UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant, State of Incorporation, I.R.S. Employer 1-11377 CINERGY CORP. 31-1385023 1-1232 THE CINCINNATI GAS & ELECTRIC COMPANY 31-0240030 1-3543 PSI ENERGY, INC. 35-0594457 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. Cinergy Corp. Yes x No o The Cincinnati Gas & Electric Company Yes x No o PSI Energy, Inc. Yes x No oý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934September 30, 2005March 31, 2006o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
File Number
Address and Telephone Number
Identification No.
(A Delaware Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500
(An Ohio Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-950031-0240030
(An Indiana Corporation)
1000 East Main Street
Plainfield, Indiana 46168
(513) 421-95002-7793THE UNION LIGHT, HEAT AND POWER COMPANY(A Kentucky Corporation)139 East Fourth StreetCincinnati, Ohio 45202(513) 421-950031-0473080Yes ý No o
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act).Exchange Act.
Large | Accelerated | Non- | |||||
Cinergy Corp. |
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PSI Energy, Inc. | o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ýx
This combined Form 10-Q is separately filed by Cinergy Corp., The Cincinnati Gas & Electric Company, and PSI Energy, Inc., and The Union Light, Heat and Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.
Cinergy Corp., The Union Light, Heat and PowerCincinnati Gas & Electric Company meets, and PSI Energy, Inc. meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and isare therefore filing itstheir company specific information with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
As of October 31, 2005,April 30, 2006, shares of common stock outstanding for each registrant were as listed:
Registrant |
| Description |
| Shares | |
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Cinergy Corp. |
| Par value $.01 per share |
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The Cincinnati Gas & Electric Company |
| Par value $8.50 per share |
| 89,663,086 | |
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PSI Energy, Inc. |
| Without par value, stated value $.01 per share |
| 53,913,701 |
ULH&P, which previously was a separate Securities and Exchange Commission (SEC) reporting entity, has filed a Form 15 with the SEC to suspend its reporting obligations under the Securities Exchange Act of 1934.
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PART I. FINANCIAL INFORMATION |
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1 |
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2
TABLE OF CONTENTS
32
CINERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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| Quarter Ended |
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| March 31 |
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| 2006 |
| 2005 |
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| (in thousands, except per |
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| (unaudited) |
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Operating Revenues |
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Electric |
| $ | 1,137,062 |
| $ | 914,359 |
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Gas |
| 355,556 |
| 313,096 |
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Other |
| 155,920 |
| 98,656 |
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Total Operating Revenues |
| 1,648,538 |
| 1,326,111 |
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Operating Expenses |
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Fuel, emission allowances, and purchased power |
| 425,896 |
| 300,619 |
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Gas purchased |
| 232,006 |
| 208,600 |
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Costs of fuel resold |
| 146,298 |
| 85,762 |
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Operation and maintenance |
| 422,658 |
| 296,695 |
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Depreciation and amortization |
| 163,758 |
| 151,449 |
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Taxes other than income taxes |
| 87,278 |
| 78,932 |
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Total Operating Expenses |
| 1,477,894 |
| 1,122,057 |
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Operating Income |
| 170,644 |
| 204,054 |
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Equity in Earnings of Unconsolidated Subsidiaries |
| 4,095 |
| 4,836 |
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Miscellaneous Income — Net |
| 18,648 |
| 2,950 |
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Interest Expense |
| 84,894 |
| 64,003 |
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Preferred Dividend Requirements of Subsidiaries |
| 277 |
| 858 |
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Income Before Taxes |
| 108,216 |
| 146,979 |
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Income Taxes |
| 21,302 |
| 32,100 |
