated externally.

 

As of March 31, 2004, CG&E has a concentration of trading credit exposure of approximately $79 million with four counterparties, each accounting for greater than 10 percent of CG&E’s total trading credit exposure.  All four of these counterparties are rated investment grade or are guaranteed or secured by an investment grade entity.

 

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.

 

6.             Commitments and Contingencies

 

(a)                                  Environmental

 

(i)           Ozone Transport Rulemakings

 

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

 

31



 

In October 1998, the 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 U.S. 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 approved the final NOX SIP Call rules issued by the states of Indiana and Kentucky, but has conditionally approved Ohio’s final rules.  Ohio developed final NOX SIP rules effective in May 2004 to satisfy the EPA’s conditions for approval.  Final approval from the EPA is pending.  The EPA has proposed withdrawal of the Section 126 rule in states with approved rules under the NOX SIP Call.  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.  The company has 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.  The company will also utilize the NOX allowance market to buy or sell NOX allowances as appropriate.  The company currently estimates that it will incur costs of approximately $84 million in addition to $706 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 reductions.  It is unclear at this time whether any additional reductions would be required beyond those proposed in the Interstate Air Quality Rules, which were proposed by the EPA in December 2003 and expected to become final in December 2004.

 

(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 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

 

32



 

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 (Miami Fort Station), and PSI’s Cayuga Generating Station, Gallagher Generating Station (Gallagher Station), Wabash River Generating Station, and Gibson Generating Station (Gibson 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.  Also in May 2004, plaintiffs filed a motion to amend the most recent complaint pursuant to the Court’s pre-trial procedures scheduling order.  This amended complaint added four new projects to the lawsuit, which had been subject to earlier EPA Notices of Violation (NOVs).  These new projects are at stations previously named in the lawsuit.  Plaintiffs also dropped their claims with respect to a number of projects, the United States dropped ten projects and the three northeast states dropped an additional five projects.  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 the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light Company (DP&L), and CG&E.  The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  This suit is being defended by CSP.  In April 2001, the District Court in that case ruled that the Government and the intervening plaintiff environmental groups could seek injunctive relief for alleged violations that occurred more than five years before the filing of the complaint only.  Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA.  Neither party appealed that decision.

 

In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a NOV to DP&L for alleged violations of PSD, NSR, and 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 SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.

 

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 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.

 

(iv)         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.

 

33



 

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).

 

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

 

PSI notified its insurance carriers of the claims related to MGP sites raised by IDEM and costs included in the Site Participation and Cost Sharing Agreements.  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.  PSI has filed a petition to transfer the appellate court’s decision to the Indiana Supreme Court for its review.  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 if 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 has performed site assessments on its sites where we believe MGP activities have occurred at some point in the past and found no imminent risk to the environment.  At the present time, CG&E cannot predict whether investigation and/or remediation will be required in the future at any of these sites.

 

(v)           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 80 pending lawsuits.  In these lawsuits, plaintiffs claim to have been exposed to asbestos-containing products in the course of their work at the CG&E and PSI generating stations.  The plaintiffs further claim that as the property owner of the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure.  A majority of the lawsuits to date have been brought against PSI.  The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.

 

Of these lawsuits, one case filed against PSI has been tried to verdict.  The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and for PSI on punitive damages.  PSI recently received an adverse ruling in an appeal of that verdict and has filed an appeal of that decision to the Indiana Supreme Court.  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

 

34



 

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 a base retail electric rate increase.  PSI has filed initial and rebuttal testimony in this case and the final set of hearings took place in November 2003.  PSI filed its proposed order in December 2003.  Based on updated testimony filed in October 2003 and the proposed order, PSI proposes an increase in annual revenues of approximately $180 million, or an average increase of approximately 14 percent over PSI’s retail electric rates in effect at the end of 2002.  An IURC decision is anticipated in the second quarter of 2004.

 

(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 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 and the hearing is scheduled for May 2004.  In addition, the PUCO requested that CG&E propose a rate stabilization plan in that same proceeding.  As part of our proposed rate stabilization plan (which seeks recovery of certain environmental, fuel, and purchased power costs), we seek to end the market development period, which would end the current rate freeze that is currently scheduled to end no later than December 31, 2005 for all customer classes, pursuant to the Ohio electric restructuring law.  Our filings also contemplate a distribution rate case in 2004 with revised rates effective January 1, 2005 and mechanisms to recover ongoing transmission costs for Midwest Independent System Operator, Inc. or other applicable Regional Transmission Organizations.  In May 2004, CG&E filed a prefiling notice with the PUCO formalizing our intent to file a rate case that will request an increase of approximately $78 million in distribution rates.  We cannot predict the outcome of these proceedings.

 

35



 

(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) seeking to increase base rates for natural gas distribution services and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $112 million over 10 years.  Through March 31, 2004, ULH&P has recovered approximately $2.5 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 KPSC’s orders approving 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 as to whether any additional SHA risers will need maintenance or replacement is ongoing.  If CG&E and ULH&P determine that replacement of all SHA risers is appropriate, we currently estimate that the replacement cost could be up to approximately $70 million for CG&E, which includes $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 (Energy Cooperative).  In February 2001, Cinergy, CG&E, and Resources were named as defendants in three class action lawsuits brought by customers relating to Energy Cooperative’s removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers.    Subsequently, these class action suits were amended and consolidated into one suit.  CG&E has been dismissed as a defendant in the consolidated suit.  The trial court certified a class against Cinergy in November 2003.  A trial date has not been set.  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.

 

In March 2001, Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by Energy Cooperative and Resources.  This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources.  Trial is anticipated to occur in November 2004.

 

36



 

We intend to vigorously defend these lawsuits and do not believe their outcome will have a material effect on our 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 to discontinue certain activities.  We are currently considering this matter, but lack sufficient information to assess the potential outcome at this time.

 

37



 

(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 March 31, 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.  Most of the guarantees do not have a set termination date; however, the borrowings associated with the majority of the guarantees are due in the first quarter of 2005.

