(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2001
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to__________
| Commission | Registrant, State of Incorporation, | I.R.S. Employer | |
|---|---|---|---|
| File Number | Address and Telephone Number | Identification No. | |
| 1-11377 | CINERGY CORP. | 31-1385023 | |
| (A Delaware Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500 | |||
| 1-1232 | THE CINCINNATI GAS & ELECTRIC COMPANY | 31-0240030 | |
| (An Ohio Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500 | |||
| 1-3543 | PSI ENERGY, INC. | 35-0594457 | |
| (An Indiana Corporation) 1000 East Main Street Plainfield, Indiana 46168 (513) 421-9500 | |||
| 2-7793 | THE UNION LIGHT, HEAT AND POWER COMPANY | 31-0473080 | |
| (A Kentucky Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500 |
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Yes X No __
This combined Form 10-Q is separately filed byCinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., andThe 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,July 31, 2001, shares of Common Stock outstanding for each registrant were as listed:
| Registrant | Description | Shares | ||
|---|---|---|---|---|
| Cinergy Corp. | Par value $.01 per share | 159,094,704 | ||
| The Cincinnati Gas & Electric Company | Par value $8.50 per share | 89,663,086 | ||
| PSI Energy, Inc. | Without par value, stated value | 53,913,701 | ||
| The Union Light, Heat and Power Company | Par value $15.00 per share | 585,333 |
TABLE OF CONTENTS
1Financial Statements
Cinergy Corp.
.................................................... 4
Consolidated Statements of Income
Income............................. 5
Consolidated Balance Sheets
Sheets................................... 6
Consolidated Statements of Changes in Common Stock Equity
Equity..... 8
Consolidated Statements of Cash Flows
Flows.........................10
The Cincinnati Gas & Electric Company
Company.............................11
Consolidated Statements of Income and Comprehensive Income
Income....12
Consolidated Balance Sheets
Sheets...................................13
Consolidated Statements of Cash Flows
Flows.........................15
PSI Energy, Inc.
Inc...................................................16
Consolidated Statements of Income and Comprehensive Income
Income....17
Consolidated Balance Sheets
Sheets...................................18
Consolidated Statements of Cash Flows
Flows.........................20
The Union Light, Heat and Power Company
Company...........................21
Statements of Income
Income..........................................22
Balance Sheets
Sheets................................................23
Statements of Cash Flows
Flows......................................25
Notes to Financial Statements
Statements..........................................26
Cautionary Statements Regarding Forward-Looking Information
Information............45
2 Management’sManagement's Discussion and Analysis of Financial Condition and
Results
of OperationsIntroductionOrganizationLiquidity
Introduction..................................................47
Organization..................................................47
Liquidity.....................................................48
Capital ResourcesFirst Quarter ............................................50
2001 Quarterly Results of Operations- Historical
Operations - Historical.............54
2001 Year to Date Results of Operations- Future
Operations - Historical..........58
Results of Operations - Future................................63
3 Quantitative and Qualitative Disclosures About Market Risk
1 Legal Proceedings4 Submissions of Matters to a Vote of Security Holders
Proceedings......................................................72
6 Exhibits and Reports on Form 8-K8-K.......................................73
Signatures.............................................................74
Signatures
CINERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
Quarter Ended March 31Year to Date
June 30 June 30
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
(unaudited)
Operating Revenues
Electric $1,874,685 $1,066,697$2,383,217 $1,250,353 $4,257,902 $2,317,050
Gas 1,813,822 498,7281,236,779 491,627 3,050,601 990,355
Other 18,022 17,65222,096 27,534 40,118 45,186
------ ------ ------ ------
Total Operating Revenues 3,706,529 1,583,0773,642,092 1,769,514 7,348,621 3,352,591
- ----------------------------------------------------------------------------------------------------
Operating Expenses
Fuel and purchased and exchanged power 1,345,881 500,7781,855,615 700,552 3,201,496 1,201,330
Gas purchased 1,710,610 406,1451,195,668 449,806 2,906,278 855,951
Operation and maintenance 249,490 252,927267,065 297,584 516,555 550,511
Depreciation and amortization 88,564 82,63192,203 85,807 180,767 168,438
Taxes other than income taxes 63,092 66,13153,409 68,458 116,501 134,589
------ ------ ------- -------
Total Operating Expenses 3,457,637 1,308,6123,463,960 1,602,207 6,921,597 2,910,819
- ----------------------------------------------------------------------------------------------------
Operating Income 248,892 274,465178,132 167,307 427,024 441,772
- ----------------------------------------------------------------------------------------------------
Equity in Earnings of Unconsolidated Subsidiaries (1,239) 1,8422,072 4,333 833 6,175
Miscellaneous - Net (4,694) (2,503)13,173 2,617 8,479 114
Interest 63,550 51,43068,067 53,113 131,617 104,543
- ----------------------------------------------------------------------------------------------------
Income Before Taxes 179,409 222,374125,310 121,144 304,719 343,518
- ----------------------------------------------------------------------------------------------------
Income Taxes 58,304 82,57241,485 44,754 99,789 127,326
Preferred Dividend Requirements of Subsidiaries 858 1,3631,275 1,716 2,638
--- ----- ----- -----
Net Income $ 120,24782,967 $ 138,43975,115 $ 203,214 $ 213,554
========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 158,989159,061 158,923 159,025 158,923
- ----------------------------------------------------------------------------------------------------
Earnings Per Common Share
Net Income $ 0.760.51 $ 0.870.47 $ 1.27 $ 1.34
- ----------------------------------------------------------------------------------------------------
Earnings Per Common Share - Assuming Dilution
Net Income $ 0.750.51 $ 0.870.47 $ 1.26 $ 1.34
- ----------------------------------------------------------------------------------------------------
Dividends Declared Per Common Share $ 0.45 $ 0.45 $ 0.90 $ 0.90
- ----------------------------------------------------------------------------------------------------
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31June 30 December 31
2001 2000
(unaudited)
- --------------------------------------------------------------------------------
(dollars in thousands)
Current Assets
Cash and cash equivalents $ 187,491133,204 $ 93,054
Restricted deposits 8,0217,528 4,195
Notes receivable 31,65525,837 35,945
Accounts receivable less accumulated provision for
doubtful accounts of $39,480$35,567 at March 31,June 30, 2001,
and $29,951 at December 31, 2000 1,853,3131,864,630 1,623,402
Materials, supplies, and fuel - at average cost 161,952206,693 159,340
Energy risk management current assets (Note 1(c)) 1,044,763512,842 1,413,281
Prepayments and other 133,028223,193 129,666
------- -------
Total Current Assets 3,420,2232,973,927 3,458,883
- --------------------------------------------------------------------------------
Property, Plant, and Equipment - at Cost
Utility plant in service 7,772,8407,887,673 7,681,612
Construction work in progress 358,452360,608 323,350
------- -------
Total Utility Plant 8,131,2928,248,281 8,004,962
Non-regulated property, plant, and equipment 3,975,8894,007,657 3,401,203
Accumulated depreciation 4,642,9834,702,197 4,586,089
--------- ---------
Net Property, Plant, and Equipment 7,464,1987,553,741 6,820,076
- --------------------------------------------------------------------------------
Other Assets
Regulatory assets 972,705974,507 976,614
Investments in unconsolidated subsidiaries 529,339562,931 538,322
Energy risk management non-current assets (Note 1(c)) 65,98497,157 37,228
Other investments 150,327155,705 146,986
Other 334,760315,590 351,619
------- -------
Total Other Assets 2,053,1152,105,890 2,050,769
- --------------------------------------------------------------------------------
Total Assets $12,937,536$12,633,558 $12,329,728
=========== ===========
- --------------------------------------------------------------------------------
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated
financial statements.
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31June 30 December 31
2001 2000
(unaudited)
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
Current Liabilities
Accounts payable $1,708,847 $1,496,494$ 1,798,198 $ 1,496,494
Accrued taxes 286,263219,938 247,006
Accrued interest 59,21154,516 47,351
Notes payable and other short-term obligations 1,809,080(Note 3) 1,653,136 1,128,657
Long-term debt due within one year (Note 2) 44,14980,620 40,545
Energy risk management current liabilities (Note 1(c)) 1,073,819527,645 1,456,375
Other 81,07883,682 106,679
------ -------
Total Current Liabilities 5,062,4474,417,735 4,523,107
- ----------------------------------------------------------------------------------------------------
Non-Current Liabilities
Long-term debt (Note 2) 2,887,7023,188,174 2,876,367
Deferred income taxes 1,190,2211,198,350 1,185,968
Unamortized investment tax credits 134,134131,857 137,965
Accrued pension and other postretirement benefit costs 410,308423,553 404,764
Energy risk management non-current liabilities (Note 1(c)1 (c)) 121,529135,482 97,507
Other 233,209226,691 252,255
------- -------
Total Non-Current Liabilities 4,977,1035,304,107 4,954,826
- ----------------------------------------------------------------------------------------------------
Total Liabilities 10,039,5509,721,842 9,477,933
- ----------------------------------------------------------------------------------------------------
Cumulative Preferred Stock of Subsidiaries
Not subject to mandatory redemption 62,833 62,834
62,834- ----------------------------------------------------------------------------------------------------
Common Stock Equity
Common Stockstock - $.01 par value; authorized
shares - 600,000,000;outstanding shares -
159,001,531158,088,053 at March 31,June 30, 2001 and 158,967,661
at December 31, 2000 1,5901,591 1,590
Paid-in capital 1,619,3661,623,458 1,619,153
Retained earnings 1,229,5521,240,761 1,179,113
Accumulated other comprehensive loss (15,356)income (loss) (16,927) (10,895)
------- -------
Total Common Stock Equity 2,835,1522,848,883 2,788,961
- ----------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 3)4)
Total Liabilities and Shareholders' Equity $12,937,536 $12,329,728$ 12,633,558 $ 12,329,728
============ ============
- ----------------------------------------------------------------------------------------------------
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated
financial statements.
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Accumulated Total
Other Common
Common Paid-in Retained Comprehensive Stock
Stock Capital Earnings Income Income/(Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
Quarter Ended March 31,June 30, 2001
Balance at JanuaryApril 1, 2001 $1,590 $1,619,153 $1,179,113 $ (10,895) $2,788,9611,590 $ 1,619,366 $ 1,229,552 $ (15,356) $ 2,835,152
Comprehensive income:
Net income 120,247 120,24782,967 82,967
Other comprehensive income (loss), net of tax effect
of ($817)
Foreign currency translation adjustment 696 696
Minimum pension liability adjustment 91 91(3,401) (3,401)
Unrealized gain (loss) on investment trusts (683) (683)
FAS 133 transition charge (Note 1(b)) (2,500) (2,500)540 540
Minimum pension liability adjustment (23) (23)
Cash flow hedges (Note 1(b)) (2,065) (2,065)1,313 1,313
-----
Total comprehensive income 115,78681,396
Issuance of 33,87086,522 shares of common stock-net 826 826stock - net 1 2,865 2,866
Treasury shares purchased (2,191) (2,191)(7,824) (7,824)
Treasury shares reissued 378 3785,622 5,622
Dividends on common stock ($.45 per share) (71,541) (71,541)(71,555) (71,555)
Other 1,200 1,733 2,9333,429 (203) 3,226
----- ----- ---- ----- -----
Ending balance at March 31,June 30, 2001 $1,590 $1,619,366 $1,229,552 $ (15,356) $2,835,152
1,591 $ 1,623,458 $ 1,240,761 $ (16,927) $ 2,848,883
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31,June 30, 2000
Balance at JanuaryApril 1, 2000 $1,589 $1,597,554 $1,064,319 $ (9,741) $2,653,7211,589 $ 1,604,096 $ 1,131,695 $ (10,512) $ 2,726,868
Comprehensive income:
Net income 138,439 138,43975,115 75,115
Other comprehensive income (loss), net of tax effect
of $534
Foreign currency translation adjustment (1,728) (1,728)6,014 6,014
Unrealized gain (loss) on investment trusts 957 957(818) (818)
----
Total comprehensive income 137,66880,311
Treasury shares purchased (1,490) (1,490)
Treasury shares reissued 4,570 4,5705,795 5,795
Dividends on common stock ($.45 per share) (71,077) (71,077)(71,114) (71,114)
Other 1,972 14 1,9864,171 7 4,178
----- ----- ----- ----- -----
Ending balanceBalance at March 31,June 30, 2000 $1,589 $1,604,096 $1,131,695 $ (10,512) $2,726,8681,589 $ 1,612,572 $ 1,135,703 $ (5,316) $ 2,744,548
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31
2001 2000CHANGES IN COMMON STOCK EQUITY
(Continued)
Accumulated Total
Other Common
Common Paid-in Retained Comprehensive Stock
Stock Capital Earnings Income/(Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
Operating ActivitiesSix Months Ended June 30, 2001
Balance at January 1, 2001 $ 1,590 $ 1,619,153 $ 1,179,113 $ (10,895) $ 2,788,961
Comprehensive income:
Net income $120,247 $138,439
Items providing or (using) cash currently:
Depreciation and amortization 88,564 82,631203,214 203,214
Other comprehensive income (loss), net of tax effect
Foreign currency translation adjustment (2,705) (2,705)
Unrealized gain from energy risk management activities (18,772) (18,182)
Deferred(loss) on investment trusts (143) (143)
Cumulative effect of change in accounting
principle (Note 1(b)) (2,500) (2,500)
Minimum pension liability adjustment 68 68
Cash flow hedges (Note 1(b)) (752) (752)
----
Total comprehensive income taxes and investment tax credits - net (1,418) (841)
Equity in earnings of unconsolidated subsidiaries 1,239 (1,842)
Allowance for equity funds used during construction (1,143) (902)
Regulatory assets - net 4,556 6,853
Changes in other current assets and current liabilities:
Restricted deposits (1,375) (30)
Accounts and notes receivable, net of reserves on receivables sold (231,528) 35,226
Materials, supplies, and fuel (2,605) 30,763
Accounts payable 209,709 (130,662)
Accrued taxes and interest 51,117 39,628
Other items-net (33,289) 7,072
Net cash provided by operating activities 185,302 188,153
Financing Activities
Change in short-term debt 680,423 89,127197,182
Issuance of long-term debt 28,148 -
Redemption of long-term debt (27,599) (594)
Retirement of preferred stock of subsidiaries - (105)
Issuance120,392 shares of common stock 826 - net 1 3,691 3,692
Treasury shares purchased (10,015) (10,015)
Treasury shares reissued 6,000 6,000
Dividends on common stock (71,541) (71,077)($.90 per share) (143,096) (143,096)
Other 4,629 1,530 6,159
----- ----- ----- ----- -----
Ending balance at June 30, 2001 $ 1,591 $ 1,623,458 $ 1,240,761 $ (16,927) $ 2,848,883
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2000
Balance at January 1, 2000 $ 1,589 $ 1,597,554 $ 1,064,319 $ (9,741) $ 2,653,721
Comprehensive income:
Net cash provided by financing activities 610,257 17,351
Investing Activities
Construction expenditures (less allowance for equity funds used during
construction) (187,184) (102,635)
Acquisitions and other investments (513,938) (108,184)
Net cash used in investing activities (701,122) (210,819)
Net increase (decrease) in cash and cash equivalents 94,437 (5,315)
Cash and cash equivalentsincome 213,554 213,554
Other comprehensive income (loss), net of tax effect
Foreign currency translation adjustment 4,286 4,286
Unrealized gain (loss) on investment trusts 139 139
---
Total comprehensive income 217,979
Treasury shares purchased (1,490) (1,490)
Treasury shares reissued 10,365 10,365
Dividends on common stock ($.90 per share) (142,191) (142,191)
Other 6,143 21 6,164
----- ----- ----- ----- -----
Ending Balance at beginning of period 93,054 81,919
Cash and cash equivalents at end of period $187,491June 30, 2000 $ 76,6041,589 $ 1,612,572 $ 1,135,703 $ (5,316) $ 2,744,548
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year to TableDate
June 30
2001 2000
- ------------------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
Operating Activities
Net income $ 203,214 $ 213,554
Items providing or (using) cash currently:
Depreciation and amortization 180,767 168,438
Unrealized (gain) loss from energy risk management activities (50,245) (49,032)
Deferred income taxes and investment tax credits - net 13,886 9,625
Equity in earnings of Contentsunconsolidated subsidiaries (833) (6,175)
Allowance for equity funds used during construction (3,219) (3,100)
Regulatory assets - net (7,672) 18,511
Changes in other current assets and current liabilities:
Restricted deposits (882) (15,333)
Accounts and notes receivable, net of reserves
on receivables sold (234,953) (197,566)
Materials, supplies, and fuel (47,346) 27,229
Accounts payable 299,060 137,975
Accrued taxes and interest (19,903) 7,530
Other items - net (90,212) (49,403)
------- -------
Net cash provided by operating activities 241,662 262,253
- ------------------------------------------------------------------------------------------
Financing Activities
Change in short-term debt 524,479 196,584
Issuance of long-term debt 372,476 123,189
Redemption of long-term debt (37,090) (55,720)
Retirement of preferred stock of subsidiaries -- (10,951)
Issuance of common stock 3,692 --
Dividends on common stock (143,096) (142,191)
-------- --------
Net cash provided by financing activities 720,461 110,911
- ------------------------------------------------------------------------------------------
Investing Activities
Construction expenditures (less allowance for equity
funds used during construction) (376,917) (215,519)
Acquisitions and other investments (545,056) (137,290)
-------- --------
Net cash used in investing activities (921,973) (352,809)
- ------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 40,150 20,355
Cash and cash equivalents at beginning of period 93,054 81,919
------ ------
Cash and cash equivalents at end of period $ 133,204 $ 102,274
========= =========
- ------------------------------------------------------------------------------------------
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial
statements