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Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle |
| 86,914 |
| 114,879 |
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Discontinued operations, net of tax (Note 8) |
| (4,057 | ) | 2,477 |
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Cumulative effect of a change in accounting principle, net of tax (Note 1(e)(i)) |
| (3,493 | ) | — |
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Net Income |
| $ | 79,364 |
| $ | 117,356 |
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Average Common Shares Outstanding — Basic |
| 200,286 |
| 195,647 |
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Earnings Per Common Share — Basic (Note 10) |
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Income before discontinued operations and cumulative effect of a change in accounting principle |
| $ | 0.43 |
| $ | 0.59 |
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Discontinued operations, net of tax |
| (0.02 | ) | 0.01 |
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Cumulative effect of a change in accounting principle, net of tax |
| (0.01 | ) | — |
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Net Income |
| $ | 0.40 |
| $ | 0.60 |
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Average Common Shares Outstanding — Diluted |
| 201,161 |
| 196,712 |
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Earnings Per Common Share — Diluted (Note 10) |
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Income before discontinued operations and cumulative effect of a change in accounting principle |
| $ | 0.43 |
| $ | 0.59 |
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Discontinued operations, net of tax |
| (0.02 | ) | 0.01 |
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Cumulative effect of a change in accounting principle, net of tax |
| (0.02 | ) | — |
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Net Income |
| $ | 0.39 |
| $ | 0.60 |
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Cash Dividends Declared Per Common Share |
| $ | 0.64 |
| $ | 0.48 |
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The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.
4
CINERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
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| Quarter Ended |
| Year to Date |
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| September 30 |
| September 30 |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Operating Revenues |
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Electric |
| $ | 1,134,494 |
| $ | 952,406 |
| $ | 2,975,129 |
| $ | 2,681,078 |
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Gas |
| 84,073 |
| 65,298 |
| 476,767 |
| 524,226 |
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Other |
| 146,712 |
| 110,879 |
| 371,895 |
| 265,674 |
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Total Operating Revenues |
| 1,365,279 |
| 1,128,583 |
| 3,823,791 |
| 3,470,978 |
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Operating Expenses |
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Fuel, emission allowances, and purchased power |
| 459,964 |
| 341,218 |
| 1,077,641 |
| 933,864 |
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Gas purchased |
| 30,446 |
| 19,792 |
| 295,135 |
| 290,728 |
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Costs of fuel resold |
| 118,619 |
| 86,917 |
| 297,469 |
| 203,441 |
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Operation and maintenance |
| 342,221 |
| 325,787 |
| 1,025,131 |
| 968,981 |
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Depreciation |
| 129,597 |
| 114,668 |
| 386,537 |
| 333,856 |
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Taxes other than income taxes |
| 65,101 |
| 57,001 |
| 209,115 |
| 204,320 |
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Total Operating Expenses |
| 1,145,948 |
| 945,383 |
| 3,291,028 |
| 2,935,190 |
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Operating Income |
| 219,331 |
| 183,200 |
| 532,763 |
| 535,788 |
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Equity in Earnings of Unconsolidated Subsidiaries |
| 6,795 |
| 8,016 |
| 25,206 |
| 18,095 |
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Miscellaneous Income (Expense) – Net |
| 17,012 |
| (944 | ) | 33,886 |
| (11,419 | ) | ||||
Interest Expense |
| 76,932 |
| 71,775 |
| 209,644 |
| 209,446 |
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Preferred Dividend Requirements of Subsidiaries |
| 603 |
| 858 |
| 2,319 |
| 2,574 |
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Income Before Taxes |
| 165,603 |
| 117,639 |
| 379,892 |
| 330,444 |
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Income Taxes |
| 33,666 |
| 24,716 |
| 79,891 |
| 76,002 |
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Net Income |
| $ | 131,937 |
| $ | 92,923 |
| $ | 300,001 |
| $ | 254,442 |
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Average Common Shares Outstanding – Basic |
| 199,069 |
| 180,881 |
| 197,741 |
| 180,129 |
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Earnings Per Common Share – Basic (Note 11) |