 

Cinergy Corp. has also provided performance guarantees on behalf of certain unconsolidated subsidiaries and joint ventures.  These guarantees support performance under various agreements and instruments (such as construction contracts, 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 amount to be $86 million under these guarantees as of March 31, 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 amount is not estimable given that the magnitude of any claims under those indemnifications would be a function of the extent of damages actually incurred, which is not practicable to estimate unless and until the event occurs.  Cinergy has estimated the maximum potential amount, where estimable, to be $115 million under these indemnification provisions.  The termination period for the majority of matters provided by indemnification provisions in purchase and sale agreements generally ranges from 2004 to 2009.

 

38



 

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, we provide benefits to retirees in the form of pension and other postretirement benefits.  Our qualified defined benefit pension plans cover substantially all U.S. 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 U.S. 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.

 

Our benefit plans’ costs for the three months ended March 31 included the following components:

 

 

 

Qualified
Pension Benefits

 

Non-Qualified
Pension
Benefits

 

Other
Postretirement
Benefits

 

 

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

8.8

 

$

7.8

 

$

1.2

 

$

0.8

 

$

1.4

 

$

1.0

 

Interest cost

 

22.1

 

21.5

 

1.7

 

1.6

 

6.0

 

5.6

 

Expected return on plans’ assets

 

(20.1

)

(20.2

)

 

 

 

 

Amortization of transition (asset) obligation

 

(0.1

)

(0.2

)

 

 

0.8

 

0.8

 

Amortization of prior service cost

 

1.1

 

1.2

 

0.5

 

0.3

 

 

 

Recognized actuarial (gain) loss

 

0.5

 

 

0.7

 

0.5

 

2.1

 

1.3

 

Voluntary early retirement costs (Statement 88) (1)

 

 

2.1

 

 

 

 

 

Net periodic benefit cost

 

$

12.3

 

$

12.2

 

$

4.1

 

$

3.2

 

$

10.3

 

$

8.7

 

 


(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)

 

39



 

The net periodic benefit cost by registrant for the three months ended March 31 was as follows:

 

 

 

Qualified
Pension Benefits

 

Non-Qualified
Pension
Benefits

 

Other
Postretirement
Benefits

 

 

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy(1)

 

$

12.3

 

$

12.2

 

$

4.1

 

$

3.2

 

$

10.3

 

$

8.7

 

CG&E and subsidiaries

 

3.7

 

2.4

 

0.2

 

0.2

 

2.6

 

2.3

 

PSI

 

3.2

 

2.9

 

0.2

 

0.2

 

5.3

 

4.4

 

ULH&P

 

0.4

 

0.3

 

 

 

0.2

 

0.2

 

 


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

 

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.  Even though final guidelines for determining actuarial equivalence have not been published, 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 $19 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 expected to be material.  Our accounting treatment for the subsidy is consistent with draft guidance proposed by the FASB staff in March 2004; however, definitive guidance has not yet been provided and thus our accounting could change.

 

8.             Investment Impairment and Discontinued Operations

 

(a)           Impairment

 

Cinergy holds a portfolio of direct and indirect investments in energy technology companies in the Power Technology and Infrastructure Services Business Unit (discussed in Note 9).  One of the companies in which Cinergy holds a non-controlling interest 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 and recognized a pre-tax impairment charge of approximately $27 million ($21 million after-tax) in the first quarter of 2004.  The impairment charge is included in Miscellaneous (Expense) Income-Net in Cinergy’s Condensed Statements of Income.

 

(b)           Discontinued Operations

 

As discussed in the 2003 10-K, in the second quarter of 2003, Cinergy completed the disposal of its gas distribution operation in South Africa, sold its remaining wind assets in the U.S., and substantially sold or liquidated the assets of its energy marketing business in the Czech Republic.

 

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

 

40



 

The table below reflects the results of operations and the income (loss) on disposal related to investments accounted for as discontinued operations for the quarters ended March 31, 2004 and 2003:

 

 

 

Quarter Ended March 31

 

 

 

2004

 

2003

 

 

 

(in thousands)

 

 

 

 

 

 

 

Revenues(1)

 

$

 

$

13,824

 

 

 

 

 

 

 

Income (Loss) Before Taxes

 

$

 

$

(329

)

 

 

 

 

 

 

Income Taxes Benefit (Expense)

 

$

 

$

159

 

 

 

 

 

 

 

Income (Loss) from Discontinued Operations

 

 

 

 

 

Income (Loss) from operations, net of tax

 

$

 

$

(170

)

 

 

 

 

 

 

Total Income (Loss) from Discontinued Operations

 

$

 

$

(170

)

 


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

 

The table below reflects the assets and liabilities related to the investments accounted for as discontinued operations as of March 31, 2004 and December 31, 2003:

 

 

 

March 31
2004

 

December 31
2003

 

 

 

(in thousands)

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

$

4,343

 

$

4,501

 

 

 

 

 

 

 

Total Assets

 

$

4,343

 

$

4,501

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

$

9,693

 

$

11,594

 

 

 

 

 

 

 

Total Liabilities

 

$

9,693

 

$

11,594

 

 

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 March 31, 2004.

 

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

41



 

international operations and performs energy risk management activities, trading activities, and customized energy solutions.

 

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

 

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.