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Quarter Ended March 31Year to Date
June 30 June 30
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands)thousand)
(unaudited)
Operating Revenues
Electric $ 932,745 $538,0181,198,015 $ 646,973 $ 2,130,760 $ 1,184,991
Gas 325,093 178,46279,407 59,598 404,500 238,060
------ ------ ------- -------
Total Operating Revenues 1,257,838 716,4801,277,422 706,571 2,535,260 1,423,051
- --------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel and purchased and exchanged power 660,680 240,352915,835 339,176 1,576,515 579,528
Gas purchased 238,291 89,61651,555 24,246 289,846 113,862
Operation and maintenance 111,625 112,283120,770 130,274 232,395 242,557
Depreciation and amortization 45,607 43,75746,656 45,569 92,263 89,326
Taxes other than income taxes 47,371 49,93144,597 53,891 91,968 103,822
------ ------ ------ -------
Total Operating Expenses 1,103,574 535,9391,179,413 593,156 2,282,987 1,129,095
- --------------------------------------------------------------------------------------------------------------
Operating Income 154,264 180,54198,009 113,415 252,273 293,956
- --------------------------------------------------------------------------------------------------------------
Miscellaneous - Net (2,404) (1,973)672 962 (1,732) (1,011)
Interest 27,396 25,74926,487 23,724 53,883 49,473
- --------------------------------------------------------------------------------------------------------------
Income Before Taxes 124,464 152,81972,194 90,653 196,658 243,472
- --------------------------------------------------------------------------------------------------------------
Income Taxes 42,889 56,85522,793 34,772 65,682 91,627
------ ------ ------ ------
Net Income $ 81,57549,401 $ 95,96455,881 $ 130,976 $ 151,845
Preferred Dividend Requirement 211 213212 212 423 425
--- --- --- ---
Net Income Applicable to Common Stock $ 81,36449,189 $ 95,75155,669 $ 130,553 $ 151,420
=========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
Net Income $ 81,57549,401 $ 95,96455,881 $ 130,976 $ 151,845
Other Comprehensive Income (Loss), Net of Tax Effect of $2,537 (3,915) -1,255 -- (2,660) --
----- ----- ------ -----
Comprehensive Income $ 77,66050,656 $ 95,96455,881 $ 128,316 $ 151,845
=========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial
statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31June 30 December 31
2001 2000
(unaudited)
- --------------------------------------------------------------------------------
(dollars in thousands)
Current Assets
Cash and cash equivalents $ 18,96112,986 $ 20,637
Restricted deposits 6041,085 160
Notes receivable from affiliated companies 186,393-- 91,732
Accounts receivable less accumulated provision for
doubtful accounts of $27,020$24,058 at March 31,June 30, 2001,
and $19,044 at December 31, 2000 657,202664,552 494,501
Accounts receivable from affiliated companies 8,64824,193 26,743
Materials, supplies, and fuel - at average cost 85,555109,120 99,061
Energy risk management current assets (Note 1(c)) 515,601225,751 697,488
Prepayments and other 43,94043,633 39,320
------ ------
Total Current Assets 1,516,9041,081,320 1,469,642
- --------------------------------------------------------------------------------
Property, Plant, and Equipment - at Cost
Utility plant in service
Electric 1,958,6911,947,640 1,905,795
Gas 883,495888,299 865,303
Common 212,427251,619 211,424
------- -------
Total Utility Plant In Service 3,054,6133,087,558 2,982,522
Construction work in progress 95,69191,431 132,577
------ -------
Total Utility Plant 3,150,3043,178,989 3,115,099
Non-regulated property, plant, and equipment 3,201,8733,234,794 3,181,076
Accumulated depreciation 2,473,7812,499,659 2,444,867
--------- ---------
Net Property, Plant, and Equipment 3,878,3963,914,124 3,851,308
- --------------------------------------------------------------------------------
Other Assets
Regulatory assets 510,219521,058 502,328
Energy risk management non-current assets 23,684(Note 1(c)) 37,841 7,000
Other 138,390130,123 156,692
------- -------
Total Other Assets 672,293689,022 666,020
- --------------------------------------------------------------------------------
Total Assets $6,067,593 $5,986,970$ 5,684,466 $ 5,986,970
=========== ===========
- --------------------------------------------------------------------------------
The accompanying notes as they relate to The Cincinnati Gas & Electric
Company are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
March 31June 30 December 31
2001 2000
(unaudited)
- --------------------------------------------------------------------------------
(dollars in thousands)
Current Liabilities
Accounts payable $ 667,069709,053 $ 543,006
Accounts payable to affiliated companies 20,56431,613 23,927
Accrued taxes 165,819125,036 152,750
Accrued interest 24,09821,878 17,645
Notes payable and other short-term obligations 184,000 264,000
Notes payable to affiliated companies 376,190280,448 163,478
Long-term debt due within one year 1,200 1,200
Energy risk management current liabilities (Note 1(c)) 529,087235,792 717,902
Other 41,25432,292 37,603
------ ------
Total Current Liabilities 2,009,2811,621,312 1,921,511
- --------------------------------------------------------------------------------
Non-Current Liabilities
Long-term debt 1,205,1471,205,234 1,205,061
Deferred income taxes 728,800738,470 735,799
Unamortized investment tax credits 95,61194,153 98,624
Accrued pension and other postretirement benefit costs 163,544164,696 164,901
Energy risk management non-current liabilities (Note 1(c)) 40,88553,361 26,337
Other 102,096106,117 118,421
------- -------
Total Non-Current Liabilities 2,336,0832,362,031 2,349,143
- --------------------------------------------------------------------------------
Total Liabilities 4,345,3643,983,343 4,270,654
- --------------------------------------------------------------------------------
Cumulative Preferred Stock
Not subject to mandatory redemption 20,486 20,486
- --------------------------------------------------------------------------------
Common Stock Equity
Common Stockstock - $8.50 par value; authorized shares-120,000,000;shares -
120,000,000;
outstanding shares-89,663,086shares - 89,663,086 at March 31,June 30, 2001 and
December 31, 2000 762,136 762,136
Paid-in capital 565,777 565,777
Retained earnings 378,739356,378 368,911
Accumulated other comprehensive loss (4,909)income (loss) (3,654) (994)
------ ----
Total Common Stock Equity 1,701,7431,680,637 1,695,830
- --------------------------------------------------------------------------------
Commitments and Contingencies (Note 3)4)
Total Liabilities and Shareholder's Equity $6,067,593$5,684,466 $5,986,970
========== ==========
- --------------------------------------------------------------------------------
The accompanying notes as they relate to The Cincinnati Gas & Electric
Company are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31Year to Date
June 30
2001 2000
- --------------------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
Operating Activities
Net income $ 81,575130,976 $ 95,964151,845
Items providing or (using) cash currently:
Depreciation and amortization 45,607 43,75792,263 89,326
Deferred income taxes and investment tax credits - net (5,890) 1,6603,170 8,378
Unrealized gain(gain) loss from energy risk management activities (9,064) (10,542)(14,190) (28,280)
Allowance for equity funds used during construction (427) (734)(941) (2,646)
Regulatory assets - net (6,530) 4,182(28,623) 8,085
Changes in other current assets and current liabilities:
Restricted deposits (444) -(925) 22
Accounts and notes receivable, net of reserves
on receivables sold (243,936) 12,569(76,146) (11,302)
Materials, supplies, and fuel 13,506 13,254(10,059) 731
Accounts payable 120,700 (68,046)173,649 55,160
Accrued taxes and interest 19,522 22,456(23,481) 10,039
Other items-net (6,000) (2,664)items - net 4,474 (38,678)
----- -------
Net cash provided by operating activities 8,619 111,856250,167 242,680
- --------------------------------------------------------------------------------------------
Financing Activities
Change in short-term debt 132,712 (7,199)36,970 (22,403)
Retirement of preferred stock - (68)(160)
Dividends on preferred stock (212) (214)(339) (425)
Dividends on common stock (71,535) (53,600)(143,086) (107,200)
-------- --------
Net cash provided by (used in)used in financing activities 60,965 (61,081)(106,455) (130,188)
- --------------------------------------------------------------------------------------------
Investing Activities
Construction expenditures (less allowance for equity
funds used during construction) (71,260) (56,143)(151,363) (107,109)
-------- --------
Net cash used in investing activities (71,260) (56,143)(151,363) (107,109)
- --------------------------------------------------------------------------------------------
Net decreaseincrease (decrease) in cash and cash equivalents (1,676) (5,368)(7,651) 5,383
Cash and cash equivalents at beginning of period 20,637 9,554
------ -----
Cash and cash equivalents at end of period $ 18,96112,986 $ 4,18614,937
========== ==========
- --------------------------------------------------------------------------------------------
The accompanying notes as they relate to The Cincinnati Gas & Electric
Company are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Quarter Ended March 31Year to Date
June 30 June 30
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
Operating Revenues
Electric $915,544 $533,752$1,184,393 $ 619,760 $2,099,937 $1,153,512
- ----------------------------------------------------------------------------------------------------
Operating Expenses
Fuel and purchased and exchanged power 688,091 271,429967,888 397,807 1,655,979 669,236
Operation and maintenance 90,862 111,343105,278 124,406 196,140 235,749
Depreciation and amortization 36,793 34,69237,202 34,733 73,995 69,425
Taxes other than income taxes 14,984 14,6097,551 13,800 22,535 28,409
----- ------ ------ ------
Total Operating Expenses 830,730 432,0731,117,919 570,746 1,948,649 1,002,819
- ----------------------------------------------------------------------------------------------------
Operating Income 84,814 101,67966,474 49,014 151,288 150,693
- ----------------------------------------------------------------------------------------------------
Miscellaneous - Net (1,770) (859)7,330 1,342 5,560 483
Interest 17,940 20,08420,597 19,769 38,537 39,853
- ----------------------------------------------------------------------------------------------------
Income Before Taxes 65,104 80,73653,207 30,587 118,311 111,323
- ----------------------------------------------------------------------------------------------------
Income Taxes 23,672 30,52318,990 11,671 42,662 42,194
------ ------ ------ ------
Net Income $ 41,43234,217 $ 50,21318,916 $ 75,649 $ 69,129
Preferred Dividend Requirement 647 1,150646 1,063 1,293 2,213
--- ----- ----- -----
Net Income Applicable to Common Stock $ 40,78533,571 $ 49,06317,853 $ 74,356 $ 66,916
- ----------------------------------------------------------------------------------------------------
Net Income $ 41,43234,217 $ 50,21318,916 $ 75,649 $ 69,129
Other Comprehensive Income (Loss), Net of Tax Effect of $134 (465) 632338 (597) (127) 35
--- ---- ---- --
Comprehensive Income $ 40,96734,555 $ 50,84518,319 $ 75,522 $ 69,164
========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------
The accompanying notes as they relate to PSI Energy, Inc. are an integral part
of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31June 30 December 31
2001 2000
(unaudited)
- --------------------------------------------------------------------------------
(dollars in thousands)
Current Assets
Cash and cash equivalents $ 7,0989,600 $ 1,311
Restricted deposits 8101,014 341
Notes receivable 3-- 3
Notes receivable from affiliated companies 6,61888,188 12,798
Accounts receivable less accumulated provision
for doubtful accounts of $10,342$9,392 at March 31,June 30, 2001,
and $9,317 at December 31, 2000 655,218727,344 464,930
Accounts receivable from affiliated companies 4,8433,262 5,385
Materials, supplies, and fuel - at average cost 72,49592,314 53,838
Energy risk management current assets (Note 1(c)) 515,601225,751 697,488
Prepayments and other 49,30848,148 49,049
------ ------
Total Current Assets 1,311,9941,195,621 1,285,143
- --------------------------------------------------------------------------------
Property, Plant, and Equipment - at Cost
Utility plant in service 4,718,2274,800,115 4,699,090
Construction work in progress 262,761269,177 190,773
Total Utility Plant 4,980,9885,069,292 4,889,863
Accumulated depreciation 2,134,1492,162,814 2,110,747
--------- ---------
Net Property, Plant, and Equipment 2,846,8392,906,478 2,779,116
- --------------------------------------------------------------------------------
Other Assets
Regulatory assets 462,486453,449 474,286
Energy risk management non-current assets (Note 1(c)) 23,68437,841 7,000
Other investments 53,17556,148 51,343
Other 37,25140,569 32,887
------ ------
Total Other Assets 576,596588,007 565,516
- --------------------------------------------------------------------------------
Total Assets $4,735,429$4,690,106 $4,629,775
========== ==========
- --------------------------------------------------------------------------------
The accompanying notes as they relate to PSI Energy, Inc. are an integral part
of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
March 31June 30 December 31
2001 2000
(unaudited)
- --------------------------------------------------------------------------------
(dollars in thousands)
Current Liabilities
Accounts payable $ 580,865653,590 $ 392,206
Accounts payable to affiliated companies 23,55541,578 32,448
Accrued taxes 115,59287,291 80,995
Accrued interest 18,78227,055 23,708
Notes payable and other short-term obligations 152,600180,600 188,391
Notes payable to affiliated companies 237,277- 146,381
Long-term debt due within one year 42,42342,424 38,325
Energy risk management current liabilities (Note 1(c)) 529,087235,792 717,902
Other 13,36514,855 12,748
------ ------
Total Current Liabilities 1,713,5461,283,185 1,633,104
- --------------------------------------------------------------------------------
Non-Current Liabilities
Long-term debt (Note 2) 1,050,4911,374,956 1,074,255
Deferred income taxes 461,820473,445 458,593
Unamortized investment tax credits 38,52337,704 39,341
Accrued pension and other postretirement benefit costs 147,499150,454 143,990
Energy risk management non-current liabilities (Note 1(c)) 40,88553,361 26,337
Other 66,30266,731 78,112
------ ------
Total Non-Current Liabilities 1,805,5202,156,651 1,820,628
- --------------------------------------------------------------------------------
Total Liabilities 3,519,0663,439,836 3,453,732
- --------------------------------------------------------------------------------
Cumulative Preferred Stock
Not subject to mandatory redemption 42,347 42,348
42,348- --------------------------------------------------------------------------------
Common Stock Equity
Common Stockstock - without par value; $.01 stated value;
authorized shares-60,000,000;shares - 60,000,000; outstanding shares-53,913,701shares -
53,913,701 at March 31,June 30, 2001 and December 31, 2000 539 539
Paid-in capital 413,523 413,523
Retained earnings 760,938794,508 720,153
Accumulated other comprehensive loss (985)income (loss) (647) (520)
---- ----
Total Common Stock Equity 1,174,0151,207,923 1,133,695
- --------------------------------------------------------------------------------
Commitments and Contingencies (Note 3)4)
Total Liabilities and Shareholder's Equity $4,735,429$4,690,106 $4,629,775
========== ==========
- --------------------------------------------------------------------------------
The accompanying notes as they relate to PSI Energy, Inc. are an integral part
of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31Year to Date
June 30
2001 2000
- --------------------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
Operating Activities
Net income $ 41,43275,649 $ 50,21369,129
Items providing or (using) cash currently:
Depreciation and amortization 36,793 34,69273,995 69,425
Deferred income taxes and investment tax credits - net 2,467 (2,166)11,735 5,517
Unrealized gain from energy risk management activities (9,064) (10,542)(14,190) (23,081)
Allowance for equity funds used during construction (716) (168)(2,278) (454)
Regulatory assets - net 11,086 2,67120,951 10,426
Changes in other current assets and current liabilities:
Restricted deposits (469) (52)(673) (155)
Accounts and notes receivable, net of reserves on
receivables sold (177,278) 48,533(331,677) 75,266
Materials, supplies, and fuel (18,657) 17,804(38,476) 26,783
Accounts payable 179,766 42,897270,514 49,495
Accrued taxes and interest 29,671 (7,637)9,643 (23,943)
Other items - net (20,114) (4,027)(15,534) (41,861)
------- -------
Net cash provided by operating activities 74,917 172,21859,659 216,547
- --------------------------------------------------------------------------------------------
Financing Activities
Change in short-term debt 55,105 (83,796)(154,172) (58,408)
Issuance of long-term debt 322,471 53,075
Redemption of long-term debt (19,825) (150)(55,276)
Retirement of preferred stock - (37)(10,791)
Dividends on preferred stock (647) (1,150)(1,294) (2,295)
Dividends on common stock - (18,000)(36,000)
----- -------
Net cash provided by (used in) financing activities 34,633 (103,133)147,180 (109,695)
- --------------------------------------------------------------------------------------------
Investing Activities
Construction expenditures (less allowance for equity
funds used during (101,931)
construction) (51,091)(193,691) (108,461)
Other investments (1,832) (2,919)(4,859) (3,157)
------ ------
Net cash used in investing activities (103,763) (54,010)(198,550) (111,618)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,787 15,0758,289 (4,766)
Cash and cash equivalents at beginning of period 1,311 8,842
----- -----
Cash and cash equivalents at end of period $ 7,0989,600 $ 23,9174,076
========= =========
- --------------------------------------------------------------------------------------------
The accompanying notes as they relate to PSI Energy, Inc. are an integral part
of these consolidated financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF INCOME
Quarter Ended March 31Year to Date
June 30 June 30
2001 2000 2001 2000
- --------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
Operating Revenues
Electric $ 54,60262,260 $ 49,28855,080 $ 116,862 $ 104,368
Gas 59,162 33,48713,608 11,060 72,770 44,547
------ ------ ------ ------
Total Operating Revenues 113,764 82,77575,868 66,140 189,632 148,915
- --------------------------------------------------------------------------------
Operating Expenses
Electricity purchased from parent
company for resale 36,844 35,21134,523 39,929 71,367 75,140