| $ | 0.67 |
| $ | 0.51 |
| $ | 1.52 |
| $ | 1.41 |
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Average Common Shares Outstanding – Diluted |
| 200,167 |
| 183,478 |
| 198,777 |
| 182,564 |
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Earnings Per Common Share – Diluted (Note 11) |
| $ | 0.66 |
| $ | 0.50 |
| $ | 1.51 |
| $ | 1.39 |
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Cash Dividends Declared Per Common Share (Note 2) |
| $ | 0.96 |
| $ | 0.47 |
| $ | 1.92 |
| $ | 1.41 |
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| March 31 |
| December 31 |
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| 2006 |
| 2005 |
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| (dollars in thousands) |
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| (unaudited) |
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Current Assets |
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Cash and cash equivalents |
| $ | 147,557 |
| $ | 146,056 |
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Receivables less accumulated provision for doubtful accounts of $7,351 at March 31, 2006, and $4,767 at December 31, 2005 |
| 1,163,713 |
| 1,659,411 |
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Fuel, emission allowances, and supplies |
| 521,516 |
| 589,152 |
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Energy risk management current assets |
| 595,292 |
| 991,252 |
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Prepayments and other |
| 410,443 |
| 408,975 |
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Total Current Assets |
| 2,838,521 |
| 3,794,846 |
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Property, Plant, and Equipment — at Cost |
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Property, plant, and equipment |
| 16,249,269 |
| 15,990,864 |
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Accumulated depreciation |
| 5,563,590 |
| 5,477,782 |
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Net Property, Plant, and Equipment |
| 10,685,679 |
| 10,513,082 |
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Other Assets |
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Regulatory assets |
| 1,045,511 |
| 1,069,854 |
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Investments in unconsolidated subsidiaries |
| 481,807 |
| 479,466 |
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Energy risk management non-current assets |
| 302,904 |
| 306,959 |
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Notes receivable, non-current |
| 165,191 |
| 171,325 |
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Goodwill and other intangible assets |
| 176,193 |
| 169,081 |
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Other |
| 637,337 |
| 615,012 |
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Total Other Assets |
| 2,808,943 |
| 2,811,697 |
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Assets of Discontinued Operations (Note 8) |
| 22,491 |
| 34,215 |
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Total Assets |
| $ | 16,355,634 |
| $ | 17,153,840 |
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The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.
5
CINERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
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| September 30 |
| December 31 |
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| 2005 |
| 2004 |
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| (dollars in thousands) |
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| (unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
| $ | 165,831 |
| $ | 164,541 |
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Notes receivable, current |
| 81,622 |
| 214,513 |
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Accounts receivable less accumulated provision for doubtful accounts of $4,489 at September 30, 2005, and $5,514 at December 31, 2004 |
| 1,482,068 |
| 1,061,140 |
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Fuel, emission allowances, and supplies |
| 607,925 |
| 444,750 |
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Energy risk management current assets |
| 1,260,255 |
| 381,146 |
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Prepayments and other |
| 567,113 |
| 174,624 |
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Total Current Assets |
| 4,164,814 |
| 2,440,714 |
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Property, Plant, and Equipment – at Cost |
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Utility plant in service |
| 10,642,931 |
| 10,076,468 |
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Construction work in progress |
| 398,130 |
| 333,687 |
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Total Utility Plant |
| 11,041,061 |
| 10,410,155 |
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Non-regulated property, plant, and equipment |
| 4,853,947 |
| 4,700,009 |
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Accumulated depreciation |
| 5,447,931 |
| 5,180,699 |