 

42


Financial results by business unit for the quarters ended March 31, 2004, and March 31, 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 March 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

405,707

 

$

882,949

 

$

2

 

$

1,288,658

 

$

 

$

1,288,658

 

Intersegment revenues

 

39,453

 

 

 

39,453

 

(39,453

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margins -

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric

 

181,380

 

409,834

 

 

591,214

 

 

591,214

 

Gas

 

23,134

 

104,196

 

 

127,330

 

 

127,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

46,092

 

79,505

 

(22,582

)

103,015

 

 

103,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues -

 

 

 

 

 

 

 

 

 

 

 

 

 

External customers

 

$

433,642

 

$

834,315

 

$

1

 

$

1,267,958

 

$

 

$

1,267,958

 

Intersegment revenues

 

39,123

 

 

 

39,123

 

(39,123

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margins -

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric

 

174,207

 

378,986

 

 

553,193

 

 

553,193

 

Gas

 

60,028

 

102,890

 

 

162,918

 

 

162,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

(170

)

 

 

(170

)

 

(170

)

Cumulative effect of changes in accounting principles, net of tax

 

26,462

 

 

 

26,462

 

 

26,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit (loss)(2)

 

97,105

 

74,069

 

(5,089

)

166,085

 

 

166,085

 

 


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

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

 

43



 

Total segment assets at March 31, 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

 

$

5,551,997

 

$

8,415,370

 

$

152,397

 

$

14,119,764

 

$

60,503

 

$

14,180,267

 

Segment assets from discontinued operations

 

4,343

 

 

 

4,343

 

 

4,343

 

Total segment assets at March 31, 2004

 

$

5,556,340

 

$

8,415,370

 

$

152,397

 

$

14,124,107

 

$

60,503

 

$

14,184,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



 

10.                               EPS

 

A reconciliation of EPS to EPS – assuming dilution is presented below for the quarters ended March 31, 2004 and 2003:

 

 

 

Income

 

Shares

 

EPS

 

 

 

(in thousands, except per share amounts)

 

Quarter Ended March 31, 2004

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

 

 

Net Income

 

$

103,015

 

179,261

 

$

0.57

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

835

 

 

 

Directors’ compensation plans

 

 

 

148

 

 

 

Contingently issuable common stock

 

 

 

574

 

 

 

Stock purchase contracts

 

 

 

1,108

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

103,015

 

181,926

 

$

0.57

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 2003

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

 

 

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

 

$

139,793

 

 

 

$

0.81

 

Discontinued operations, net of tax

 

(170

)

 

 

 

Cumulative effect of changes in accounting principles, net of tax

 

26,462

 

 

 

0.15

 

Net Income

 

$

166,085

 

173,387

 

$

0.96

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Common stock options

 

 

 

724

 

 

 

Directors’ compensation plans

 

 

 

134

 

 

 

Contingently issuable common stock

 

 

 

717

 

 

 

 

 

 

 

 

 

 

 

EPS - assuming dilution:

 

 

 

 

 

 

 

Net income plus assumed conversions

 

$

166,085

 

174,962

 

$

0.95

 

 

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 0.9 million and 3.5 million shares were excluded from the EPS - assuming dilution calculation for the quarters ended March 31, 2004 and 2003, respectively.

 

Also excluded from the EPS - assuming dilution calculation for the quarters ended March 31, 2004 and 2003, are up to 9.7 million and 10.8 million shares, respectively, issuable pursuant to the stock purchase contracts issued by Cinergy Corp. in December 2001 associated with the preferred trust securities transaction.  The number of shares issuable pursuant to the stock purchase contracts is contingent upon the market price of Cinergy Corp. stock in February 2005 and could range between 9.2 and 10.8 million shares.

 

45



 

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 I. Financial Statements”.

 

We undertake no obligation to update the information contained herein.

 

46



 

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 in the southwestern portion of Ohio and, through its subsidiaries, in nearby areas of Kentucky and Indiana.  CG&E is responsible for the majority of our power marketing and trading activity.  CG&E’s principal subsidiary, 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.

 

47



 

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 Commitment and Contingency Issues

 

Ambient Air Standards

 

In 1997, the United States (U.S.) Environmental Protection Agency (EPA) revised the National Ambient Air Quality Standards for ozone and fine particulate matter.  On April 15, 2004, the EPA made final state ozone non-attainment area designations.  Several counties in which we operate have been designated as being in non-attainment with the new ozone standard.  EPA is also under a court ordered deadline to make final fine particulate area designations by December 15, 2004.  Several counties in which we operate are likely to be designated as non-attainment with 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.  Cinergy cannot predict the effect of the ozone non-attainment designations at this time.

 

Other Investing Activities

 

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

 

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

 

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

 

A FUCO is a company all of whose utility assets and operations are located outside the U.S. and which are used for the generation, transmission, or distribution of electric energy for sale at retail or wholesale, or the distribution of gas at retail.  A FUCO may not derive any income, directly or indirectly, from the generation, transmission, or distribution of electric energy for sale or the distribution of gas at

 

48



 

retail within the U.S.  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 March 31, 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 March 31, 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 U.S., Canada, and Mexico.  Energy-Related Assets include, natural gas exploration, development, production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated assets, facilities and equipment, but would exclude any assets, facilities, or equipment that would cause the owner or operator thereof to be deemed a public utility company.  As of March 31, 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.

 

49



 

At March 31, 2004, we had invested approximately $26 million in these 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 March 31, 2004, we had $737 million outstanding under the guarantees issued, of which approximately 91 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 I. 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 March 31, 2004 trading portfolio, if such an event were to occur, Cinergy would be required to issue up to approximately $86 million in collateral related to its gas and power trading operations, of which $41 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.

 

50



 

 

 

Short-term Regulatory Authority
March 31, 2004

 

 

 

(in millions)

 

 

 

Authority

 

Outstanding

 

 

 

 

 

 

 

Cinergy Corp.