Gas purchased 42,912 17,9948,324 4,988 51,236 22,982
Operation and maintenance 9,247 9,2288,954 9,466 18,201 18,694
Depreciation and amortization 4,165 3,7364,239 3,922 8,404 7,658
Taxes other than income taxes 1,107 1,0981,155 1,025 2,262 2,123
----- ----- ----- -----
Total Operating Expenses 94,275 67,26757,195 59,330 151,470 126,597
- --------------------------------------------------------------------------------
Operating Income 19,489 15,50818,673 6,810 38,162 22,318
- --------------------------------------------------------------------------------
Miscellaneous - Net (469) (191)(144) (439) (613) (630)
Interest 1,693 1,5711,550 1,573 3,243 3,144
- --------------------------------------------------------------------------------
Income Before Taxes 17,327 13,74616,979 4,798 34,306 18,544
- --------------------------------------------------------------------------------
Income Taxes 3,472 5,6005,968 2,021 9,440 7,621
----- ----- ----- -----
Net Income $ 13,85511,011 $ 8,1462,777 $ 24,866 $ 10,923
========= ========= ========= =========
- --------------------------------------------------------------------------------
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
BALANCE SHEETS
ASSETS March 31June 30 December 31
2001 2000
(unaudited)
- --------------------------------------------------------------------------------
(dollars in thousands)
Current Assets
Cash and cash equivalents $ 6,8964,426 $ 6,460
Accounts receivable less accumulated provision for
doubtful accounts of $2,262$2,343 at March 31,June 30, 2001,
and $1,492 at December 31, 2000 22,8449,926 28,518
Accounts receivable from affiliated companies 69721 2,279
Materials, supplies, and fuel - at average cost 2,9827,264 6,300
Prepayments and other 137600 274
--- ---
Total Current Assets 33,55622,237 43,831
- --------------------------------------------------------------------------------
Property, Plant, and Equipment - at Cost
Utility plant in service
Electric 241,668241,556 234,482
Gas 186,913188,718 184,878
Common 44,94949,633 44,603
------ ------
Total Utility Plant In Service 473,530479,907 463,963
Construction work in progress 12,07811,249 15,069
------ ------
Total Utility Plant 485,608491,156 479,032
Accumulated depreciation 172,879174,555 169,403
------- -------
Net Property, Plant, and Equipment 312,729316,601 309,629
- --------------------------------------------------------------------------------
Other Assets
Regulatory assets 10,36210,384 10,177
Other 6,6145,069 5,110
----- -----
Total Other Assets 16,97615,453 15,287
- --------------------------------------------------------------------------------
Total Assets $363,261$354,291 $368,747
======== ========
- --------------------------------------------------------------------------------
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
March 31June 30 December 31
2001 2000
(unaudited)
- --------------------------------------------------------------------------------
(dollars in thousands)
Current Liabilities
Accounts payable $ 10,4264,563 $ 24,249
Accounts payable to affiliated companies 13,62921,562 20,192
Accrued taxes 1,0981,004 (5,760)
Accrued interest 1,1881,265 1,215
Notes payable to affiliated companies 24,27513,565 29,403
Other 13,8464,015 11,669
----- ------
Total Current Liabilities 64,46245,974 80,968
- --------------------------------------------------------------------------------
Non-Current Liabilities
Long-term debt 74,59774,605 74,589
Deferred income taxes 35,62538,631 35,822
Unamortized investment tax credits 3,6153,546 3,684
Accrued pension and other postretirement benefit costs 13,00713,085 13,041
Amounts due to customers - income taxes 7,439 7,439
Other 3,4743,787 6,016
----- -----
Total Non-Current Liabilities 137,757141,093 140,591
- --------------------------------------------------------------------------------
Total Liabilities 202,219187,067 221,559
- --------------------------------------------------------------------------------
Common Stock Equity
Common Stockstock - $15.00 par value; authorized shares-1,000,000;shares -
1,000,000; outstanding shares-585,333shares - 585,333 at
March 31,June 30, 2001 and December 31, 2000 8,780 8,780
Paid-in capital 20,305 20,305
Retained earnings 131,957138,139 118,103
------- -------
Total Common Stock Equity 161,042167,224 147,188
- --------------------------------------------------------------------------------
Commitments and Contingencies (Note 3)4)
Total Liabilities and Shareholder's Equity $363,261$354,291 $368,747
======== ========
- --------------------------------------------------------------------------------
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CASH FLOWS
Quarter Ended
March 31Year to Date
June 30
2001 2000
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands)
(unaudited)
Operating Activities
Net income $ 13,85524,866 $ 8,14610,923
Items providing or (using) cash currently:
Depreciation and amortization 4,165 3,7368,404 7,658
Deferred income taxes and investment tax credits - net (266) (536)2,671 (565)
Allowance for equity funds used during construction 14 -(37) (28)
Regulatory assets - net (270) 169(377) 203
Changes in other current assets and current liabilities:
Accounts and notes receivable, net of reserves on receivables sold 6,474 7,35121,274 7,298
Materials, supplies, and fuel 3,318 4,438(964) 2,497
Accounts payable (20,386) (8,242)(18,316) (1,762)
Accrued taxes and interest 6,831 5,3676,814 4,294
Other items - net (1,112) 3,514(10,993) 4,474
------- -----
Net cash provided by operating activities 12,623 23,94333,342 34,992
- ------------------------------------------------------------------------------------------------------------
Financing Activities
Change in short-term debt (5,128) (18,615)(15,838) (16,229)
Dividends on common stock (4,829) (4,975)
------ ------
Net cash used in financing activities (5,128) (18,615)(20,667) (21,204)
- ------------------------------------------------------------------------------------------------------------
Investing Activities
Construction expenditures (less allowance for equity funds used during
construction) (7,059) (7,069)(14,709) (12,761)
------- -------
Net cash used in investing activities (7,059) (7,069)(14,709) (12,761)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 436 (1,741)(2,034) 1,027
Cash and cash equivalents at beginning of period 6,460 3,641
----- -----
Cash and cash equivalents at end of period $ 6,8964,426 $ 1,9004,668
======== ========
- ------------------------------------------------------------------------------------------------------------
The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of
these financial statements.
In this reportCinergy (which includesCinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we,” “our,”"we," "our," or “us.”"us."
Our 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 statements should be read in conjunction with the Financial Statements and the notes thereto included in the combined 2000 Form 10-K of the registrants. Certain amounts in the 2000 Financial Statements have been reclassified to conform to the 2001 presentation.
We use derivative financial instruments to manage:
We account for derivatives under Statement of Financial Accounting Standards No. 133,Accounting for Derivatives and Hedging Activities (Statement 133), which requires all derivatives that are not exempted to be accounted for at fair value. Changes in the derivative’s fair value must be recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivatives that qualify as hedges can (a) offset related fair value changes on the hedged item in the income statement for fair value hedges; or (b) be recorded in other comprehensive income for cash flow hedges. To qualify for hedge accounting, financial instruments must be designated as a hedge (for example, an offset of foreign exchange or interest rate risks) at the inception of the contract and must be effective at reducing the risk associated with the hedged item. Accordingly, changes in the fair values or cash flows of instruments designated as hedges must be highly correlated with changes in the fair values or cash flows of the related hedged items.
From time to time, we may use foreign exchange forwardcurrency contracts (for example, a contract obligating one party to buy, and the other to sell, a specified quantity of a foreign currency for a fixed price at a future date) and currency swaps (for example, a contract whereby two parties exchange principal and interest cash flows denominated in different currencies) to hedge foreign currency denominated purchase and sale commitments (cash flow hedges) and certain of our net investments in foreign operations (net investment hedges) against currency exchange rate fluctuations. At March 31,June 30, 2001, the fair value, and ineffectiveness, of instruments that we have classified as foreign currency cash flow hedges was not material. Reclassification of unrealized gains or losses on foreign currency cash flow hedges from other comprehensive income occurs when the underlying hedged item is recorded in income.
We also use interest rate swaps (an agreement by two parties to exchange fixed-interest rate cash flows for floating-interest rate cash flows). Through December 31, 2000, we utilized the accrual method to account for these interest rate swaps. Accordingly, gains and losses were calculated based on the current period difference between the fixed-rate and the floating-rate interest amounts, using agreed upon notional amounts. These gains and losses were recognized in our Consolidated Statements of Income as a component ofInterest over the life of the agreement. Effective with our adoption of Statement 133 in the first quarter of 2001, we began accounting for interest rate swaps using mark-to-market accounting and are assessing the effectiveness of any swaps used in hedging activities. At March 31,June 30, 2001, the fair value, and ineffectiveness, of instruments that we have classified as cash flow hedges of variable rate debt instruments was not material. Reclassification of unrealized gains or losses on cash flow hedges of variable ratevariable-rate debt instruments occurs from other comprehensive income occurs as interest payments are made on the debt instrument. See Note 1(d) below for further discussion of Statement 133.
We market and trade electricity, natural gas, and other energy-related products. We designate transactions as physical or trading at the time they are originated. Physical refers to our intent and projected ability to fulfill substantially all obligations from company-owned assets. We sell generation to third parties when it is not required to meet native load requirements (end-use customers within our public utilitiesutility companies’ franchise service territory). All other energy contracts (including most natural gas contracts) are classified as trading. We account for physical transactions on a settlement basis and trading transactions using the mark-to-market method of accounting, consistent with our application of EITF 98-10,Accounting for Contracts Involved in Energy Trading and Risk Management Activities.Activities. To the extent that physical transactions constitute derivatives under Statement 133, we typically applyutilize the normal purchases and sales exemption.exemption, when the criteria for the application of the normal exemption are met. To the extent trading transactions constitute derivatives under Statement 133, we typically do not attempt to identify them as a hedging instrument. Under the mark-to-market method of accounting, trading transactions are shown at fair value in our Consolidated Balance Sheets asEnergy risk management assets – andEnergy risk management liabilities–current and non-current.non-current. We reflect changes in fair value resulting in unrealized gains and losses inFuel and purchased and exchanged powerandGas purchased.purchased. We record the revenues and costs for all transactions in our Consolidated Statements of Income when the contracts are settled. We recognize revenues inOperating revenues;revenues; costs are recorded inFuel and purchased and exchanged power andGas purchased.purchased.
Although we intend to settle physical contracts with company-owned generation, occasionally we settle these contracts with power purchased on the open trading markets. The cost of these purchases could be in excess of the associated revenues. We recognize the gains or losses on these transactions as the power is delivered. Due to the infrequency of such settlements, both historical and projected, and the fact that physical power settlement to the customer still occurs, we continue to apply the normal purchases and sales exemptionsexemption to such physical contracts that constitute derivatives. Open market purchases may occur for the following reasons:
We value contracts in the trading portfolio using end-of-the-period market prices, utilizing the following factors (as applicable):
We anticipate that some of the electricity obligations, even though considered trading contracts, will ultimately be settled using company-owned generation. The cost of this generation is usually below the market price at which the trading portfolio has been valued. We expect earnings volatility from period to period due to the risks associated with marketing and trading electricity, natural gas, and other energy-related products.
During the first quarter,six months of 2001, our natural gas trading volumes increased substantially. Because of this volume change and the increasingpotential volatility of gas prices, our risk exposure to these markets has increased. However, we continue to employ value-at-risk analysis and other methodologies to mitigate our risks in all trading operations, including natural gas trading.
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141,Business Combinations (Statement 141), and No. 142,Goodwill and Other Intangible Assets (Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives will no longer be subject to amortization. Goodwill will be initially assessed for impairment shortly after adoption and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under current accounting standards. This test must be applied at the “reporting unit” level, which will be defined withinCinergy after further review and will be a level no broader than the current business segments discussed in Note 5. Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. We will begin applying Statement 141 in the third quarter of 2001 and adopt Statement 142 in the first quarter of 2002. Until we adopt Statement 142, goodwill will continue to be amortized. We do not believe that the discontinuance of amortization of goodwill will be material to our 2002 results of operations. We are analyzing the impact of the initial impairment test, and are unable to predict, at this time, whether the implementation of these accounting standards will be material to our financial position or results of operations.
During 1998, FASB issued Statement 133. This standard iswas effective for fiscal yearscalendar year-end companies beginning after June 15, 2000,in 2001, and requires companies to record derivative instruments which are not exempt under certain provisions of Statement 133 as assets or liabilities, measured at fair value (i.e., marked-to-market). Our financial statements reflect the adoption of Statement 133 in January 2001. Since many of our derivatives were previously required to use mark-to-market accounting, the effects of implementation arewere immaterial.
These effects doOur adoption did not reflect the potential impact of applying mark-to-market accounting to selected call options and forwards we use to hedge peak period exposure to electricity demand.forwards. We havehad not historically marked these instruments to market because they are intended as either hedges of peak period exposure and are notor sales contracts served with physical generation, neither of which were considered trading instruments. We currently classifyactivities. At adoption, we classified these types of instrumentscontracts as normal purchases underor sales based on our interpretation of Statement 133. However,133 and in the absence of definitive guidance on such contracts. In June 2001, the FASB-sponsored Derivatives Implementation Group (DIG) has yet to issueissued final guidance on these typesthe application of instruments. In April 2001, the DIG posted tentative guidance that would preclude these contracts from qualifying for the normal purchases and sales exemption. Thisexemption to electricity contracts structured as options or forwards. While much of the criteria that this guidance requires is consistent with the existing guidance in Statement 133, some criteria were added. We will adopt the new guidance in the third quarter of 2001, and preliminary estimates indicate that the effects of implementation for these contracts will not be final untilmaterial. We will continue to apply this guidance to any new electricity contracts that meet the FASB staff considers all comments provided duringdefinition of a 35-day comment period. These instruments will require mark-to-market accounting unless the FASB staff reconsiders its guidance based on the comments provided. The FASB has scheduled an open meeting with utility industry representatives to discuss these issues. If ultimately required to mark these instruments to market, this could result in additional earnings volatility. At March 31, 2001, the fair value of these instruments was $14 million.derivative.
In January 2001, PSI Energy, Inc. (PSI)(PSI) retired $19.8 million principal amount of non-interest bearing Series 1994 Promissory Note, which had matured. The securities were not replaced by new issues of debt. In March 2001, Cinergy Global Resources, Inc., a subsidiary ofCinergy, borrowed $26 million at a fixed interest rate of 6.10%, maturing on March 31, 2003.
On June 22, 2001,PSI issued $325 million principal amount of First Mortgage Bonds Series EEE, 6.65% with a maturity date of June 15, 2006. The net proceeds of the offering were used to repay short-term indebtedness.
On March 21, 2001,Cinergy Corp. placed a $500 million, 364-day senior revolving credit facility. Also, on May 4, 2001,Cinergy Corp. placed a $400 million, three-year senior revolving credit facility which replacedCinergy Corp.'s $400 million, five-year revolving credit facility that expired on May 6, 2001, and a $200 million, three-year revolving credit facility that expired on July 20, 2001. These facilities are used to provide short-term interim financing.
In June 1997, the Ozone Transport Assessment Group, which consisted of 37 states, made a wide range of recommendations to the U.S.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. In late 1997, the EPA published a proposed call for revisions to State Implementation Plans (SIPs) for achieving emissions reductions to address air quality concerns. The EPA must approve all SIPs.