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Net Property, Plant, and Equipment |
| 10,447,077 |
| 9,929,465 |
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Other Assets |
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Regulatory assets |
| 1,021,277 |
| 1,030,333 |
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Investments in unconsolidated subsidiaries |
| 486,795 |
| 513,675 |
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Energy risk management non-current assets |
| 397,471 |
| 138,787 |
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Notes receivable, non-current |
| 177,127 |
| 193,857 |
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Other investments |
| 128,581 |
| 125,367 |
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Restricted funds held in trust |
| 277,400 |
| 358,006 |
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Goodwill and other intangible assets |
| 152,342 |
| 132,752 |
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Other |
| 213,323 |
| 119,361 |
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Total Other Assets |
| 2,854,316 |
| 2,612,138 |
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Total Assets |
| $ | 17,466,207 |
| $ | 14,982,317 |
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| March 31 |
| December 31 |
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| 2006 |
| 2005 |
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| (dollars in thousands) |
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| (unaudited) |
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Current Liabilities |
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Accounts payable |
| $ | 1,347,350 |
| $ | 1,879,528 |
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Accrued taxes |
| 156,688 |
| 219,469 |
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Accrued interest |
| 86,034 |
| 64,725 |
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Notes payable and other short-term obligations (Note 4) |
| 1,090,765 |
| 923,600 |
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Long-term debt due within one year |
| 704,850 |
| 360,730 |
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Energy risk management current liabilities |
| 464,358 |
| 1,010,585 |
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Other |
| 158,093 |
| 185,221 |
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Total Current Liabilities |
| 4,008,138 |
| 4,643,858 |
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Non-Current Liabilities |
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Long-term debt |
| 4,285,611 |
| 4,459,695 |
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Deferred income taxes |
| 1,502,784 |
| 1,523,070 |
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Unamortized investment tax credits |
| 88,677 |
| 90,852 |
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Accrued pension and other postretirement benefit costs |
| 719,347 |
| 729,221 |
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Regulatory liabilities |
| 565,481 |
| 546,047 |
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Energy risk management non-current liabilities |
| 330,061 |
| 338,514 |
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Other |
| 244,287 |
| 184,569 |
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Total Non-Current Liabilities |
| 7,736,248 |
| 7,871,968 |
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Liabilities of Discontinued Operations (Note 8) |
| 25,727 |
| 28,876 |
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Commitments and Contingencies |
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Total Liabilities |
| 11,770,113 |
| 12,544,702 |
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Cumulative Preferred Stock of Subsidiaries |
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Not subject to mandatory redemption |
| 11,258 |
| 31,743 |
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Common Stock Equity |
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Common stock - $.01 par value; authorized shares — 600,000,000; issued shares — 200,653,988 at March 31, 2006, and 199,707,338 at December 31, 2005; outstanding shares — 200,507,375 at March 31, 2006, and 199,565,684 at December 31, 2005 |
| 2,007 |
| 1,997 |
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Paid-in capital |
| 3,017,579 |
| 2,982,625 |
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Retained earnings |
| 1,673,739 |
| 1,721,716 |
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Treasury shares at cost — 146,613 shares at March 31, 2006, and 141,654 shares at December 31, 2005 |
| (5,047 | ) | (4,823 | ) | ||
Accumulated other comprehensive loss |
| (114,015 | ) | (124,120 | ) | ||
Total Common Stock Equity |
| 4,574,263 |
| 4,577,395 |
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Total Liabilities and Shareholders’ Equity |
| $ | 16,355,634 |
| $ | 17,153,840 |
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The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.