 

$

5,000

(1)

$

33

 

CG&E and subsidiaries

 

671

 

55

 

PSI

 

600

 

183

 

ULH&P

 

65

 

21

 

 


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

 

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

 

51



 

Cinergy Corp.’s short-term borrowing consists primarily of unsecured revolving lines of credit and the sale of commercial paper.  Cinergy Corp.’s $1 billion revolving credit facilities and $800 million commercial paper program also support the short-term borrowing needs of CG&E, 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.  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
March 31, 2004

 

 

 

Established
Lines

 

Outstanding

 

Unused

 

Standby
Liquidity(3)

 

Available
Revolving
Lines of
Credit

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy

 

 

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

 

 

 

 

Revolving lines

 

$

1,000

 

$

 

$

1,000

 

$

44

 

$

956

 

Uncommitted lines(1)

 

40

 

 

40

 

 

 

 

 

Commercial paper(2)

 

 

 

33

 

767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cinergy Total

 

 

 

$

237

 

 

 

 

 

$

965

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries

 

 

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

15

 

$

 

$

15

 

 

 

 

 

Pollution control notes

 

 

 

112

 

 

 

 

 

 

 

Money pool

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E Total

 

 

 

$

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

 

 

 

 

Uncommitted lines(1)

 

$

60

 

$

 

$

60

 

 

 

 

 

Pollution control notes

 

 

 

81

 

 

 

 

 

 

 

Money pool

 

 

 

183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSI Total

 

 

 

$

264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ULH&P

 

 

 

 

 

 

 

 

 

 

 

Money pool

 

 

 

$

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ULH&P Total

 

 

 

$

21

 

 

 

 

 

 

 

 


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

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

(3)     Standby liquidity is reserved against the revolving lines to support the commercial paper program and outstanding letters of credit (currently $33 million and $11 million, respectively).

 

52



 

At March 31, 2004, Cinergy Corp. had $956 million remaining unused and available capacity relating to its $1 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 2004

 

 

 

 

 

 

 

Direct borrowing

 

 

 

$

 

 

$

 

$

 

 

Commercial paper support

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 364-day facility

 

 

 

600

 

33

 

567

 

 

 

 

 

 

 

 

 

 

 

Three-year senior revolving

 

May 2004

 

 

 

 

 

 

 

Direct borrowing

 

 

 

 

 

 

 

 

Commercial paper support

 

 

 

 

 

 

 

 

Letter of credit support

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Three-year facility

 

 

 

400

 

11

 

389

 

 

 

 

 

 

 

 

 

 

 

Total Credit Facilities

 

 

 

$

1,000

 

$

44

 

$

956

 

 

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 the two facilities that were scheduled to expire in April and May 2004.

 

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

 

53



 

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.

 

A summary of our long-term debt authorizations at March 31, 2004, was as follows:

 

 

 

Authorized

 

Used

 

Available

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Cinergy Corp.

 

 

 

 

 

 

 

PUHCA total capitalization(1)

 

$

5,000

 

$

1,472

 

$

3,528

 

 

 

 

 

 

 

 

 

CG&E and subsidiaries(2)

 

 

 

 

 

 

 

State Public Utility Commissions

 

$

575

 

$

 

$

575

 

 

 

 

 

 

 

 

 

PSI

 

 

 

 

 

 

 

State Public Utility Commission(3)

 

$

 

$

 

$

 

State Public Utility Commission - Tax-Exempt(3)

 

 

 

 

 

 

 

 

 

 

 

 

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.

(3)     On April 28, 2004, the Indiana Utility Regulatory Commission (IURC) issued an order granting PSI additional long-term debt issuance authority of up to $500 million and tax-exempt issuance authority of up to $250 million through December 31, 2005.

 

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, of which $800 million 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, of which $800 million remains available for issuance.  ULH&P has effective shelf registration statements with the SEC relating to the issuance of up to $50 million in unsecured debt securities and up to $40 million in first mortgage bonds, of which $30 million in unsecured debt securities and $20 million in first mortgage bonds remain available for issuance.

 

Off-Balance Sheet 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 arrangement involves the sale of accounts receivable to a qualifying special purpose entity.

 

54



 

Securities Ratings

 

As of March 31, 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 first quarter of 2004, Cinergy has issued approximately 1.2 million shares under these plans.

 

55



 

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 March 31, 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

 

$

103,015

 

$

166,085

 

$

(63,070

)

(38

)

$

77,455

 

$

117,236

 

$

(39,781

)

(34

)

$

40,806

 

$

33,727

 

$

7,079

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric gross margin

 

591,214

 

553,193

 

38,021

 

7

 

304,815

 

298,010

 

6,805

 

2

 

279,483

 

244,816

 

34,667

 

14

 

Gas gross margin

 

127,330

 

162,918

 

(35,588

)

(22

)

104,135

 

103,511

 

624

 

1

 

 

 

 

 

 


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

 

Cinergy’s and CG&E’s net income decreased for the quarter ended March 31, 2004 as compared to the same period last year as a result of a number of factors.  Operation and maintenance expense increased primarily as a result of increases in emission allowances expenses, employee incentive compensation costs, and transmission costs.  Additionally, the decreases in net income reflect 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.  Cinergy’s decrease also reflects the decline in gas gross margins as well as an impairment charge on an investment, both discussed below.  Cinergy’s and CG&E’s decreases in net income were partially offset by the higher electric gross margins discussed below.

 

PSI’s net income increased as a result of higher electric gross margins discussed below.  This increase was partially offset by higher Operation and maintenance expense primarily related to greater emission allowances expenses and an increase in Depreciation expense primarily due to the addition of depreciable plant.

 

Electric Margins

 

Cinergy’s, CG&E’s, and PSI’s electric gross margins increased for the quarter ended March 31, 2004 as compared to the same period last year.  Cinergy’s and CG&E’s variances reflect in part, an increase in net revenues on power marketing, trading, and origination contracts.  Cinergy’s, CG&E’s, and PSI’s increases also included higher electric retail margins as a result of additional megawatt hour (MWh) sales.  Cinergy’s and PSI’s increases included a higher price received per MWh on certain rate tariff adjustments.  Milder weather in 2004 as compared to 2003, primarily impacting residential customers, partially offset the increases in margins for Cinergy, CG&E,and PSI.  Additionally offsetting Cinergy’s and CG&E’s increases was an increase in the average price of fuel for the quarter.