(i) Nitrogen Oxide (NOx)(NOX) SIP Call
In October 1998, the EPA finalized its ozone transport rule, also known as the NOxNOX SIP Call. It applied to 22 states in the eastern half of the United States (U.S.)U.S., including the three states in which our electric utilities operate, and also proposed a model NOxNOX emission allowance-trading program. This rule recommended states reduce NOxNOX emissions primarily from industrial and utility sources to a certain level by May 2003. The EPA gave the affected states until September 30, 1999, to incorporate NOxNOX reductions and, at the discretion of the state, a NOxNOX trading program into their SIPs. The EPA proposed to implement a federal plan to accomplish the equivalent NOxNOX reductions by May 1, 2003, if states failed to revise their SIPs.
Ohio, Indiana, a number of other states, and various industry groups (some of which we are a member), filed legal challenges to the NOxNOX SIP Call in late 1998. On May 25, 1999, the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals) granted a request for a deferral of the rule and indefinitely suspended the September 30 filing deadline, pending further review by the Court of Appeals.
In March 2000, the Court of Appeals substantially upheld the EPA’s rule. On April 11, 2000, the EPA asked the Court of Appeals to remove its May 25, 1999 suspension of the rule and also directed states to submit SIP revisions by September 1, 2000. On April 17, 2000, various states and industry groups (some of which we are a member) filed a request with the Court of Appeals for a rehearing of the NOxNOX SIP Call decisions. On April 24, 2000, the same group filed a request with the Court of Appeals to require a rulemaking and a comment period to determine a new compliance date. The states also filed a request to obtain more time to file their SIPs. On June 23, 2000, the Court of Appeals denied both requests and directed the states to submit their SIP revisions by October 30, 2000. The states of Indiana, Kentucky, and Ohio subsequently submitted letters stating their intent to revise their SIPs in response to the NOxNOX SIP Call. On December 26, 2000, the EPA took final action against Indiana, Kentucky, Ohio, and most other SIP Call affected states for failing to make complete SIP revisions. This action triggers an 18-month time clock for mandatory sanctions under a Federal Implementation Plan. The states of Indiana, Kentucky, and Ohio now anticipate final adoption of compliant SIP Call rules by late summer 2001.
In August 2000, the Court of Appeals extended the May 1, 2003 deadline for NOxNOX reductions to May 31, 2004. The states and other groups appealedsought review of the Court of Appeals ruling toby the U.S. Supreme Court (Supreme Court). In March 2001, the Supreme Court decided not to accept their appeal.grant that review.
In June 2001, the Court of Appeals remanded portions of the NOX SIP Call to the EPA for reconsideration of how growth was factored into the state NOX budgets. It is unclear whether this decision will result in an increase or decrease in the size of the NOX reduction requirement.
The states of Indiana and Kentucky approved the final NOX SIP Call rule, through a cap and trade program, in June and July of 2001, respectively. The EPA is expected to approve the state rules by the end of 2001. The State of Ohio is still in the process of developing its version of the NOXSIP Call rule.
On September 25, 2000,Cinergy announced a plan for its subsidiaries, The Cincinnati Gas & Electric Company (CG&E) andPSI, to invest approximately $700 million in pollution control equipment and other methods to reduce NOx NOXemissions. ThisThe current estimate of costs for this expected investment is approximately $800 million (in nominal dollars) from 2001-2005, and includes the following:
SCRs are the most proven technology currently available forof reducing NOX emissions produced in coal-fired generating stations.
(ii) Section 126 Petitions
In February 1998, the northeast states filed petitions seeking the EPA’s assistance in reducing ozone in the easternEastern U.S. under Section 126 of the Clean Air Act (CAA). The EPA believes that Section 126 petitions allow a state to claim that sources in another state are contributing to its air quality problem and request that the EPA require the upwind sources to reduce their emissions.
In December 1999, the EPA granted four Section 126 petitions relating to NOx NOXemissions.
This ruling affected all of our Ohio and Kentucky facilities, as well as some of our Indiana facilities, and requires us to reduce our NOxNOX emissions to a certain level by May 2003. The EPA's action grantingIn May 2001, the Court of Appeals substantially upheld a challenge to the Section 126 petitions was appealedrequirements, and remanded portions of the rule to the CourtEPA for reconsideration of Appeals. Oral arguments were held in this case on December 15, 2000. A final decisionhow growth was factored into the emission limitations. It is expected some time withinuncertain whether the next few months.May 2003 compliance deadline will be deferred while the EPA revisits the size of the emission limitations.
(iii) State Ozone Plans
On November 15, 1999, the State of Indiana and the Commonwealth of Kentucky (along with Jefferson County, Kentucky) jointly filed an amendment to their attainment demonstration on how they intend to bring the greater Louisville area, including Floyd and Clark Counties in Indiana, into attainment with the one-hour ozone standard. The SIP amendments call for, among other things, statewide NOxNOX reductions from utilities in Indiana, Kentucky, and surrounding states which are less stringent than the EPA’s NOxNOX SIP Call. Indiana and Kentucky committed to adopt utility NOxNOX control rules by December 2000, that would require controls be installed by May 2003. However, Indiana halted the rulemaking for NOxNOX controls at this level, but continues to develop NOxcompleted NOX SIP Call level reduction regulations. Kentucky did complete theirhas completed its rulemaking, but hasand issued a proposedfinal rule to changethat changed the compliance deadline to mirror the NOxNOX SIP Call (Mayof May 31, 2004).2004.
See Note 3(d)4(d) below for a discussion of the tentative EPA settlement, which relates to matters discussed within this note.
The CAA’s NSR provisions require that a company obtain a pre-construction permit if it plans to build a new stationary source of pollution or make a major modification to an existing facility unless the changes are exempt. In July 1998, the EPA requested comments on proposed revisions to the NSR rules that would change NSR applicability by eliminating exemptions contained in the current regulation. On June 22, 2001, the EPA issued a NSR 90-Day Review Paper and scheduled four public forums across the U.S. to gather more information on the impacts of NSR.Cinergy provided oral testimony at an EPA public forum held in Cincinnati, Ohio on July 10, 2001, and plans to submit written comments as well.
Since July 1999, The Cincinnati Gas & Electric Company (CG&E)CG&E andPSI have received requests from the EPA (Region 5), under Section 114 of the CAA, seeking documents and information regarding capital and maintenance expenditures at several of their respective generating stations. These requests were part of an industry-wide investigation assessing compliance with the NSR and the New Source Performance Standards (NSPS) of the CAA at electric generating stations.
On September 15, 1999, November 3, 1999, and February 2, 2001, the Attorneys General of New York, Connecticut, and New Jersey, respectively, issued letters notifyingCinergy andCG&E of their intent to sue under the citizens’ suit provisions of the CAA. These states allege violations of the CAA by constructing and continuing to operate a major modification to ofCG&E’s W.C. Beckjord Generating Station (Beckjord Station) without obtaining the required NSR pre-construction permits.
On November 3, 1999, the EPA sued a number of holding companies and electric utilities, includingCinergy,CG&E, andPSI, in various U.S. District Courts (District Court). TheCinergy,CG&E, andPSI suit alleged violations of the CAA at two of our generating stations relating to NSR and NSPS requirements. The suit sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at Beckjord Station and atPSI’s Cayuga Generating Station (Cayuga Station), and (2) civil penalties in amounts of up to $27,500 per day for each violation.
On March 1, 2000, the EPA filed an amended complaint againstCinergy,CG&E, and PSI.PSI. The amended complaint added alleged violations of the NSR requirements of the CAA at two of our generating stations contained in a notice of violation (NOV) filed by the EPA on November 3, 1999. It also added claims for relief of alleged violations of nonattainment NSR, Indiana and Ohio SIPs, and particulate matter emission limits (as discussed below in the “Beckjord Station NOV” section).section.)
The amended complaint sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at Beckjord Station, Cayuga Station, andPSI’s Wabash River Generating Station and Gallagher Generating Station, and such other measures as necessary, and (2) civil penalties in amounts of up to $27,500 per day for each violation.
On March 1, 2000, the EPA also filed an amended complaint in a separate lawsuit alleging violations of the CAA relating to NSR, Prevention of Significant Deterioration (PSD), and Ohio SIP requirements regarding various generating stations, including a generating station operated by the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light Company (DP&L), andCG&E.&E. The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. This suit is being defended by CSP. On April 4, 2001, the District Court in that case ruled that neither the Government nor the intervening plaintiff environmental groups could obtain civil penalties for any alleged violations that occurred more than five years prior to the filing of the complaint, but that both parties could seek injunctive relief for alleged violations that occurred more than five years before the filing of the complaint. Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA. There is no indication at this time if anyNeither party intends to appeal thisappealed that decision.
On June 28, 2000, the EPA issued a NOV toCinergy,CG&E, andPSI for alleged violations of NSR, PSD, and SIP requirements atCG&E’s Miami Fort Generating Station andPSI’sGibson Generating Station. In addition,Cinergy andCG&E have been informed by DP&L, the operator of J.M. Stuart Generating Station (Stuart Station), that on June 30, 2000, the EPA issued a NOV for alleged violations of NSR, PSD, and SIP requirements at this station.CG&E owns 39% of Stuart Station. The NOVs indicated that 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.
On August 2, 2001, the states of New York, New Jersey, and Connecticut filed an Assented to Motion to Intervene in this litigation. Their motion was granted by the District Court on August 3, 2001. The states’ proposed complaint is an exhibit to the motion to intervene. Cinergy, CG&E and PSI are in the process of evaluating the states' complaint but, at this time, we are unable to determine the effect, if any, that this filing will have on the issues affecting us regarding NSR as framed in the EPA's Amended Complaint.
See Note 3(d)4(d) below for a discussion of the tentative EPA settlement, which relates to matters discussed within this note.
On November 30, 1999, the EPA filed a NOV againstCinergy andCG&E alleging that emissions of particulate matter at the Beckjord Station exceeded the allowable limit. The NOV indicated that the EPA may (1) issue an administrative penalty order, or (2) file a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. The allegations contained in this NOV were incorporated within the March 1, 2000 amended complaint, as discussed in section (b).Note 4(b) above. On June 22, 2000, the EPA issued a NOV and a Finding of Violation (FOV) alleging additional particulate emission violations at Beckjord Station and offered us an opportunity to meet and discuss the allegations and corrective measures. The NOV/FOV indicated the EPA may issue an administrative compliance order, issue an administrative penalty order, or bring a civil or criminal action.
See Note 3(d)4(d) below for a discussion of the tentative EPA settlement, which relates to matters discussed within this note.
On December 21, 2000,Cinergy,CG&E, andPSI reached an agreement in principle with the EPA, the U.S. Department of Justice, three northeast states, and two environmental groups that could serve as the basis for a negotiated resolution of CAA claims and other related matters brought against coal-fired power plants owned and operated byCinergy’s operating subsidiaries. The complete resolution of these issues is contingent upon establishing a final agreement with the EPA and other parties. If a final agreement is reached with these parties, this would resolve past claims of NSR violations as well as the Beckjord Station NOVs/FOV discussed above.
Under the terms of the tentative agreement, the EPA and the other plaintiffs have agreed to drop all challenges of past maintenance and repair activities at our coal-fired generation plants. In addition, the intent of the tentative agreement is that we would be allowed to continue on-going activities to maintain reliability and availability without subjecting the plants to future litigation regarding federal permitting requirements.
In return for resolution of past claims, future operational certainty, and protection of system wide demand growth, we have tentatively agreed to:
The estimated cost for these capital expenditures is expected to be approximately $700 million. These capital expenditures are in addition to our previously announced commitment to install NOX NOXcontrols over the next five years at an estimated cost of approximately $700$800 million as previously discussed in “Ozone Transport Rulemaking.”
In reaching the tentative agreement, we did not admit any wrongdoing and remain free to continue our current maintenance practices, as well as implement future projects for improved reliability. If the settlement is not completed, we intend to defend the suit vigorously in court. In such an event, it is not possible to determine the likelihood that the plaintiffs would prevail on their claims or whether resolution of this matter would have a material effect on our financial condition or results of operations.
(i) General
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.
(ii) PSI
Coal tar residues, related hydrocarbons, and various metals associated with MGP sites have been found at former MGP sites in Indiana, including at least 21 sites whichPSI or its predecessors previously owned.PSI acquired four of the sites from Northern Indiana Public Service Company (NIPSCO) in 1931. At the same time,PSIsold NIPSCO the sites located in Goshen and Warsaw, Indiana. In 1945,PSI sold 19 of these sites (including the four sites it acquired from NIPSCO) to the predecessor of the Indiana Gas Company, Inc. (IGC). IGC later sold the site located in Rochester, Indiana to NIPSCO.
IGC (in 1994) and NIPSCO (in 1995) both made claims against PSI.PSI. The basis of these claims was thatPSI is a Potentially Responsible Party with respect to the 21 MGP sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The claims further asserted thatPSI was legally responsible for the costs of investigating and remediating the sites. In August 1997, NIPSCO filed suit againstPSI in federal court claiming recovery (pursuant to CERCLA) of NIPSCO’s past and future costs of investigating and remediating MGP-related contamination at the Goshen MGP site.
In November 1998, NIPSCO, IGC, andPSI entered into a Site Participation and Cost Sharing Agreement.Agreement (Agreement). This agreement allocated CERCLA liability for past and future costs at seven MGP sites in Indiana among the three companies. As a result of the agreement,Agreement, NIPSCO’s lawsuit againstPSI was dismissed. The parties have assigned lead responsibility for managing further investigation and remediation activities at each of the sites to one of the parties. Similar agreements were reached between IGC andPSI that allocate CERCLA liability at 14 MGP sites with which NIPSCO was not involved. These agreements concluded all CERCLA and similar claims between the three companies related to MGP sites. The parties continue to investigate and remediate the sites, as appropriate under the agreements and applicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of the sites.
PSI notified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and the IDEM. In April 1998,PSI filed suit in Hendricks County Circuit Court in the State of Indiana (Court) against its general liability insurance carriers. Subsequently,PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims againstPSI, or (2) payPSI’scosts of defense and compensatePSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. The Court rescheduled the trial date for the case from May 2001 to January 2002. The Court ordered the parties to submit the case to mediation in February 2001. The mediation was not successful in resolvingPSI’s claims against all of the insurance carriers. Settlement discussions with some of the insurance carriers have been ongoing. At the present time,PSI cannot predict either the progress or outcome of these discussions or the outcome of this litigation.
PSI has accrued costs for the sites related to investigation, remediation, and groundwater monitoring to the extent such costs are probable and can be reasonably estimated.PSI does not believe it can provide an estimate of the reasonably possible total remediation costs for any site before a remedial investigation/feasibility study has been completed. To the extent remediation is necessary, the timing of the remediation activities impacts the cost of remediation. Therefore,PSIcurrently cannot determine the total costs that may be incurred in connection with the remediation of all sites, to the extent that remediation is required. According to current information, these future costs at the 21 Indiana MGP sites are not material to our financial condition or results of operations. As further investigation and remediation activities are performed at these sites, the potential liability for the 21 Indiana MGP sites could be material to our financial position or results of operations.
(iii) CG&E
CG&E and its utility subsidiaries are aware of potential sites where MGP activities have occurred at some time in the past. None of these sites is known to present a risk to the environment.CG&Eand its utility subsidiaries have begun preliminary site assessments to obtain information about some of these MGP sites.
In January 2000, Cinergy Investments, Inc. (Investments) sold Cinergy Resources, Inc. (CRI), a former subsidiary, to Licking Rural Electrification, Inc. doing business as The Energy Cooperative (Energy Cooperative). In February 2001,Cinergy,CG&E, and CRI were named as defendants in three class actions lawsuits. These lawsuits are in connection withrelating to Energy Cooperative'sCooperative’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. On March 30, 2001,Cinergy,CG&E, and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and CRI. This lawsuit concerns any obligations or liability Investments may have to Energy Cooperative following its sale of CRI. We intend to vigorously defend these lawsuits. At the present time,Cinergy cannot predict the outcome of these suits.
As discussed in the 2000 Form 10-K,OtherPSI In compliance with an electric wholesale rate case settlement adopted by the Federal Energydefers fuel costs that are recoverable in future periods subject to Indiana Utility Regulatory Commission (FERC) effective February 2000, CG&E reduced(IURC) approval under a fuel recovery mechanism. On June 6, 2001, the costIURC issued an order in aPSI fuel recovery proceeding, disallowing approximately $14 million of fuel reflecteddeferred costs. On June 26, 2001,PSI formally requested that the IURC reconsider its disallowance decision.PSIbelieves ithas strong legal and factual arguments in its wholesale base ratesfavor and revised its wholesale fuel adjustment factor. Beginning March 1, 2000,that it will ultimately be permitted to recover these costs. However,PSI cannot definitively predict the ultimate outcome of either the petition for IURC reconsideration or any possible appeal of this matter.