6
CINERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CHANGES IN COMMON STOCK EQUITY
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| Total |
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| Other |
| Common |
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| Common |
| Paid-in |
| Retained |
| Treasury |
| Comprehensive |
| Stock |
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| Stock |
| Capital |
| Earnings |
| Stock |
| Income (Loss) |
| Equity |
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| (dollars in thousands, except per share amounts) |
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| (unaudited) |
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Quarter Ended March 31, 2006 |
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Balance at January 1, 2006 (199,565,684 shares) |
| $ | 1,997 |
| $ | 2,982,625 |
| $ | 1,721,716 |
| $ | (4,823 | ) | $ | (124,120 | ) | $ | 4,577,395 |
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Comprehensive income: |
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Net income |
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| 79,364 |
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| 79,364 |
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Other comprehensive income, net of tax effect of $(5,413) |
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Foreign currency translation adjustment |
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| 120 |
| 120 |
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Unrealized gain on investment trusts |
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| 1,530 |
| 1,530 |
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Minimum pension liability adjustment |
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| 916 |
| 916 |
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Cash flow hedges |
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|
|
|
| 7,539 |
| 7,539 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 89,469 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock — net (946,650 shares) |
| 10 |
| 28,862 |
|
|
|
|
|
|
| 28,872 |
| ||||||
Treasury shares purchased (4,959 shares) |
|
|
|
|
|
|
| (224 | ) |
|
| (224 | ) | ||||||
Dividends on common stock ($0.64 per share) |
|
|
|
|
| (127,314 | ) |
|
|
|
| (127,314 | ) | ||||||
Other |
|
|
| 6,092 |
| (27 | ) |
|
|
|
| 6,065 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance at March 31, 2006 (200,507,375 shares) |
| $ | 2,007 |
| $ | 3,017,579 |
| $ | 1,673,739 |
| $ | (5,047 | ) | $ | (114,015 | ) | $ | 4,574,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter Ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at January 1, 2005 (187,524,229 shares) |
| $ | 1,877 |
| $ | 2,559,715 |
| $ | 1,613,340 |
| $ | (4,336 | ) | $ | (54,674 | ) | $ | 4,115,922 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 117,356 |
|
|
|
|
| 117,356 |
| ||||||
Other comprehensive income (loss), net of tax effect of $2,431 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| (5,838 | ) | (5,838 | ) | ||||||
Unrealized loss on investment trusts |
|
|
|
|
|
|
|
|
| (1,175 | ) | (1,175 | ) | ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| 1,856 |
| 1,856 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 112,199 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock — net (10,475,010 shares) |
| 104 |
| 353,753 |
|
|
|
|
|
|
| 353,857 |
| ||||||
Treasury shares purchased (9,585 shares) |
|
|
|
|
|
|
| (299 | ) |
|
| (299 | ) | ||||||
Dividends on common stock ($0.48 per share) |
|
|
|
|
| (91,879 | ) |
|
|
|
| (91,879 | ) | ||||||
Other |
|
|
| 6,290 |
| (113 | ) |
|
|
|
| 6,177 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance at March 31, 2005 (197,989,654 shares) |
| $ | 1,981 |
| $ | 2,919,758 |
| $ | 1,638,704 |
| $ | (4,635 | ) | $ | (59,831 | ) | $ | 4,495,977 |
|
|
| September 30 |
| December 31 |
| ||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 2,142,077 |
| $ | 1,348,576 |
|
Accrued taxes |
| 266,459 |
| 216,804 |
| ||
Accrued interest |
| 69,504 |
| 54,473 |
| ||
Notes payable and other short-term obligations (Note 5) |
| 1,198,670 |
| 958,910 |
| ||
Long-term debt due within one year |
| 349,012 |
| 219,967 |
| ||
Energy risk management current liabilities |
| 1,419,332 |
| 310,741 |
| ||
Other |
| 141,448 |
| 171,188 |
| ||
Total Current Liabilities |
| 5,586,502 |
| 3,280,659 |
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt |
| 4,022,076 |
| 4,227,741 |
| ||
Deferred income taxes |
| 1,445,371 |
| 1,597,120 |
| ||
Unamortized investment tax credits |
| 93,070 |
| 99,723 |
| ||
Accrued pension and other postretirement benefit costs |
| 652,409 |
| 688,277 |
| ||
Regulatory liabilities |
| 578,520 |
| 557,419 |
| ||
Energy risk management non-current liabilities |
| 420,326 |
| 127,340 |
| ||
Other |
| 195,230 |
| 225,298 |
| ||
Total Non-Current Liabilities |
| 7,407,002 |
| 7,522,918 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 12,993,504 |
| 10,803,577 |
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock of Subsidiaries |
|
|
|
|
| ||
Not subject to mandatory redemption |
| 31,743 |
| 62,818 |
| ||
|
|
|
|
|
| ||
Common Stock Equity |
|
|
|
|
| ||
Common stock - $.01 par value; authorized shares – 600,000,000; issued shares – 199,280,386 at September 30, 2005, and 187,653,506 at December 31, 2004; outstanding shares – 199,139,968 at September 30, 2005, and 187,524,229 at December 31, 2004 |
| 1,993 |
| 1,877 |
| ||
Paid-in capital |
| 2,969,103 |
| 2,559,715 |
| ||
Retained earnings |
| 1,534,752 |
| 1,613,340 |
| ||
Treasury shares at cost – 140,418 shares at September 30, 2005, and 129,277 shares at December 31, 2004 |
| (4,776 | ) | (4,336 | ) | ||
Accumulated other comprehensive loss |
| (60,112 | ) | (54,674 | ) | ||
Total Common Stock Equity |
| 4,440,960 |
| 4,115,922 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 17,466,207 |
| $ | 14,982,317 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.