 

56



 

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

 

$

670

 

$

684

 

$

(14

)

(2

)

$

334

 

$

334

 

$

 

 

$

336

 

$

350

 

$

(14

)

(4

)

Wholesale

 

169

 

112

 

57

 

51

 

71

 

70

 

1

 

1

 

71

 

56

 

15

 

27

 

Other

 

39

 

27

 

12

 

44

 

33

 

25

 

8

 

32

 

9

 

6

 

3

 

50

 

Total

 

$

878

 

$

823

 

$

55

 

7

 

$

438

 

$

429

 

$

9

 

2

 

$

416

 

$

412

 

$

4

 

1

 

 


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

 

Retail electric operating revenues decreased for Cinergy and PSI mainly due to a three percent and five percent decrease in the average retail price per MWh, respectively, in the first quarter of 2004 as compared to 2003.  These average decreases resulted in approximately $23 million and $19 million lower retail revenues for Cinergy and PSI, respectively.  The declines in the retail price per MWh were mainly due to decreases in rate tariff adjustments associated with PSI’s fuel cost recovery program partially offset by approximately $9 million in increases in other rate tariff adjustments related to emission allowances, construction work in progress, and clean coal technologies tracking mechanisms.  The cost of fuel for PSI’s retail customers is passed on dollar-for-dollar under the state mandated fuel cost recovery mechanism.  Milder weather in the first quarter of 2004 as compared to 2003 also contributed to the decline in retail electric revenues, primarily for residential customers.  Heating degree days in PSI’s service territory decreased approximately nine percent in the first quarter of 2004 as compared to 2003.  These variances were partially offset by an increase of approximately $12 million and $6 million for Cinergy and PSI, respectively, due to higher amounts of MWh delivered to non-residential customers.

 

CG&E’s retail revenues were flat for the quarter ended March 31, 2004, as compared to 2003.  The average retail price per MWh decreased causing an approximate $4 million decline in retail revenue in 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.  Milder weather in the first quarter of 2004 as compared to 2003 also contributed to the decline in retail electric revenues, primarily for residential customers.  Heating degree days decreased approximately seven percent in CG&E’s service territory in the first quarter of 2004 as compared to 2003.  These decreases were offset by an increase in MWh delivered to non-residential customers.

 

Electric wholesale revenues increased for Cinergy and PSI and remained relatively flat for CG&E for the first quarter of 2004 as compared to 2003.  Cinergy’s increase includes a number of factors.   Net revenues on power marketing, trading, and origination contracts increased approximately $20 million over the first 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) market.  Additionally, approximately $16 million of Cinergy’s variance includes increases in wholesale revenues from non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

 

57



 

The majority of the remaining increase was attributable to increases in wholesale sales from excess generation capacity after serving regulated retail customers.

 

CG&E’s electric wholesale revenues remained relatively flat for the quarter.  Net revenues on power marketing, trading, and origination contracts increased by approximately $24 million over the first 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 market.  This increase was offset by a decrease in MWh 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 increases in wholesale sales from excess generation capacity after serving regulated retail customers.  This increase was partially offset by an approximate $5 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 first quarter of 2004, as compared to 2003.  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 $6 million, $3 million, and $3 million, respectively.  Cinergy’s and CG&E’s other Electric operating revenues also increased by approximately $5 million reflecting an increase in third party coal sales and the introduction of coal trading activity.

 

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

 

$

249

 

$

240

 

$

9

 

4

 

$

115

 

$

105

 

$

10

 

10

 

$

114

 

$

135

 

$

(21

)

(16

)

Purchased power

 

38

 

30

 

8

 

27

 

18

 

26

 

(8

)

(31

)

23

 

32

 

(9

)

(28

)

 


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

 

58



 

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 March 31, 2003, to the quarter ended March 31, 2004:

 

 

 

Cinergy(1)

 

CG&E

 

PSI

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Fuel Expense – March 31, 2003

 

$

240

 

$

105

 

$

135

 

 

 

 

 

 

 

 

 

Increase (Decrease) due to changes in:

 

 

 

 

 

 

 

Price of fuel

 

12

 

11

 

1

 

Deferred fuel cost

 

(36

)

 

(36

)

Fuel consumption

 

8

 

(6

)

14

 

New entities(2)

 

14

 

 

 

Other(3)

 

11

 

5

 

 

 

 

 

 

 

 

 

 

Fuel Expense – March 31, 2004

 

$

249

 

$

115

 

$

114

 

 


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

(2)          Reflects additional expense due to non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

(3)          Includes costs of third party coal sales and costs associated with the introduction of coal trading activity.

 

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 decreased for CG&E and PSI for the quarter ended March 31, 2004, as compared to 2003.  CG&E’s and PSI’s decreases in Purchased power expense reflect substantial reductions in the amount of purchases made for wholesale full requirements customers.  Both CG&E’s and PSI’s decreases were partially offset by an increase in the amount of MWh purchased primarily for non-residential customers, consistent with the increases in load for the customers discussed previously as part of retail electric revenues.

 

Cinergy’s increase was due to a significantly greater amount of third party purchases by its subsidiaries in 2004, as opposed to intercompany purchases in 2003 that were eliminated.

 

Gas Margins

 

CG&E’s gas gross margins remained relatively flat and Cinergy’s decreased for the quarter ended March 31, 2004, as compared to the same period last year.  CG&E’s gas margins increased by $8 million primarily due to rate tariff adjustments associated with a low-income

 

59



 

subsidy program, Ohio excise taxes, and the gas main replacement program.  This was offset by a $7 million decrease reflecting less volume sold due to milder weather during 2004.  Heating degree days decreased approximately seven percent in CG&E’s service territory in the first quarter of 2004 as compared to 2003.

 

Cinergy’s gas margins fell approximately $36 million due to lower margins from our gas marketing and trading business.  Our domestic gas marketing and trading business experienced a $28 million decline in physical and financial trading margins.  Natural gas prices were extremely volatile in the first quarter of 2003.  The reduction in gas marketing and trading margins resulted from fewer trading opportunities caused by lower volatility, lower price levels, and milder weather in 2004.  The remaining decline was due to a drop in our storage and transportation margins.  Our volume sold from storage experienced a 35 percent decline in 2004, reflecting milder weather.