In May 2001, the Kentucky Public Service Commission (KPSC) approved an offer of settlement by The Union Light, Heat and Power Company (ULH&P) began passing through(ULH&P) which allowsULH&P to maintain its existing retail customers the fuel costs incurred pursuant to the revised wholesaleelectric base rates and fuel adjustment factor but did not synchronizeclause at current levels through December 2003 and limits electric rate increases for three years thereafter, resolving all related matters previously pending before the costKPSC. The settlement also approved the proposed wholesale power supply contract betweenULH&P andCG&E, beginning January 1, 2002, and made the necessary determinations under the Public Utilities Holding Company Act of fuel reflected in retail base rates1935, as amended (PUHCA), forCG&E to transfer its generating assets and liabilities to an exempt wholesale generator (EWG). In connection with the reduced costthis settlementULH&P recognized revenues of fuel reflected in wholesale base rates. As a result, on an annual basis, ULH&P is recovering and recognizing as revenue approximately $18$10 million, more in costs than it incurred. While ULH&P believes its position is consistent with applicable rate regulation, the issue was broughtwhich had been previously deferred subject to the Kentucky Public Service Commission (KPSC) for a final determination. In March 2001, a tentative settlement with the KPSC staff was reached which, if approved by the KPSC, would allow ULH&P to retain the revenues collected to date and maintain retail base rates at their current level. On May 11, 2001, the settlement was approved by the KPSC.refund.
As discussed in the 2000 Form 10-K, in early 2001,Cinergy announced certain organizational changes which further aligned the business units to reflectCinergy’s strategic vision. The revised structure has three business units, as follows:
Energy Merchant manages wholesale generation and the buying and selling of energy commodities. Energy Merchant earns revenues from the electric generation and the operation of power plants; wholesale energy trading, marketing, and risk management; and customized energy solutions.
Regulated Businesses consists of a regulated, integrated utility, and regulated electric and gas transmission and distribution services. Regulated Businesses plans, constructs, operates, and maintains theCinergy operating companies'companies’ 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 throughCinergy’s transmission system.
PTIS primarily manages the development, marketing and sales of our non-regulated retail energy and energy-related products and services.businesses. Products and services offered by PTIS include energy management and consulting services to commercial customers that operate retail facilities; utility operations and infrastructure services to utilities; and building and maintaining fiber optic telecommunication networks for businesses, municipalities, telecommunications carriers, and schools. PTIS also manages Cinergy Ventures, LLC (Ventures), the company'sCinergy’s venture capital subsidiary. Ventures invests in emerging energy technologies with promising commercial applications that can benefit future PTIS Cinergybusiness development activities.
Financial results by business unit for the quarters ended March 31, 2001 and 2000, are as indicated below. Amounts for the prior year have been restated to reflect segment restructuring which includes the consolidation of the former International Business unitUnit into the Energy Merchant and Regulated Businesses business units. This restructuring became effective January 1, 2001.
Financial results by business unit for the quarters ended June 30, 2001 and June 30, 2000:
Cinergy Business Units
Cinergy Business Units----------------------
Energy Regulated Reconciling
Merchant(5) Businesses(5) PTIS Total All Other (1) Eliminations (2)Eliminations(1) Consolidated
----------- ------------- ---- ----- --------------- -------------
(in thousands)
2001Quarter ended 6/30/01
Operating revenues -
External customers $2,874,277 (4) $ 817,811 $ 14,441 $3,706,529 $ - $ - $3,706,529
Intersegment revenues 35,203 - - 35,203 - (35,203) -
Segment profit (loss) (3) 39,295 85,750 (4,798) 120,247 - - 120,247
2000
Operating revenues -revenues-
External customers $ 704,642 (4)3,045,280(3) $ 859,948586,228 $ 18,487 $1,583,07710,584 $ -3,642,092 $ - $1,583,077-- $ 3,642,092
Intersegment revenues 241,588 - - 241,588 - (241,588) -29,070(4) -- -- 29,070 (29,070) --
Segment profit (loss) (3) 51,277 87,772 (610) 138,439(2) 30,310 55,896 (3,239) 82,967 -- 82,967
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended 6/30/00
Operating revenues-
External customers $ 1,003,793(3) $ 748,370 $ 17,351 $ 1,769,514 $ -- $ 1,769,514
Intersegment revenues 241,270(4) -- -- 241,270 (241,270) --
Segment profit (loss)(2) 38,435 39,235 (2,555) 75,115 -- 75,115
- 138,439------------------------------------------------------------------------------------------------------------------------------------
(1) The All Other category represents miscellaneous corporate items, which are not allocated to business units for purposes of segment performance measurement.
(2) The Reconciling Eliminations category eliminates the intersegment revenues of Energy Merchant.
(3)(2) Management utilizes segment profit (loss) to evaluate segment performance.
(4)(3) The increase in 2001 as compared to 2000 is primarily due to the increase in volumes and average price realized on non-firm wholesale
transactions.
(4) In connection with deregulation in Ohio, beginning in 2001, certain revenues which were previously recorded through intersegment transfer
pricing, are now directly recorded to the business segment.
(5) Effective January 2001, electric customer choice legislation was implemented in Ohio. For comparative purposes, the estimated pro forma
adjustment to reflect this effect on firstsecond quarter 2000 results would be as follows:
Energy RegulatedEnergyMerchant Businesses -------- ---------- Operating revenues(31,297) 31,297$ (28,904) $ 28,904 Segment profit (loss)(11,091) 11,091$ (9,535) $ 9,535
Financial results by business unit for the six months ended June 30, 2001 and June 30, 2000:
Cinergy Business Units
----------------------
Energy Regulated Reconciling
Merchant(5) Businesses(5) PTIS Total Eliminations(1) Consolidated
----------- ------------- ---- ----- --------------- -------------
(in thousands)
Six months ended 6/30/01
Operating revenues-
External customers $ 5,919,557(3) $ 1,404,039 $ 25,025 $ 7,348,621 $ - $7,348,621
Intersegment revenues 64,273(4) - - 64,273 (64,273) -
Segment profit (loss)(2) 69,605 141,646 (8,037) 203,214 - 203,214
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended 6/30/00
Operating revenues-
External customers $ 1,708,435(3) $ 1,608,318 $ 35,838 $ 3,352,591 $ - $3,352,591
Intersegment revenues 482,858(4) - - 482,858 (482,858) -
Segment profit (loss)(2) 89,712 127,007 (3,165) 213,554 - 213,554
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The Reconciling Eliminations category eliminates the intersegment revenues of Energy Merchant.
(2) Management utilizes segment profit (loss) to evaluate segment performance.
(3) The increase in 2001 as compared to 2000 is primarily due to the increase in volumes and average price realized on non-firm wholesale
transactions.
(4) In connection with deregulation in Ohio, beginning in 2001, certain revenues which were previously recorded through intersegment transfer
pricing, are now directly recorded to the business segment.
(5) Effective January 2001, electric customer choice legislation was implemented in Ohio. For comparative purposes, the estimated pro forma
adjustment to reflect this effect on the six months ended June 30, 2000 results would be as follows:
Energy Regulated
Merchant Businesses
-------- ----------
Operating revenues $ (60,201) $ 60,201
Segment profit (loss) $ (20,626) $ 20,626
Total segment assets at March 31,June 30, 2001 and December 31, 2000, are as indicated below.follows:
Business Units
Cinergy Business Units ---------------------- Regulated EnergyRegulatedMerchant Businesses PTIS Total All Other(1)Consolidated --------------- ---------- ---- ----- --------- ------------ (in thousands) Total segment assets atMarch 31,June 30, 2001$5,921,620 $6,794,748 $184,118 $12,900,486 $37,050 $12,937,536$5,461,535 $6,921,852 $210,323 $12,593,710 $39,848 $12,633,558 Total segment assets at December 31, 2000 5,947,8246,162,141 177,2756,162,243 177,173 12,287,240 42,488 12,329,728(1) The All Other category represents miscellaneous corporate items, which are not allocated to business units for purposes of segment performance measurement.(EPS)
5.6. Earnings Per Common Share
A reconciliation of
earnings per common share (EPS)EPS to earnings per common share assuming dilution (diluted EPS) is presentedbelow:below for the quarters ended June 30, 2001 and June 30, 2000:Income Shares EPS ------ ------ --- (in thousands, except per share amounts) Quarter endedMarch 31,June 30, 2001 EPS: Netincome $120,247 158,989 $0.76Income $82,967 159,061 $ 0.51 Effect of dilutive securities: Common stock options9611,157 Share saver plan common stock331 Directors' compensation plans140139 Contingently issuable common stock300 EPS-assuming588 --- EPS - assuming dilution: Net income plus assumed conversions$120,247 160,423 $0.75$82,967 160,946 $ 0.51 - -------------------------------------------------------------------------------- Quarter endedMarch 31,June 30, 2000 EPS: Netincome $138,439Income $75,115 158,923$0.87$ 0.47 Effect of dilutive securities: Common stock options9318 Contingently issuable common stock343 EPS-assuming293 --- EPS - assuming dilution: Net income plus assumed conversions$138,439 159,275 $0.87$75,115 159,534 $ 0.47Options to purchase shares of common stock are excluded from the calculation of diluted EPS when the exercise prices of these options are greater than the average market price of the common shares during the period. For the quarters ended
March 31,June 30, 2001 and 2000, approximatelytwo1.8 million andseven2 million shares, respectively, were excluded from the diluted EPS calculation.A reconciliation of EPS to diluted EPS is presented below for the six months ended June 30, 2001 and June 30, 2000:
Income Shares EPS ------ ------ --- (in thousands, except per share amounts) Six months ended June 30, 2001 EPS: Net Income $203,214 159,025 $ 1.27 Effect of dilutive securities: Common stock options 1,060 Directors' compensation plans 139 Contingently issuable common stock 563 --- EPS - assuming dilution: Net income plus assumed conversions $203,214 160,787 $ 1.26 - -------------------------------------------------------------------------------- Six months ended June 30, 2000 EPS: Net Income $213,554 158,923 $ 1.34 Effect of dilutive securities: Common stock options 94 Contingently issuable common stock 322 --- EPS - assuming dilution: Net income plus assumed conversions $213,554 159,339 $ 1.34Options to purchase shares of common stock are excluded from the calculation of diluted EPS when the exercise prices of these options are greater than the average market price of the common shares during the period. For the six months ended June 30, 2001 and 2000, approximately 2.1 million and 2 million shares, respectively, were excluded from the diluted EPS calculation.
6.7. Ohio DeregulationAs discussed in the 2000 Form 10-K, on July 6, 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill), beginning the transition to electric deregulation and customer choice for the
stateState of Ohio. The Electric Restructuring Bill created a competitive electric retail service market effective January 1, 2001. The legislationprovidedprovides for a market development period that began January 1, 2001 and ends no later than December 31, 2005.On May 8, 2000,CG&E reached a stipulated agreement with the Public Utilities Commission of Ohio (PUCO) staff and various other interested parties with respect to its proposal to implement electric customer choice in Ohio effective January 1, 2001. On August 31, 2000, the PUCO approvedCG
&E’s&E's stipulation agreement. Two parties filed applications for rehearing with the PUCO. On October 18, 2000, the PUCO denied these applications. One of the parties appealed to the Ohio Supreme Court in the fourth quarter of 2000 andCG&E subsequently intervened in that case. On April 6, 2001,CG&E filed for dismissal of this appeal. On July 25, 2001, the Ohio Supreme Court deniedCG&E's motion to dismiss.CG&E is unable to predict the outcome of this proceeding.
As previously discussed, theThe August 31, 2000 order authorizesCG&E to transfer its generation assets to one or more non-regulated corporate subsidiary(ies).ThisIn addition to the regulatory approvals received from the PUCO and the KPSC this transfer may also require the approval or consent of one or more of thefollowing regulatory agencies:following: theIndiana UtilityIURC, the Federal Energy Regulatory Commissionthe KPSC, the FERC,(FERC), the Securities and Exchange Commission under thePublic Utility Holding Company Act of 1935, as amended,PUHCA, and various third parties. As the transfer is contingent uponCG&E receiving various other consents and approvals, the timing and receipt of which are unknown, the completion date of the transfer of generation assets to the non-regulated subsidiary(ies) is uncertain.
7.8. Power TradingContracts within the trading portfolio of the power marketing and trading operations are primarily with power marketers and other investor-owned utilities. The majority of these contracts are for terms of one year or less. Electric power 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, especially when dealing with new market entrants. Credit discounts are included in the determination of fair value for all open positions in the power-trading portfolio.
As stated in our 2000 Form 10-K, in 2000 the Western U.S., primarily California, began experiencing unprecedented price levels and volatility for wholesale electricity. Because of the nature of deregulation in California,
California’sCalifornia's two largest utilities have accumulated significant unpaid obligations, are having difficulty obtaining capital, and one of these utilities has declared bankruptcy. We continue to maintain a balanced Western U.S. portfolio and have no unrealized gain positions directly with these utilities. Asignificantportion of our Energy risk management assets and Energy risk management liabilities-current are with counterparties in the Western U.S.IfAlthough pricescontinue at elevated levels or should thesedropped significantly in the second quarter of 2001, the volatility of prices, the possibility of certain utilitiesbe unable to funddefaulting on their unpaid obligations, and the potential for further FERC-ordered wholesale electric refunds could result in credit failures by powermarketers could result.marketers. Given these issues, the fair values of our positions in the Western U.S.have been adjustedcontinue to reflecta higheran elevated level of credit discount. Nonperformance by any of the Western U.S. counterparties could have a material effect on the operating results ofCinergy,CG&E, andPSI.PSI.Return to Table of Contents
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATIONCautionary Statements Regarding Forward-Looking InformationIn this report we discuss various matters that may make
management’smanagement's corporate vision of the future clearer for you. This report outlinesmanagement’smanagement's goals and projections for the future. These goals and projections are considered forward-looking statements and are based onmanagement’smanagement's beliefs and assumptions.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 are often presented with forward-looking statements. In addition, other factors could cause actual results to differ materially from those indicated in any forward-looking statement. These include:
Unless we otherwise have a duty to do so, the Securities and Exchange Commission’sCommission's (SEC) rules do not require forward-looking statements to be revised or updated (whether as a result of changes in actual results, changes in assumptions, or other factors affecting the statements). Our forward-looking statements reflect our best beliefs as of the time they are made and may not be updated for subsequent developments.
In this reportCinergy (which includesCinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we,” “our,”"we," "our," or “us.”"us."
In Management’sManagement's Discussion and Analysis (MD&A), we explain our general operating environment, as well as our liquidity, capital resources, and results of operations. Specifically, we discuss the following:
Cinergy Corp., a Delaware corporation created in October 1994, owns all outstanding common stock of The Cincinnati Gas & Electric Company (CG&E)(CG&E) and PSI Energy, Inc. (PSI)(PSI), both of which are public utility subsidiaries (operating companies). As a result of this ownership, we are considered a utility holding company. Because we are a holding company whose utility subsidiaries operate in multiple states, we are registered with and are subject to regulation by the SEC under the PUHCA.Public Utility Holding Company Act of 1935 (PUHCA), as amended. Our other principal subsidiaries are:
CG&E, an Ohio corporation, is a combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through its subsidiaries, in nearby areas of Kentucky and Indiana. It has three wholly-owned utility subsidiaries and two wholly-owned non-utility subsidiaries.CG&E’s&E's principal utility subsidiary, The Union Light, Heat and Power Company (ULH&P)(ULH&P), is a Kentucky corporation that provides electric and gas service in northern Kentucky.CG&E’s&E's other subsidiaries are insignificant to its results of operations.
PSI, an Indiana corporation, is an electric utility that provides service in north central, central, and southern Indiana.
The majority of our operating revenues are derived from the sale of electricity and the sale and/or transportation of natural gas.
In early 2001, we announced certain organizational changes which further aligned the business units to reflect Cinergy’sCinergy's strategic vision. The revised structure reflects three business units, as follows:
See Note 45 of the "Notes to Financial Statements" in "Part I. Financial Information," for financial information by business unit.
In the “Liquidity”"Liquidity" section, we discuss environmental issues as they relate to our current and future cash needs. In the “Capital Resources”"Capital Resources" section, we discuss how we intend to meet these capital requirements.
As discussed in the 2000 Form 10-K, in 1997 the U.S. Environmental Protection Agency (EPA) revised the National Ambient Air Quality Standards for ozone and fine particulate matter. The EPA has estimated that it will take up to five years to collect sufficient ambient air monitoring data to determine fine particulate matter non-attainment areas. TheA fine particulate monitoring network was put in place during 1999 and 2000. Following identification of non-attainment areas, the states will then determineidentify the sources of the particulatesparticulate emissions and determine a regionaldevelop emission reduction plan.plans. These plans may be state-specific or regional. We currently cannot predict the exact amount and timing of required reductions.