7
CINERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITYCASH FLOWS
|
| Quarter Ended |
| ||||
|
| March 31 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
Cash Flows from Operations |
|
|
|
|
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
| $ | 79,364 |
| $ | 117,356 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 163,793 |
| 153,419 |
| ||
Loss on impairment or disposal of subsidiaries and investments, net |
| 7,398 |
| 6,818 |
| ||
Cumulative effect of a change in accounting principle, net of tax |
| 3,493 |
| — |
| ||
Change in net position of energy risk management activities |
| (154,665 | ) | 66,342 |
| ||
Deferred income taxes and investment tax credits — net |
| (14,309 | ) | (20,258 | ) | ||
Equity in earnings of unconsolidated subsidiaries |
| (4,095 | ) | (4,836 | ) | ||
Return on equity investments |
| 4,857 | �� | — |
| ||
Allowance for equity funds used during construction |
| (3,065 | ) | (1,987 | ) | ||
Regulatory asset/liability deferrals |
| (21,465 | ) | (27,514 | ) | ||
Regulatory asset amortization |
| 13,367 |
| 8,028 |
| ||
Accrued pension and other postretirement benefit costs |
| (20,177 | ) | 22,511 |
| ||
Cost of removal |
| (5,481 | ) | (5,475 | ) | ||
Changes in current assets and current liabilities: |
|
|
|
|
| ||
Accounts and notes receivable |
| 503,549 |
| 159,607 |
| ||
Fuel, emission allowances, and supplies |
| 67,636 |
| 54,408 |
| ||
Prepayments |
| 8,498 |
| (65,218 | ) | ||
Accounts payable |
| (529,943 | ) | (75,935 | ) | ||
Accrued taxes and interest |
| (39,267 | ) | 41,216 |
| ||
Other assets |
| (13,562 | ) | (16,737 | ) | ||
Other liabilities |
| 38,393 |
| (33,627 | ) | ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 84,319 |
| 378,118 |
| ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Construction expenditures (less allowance for equity funds used during construction) |
| (298,117 | ) | (242,511 | ) | ||
Proceeds from notes receivable |
| 5,466 |
| 4,852 |
| ||
Withdrawal of restricted cash held in trust |
| 47,585 |
| 35,631 |
| ||
Other investments |
| (50,646 | ) | (2,155 | ) | ||
Proceeds from distributions by investments and sale of investments and subsidiaries |
| 1,480 |
| 32,071 |
| ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (294,232 | ) | (172,112 | ) | ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Change in short-term debt |
| 166,891 |
| (509,066 | ) | ||
Issuance of long-term debt |
| 174,069 |
| 4,165 |
| ||
Redemption of long-term debt |
| (13,612 | ) | (3,516 | ) | ||
Retirement of preferred stock of subsidiaries |
| (20,485 | ) | — |
| ||
Issuance of common stock |
| 28,872 |
| 353,857 |
| ||
Dividends on common stock |
| (127,314 | ) | (91,879 | ) | ||
Excess tax benefits from stock options |
| 2,993 |
| — |
| ||
|
|
|
|
|
| ||
Net cash provided by (used in) financing activities |
| 211,414 |
| (246,439 | ) | ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| 1,501 |
| (40,433 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 146,056 |
| 164,541 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 147,557 |