 

Other Revenues

 

Other revenues for Cinergy increased for the quarter ended March 31, 2004, as compared to 2003.  Operating fees received by a non-regulated subsidiary that provides cogeneration services increased approximately $7 million as a result of operational efficiencies.  Other revenues also increased approximately $6 million due to non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

 

Operating Expenses

 

Operation and Maintenance

 

Operation and maintenance expense increased for Cinergy, CG&E, and PSI for the quarter ended March 31, 2004, as compared to 2003.  Cinergy’s, CG&E’s, and PSI’s increases include approximately $18 million, $4 million, and $14 million, respectively, of higher expenses related to emissions allowances.  These increases primarily reflect a reduction in the amount deferred under PSI’s emission allowances tracking mechanism as authorized by the Indiana Utility Regulatory Commission (IURC) and higher expenses due to an increase in the weighted average cost and the number of allowances used during the period.  The expenses also reflect increases of approximately $10 million, $5 million, and $3 million for Cinergy, CG&E, and PSI, respectively, in employee incentive compensation costs.  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 were higher by approximately $3 million for CG&E.  Maintenance expenses decreased for PSI, partially offsetting PSI’s aforementioned increases.  Approximately $6 million of Cinergy’s increase relates to non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

 

Depreciation

 

Depreciation expense increased for Cinergy and PSI, and decreased for CG&E for the quarter ended March 31, 2004, as compared to 2003.  Approximately $7 million of Cinergy’s and PSI’s

 

60



 

increase was due to the addition of depreciable plant primarily including pollution control equipment.  Partially offsetting Cinergy’s increase and contributing to CG&E’s decrease was an approximate $7.5 million reduction due to higher estimated useful lives of certain of CG&E’s assets resulting from a new depreciation study completed during the third quarter of 2003.  Approximately $3 million of Cinergy’s increase and partially offsetting CG&E’s decrease was the addition of depreciable plant primarily including pollution control equipment and additions related to the accelerated gas main replacement program.

 

Taxes Other Than Income Taxes

 

Taxes other than income taxes expense increased for Cinergy and CG&E for the quarter ended March 31, 2004, as compared to 2003.  This increase was primarily related to an approximate $3 million increase in Ohio gross receipts taxes, reflecting higher sales for the comparative period.

 

Miscellaneous (Expense) Income - Net

 

Miscellaneous (Expense) Income - Net decreased for Cinergy for the quarter ended March 31, 2004, as compared to 2003.  This decrease reflects an approximate $27 million pre-tax impairment charge ($21 million after-tax) on a non-controlling interest in an investment primarily involved in the development and sale of outage management software.  The decrease was partially offset by interest income of approximately $5 million on the notes receivable of two subsidiaries consolidated in the third quarter of 2003, as discussed in the 2003 10-K.  Additionally, partially offsetting the decrease was approximately $4 million in gains on the disposal of other non-regulated investments.

 

Interest Expense

 

Interest Expense increased for Cinergy for the quarter ended March 31, 2004, as compared to 2003.  Approximately $6 million of the increase reflects the recognition of a note payable to a trust.  Also reflected in the increase is approximately $5 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 No. 46, Consolidation of Variable Interest Entities (Interpretation 46), as discussed in the 2003 10-K.  Partially offsetting these increases was an increase in interest capitalized in the first quarter of 2004, as compared to 2003, primarily reflecting the post-in-service carrying costs deferred for recovery as authorized by the IURC.

 

Preferred Dividend Requirement of Subsidiary Trust

 

Preferred Dividend Requirement of Subsidiary Trust decreased for Cinergy for the quarter ended March 31, 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 for Cinergy decreased for the quarter ended March 31, 2004, as compared to 2003.  CG&E’s and PSI’s effective income tax rates remained flat for the comparative period.  Cinergy’s decrease was primarily a result of changes in the amount of

 

61



 

estimated tax credits associated with the production and sale of synthetic fuel, as discussed further below.  Cinergy’s effective tax rate for 2004 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 $145 million in tax credits, including approximately $25 million in 2004.

 

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 Emerging Issues Task Force (EITF) Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities, as discussed in the 2003 10-K.

 

62



 

ULH&P

 

Electric and gas gross margins and net income for ULH&P for the quarters ended March 31, 2004 and 2003, were as follows:

 

 

 

ULH&P

 

 

 

2004

 

2003

 

Change

 

% Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Electric gross margin

 

$

16,762

 

$

15,806

 

956

 

6

 

Gas gross margin

 

17,306

 

17,884

 

(578

)

(3

)

Net income

 

7,888

 

9,406

 

(1,518

)

(16

)

 

Summary of Results

 

Electric gross margins increased for ULH&P for the quarter ended March 31, 2004 compared to 2003.  This increase was primarily due to increases in MWh delivered to non-residential customers.  Gas gross margins decreased for the same period.  The majority of the decrease is due to milder weather in the first quarter of 2004 as compared to 2003.  Heating degree days decreased approximately seven percent as compared to the same period last year.  The decrease due to milder weather was partially offset by rate tariff adjustments associated with the gas main replacement program.

 

The decrease in net income for the year was primarily due to increased Operation and maintenance expense for the quarter ended March 31, 2004, as compared to 2003.  The majority of this increase was due to approximately $800,000 in higher employee benefits and incentive compensation program expenses.

 

63



 

MD&A - RESULTS OF OPERATIONS - FUTURE

 

FUTURE EXPECTATIONS/TRENDS

 

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

 

ELECTRIC INDUSTRY

 

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).  At this time, Cinergy cannot predict the effect the filing will have on its results of operations.

 

Blackout Report

 

In April 2004, the U.S.-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 various orders and rulemakings that applied to granting market-based rate authority and specifically addressed generation market power, transmission market power, barriers to entry, and affiliated company issues.  At this time, we cannot predict the effect such orders 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.

 

64



 

As discussed in the 2003 10-K, CG&E and PSI executed a new joint operating agreement in April 2002 whereby new power marketing and trading contracts since April 2002 are originated 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.