On May 14, 1999, the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals) ruled that boththe EPA's final rule establishing the new eight-hour ozone standard and the fine particulate matter standard were questionable and were determined to be unenforceable by the EPA.constituted an invalid delegation of legislative authority. In June 1999, the EPA appealed the decision. On October 29, 1999, the full Court of Appeals rejected the EPA’sEPA's request for reconsideration. In January 2000, the EPA appealed to the U.S. Supreme Court (Supreme Court) and on February 27, 2001 the Supreme Court upheldreversed the standards in question.Court of Appeals' ruling. However, the Supreme Court invalidated the EPA’sEPA's implementation procedure for the portion of the case dealing with the eight-hour ozone standard. NeitherThe EPA currently is evaluating approaches for implementing the eight-hour ozone standard in accordance with the Supreme Court's opinion. Meanwhile, the Court of Appeals norcontinues to consider the EPA has responded tovalidity of the ruling to date.eight-hour ozone standard and the fine particulate matter standard, as a number of issues that were raised by the parties were not addressed in its original opinion, invalidating those standards. The parties will file supplemental briefs on these issues, and further oral argument may be held. We currently cannot determine the outcome of this litigation or of future EPA actions in response to the future rulingslitigation and the effects on future emissions reduction requirements.
See also Notes 3(a)4(a), (b), (c), (d), and (e), respectively, of the "Notes to Financial Statements" in "Part I. Financial Information."Information" for a discussion of other environmental issues.
As discussed in the 2000 Form 10-K, our ability to Table of Contents
We meet our capital requirements through a combination of internally generated funds and debt issuances. We expect to meet our future capital needs through a combination of internally and externally generated funds, including the issuance of debt and/or equity securities.
In early May 2001,Cinergy Corp.'s certificate of incorporation was amended to authorize the issuance of preferred securities in addition to common stock, following approval by the SEC under the PUHCA and the shareholders ofCinergy Corp.
Cinergy Corp. has current authorization from the SEC under the PUHCA to increase its total capitalization at December 31, 1999 (excluding retained earnings and accumulated other comprehensive income) by an additional $5 billion, through issuance of any combination of equity and debt securities. This increased authorization is subject to certain conditions, including, among others, that common equity comprises at least 30% ofCinergy Corp.’s's consolidated capital structure and thatCinergy Corp., under certain circumstances, maintains an investment grade rating on its senior debt obligations.
In connection with the current SEC authorization,Cinergy Corp. has $1.7 billion in established lines of credit. As of March 31,June 30, 2001, $233$387 million was unused and available on these lines.
On March 21, 2001,Cinergy Corp. placed a $500 million, 364-day senior revolving credit facility. Also, on May 4, 2001,Cinergy Corp. placed a $400 million, three-year senior revolving credit facility which replacedCinergy Corp.'s $400 million, five-year revolving credit facility that expired on May 6, 2001, and a $200 million, three-year revolving credit facility that expired on July 20, 2001. These facilities are being utilized to provide short-term interim financing.
Our non-regulated subsidiaries have the ability to borrow funds fromCinergy Corp. if the need arises. Certain of our non-regulated subsidiaries also have established lines of credit. As of March 31,June 30, 2001, our$3.7 million was unused and available on these established lines.
Our operating companies, had regulatory authority to borrow up to a total of $853 million in short-term debt ($453 million for CG&E and its subsidiaries, including $50 million for ULH&P, and $400 million for PSI). On April 6, 2001, Cinergy Corp. filed an application with the SEC to increase PSI’s authority to $600 million and ULH&P’s authority to $65 million. In connection with the current authority, CG&E and PSI, have established lines of credit of $15 million and $60 million respectively, of which $15 million forCG&E remained unused and available at March 31, 2001.
available.
In May 2001, CG&E filed an application with the PUCO to increase its short-term debt authority to $600 million and on June 28, 2001, the PUCO granted this request. On March 21,April 6, 2001,Cinergy Corp. placed a $500 filed an application with the SEC to increasePSI's and ULH&P's short-term debt authority to $600 million 364-day senior revolving credit facility. The facility is intended to provide short-term, interim financing. Also, on May 4,and $65 million respectively. On August 2, 2001, Cinergy Corp. placed a $400 million, three-year senior revolving credit facility. The facility replaced Cinergy Corp.’s $400 million, five-year revolving credit facility that expired on May 6, 2001. Cinergy Corp.’s $200 million, three-year revolving credit facility will expire July 20, 2001.
Certain ofthe SEC granted our non-regulated subsidiaries also have established lines of credit.request effective immediately. As of March 31,August 2, 2001, $3our operating companies had regulatory authority to borrow up to a total of $1.3 billion in short-term debt ($671 million was unusedforCG&E and available on these established lines. Our non-regulatedits subsidiaries, have the availability of funds from Cinergy Corp. if the need arises.including $65 million for ULH&P, and $600 million forPSI.)
As of March 31,June 30, 2001, the commercial paper program iswas limited to a maximum outstanding principal amount of $800 million forCinergy Corp. In early 2001,Cinergy Corp. expanded the commercial paper program to this amount and reduced the established lines of credit atCG&E and PSI.PSI. The expansion of the commercial paper program at theCinergy Corp. level will, in part, support the short-term borrowing needs ofCG&E andPSI and will eliminate the need for commercial paper programs atCG&E and PSI.PSI. TheCinergy Corp. commercial paper program expansion is supported by the new $400 million, 364-day revolving credit facility that was placed in early 2001. As of March 31,June 30, 2001,Cinergy Corp. had issued $309$566 million in commercial paper.
Under the PUHCA authorization mentioned above, we are able to issue and sell long-term debt at the parent holding company level. In May 2001, CG&E filed an application with the PUCO to increase its long-term debt authority to $400 million and on June 28, 2001, the PUCO granted this request. As of March 31,June 30, 2001,Cinergy Corp. had $400 million of long-term debt outstanding. As of March 31,June 30, 2001,CG&E,PSI, andULH&P have remaining state regulatory authority for long-term debt issuances of $200$400 million, $346$21 million, and $30 million, respectively.PSI intends to file an application with the IURC requesting an increase in long-term debt issuance authority up to $400 million. On July 26, 2001,Cinergy Corp. filed a registration statement with the SEC requesting authority to issue up to $500 million in unsecured debt. The registration is pending SEC approval. We may, at any time, request additional long-term debt authorization, which is subject to regulatory approval.
CG&E andPSI have issued variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes). Because the holders of these notes have the right to redeem their notes on any business day, they are reflected in Notes payable and other short-term obligations in the Consolidated Balance Sheets forCinergy (Cinergy Corp. and all of its regulated and non-regulated subsidiaries),CG&E, andPSI. At June 30, 2001,CG&E and PSI. At March 31, 2001, CG&E and PSI had $184 million and $83 million, respectively, outstanding in pollution control notes.notes, classified as short-term debt.
Cinergy Corp., Services, and our operating companies and their subsidiaries participate in a money pool arrangement to better manage cash and working capital requirements. Under this arrangement, those companies with surplus short-term funds provide short-term loans to others. This surplus cash may be from internal or external sources. The amounts outstanding under this money pool arrangement are shown as Notes receivable from affiliated companies or Notes payable to affiliated companies on the Consolidated Balance Sheets forCG&E andPSI and on the Balance Sheets forULH&P.&P.
As of July 31, 2001, the major credit ratings agencies rated our securities as follows:
Fitch (1) Moody's (2) S&P (3)
--------- ----------- -----------
Cinergy Corp.
Corporate Credit BBB+ Baa2 BBB+/A-2
Senior Unsecured Debt BBB+ Baa2 BBB+
Commercial Paper F-2 P-2 A-2
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) During 2000, Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co. merged, and are
now known as Fitch, thereby combining their ratings of Cinergy Corp. and its
affiliates.
(2) Moody's Investors Service (Moody's)
(3) Standard & Poor's Ratings Services (S&P)
As discussed in the 2000 Form 10-K, on December 12, 2000, S&P placed its ratings ofCinergy Corp. and its operating affiliates,CG&E andPSI, on CreditWatch with negative implications. On January 22, 2001, Moody's announced it had assigned negative outlooks to the debt and preferred stock securities ofCinergy Corp. and all of its subsidiaries. These actions are primarily in response toCinergy's announcement regarding one of its non-regulated subsidiaries entering into a definitive agreement to acquire two natural gas-fired merchant electric generating facilities from Enron North America. Other items of concern include (1) the announcement thatCinergy Corp.,CG&E, andPSI have reached an agreement in principle with the EPA; (2) the continuing uncertainty surroundingCG&E's post-deregulation corporate and financial structure; (3) the absence of restructuring legislation and stranded investment resolution in Indiana; and (4)Cinergy's emphasis on higher-risk non-regulated activities.
Effective July 27, 2001, Moody's changed its assignment of ratings to different classes of securities issued by the same company, which was prompted by Moody's research published in November 2000. The refinements are of a technical nature and are not indicative of changes in fundamental credit quality.CG&E's andPSI's preferred stock were affected by these changes and the new ratings are noted in the table above. These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.
We are subject to aan SEC order under the PUHCA, which limits the amountsCinergy Corp. can have outstanding under guarantees (promises to pay by one party in the event of default by another party) at any one time to $2 billion. As of March 31,June 30, 2001, we had $1.1$1.3 billion outstanding under the guarantees issued. This amount representsCinergy Corp.’s's guarantees of liabilities and commitments of our consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures.
Electric and gas gross margins and net income forCinergy,CG&E, andPSI for the quarters ended March 31,June 30, 2001 and 2000 were as follows:
Cinergy (1)Cinergy(1) CG&E and subsidiaries PSI
---------- ------------------------ ---
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(in thousands)
Electric gross margin $ 528,804 $ 565,919 $ 272,065 $ 297,666 $ 227,453 $ 262,323$527,602 $549,801 $282,180 $307,797 $216,505 $221,953
Gas gross margin 103,212 92,583 86,802 88,846 - -41,111 41,821 27,852 35,352 -- --
Net income 120,247 138,439 81,575 95,964 41,432 50,21382,967 75,115 49,401 55,881 34,217 18,916
(1) The results of Cinergy also include amounts related to non-registrants.
Diluted earnings per share for the firstsecond quarter 2001 was $.75$.51 per share as compared to $.87$.47 per share for the same period last year. The decreaseThis increase in earnings iswas primarily attributable to the effectsgrowth in Energy Merchant's origination and marketing and trading segment. Also contributing to the increase was the effect of implementationa one-time charge relating to a limited early retirement program reflected in the second quarter of customer choice legislation in Ohio,2000. Offsetting this increase were reduced margins due to lower generation availability and reduced industrial demand, increased coal costs and higherincreased interest and depreciation expenses, reflecting increased investment activity overprimarily associated with the past twelve months.company's larger portfolio of peaking generation.
The explanations below follow the line items on the Consolidated Statements of Income forCinergy,CG&E, and PSI.PSI. However, only the line items that varied significantly from prior periods are discussed.
ELECTRIC OPERATING REVENUES
Cinergy (1)Cinergy(1) CG&E and subsidiaries PSI
---------- ------------------------- ---
2001 2000 % Change 2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- -------- ---- ---- ---------
(in millions)
Retail $ 628652 $ 650 (3)651 - $ 339355 360 (1) $ 351 (3) $ 289 $ 298 (3)297 $291 2
Wholesale 1,170 384 205 586 182 222 619 227 1731,666 555 200 833 282 195 879 321 174
Other 77 33 13365 44 48 10 5 100 8 5 60 8 9 (11)-
-- -- -- - - -
Total $ 1,875 $ 1,067 76 $ 933 $ 538 73 $ 916 $ 534 72$2,383 $1,250 91 $1,198 647 85 $1,184 $620 91
(1) The results of Cinergy also include amounts related to non-registrants.
Electric operating revenues forCinergy,CG&E, andPSI increased for the quarter ended March 31,June 30, 2001, as compared to 2000, mainly due to an increase in volumes on non-firm wholesale transactions related to energy marketing and trading activity. Non-firm power is power without a guaranteed commitment for physical delivery. The increase in other electric operating revenues forCinergy primarily reflects increased activities of our foreign subsidiaries.
Cinergy(1) CG&E and subsidiaries
---------- -------------------------
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
(in millions)
Non-regulated $1,158 $432 168 $ - $ - -
Retail 69 48 44 69 48 44
Transportation 7 11 (36) 7 11 (36)
Other 3 1 200 3 1 200
--- --- --- ---
Total $1,237 $492 151 $79 $60 32
(1) The results of Cinergy also include amounts related to non-registrants.
Gas operating revenues forCinergy increased in the second quarter of 2001, when compared to the same period last year. This increase was primarily the result of increased volumes and a higher price received per thousand cubic feet (mcf) sold by Cinergy Marketing and Trading, LLC (Marketing and Trading).
CG&E’s retail gas revenues increased primarily due to a higher price received per mcf sold and an increase in retail gas customers. The higher price reflects a substantial increase in the wholesale gas commodity cost, which is passed directly to the retail customer dollar-for-dollar under the state mandated gas cost recovery mechanism. Retail sales increased and transportation sales decreased as a result of customers switching back toCG&E gas service.
Cinergy(1) CG&E and subsidiaries PSI
---------- ------------------------- ---
2001 2000 % Change 2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- -------- ---- ---- --------
(in millions)
Fuel $ 196 $ 206 (5) $ 84 87 (3) $ 109 $ 113 (4)
Purchased and
exchanged power 1,660 494 236 832 252 230 859 285 201
Gas purchased 1,195 450 166 52 24 117 - - -
Operation and
maintenance 268 299 (10) 120 131 (8) 105 125 (16)
Depreciation and
amortization 92 85 8 46 45 2 37 34 9
Taxes other than
income taxes 53 68 (22) 45 54 (17) 8 14 (43)
-- -- -- -- --- --
Total $3,464 $1,602 116 $1,179 593 99 $ 1,118 $ 571 96
(1) The results of Cinergy also include amounts related to non-registrants.
Fuel represents the cost of coal, natural gas, and oil that is used to generate electricity. The following table details the changes to fuel expense from the quarter ended June 30, 2000, to the quarter ended June 30, 2001:
Cinergy(1) CG&E PSI
---------- -------- ---
(in millions)
Fuel expense - June 30, 2000 $ 206 $ 87 $ 113
Increase (decrease) due to changes in:
Price of fuel 19 12 7
Deferred fuel cost (10) (5) (5)
MWh generation (16) (10) (6)
Other (3) - -
-- -- --
Fuel expense - June 30, 2001 $ 196 $ 84 $ 109
(1) The results of Cinergy also include amounts related to non-registrants.
Fuel expense forCinergy,CG&E, andPSI decreased for the quarter ended June 30, 2001, when compared to the same period last year, primarily as a result of lower generation and lower deferred fuel costs.CG&E’s decrease in deferred fuel costs was the result of the implementation of electric deregulation in the State of Ohio and the associated termination of the fuel recovery mechanism.
Fuel prices forCinergy,CG&E, andPSI increased for the quarter ended June 30, 2001, when compared to the same period last year. This increase was primarily due to increases in the market price of coal.
Purchased and exchanged power expenseincreased forCinergy,CG&E, andPSI for the second quarter of 2001, as compared to last year, primarily due to an increase in purchases of non-firm wholesale power, reflecting higher sales volumes in the energy marketing and trading operations.
Gas purchased expense increased forCinergy andCG&E for the second quarter of 2001, when compared to the same period last year, primarily due to an increase in gas commodity trading volumes and an increase in the average cost per mcf of gas purchased.CG&E’s wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism.
Cinergy’s and PSI’sOperation and maintenance expense decreased for the quarter ended June 30, 2001, as compared to the same period last year, primarily due to a reduction in the amortization of demand-side management costs, resulting from the expiration of the agreement in May 2000. Also contributing to this decrease were expenses related to the limited early retirement plan in 2000 as discussed in the 2000 Form 10-K.
Cinergy’s,CG&E’s, andPSI’sTaxes other than income taxesdecreased for the quarter ended June 30, 2001, as compared to the same period last year. This decrease was primarily attributable to reduced property tax expense and other tax changes associated with deregulation in Ohio.
Cinergy’sInterest expense increased $15 million for the second quarter ended June 30, 2001, when compared to the same period last year. This increase was primarily due to the financing of additional investments, principally peaking generation.
CG&E’sIncome taxexpense decreased $12 million for the second quarter of 2001, when compared to the same period last year. This decrease was primarily due to the decrease in taxable income.
Electric and gas gross margins and net income forCinergy,CG&E, andPSI for the six months ended June 30, 2001 and 2000 were as follows:
Cinergy(1) CG&E and subsidiaries PSI
---------- ------------------------- ---
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
(in thousands)
Electric gross margin $1,056,406 $1,115,720 $554,245 $605,463 $443,958 $484,276
Gas gross margin 144,323 134,404 114,654 124,198 - -
Net income 203,214 213,554 130,976 151,845 75,649 69,129
(1) The results of Cinergy also include amounts related to non-registrants.