| $ | 124,108 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest (net of amount capitalized) |
| $ | 65,279 |
| $ | 60,902 |
|
Income taxes |
| $ | 78,653 |
| $ | 7,671 |
|
|
|
|
|
|
|
|
|
|
| Accumulated |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
| Other |
| Common |
| ||||||
|
| Common |
| Paid-in |
| Retained |
| Treasury |
| Comprehensive |
| Stock |
| ||||||
|
| Stock |
| Capital |
| Earnings |
| Stock |
| Income (Loss) |
| Equity |
| ||||||
|
| (dollars in thousands, except per share amounts) |
| ||||||||||||||||
|
| (unaudited) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at July 1, 2005 (198,528,683 shares) |
| $ | 1,987 |
| $ | 2,941,747 |
| $ | 1,594,053 |
| $ | (4,766 | ) | $ | (67,634 | ) | $ | 4,465,387 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 131,937 |
|
|
|
|
| 131,937 |
| ||||||
Other comprehensive income (loss), net of tax effect of $(6,194) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| (285 | ) | (285 | ) | ||||||
Unrealized gain on investment trusts |
|
|
|
|
|
|
|
|
| 1,104 |
| 1,104 |
| ||||||
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
| (571 | ) | (571 | ) | ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| 7,274 |
| 7,274 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 139,459 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock – net (611,574 shares) |
| 6 |
| 25,861 |
|
|
|
|
|
|
| 25,867 |
| ||||||
Treasury shares purchased (289 shares) |
|
|
|
|
|
|
| (10 | ) |
|
| (10 | ) | ||||||
Dividends on common stock ($0.96 per share) (Note 2) |
|
|
|
|
| (191,120 | ) |
|
|
|
| (191,120 | ) | ||||||
Other |
|
|
| 1,495 |
| (118 | ) |
|
|
|
| 1,377 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance at September 30, 2005 (199,139,968 shares) |
| $ | 1,993 |
| $ | 2,969,103 |
| $ | 1,534,752 |
| $ | (4,776 | ) | $ | (60,112 | ) | $ | 4,440,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter Ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at July 1, 2004 (180,323,246 shares) |
| $ | 1,804 |
| $ | 2,248,084 |
| $ | 1,543,883 |
| $ | (3,966 | ) | $ | (39,804 | ) | $ | 3,750,001 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 92,923 |
|
|
|
|
| 92,923 |
| ||||||
Other comprehensive loss, net of tax effect of $(1,162) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| (741 | ) | (741 | ) | ||||||
Unrealized loss on investment trusts |
|
|
|
|
|
|
|
|
| (662 | ) | (662 | ) | ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| (138 | ) | (138 | ) | ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 91,382 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock – net (675,273 shares) |
| 7 |
| 20,989 |
|
|
|
|
|
|
| 20,996 |
| ||||||
Treasury shares purchased (2,963 shares) |
|
|
|
|
|
|
| (60 | ) |
|
| (60 | ) | ||||||
Dividends on common stock ($0.47 per share) |
|
|
|
|
| (84,873 | ) |
|
|
|
| (84,873 | ) | ||||||
Other |
|
|
| 3,578 |
| (85 | ) |
|
|
|
| 3,493 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance at September 30, 2004 (180,995,556 shares) |
| $ | 1,811 |
| $ | 2,272,651 |
| $ | 1,551,848 |
| $ | (4,026 | ) | $ | (41,345 | ) | $ | 3,780,939 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.