 

Changes in Fair Value

 

The changes in fair value of the energy risk management assets and liabilities, for the periods ended March 31, 2004 and 2003, are presented in the table below:

 

 

 

Change in Fair Value

 

 

 

March 31, 2004

 

March 31, 2003

 

 

 

Cinergy(1)

 

CG&E

 

Cinergy(1)

 

CG&E

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Fair value of contracts outstanding at beginning of period

 

$

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)

 

49

 

28

 

73

 

4

 

 

 

 

 

 

 

 

 

 

 

Option premiums paid/(received)

 

6

 

1

 

(2

)

1

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of changes in accounting principle

 

 

 

(20

)

(13

)

 

 

 

 

 

 

 

 

 

 

Contracts settled

 

(48

)

(10

)

(114

)

(37

)

 

 

 

 

 

 

 

 

 

 

Fair value of contracts outstanding at end of period

 

$

48

 

$

39

 

$

13

 

$

(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 March 31, 2004 and 2003 of our energy risk management assets and liabilities:

 

 

 

March 31, 2004

 

March 31, 2003

 

 

 

Cinergy(1)

 

CG&E

 

Cinergy(1)

 

CG&E

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Energy risk management assets - current

 

$

352

 

$

122

 

$

439

 

$

74

 

Energy risk management assets - non-current

 

114

 

49

 

93

 

34

 

 

 

 

 

 

 

 

 

 

 

Energy risk management liabilities - current

 

(330

)

(108

)

(434

)

(90

)

Energy risk management liabilities - non-current

 

(88

)

(24

)

(85

)

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

$

48

 

$

39

 

$

13

 

$

(2

)

 


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

 

65



 

The following table presents the expected maturity of the energy risk management assets and liabilities as of March 31, 2004, for Cinergy and CG&E:

 

 

 

Fair Value of Contracts as of March 31, 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

 

$

3

 

$

9

 

$

 

$

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices based on models and other valuation methods(3)

 

19

 

20

 

2

 

(5

)

36

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

22

 

$

29

 

$

2

 

$

(5

)

$

48

 

 

 

 

 

 

 

 

 

 

 

 

 

CG&E

 

 

 

 

 

 

 

 

 

 

 

Prices actively quoted

 

$

8

 

$

12

 

$

 

$

 

$

20

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices based on models and other valuation methods(3)

 

6

 

13

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

14

 

$

25

 

$

 

$

 

$

39

 

 


(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 the Company’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 is generally greater than with other commodity trading.

 

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 March 31, 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.

 

66



 

Cinergy(1)

 

Rating

 

Total
Exposure
Before Credit
Collateral

 

Credit
Collateral

 

Net
Exposure

 

Percentage of
Total
Net Exposure

 

Number of Counterparties
Greater than 10%

 

Net Exposure of
Counterparties
Greater than
10%(4)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade(2)

 

$

498,587

 

$

20,205

 

$

478,382

 

78

%

 

$

 

Internally Rated-Investment Grade(3)

 

100,077

 

6,266

 

93,811

 

15

 

 

 

Non-Investment Grade

 

101,391

 

69,407

 

31,984

 

5

 

 

 

Internally Rated-Non-Investment Grade

 

38,881

 

27,283

 

11,598

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

738,936

 

$

123,161

 

$

615,775

 

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)

 

$

454,488

 

$

37,274

 

$

6,825

 

$

498,587

 

Internally Rated-Investment Grade(3)

 

97,409

 

2,396

 

272

 

100,077

 

Non-Investment Grade

 

101,391

 

 

 

101,391

 

Internally Rated-Non-Investment Grade

 

38,774

 

107

 

 

38,881

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

692,062

 

$

39,777

 

$

7,097

 

$

738,936

 

 


(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.

 

67



 

CG&E

 

Rating

 

Total
Exposure
Before Credit
Collateral

 

Credit
Collateral

 

Net
Exposure

 

Percentage of
Total
Net Exposure

 

Number of Counterparties
Greater than 10%

 

Net Exposure of
Counterparties
Greater than
10%(3)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Grade(1)

 

$

126,312

 

$

9,253

 

$

117,059

 

95

%

4

 

$

79,054

 

Internally Rated-Investment Grade(2)

 

5,037

 

214

 

4,823

 

4

 

 

 

Non-Investment Grade

 

15,618

 

14,313

 

1,305

 

1

 

 

 

Internally Rated-Non-Investment Grade

 

1,643

 

1,491

 

152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

148,610

 

$

25,271

 

$

123,339

 

100

%

4

 

$

79,054

 

 

 

 

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)

 

$

115,605

 

$

13,346

 

$

(2,639

)

$

126,312

 

Internally Rated-Investment Grade(2)

 

5,133

 

(96

)

 

5,037

 

Non-Investment Grade

 

15,618

 

 

 

15,618

 

Internally Rated-Non-Investment Grade

 

1,643

 

 

 

1,643

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

137,999

 

$

13,250

 

$

(2,639

)

$

148,610

 

 


(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.

 

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.

 

68



 

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, had an immaterial impact on our financial position.

 

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

 

69



 

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”.

 

70



 

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 March 31, 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 March 31, 2004 and found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

71



 

PART II.  OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

CLEAN AIR ACT (CAA) LAWSUIT

 

In November 1999, and through subsequent amendments, the United States (U.S.) 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 U.S. 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 (Miami Fort Station), and PSI’s Cayuga Generating Station, Gallagher Generating Station (Gallagher Station), Wabash River Generating Station, and Gibson Generating Station (Gibson 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.  Also in May 2004, plaintiffs filed a motion to amend the most recent complaint pursuant to the Court’s pre-trial procedures scheduling order.  This amended complaint added four new projects to the lawsuit, which had been subject to earlier EPA Notices of Violation (NOVs).  These new projects are at stations previously named in the lawsuit.  Plaintiffs also dropped their claims with respect to a number of projects, the United States dropped ten projects and the three northeast states dropped an additional five projects.  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 the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light Company (DP&L), and CG&E.  The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  This suit is being defended by CSP.  In April 2001, the District Court in that case ruled that the Government and the intervening plaintiff environmental groups could seek injunctive relief for alleged violations that occurred more than five years before the filing of the complaint only.  Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA.  Neither party appealed that decision.

 

In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a NOV to DP&L for alleged violations of PSD, NSR, and 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 SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.