Diluted earnings per share for the six months ended June 30, 2001 was $1.26 per share as compared to $1.34 per share for the same period last year. This decrease in earnings was attributable to reduced margins due to lower generation availability, reduced industrial demand, increased coal costs, and higher interest primarily associated with the company’s larger portfolio of peaking generation. Offsetting this decrease was the growth in Energy Merchant’s origination and marketing and trading segment and reduced operation and maintenance expenditures related to our continuous cost improvement initiatives.
The explanations below follow the line items on the Consolidated Statements of Income forCinergy,CG&E, andPSI. However, only the line items that varied significantly from prior periods are discussed.
Cinergy(1) CG&E and subsidiaries PSI
---------- ------------------------- ---
2001 2000 % Change 2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- -------- ---- ---- --------
(in millions)
Retail $1,280 $1,301 (2) $ 694 $ 712 (3) $ 586 $ 589 (1)
Wholesale 2,836 939 202 1,419 463 206 1,498 548 173
Other 142 77 84 18 10 80 16 17 (6)
--- -- -- -- -- --
Total $4,258 $2,317 84 $2,131 $1,185 80 $2,100 $1,154 82
(1) The results of Cinergy also include amounts related to non-registrants.
Electric operating revenues forCinergy,CG&E, andPSI increased for the six months ended June 30, 2001, as compared to 2000, mainly due to an increase in volumes on non-firm wholesale transactions related to energy marketing and trading activity. Partially offsetting this increase was a decrease in the average realization on retail sales, reflecting, in part, the expiration of certain interim tariff adjustments (riders). The increase in other electric operating revenues forCinergyprimarily reflects increased activities of our foreign subsidiaries.
GAS OPERATING REVENUES
Cinergy (1)Cinergy(1) CG&E and subsidiaries
---------- -------------------------
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
(in millions)
Non-regulated $ 1,489 $ 321 364$2,647 $753 252 $ - $ - -
Retail 307 154 99 307 154 99376 201 87 376 201 87
Transportation 16 22 (27) 16 22 (27)23 33 (30) 23 33 (30)
Other 2 2 - 2 2 -5 3 67 6 4 50
--- --- --- ---
Total $ 1,814 $ 499 264 $ 325 $ 178 83$3,051 $990 208 $405 $238 70
(1) The results of Cinergy also include amounts related to non-registrants.
Gas operating revenues forCinergy increased infor the first quarter ofsix months ended June 30, 2001, when compared to the same period last year. This increase iswas primarily the result of increased volumes and a higher price received per thousand cubic feet (mcf)mcf sold by Cinergy Marketing and Trading, LLC.Trading.
CG&E’sretail gas revenues increased primarily due to a higher price received per mcf sold and an increase in retail gas sales resulting from colder weather in the first quarter of 2001. The higher price reflects a substantial increase in the wholesale gas commodity cost, which is passed directly to the retail customer dollar-for-dollar under the state mandated gas cost recovery mechanism. Retail sales increased and transportation revenuessales decreased as a result of approximately 30,000 customers switching back toCG&E gas service.
Cinergy(1) CG&E gas service.
OPERATING EXPENSES
Cinergy (1) CG&E and subsidiaries PSI
---------- ----- ---
2001 2000 % Change 2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- -------- ---- ---- --------
(in millions)
Fuel $ 200396 $ 186 8392 1 $ 96180 $ 82 17169 7 $ 99208 $ 99 -212 (2)
Purchased and
exchanged power 1,146 315 264 565 158 258 589 172 2422,806 809 247 1,397 410 241 1,448 458 216
Gas purchased 1,711 406 321 238 90 1642,906 856 239 290 114 154 - - -
Operation and
maintenance 249 252 (1) 112 112 - 91 111 (18)517 551 (6) 232 243 (5) 196 236 (17)
Depreciation and
amortization 181 168 8 92 89 833 74 69 7 46 44 5 37 35 6
Taxes other than
income 63 66 (5) 47 50 (6) 15 15
taxes -116 135 (14) 92 104 (12) 23 28 (18)
--- --- -- --- -- --
Total $3,458 $1,308 164 $1,104 $ 536 106 $ 831 $ 432 92$6,922 $2,911 138 $2,283 $1,129 102 $1,949 $1,003 94
(1) The results of Cinergy also include amounts related to non-registrants.
Fuel
Fuel 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 quartersix months ended March 31,June 30, 2000, to the quartersix months ended March 31,June 30, 2001:
Cinergy (1)Cinergy(1) CG&E PSI
---------- ----- ---
(in millions)
Fuel expense - March 31,June 30, 2000 $ 186 $ 82 $ 99$392 $169 $212
Increase (Decrease)(decrease) due to changes in:
Price of fuel 21 12 940 24 16
Deferred fuel cost (1) - (1)(11) (5) (6)
MWh generation (6) 2(22) (8) (14)
Other (3) - -
-- -- --
Fuel expense - March 31,June 30, 2001 $ 200 $ 96 $ 99$396 $180 $208
(1) The results of Cinergy also include amounts related to non-registrants.
Fuel expense forCinergy and CG&E increased for the six months ended June 30, 2001, when compared to the same period last year, primarily due to increases in the market price of coal. Partially offsetting this increase were lower generation and lower deferred fuel costs.CG&E’s decrease in deferred fuel costs was the result of the implementation of electric deregulation in the State of Ohio and the associated termination of the fuel recovery mechanism.
Purchased and Exchanged Power
Purchased and exchanged powerexpense increased forCinergy,CG&E, andPSI for the first quarter ofsix months ended June 30, 2001, as compared to last year, primarily due to an increase in purchases of non-firm wholesale power, reflecting higher sales volumes in the energy marketing and trading operations.
Gas Purchased
Gas purchased expense increased forCinergy andCG&E for the first quarter ofsix months ended June 30, 2001, when compared to the same period last year, primarily due to increasedan increase in gas commodity trading volumes and an increase in the average cost per mcf of gas purchased. TheCG&E’s wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism.
Operation and Maintenance
Cinergy’sandPSI’sOperation and maintenance expense decreased for the quartersix months ended March 31,June 30, 2001, as compared to the same period last year, primarily due in part to the discontinuation of contract fees associated with the coal gasification services agreement that was terminated in 2000. Also contributing to this decrease was a reduction in the amortization of demand-side management costs, resulting from the expiration of the agreement in May 2000. Also contributing to this decrease were expenses related to the limited early retirement plan in 2000 as discussed in the 2000 Form 10-K.
Depreciation and AmortizationTaxes Other Than Income Taxes
Cinergy’s,CG&E’s, andPSI’s Depreciation and amortization costs increasedTaxes other than income taxesdecreased for the quartersix months ended March 31,June 30, 2001, as compared to the same period last year,year. This decrease was primarily dueattributable to additions to depreciable plant.reduced property tax expense and other tax changes associated with deregulation in Ohio.
INTEREST
Interest
Cinergy’sInterestexpense increased $12.1$27.1 million for the first quarter ofsix months ended June 30, 2001, when compared to the same period last year. This increase iswas primarily due to the financing activities related to our non-regulated affiliates. PSI’sof additional investments, principally peaking generation.
Income Taxes
Cinergy’s andCG&E’sIncome tax expense decreased $2.1$27.5 million for the six months ended June 30, 2001, when compared to the first quarter of 2000,same period last year. The decrease was primarily due to the net redemption of long-term debt and an increasedecrease in the allowance for funds used during construction. Partially offsetting this decrease was an increase in interest related to borrowings under the money pool.taxable income.
ULH&P
The Results of Operations discussion forULH&P is presented only for the quartersix months ended March 31,June 30, 2001, in accordance with General Instruction H(2)(a) of Form 10-Q.
Electric and gas margins and net income forULH&P for the quarterssix months ended March 31,June 30, 2001, and 2000, were as follows:
ULH&P
---------
2001 2000
---- ----
(in thousands)
Electric gross margin $ 17,758 $ 14,077$45,495 $29,228
Gas gross margin 16,250 15,49321,534 21,565
Net income 13,855 8,14624,866 10,923
Electric operating revenues for the quartersix months ended March 31,June 30, 2001, compared to last year, increased mainlyprimarily due to higher megawatt hour (MWh) sales. Also contributingthe recognition of revenues previously deferred subject to this increaserefund in connection with a retail rate filing with the Kentucky Public Service Company (KPSC). A settlement agreement, which allowed the retention of such revenues, was approved by the effects of a Federal Energy Regulatory Commission (FERC) wholesale rate case that became effective during 2000.KPSC in May 2001. For further information see Note 3(g)4(h) in the “Notes to Financial Statements” in “Part I. Financial Information.” Electricity purchased from parent company for resale increased due to higher MWh sales.
The increase inGas operating revenues for the quartersix months ended March 31,June 30, 2001, compared to last year, was mainly due to a higher price received per mcf sold.Gas purchasedexpense increased due to an increase in the average cost per mcf of gas purchased. The market price of natural gas has increased significantly since the first quarter of 2000,same period last year, which has causedULH&P to pay more for the gas it delivers to customers. The wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.
The increase in Depreciation and amortization costs for the quarter ended March 31, 2001, as compared to the same period last year, was primarily due to an increase in depreciable plant.
Return to Table of ContentsELECTRIC INDUSTRYRESULTS OF OPERATIONS - FUTURE
Electric Industry
Wholesale Market Developments
Supply-side Actions
As discussed in the 2000 Form 10-K, on September 30, 1999, one of our non-regulated subsidiariesCinergy Capital and Trading, Inc. (CC&T) formed a partnership (each party having a 50 percent ownership) with Duke Energy North America, LLC (Duke), to increase the available generating capacity for use during peak demand periods. The partnership was formed for the purpose of jointly constructing and owning three wholesale generating facilities.
On March 9, 2000, the Indiana Utility Regulatory Commission (IURC) issued an order, requiring the partnership to immediately suspend all construction activities at the site located near Cadiz, (Henry County) Indiana (a peaking plant with a total capacity of 129 megawatts (MW)(MW, the basic unit of electric energy equal to one million watts) of which we own 65 MW). In making this decision the IURC found that it needed additional information related to the project before issuing a final decision. The issues raised were air quality, water supply, noise control, landscaping, plant abandonment, and emergency services training. The IURC held a hearing on this matter on November 17, 2000, and a favorable ruling was received on April 23, 2001. Construction has resumed andThe plant is expected to be completedfully operational by Julymid August 2001. With regard to this facility, we have entered into a contract with the Wabash Valley Power Association, Inc. to provide 50 MW of capacity from the facility for the next 20 years.
On March 23,June 4, 2001, Cinergy Capital & Trading, Inc., an energy merchant-focused affiliate of Cinergy Corp.,CC&T and Duke announced that it had completed the acquisition of two merchantthey would dissolve their partnership with respect to these three wholesale generating facilities inand an exchange of these generating assets would occur. Pursuant to the Southeast U.S. from Enron. The acquisition consistsagreement we will own 100% of the 494a 640 MW Brownsville generationwholesale generating facility located in HaywoodMadison County, TennesseeOhio and 100% of the 504129 MW Caledonia generationwholesale generating facility located in Lowndesnear Cadiz, Indiana. The agreement is currently pending regulatory approval. In exchange for the Madison County, Mississippi. Brownsville has four naturalOhio and Cadiz, Indiana generating facilities, Duke will own 100% of the Vermillion County, Indiana generating facility. The dissolution of the partnership will increaseCinergy’speaking capacity by 70 MW and further diversify our generation portfolio to 60 percent coal-fired base load and 40 percent gas-fired combustion turbines and Caledonia has six.peaking.
In addition toDuring the above mentioned facilities, CG&E and PSI also have ansecond quarter 2001, CC&T obtained permits for possible future construction of additional 856 MW of natural gas-fired peaking capacity.plants in Ohio and Kentucky. These units are usedpermits will allow us the flexibility to meet the demand for electric commodity in periodsincrease our portfolio of high electric use bygas fired peaking plants and increase our customers. In the latter part of 2000, natural gas was selling at record prices. If it is necessary for Cinergy to call upon the use of our natural gas-fired peakers, the cost of natural gas will directly affect Cinergy’s cost to supply the electric commodity to our customers.overall capacity.
As stated in the 2000 Form 10-K,Cinergy has 9,764 MW of coal-fired generation and we consume approximately 27 million tons of coal annually.Cinergy procures the majority of its coal through long-term supply contracts. The remainder is purchased in the spotopen market, which recently has experienced significant price increases. These price increases will have a direct effect uponCinergy’s cost to supply the electric commodity to our customers.
With the implementation of electric deregulation in the stateState of Ohio and the associated termination of the fuel cost recovery mechanism,CG&E may not fully recover its retail related fuel costs.
Demand-side Actions
Cinergy recorded a new peak demand on July 23, 2001 of 10,984 MW. Subsequently, this peak demand was exceeded on August 8, 2001 and a new peak demand of 11,088 MW was recorded.Cinergy met customer demands for both peaks with our own supply and planned purchases from other regional electric suppliers.
Retail Market Developments
Federal Update
President Bush has indicated that legislation addressing the energy security needs of America deserves prompt consideration. He has appointed Vice President Cheney to head an interagency-task force to recommend a course of action. The task force is looking into ways toIn May 2001, the Vice President and the National Energy Policy Development Group released the National Energy Policy (Policy). Among other things, the Policy recommends increased conservation of energy and calls for the increase the supplyof supplies of electricity, oil and natural gas. The task force is also lookinggas consistent with environmentally sound principles. Many of these recommendations are being considered by Congress. Specific legislation for restructuring of the electricity industry may be considered at the energy shortages in California. The start of a new congressional session and presidential administration makes comprehensive electric industry deregulation uncertain in the near future.later date.
Ohio
As discussed in the 2000 Form 10-K, on July 6, 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill), beginning the transition to electric deregulation and customer choice for the stateState of Ohio. The Electric Restructuring Bill created a competitive electric retail service market effective January 1, 2001. The legislation provided for a market development period that began January 1, 2001, and ends no later than December 31, 2005.
On May 8, 2000,CG&E reached a stipulated agreement with the Public Utilities Commission of Ohio (PUCO) staff and various other interested parties with respect to its proposal to implement electric customer choice in Ohio effective January 1, 2001. On August 31, 2000, the PUCO approvedCG&E’s stipulation agreement. Two parties filed applications for rehearing with the PUCO. On October 18, 2000, the PUCO denied these applications. One of the parties appealed to the Ohio Supreme Court in the fourth quarter of 2000 andCG&E subsequently intervened in that case. On April 6, 2001,CG&E filed for dismissal of this appeal. On July 25, 2001, the Supreme Court of Ohio deniedCG&E’s motion to dismiss.CG&E is unable to predict the outcome of this proceeding.
The August 31, 2000 order authorizesCG&E to transfer its generation assets to one or more non-regulated corporate subsidiary(ies). ThisIn addition to the regulatory approvals received from the PUCO and the KPSC this transfer may require the approval or consent of one or more of the following regulatory agencies:following: the IURC, the Kentucky Public ServiceFederal Energy Regulatory Commission (KPSC)(FERC), the FERC, the SEC under the PUHCA, and various third parties. As the transfer is contingent uponCG&E receiving various consents and approvals, the timing and receipt of which are unknown, the completion date of the transfer of generation assets to the non-regulated subsidiary(ies) is uncertain.
Midwest Independent Transmission System Operator, Inc. (Midwest ISO)
As discussed in the 2000 Form 10-K, in the fall of 2000, three transmission owners (Departing Companies) announced their intent to leave the Midwest ISO and join the proposed Alliance Regional Transmission Organization (Alliance) by the end of 2001. On December 13, 2000, six additional transmission owners, includingCinergy, announced a plan for conditional withdrawal from the Midwest ISO if the Departing Companies left the organization.
On January 24, 2001, the FERC issued an order providing 30 days of confidential settlement talks between the Alliance and the Midwest ISO and its stakeholders, in an effort to resolve issues related to such withdrawals.Cinergy actively participated in the settlement process. On February 23, 2001, the settlement judge reported to the FERC that settlement talks produced a unanimous comprehensive settlement between all related parties. The settlement includes three major components:
The settlement, which was signed byCinergy, was filedapproved by the FERC on March 21, 2001. On May 8, 20012001. Under terms of the FERC approved the settlement. With the FERC approved settlement, the Departing Companies will be permitted to leave the Midwest ISO, and the other transmission owner members of the Midwest ISO, includingCinergy, will remain as members of the Midwest ISO until at least December 31, 2002. Also, as part of the settlement, both organizations have committed to begin operations by the end of 2001.
On June 20, 2001,Cinergy and various other Indiana Midwest ISO transmission owners made a joint filing with the IURC seeking permission to transfer functional control of their transmission facilities to the Midwest ISO.
At the FERC’s July 10, 2001 meeting, a number of Regional Transmission Organization (RTO) related orders were approved, but in approving these orders the FERC suggested that they had an interest in limiting the number of RTO’s nationally. At the current time it is unclear if these suggestions will have any effect on the operations of the Midwest ISO.