 

72



 

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 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.

 

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).

 

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

 

PSI notified its insurance carriers of the claims related to MGP sites raised by IDEM and costs included in the Site Participation and Cost Sharing Agreements.  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.  PSI has filed a petition to transfer the appellate court’s decision to the Indiana Supreme Court for its review.  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 if the likelihood of incurring

 

73



 

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

 

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

 

See Note 6 of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements” for further information regarding our commitments and contingencies.

 

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

January 1 – January 31

 

111,447

 

$

38.71

 

N/A

 

N/A

February 1 – February 29

 

377,757

 

$

38.63

 

N/A

 

N/A

March 1 – March 31

 

8,769

 

$

40.07

 

N/A

 

N/A

 

74



 

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

 

The annual meeting of shareholders of Cinergy Corp., was held on May 4, 2004, in Covington, Kentucky.

 

At the meeting, shareholders ratified the selection of Deloitte and Touche, the members of Deloitte Touche Tohmatsu and their respective affiliates, as the Company’s independent auditors and elected three Class I directors to the board of Cinergy Corp. to serve for three-year terms ending in 2007, as set forth below:

 

Directors

 

Votes For

 

Votes Withheld

 

 

 

 

 

 

 

Class I

 

 

 

 

 

Michael G. Browning

 

155,496,837

 

3,747,963

 

George C. Juilfs

 

156,161,356

 

3,083,444

 

Dudley S. Taft

 

156,170,459

 

3,074,341

 

 

In lieu of the annual meeting of shareholders of The Cincinnati Gas & Electric Company (CG&E), a resolution was duly adopted via unanimous written consent of Cinergy Corp., CG&E’s sole shareholder, effective May 3, 2004 electing the following members to the Board of Directors for one-year terms expiring in 2005:

 

                  James E. Rogers

                  R. Foster Duncan

                  James L. Turner

 

The annual meeting of shareholders of PSI Energy, Inc. (PSI) was held on May 4, 2004, in Covington, Kentucky.  Proxies were not solicited for the annual meeting.  Cinergy Corp. owns all of the 53,913,701 outstanding shares, representing a like number of votes, of the common stock of PSI.  By unanimous vote, the following members to the Board of Directors were elected at the annual meeting for one-year terms expiring in 2005:

 

                  Michael G. Browning

                  James E. Rogers

                  Douglas F. Esamann

 

None of the 650,989 outstanding shares, representing 423,331 votes, of the preferred stock of PSI, were present or voted at the annual meeting.

 

75



 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

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

 

Exhibit
Designation

 

Registrant

 

Nature of Exhibit

 

Previously Filed
as Exhibit to:

 

 

 

 

 

 

 

Additional Exhibits

 

 

 

 

 

 

 

 

 

 

 

 

 

10-rr

 

Cinergy Corp.

 

Amendment to Cinergy Corp. 401(k) Excess Plan, adopted March 31, 2004, effective January 1, 2004.

 

 

 

 

 

 

 

 

 

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 Exchange Act, 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 Exchange Act, 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 March 31, 2004.

 

Date of Report

 

Registrant

 

Item Furnished or Filed

 

 

 

 

 

January 23, 2004

 

Cinergy Corp.

 

Item 12. Results of Operations and Financial Condition

 

76



 

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:  May 7, 2004

/s/ Lynn J. Good

 

 

    Lynn J. Good

 

 

(duly authorized officer

 

 

and

 

 

principal accounting officer)

 

 

77


EX-10.RR 2 a04-5115_1ex10drr.htm EX-10.RR

Exhibit 10.rr

 

Adopted pursuant to resolutions of the Cinergy

Corp. Benefits Committee on March 31, 2004

 

 

AMENDMENT TO THE

CINERGY CORP. 401(K) EXCESS PLAN

 

 

The Cinergy Corp. 401(k) Excess Plan, originally adopted as of January 1, 1997, as amended from time to time (the “Plan”), is hereby amended.


(1)           Explanation of Amendment

 

The Plan is amended to provide that all distributions from the Plan will be made in the form of cash, except with respect to nonelective employer contributions and deferrals made to the Plan on or before December 31, 2003 on behalf of certain participants designated by the Committee, which amounts may be distributed in the form of shares of the Company’s common stock, if so elected by such a designated participant, to the extent such amounts are deemed invested in the Company’s common stock as of December 31, 2003.

 

(2)           Amendment

 

Section 5.1(d) of the Plan is hereby amended in its entirety to read as follows:

“(d)                           Distribution in Cash or in Kind.  All distributions from the Plan shall be made in the form of cash.  Notwithstanding the preceding sentence, amounts credited on or before December 31, 2003 to the Nonelective Employer Contributions Account or the Deferral Account of any Participant designated by the Benefits Committee (the “Designated Participants”), adjusted for earnings and losses, may be distributed to such Designated Participant, if so elected by the Designated Participant in accordance with procedures established by the Benefits Committee, in the form of Company Stock to the extent such amounts are deemed invested in Company Stock as of December 31, 2003.”

IN WITNESS WHEREOF, Cinergy Corp. has caused this Amendment to be executed and approved by its duly authorized officer as of March 31, 2004.

 

 

 

By:

/s/ Timothy V. Verhagen

 

 

 

Timothy J. Verhagen

 

 

Vice President of Human Resources

 


EX-31.A 3 a04-5115_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: May 7, 2004

 

 

/s/ James E. Rogers

 

James E. Rogers

Chief Executive Officer

 


EX-31.B 4 a04-5115_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: May 7, 2004

 

 

/s/ R. Foster Duncan

 

R. Foster Duncan

Chief Financial Officer

 


EX-32.A 5 a04-5115_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 March31, 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.

 

 

/s/ James E. Rogers

 

James E. Rogers

Chief Executive Officer

May 7, 2004

 


EX-32.B 6 a04-5115_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 March 31, 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.

 

 

/s/ R. Foster Duncan

 

R. Foster Duncan

Chief Financial Officer

May 7, 2004

 


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