In March 2001, H.R. 1101, a bill to repeal the PUHCA, was introduced in the U.S. House of Representatives as a companion piece of legislation to S. 206. It has been referred to the House Committee on Energy and Commerce for action.
President Bush has identified the need for the repeal of the PUHCA as a priority of the federal energy legislation. The National Energy Policy recommends PUHCA repeal as part of a broader restructuring of the electricity industry. We support the repeal of the PUHCA either as part of broader restructuring of the electricity industry or as separate legislation.
As discussed in the 2000 Form 10-K, in May 1999,PSIfiled a petition with the IURC seeking approval of a purchased power tracking mechanism (Tracker). This request was designed to provide for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not sought through the existing fuel adjustment clause.
Amounts relatingIn March 2001, the IURC held a hearing to reviewPSI’s 2000 purchases (approximately $20 million) have been deferred for subsequent recovery. A hearing was held on March 15, 2001 to review PSI’s 2000 purchases and rule on its associated request for recovery of costs. AnOn May 16, 2001, the IURC issued an order in this continuing phase is expected inapproving the second quarterrecovery of 2001.PSI’s summer 2000 purchased power costs ($18.5 million) via the Tracker (net of a mitigation credit and net of the displaced energy amount recovered through the fuel adjustment charge process).
A hearing was held before the IURC on February 15, 2001 to determine whether it was appropriate forPSIto continue the Tracker for future periods. On April 11, 2001, a favorable order was received. The Tracker was extended for two years, through the summer of 2002.PSI is authorized to recover 90% of its purchased power expenses through the Tracker (net of the displaced energy portion recovered through the fuel recovery process and net of the mitigation credit portions), with the remaining 10% deferred for subsequent recovery in PSI's PSI’snext general rate case (subject to a showing of prudence).
Purchased Power Agreement ULH&P purchases its energy from CG&E pursuant to a FERC-approved contract that is due to expire on December 31, 2001. On March 20, 2001, a hearing was held before the KPSC on a proposed new five-year wholesale power supply agreement that provides for the collection of the wholesale amounts through retail rates. The power supply pass-through to retail rates will be frozen until December 31, 2006, and the transmission and distribution portion of retail rates cannot be changed before January 1, 2004. On May, 11, 2001, the agreement was approved by the KPSC.
Upon consummation of the merger betweenCG&Eand PSI Resources Inc. in 1994, an operating agreement entered into betweenCG&E,PSI, and Services was filed with and approved by the FERC. This agreement was established to provide for the coordinated planning and operation of the two regulated entities'entities’ generation and transmission systems, and addressed issues such as joint dispatch of the generating systems, joint capacity and environmental compliance planning, and coordinated planning and operation of the joint transmission system.
In October 2000,CG&E,PSI, and Services filed a notice of termination of the operating agreement with the FERC. The reason for the termination filing is that, with the introduction of deregulation in the stateState of Ohio, the companies no longer share the common characteristics that formed the basis for the operating agreement. On December 22, 2000, the FERC ruled that the companies have the contractual right to terminate the operating agreement. Additionally, the FERC established a termination effective date of May 22, 2001, and set a May 1, 2001, hearing date on the issue of the reasonableness of termination.
Certain parties have initiated an appeal ofappealed the FERC'sFERC’s December 22, 2000 decision. Additionally, on March 14, 2001, the IURC initiated an investigation into the termination of the operating agreement. TheSubsequently, the parties filed a settlement withto the FERC on May 9, 2001,proceeding reached a settlement resolving termination issues and certain compensation and damage issues. This settlement, which is pendingwas approved by the FERC approval,on June 13, 2001, extends the termination of the existing operating agreement until a new successor agreement has been allowed to become effective by the FERC. The settlement also provides that the parties will engage in negotiations concerning such a successor agreement and thatPSI will file a proposed successor agreement with the IURC in the IURC investigation proceeding. As of October 15,16, 2001, pursuant to the settlement,Cinergy has the right to file the proposed successor agreement with the FERC for approval. The parties would then be free to contest the new agreement at the FERC. Also as part of the settlement, the parties agreed to ultimately dismiss the appeals of the December 2000 FERC decision, with prejudice, after holding such appeals in abeyance pending Cinergy'sCinergy’s compliance with the terms of the settlement. The settlement is subject to FERC approval.On June 22, 2001, in the IURC investigation proceeding,PSI filed its case-in-chief testimony, including proposed successor agreements. Evidentiary hearings in the IURC investigation proceeding are scheduled for September 2001. At this time, we cannot predict the outcome of either the IURC investigation proceeding or the FERC proceedings concerning any proposed successor agreements.
As discussed in the 2000 Form 10-K,PSI defers fuel costs that are recoverable in future periods subject to IURC approval under a fuel recovery mechanism. On June 6, 2001, the IURC issued an order in aPSI fuel recovery proceeding, disallowing approximately $14 million of deferred costs. On June 26, 2001,PSI formally requested that the IURC reconsider its disallowance decision.PSIbelieves ithas strong legal and factual arguments in its favor and that it will ultimately be permitted to recover these costs. However,PSI cannot definitively predict the ultimate outcome of either the petition for IURC reconsideration or any possible appeal of this matter.
We market and trade electricity, natural gas, and other energy-related products. We use over-the-counter forward and option contracts for the purchase and sale of electricity and also trade exchange-traded futures contracts.
As stated in our 2000 Form 10-K, in 2000 the Western U.S., primarily California, began experiencing unprecedented price levels and volatility for wholesale electricity. Because of the nature of deregulation in California, California’s two largest utilities have accumulated significant unpaid obligations, are having difficulty obtaining capital, and one of these utilities has declared bankruptcy. We continue to maintain a balanced Western U.S. portfolio and have no unrealized gain positions directly with these utilities. A significant portion of ourEnergy risk management assets andEnergy risk management liabilities-current are with counterparties in the Western U.S. IfAlthough prices continue at elevated levels or should thesedropped significantly in the second quarter of 2001, the volatility of prices, the possibility of certain utilities be unable to funddefaulting on their unpaid obligations, and the potential for further FERC-ordered wholesale electric refunds could result in credit failures by power marketers could result.marketers. Given these issues, the fair values of our positions in the Western U.S. have been adjustedcontinue to reflect a higheran elevated level of credit discount. Nonperformance by any of the Western U.S. counterparties could have a material effect on the operating results ofCinergy,CG&E, and PSI.PSI.
During the first quarter, ourOur natural gas trading volumes have increased substantially.substantially during 2001. Because of this volume change and the increasing volatility of gas prices, our risk exposure to these markets has increased. However, we continue to employ value-at-risk analysis and other methodologies to mitigate our risks in all trading operations, including natural gas trading.
From time to time, we may utilize foreign exchange forward contracts and currency swaps to hedge certain of our net investments in foreign operations.
Our net exposure to changes in interest rates primarily consists of debt instruments with floating interest rates that are benchmarked to various market indices. To manage the exposure to fluctuations in interest rates and to lower funding costs, we evaluate the use of, and have entered into, interest rate swaps.
See Notes 1(b) and (c) of the “Notes to Financial Statements” in “Part I. Financial Information” for our accounting policies for certain derivative instruments. Our market risks have not changed materially from the market risks reported in the 2000 Form 10-K.
On May 4, 2001,ULH&P filed an applicationa retail gas rate case with the KPSC seeking to increase base rates for natural gas distribution services by approximately $7 million annually, or 8% overall. A hearing in this matter has been scheduled for November 27, 2001. We expect that any rate change as a result of this filing will be effective in late 2001.the first quarter of 2002. Simultaneously,ULH&Pannounced a major gas main replacement program with a capital cost of approximately $112 million over the next ten years.ULH&P has requested recovery of the costs of this program through a tracking mechanism.
On July 31, 2001,CG&E filed a retail gas rate case with the PUCO seeking to increase base rates for natural gas distribution services by approximately $25 million or 5% overall. We expect that any rate change as a result of this filing will be effective in the second quarter of 2002. Simultaneously,CG&Eannounced an accelerated cast iron/bare steel pipe replacement program with a capital cost of approximately $716 million over the next ten years.CG&E has requested recovery of the costs of this program through a tracking mechanism.
In January 2000, Investments sold Cinergy Resources, Inc. (CRI), a former subsidiary, to Licking Rural Electrification, Inc. doing business as The Energy Cooperative (Energy Cooperative). In February 2001,Cinergy,CG&E, and CRI were named as defendants in three class actions lawsuits. These lawsuits are in connection with Energy Cooperative'sCooperative’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. On March 30, 2001,Cinergy,CG&E, and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and CRI. This lawsuit concerns any obligations or liability Investments may have to Energy Cooperative following its sale of CRI. We intend to vigorously defend these lawsuits. At the present time,Cinergy cannot predict the outcome of these suits.
During 1998,On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting141,Business Combinations (Statement 141), and No. 142,Goodwill and Other Intangible Assets (Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for Derivative Instrumentsusing the purchase method. With the adoption of Statement 142, goodwill and Hedging Activities (Statement 133).other intangibles with indefinite lives will no longer be subject to amortization. Goodwill will be initially assessed for impairment shortly after adoption and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under current accounting standards. This test must be applied at the “reporting unit” level, which will be defined withinCinergy after further review and will be a level no broader than the current business segments discussed in Note 5 of the “Notes to Financial Statements” in “Part I. Financial Information.” Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. We will begin applying Statement 141 in the third quarter of 2001 and adopt Statement 142 in the first quarter of 2002. Until we adopt Statement 142, goodwill will continue to be amortized. We do not believe that the discontinuance of amortization of goodwill will be material to our 2002 results of operations. We are analyzing the impact of the initial impairment test, and are unable to predict, at this time, whether the implementation of these accounting standards will be material to our financial position or results of operations.
During 1998, FASB issued Statement 133. This standard iswas effective for fiscal yearscalendar year-end companies beginning after June 15, 2000,in 2001, and requires companies to record derivative instruments which are not exempt under certain provisions of Statement 133 as assets or liabilities, measured at fair value (i.e., marked-to-market). Our financial statements reflect the adoption of Statement 133 in January 2001. Since many of our derivatives were previously required to use mark-to-market accounting, the effects of implementation arewere immaterial.
These effects doOur adoption did not reflect the potential impact of applying mark-to-market accounting to selected call options and forwards we use to hedge peak period exposure to electricity demand.forwards. We havehad not historically marked these instruments to market because they are intended as either hedges of peak period exposure and are notor sales contracts served with physical generation, neither of which were considered trading instruments. We currently classifyactivities. At adoption, we classified these types of instrumentscontracts as normal purchases underor sales based on our interpretation of Statement 133. However,133 and in the absence of definitive guidance on such contracts. In June 2001, the FASB-sponsored Derivatives Implementation Group (DIG) has yet to issueissued final guidance on these typesthe application of instruments. In April 2001, the DIG posted tentative guidance that would preclude these contracts from qualifying for the normal purchases and sales exemption. Thisexemption to electricity contracts structured as options or forwards. While much of the criteria that this guidance requires is consistent with the existing guidance in Statement 133, some criteria were added. We will adopt the new guidance in the third quarter of 2001, and preliminary estimates indicate that the effects of implementation for these contracts will not be final untilmaterial. We will continue to apply this guidance to any new electricity contracts that meet the FASB staff considers all comments provided duringdefinition of a 35-day comment period. These instruments will require mark-to-market accounting unless the FASB staff reconsiders its guidance based on the comments provided. The FASB has scheduled an open meeting with utility industry representatives to discuss these issues. If ultimately required to mark these instruments to market, this could result in additional earnings volatility. At March 31, 2001, the fair value of these instruments was $14 million.derivative.
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” and Notes 1(b) and (c) and Note 78 of the “Notes to Financial Statements” in “Part I. Financial Information.”
See Notes 3(b)4(b), (c), and (d) of the “Notes to Financial Statements” in “Part I. Financial Information” for a discussion of the lawsuit and notices of violation filed by the U.S. Environmental Protection Agency (EPA) againstCinergy,CG&E, and PSI.PSI.
See Notes 3(e)4(e) of the “Notes to Financial Statements” in “Part I. Financial Information” for a discussion of manufactured gas plant sites as they relate to our operating companies.
On July 6, 2000, the EPA identifiedPSI and Indianapolis Power and Light Company (IPL) as Potentially Responsible Parties for the release of hazardous substances at the M Metals Superfund Site (Site) located in Indianapolis, Indiana. The EPA advised that it had taken response actions relating to the Site and had incurred costs of approximately $500,000. The EPA has demanded reimbursement of these costs incurred related to the Site and has encouragedPSI and IPL to work out an allocation between themselves for the payment of the costs. On April 19, 2001,PSI reached an agreement in principle with the EPA. Specific details of the settlement are still being negotiated.
See Note 3(f)4(f) of the "Notes to Financial Statements" in "Part I. Financial Information" for discussion of customer choice litigation.Return to Table of Contents
Class I Votes For Votes Withheld James K. Baker 136,738,313 3,830,186 Michael G. Browning 136,815,180 3,753,319 John A. Hillenbrand II 136,728,275 3,840,224 George C. Juilfs 136,875,154 3,693,345
Additionally, an amendment to Article FOURTH of the Certificate of Incorporation of Cinergy Corp. authorizing the issuance of up to 10,000,000 shares of preferred stock, $.01 par value, was approved. Cinergy Corp.’s Board of Directors will have the right to establish, for each series of preferred stock issued from time to time, the series’ designation and number of shares; dividend rights and rates; voting, conversion and redemption rights, if any; liquidation rights; powers, preferences and relative, participating, optional or other special rights, if any; and any qualifications, limitations or restrictions on those rights. Cinergy Corp.’s Board of Directors believes that the availability of preferred stock will provide the corporation with increased flexibility in connection with future financing and similar corporate transactions. The Board of Directors has adopted resolutions that state that the preferred stock: (i) is not to be used for the principal purpose of acting as an anti-takeover device without prior shareholder approval; and (ii) is not to be given super-majority voting rights. There were 101,007,026 common shares voted for the amendment, 18,708,002 voted against the amendment, 1,864,279 abstentions, and 18,989,192 broker non-votes.
In lieu of the annual meeting of shareholders of CG&E, a resolution was duly adopted via unanimous written consent of Cinergy Corp., CG&E’s sole shareholder, effective April 30, 2001, electing the following members of the Board of Directors for one-year terms expiring in 2002:
The annual meeting of shareholders of PSI was held May 1, 2001, in Cincinnati, Ohio. 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 of the Board of Directors were re-elected at the annual meeting for one-year terms expiring in 2002:
None of the 651,136 outstanding shares, representing 423,478 votes, of the preferred stock of PSI, were present or voted at the annual meeting.
(a) The documents listed below are being filed or have previously been filed on behalf ofCinergy Corp.Corp.,CG&E,PSI, CG&E, PSI, andULH&P and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith:
Previously Filed
Exhibit Designation Registrant Nature of Exhibit as Exhibit to:
------------------- ---------- ----------------- --------------
Instruments defining
the rights of holders,
including Indentures
Fifty-third Supplemental Indenture
Cinergy Corp. between PSI and LaSalle National Bank
4a PSI dated June 15, 2001.
Material
Contracts
Amendment to Cinergy Corp. Union
Employees' 401 (k) Plan, adopted
January 1, 1998, effective January 1,
10a Cinergy Corp. 2001.
Cinergy Corp. Non-Union Employees'
Severance Opportunity Plan as amended
and restated effective June 1, 2001,
10b Cinergy Corp. adopted May 30, 2001.
Employment Agreement dated May 15,
Cinergy Corp. 2001, among Cinergy Corp. and CG&E and
10c CG&E J. Joseph Hale, Jr.
Employment Agreement dated May 15,
2001, among Cinergy Corp. and M.
10d Cinergy Corp. Stephen Harkness.
Cinergy Corp. Employment Agreement dated May 15,
CG&E 2001, among Cinergy Corp., CG&E and
10e PSI PSI and Bernard F. Roberts.
Cinergy Corp. Employment Agreement dated March 9,
CG&E 2001, among Cinergy Corp., CG&E and
10f PSI PSI and Lisa D. Gamblin.
Employment Agreement dated March 9,
2001, among Cinergy Corp. and Timothy
10g Cinergy Corp. J. Verhagen.
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|---|
(b) No reports on Form 8-K were filed during the quarter.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although Cinergy Corp., The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), and The Union Light, Heat and Power Company (ULH&P) believe that the disclosures are adequate to make the information presented not misleading. In the opinion of Cinergy Corp., CG&E, PSI, and ULH&P, these statements reflect all adjustments (which include normal, recurring adjustments) necessary to reflect the results of operations for the respective periods. The unaudited statements are subject to such adjustments as the annual audit by independent public accountants may disclose to be necessary.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed by an officer and the chief accounting officer on their 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: | |||
| Bernard F. Roberts | |||
| Duly Authorized Officer | |||
| and | |||
| Chief Accounting Officer |