8
CINERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(Continued)
|
|
|
|
|
|
|
|
|
| Accumulated |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
| Other |
| Common |
| ||||||
|
| Common |
| Paid-in |
| Retained |
| Treasury |
| Comprehensive |
| Stock |
| ||||||
|
| Stock |
| Capital |
| Earnings |
| Stock |
| Income (Loss) |
| Equity |
| ||||||
|
| (dollars in thousands, except per share amounts) |
| ||||||||||||||||
|
| (unaudited) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Year to Date September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at January 1, 2005 (187,524,229 shares) |
| $ | 1,877 |
| $ | 2,559,715 |
| $ | 1,613,340 |
| $ | (4,336 | ) | $ | (54,674 | ) | $ | 4,115,922 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 300,001 |
|
|
|
|
| 300,001 |
| ||||||
Other comprehensive income (loss), net of tax effect of $441 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| (13,392 | ) | (13,392 | ) | ||||||
Unrealized gain on investment trusts |
|
|
|
|
|
|
|
|
| 150 |
| 150 |
| ||||||
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
| (571 | ) | (571 | ) | ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| 8,375 |
| 8,375 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 294,563 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock – net (11,626,880 shares) |
| 116 |
| 403,374 |
|
|
|
|
|
|
| 403,490 |
| ||||||
Treasury shares purchased (11,141 shares) |
|
|
|
|
|
|
| (440 | ) |
|
| (440 | ) | ||||||
Dividends on common stock ($1.92 per share) (Note 2) |
|
|
|
|
| (378,196 | ) |
|
|
|
| (378,196 | ) | ||||||
Other |
|
|
| 6,014 |
| (393 | ) |
|
|
|
| 5,621 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance at September 30, 2005 (199,139,968 shares) |
| $ | 1,993 |
| $ | 2,969,103 |
| $ | 1,534,752 |
| $ | (4,776 | ) | $ | (60,112 | ) | $ | 4,440,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Year to Date September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at January 1, 2004 (178,336,854 shares) |
| $ | 1,784 |
| $ | 2,195,985 |
| $ | 1,551,003 |
| $ | (3,255 | ) | $ | (44,835 | ) | $ | 3,700,682 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 254,442 |
|
|
|
|
| 254,442 |
| ||||||
Other comprehensive income (loss), net of tax effect of $(1,928) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| 691 |
| 691 |
| ||||||
Unrealized gain on investment trusts |
|
|
|
|
|
|
|
|
| (166 | ) | (166 | ) | ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| 2,965 |
| 2,965 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 257,932 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock – net (2,683,696 shares) |
| 27 |
| 67,200 |
|
|
|
|
|
|
| 67,227 |
| ||||||
Treasury shares purchased (24,994 shares) |
|
|
|
|
|
|
| (771 | ) |
|
| (771 | ) | ||||||
Dividends on common stock ($1.41 per share) |
|
|
|
|
| (253,418 | ) |
|
|
|
| (253,418 | ) | ||||||
Other |
|
|
| 9,466 |
| (179 | ) |
|
|
|
| 9,287 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance at September 30, 2004 (180,995,556 shares) |
| $ | 1,811 |
| $ | 2,272,651 |
| $ | 1,551,848 |
| $ | (4,026 | ) | $ | (41,345 | ) | $ | 3,780,939 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.
9
CINERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| Year to Date |
| ||||
|
| September 30 |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
Cash Flows from Operations |
|
|
|
|
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
| $ | 300,001 |
| $ | 254,442 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
| 386,537 |
| 333,856 |
| ||
Loss on impairment or disposal of subsidiaries and investments, net |
| 7,542 |
| 38,268 |
| ||
Change in net position of energy risk management activities |
| 263,784 |
| (35,463 | ) | ||
Deferred income taxes and investment tax credits – net |
| (16,249 | ) | 81,649 |
| ||
Equity in earnings of unconsolidated subsidiaries |
| (25,206 | ) | (18,095 | ) | ||
Return on equity investments |
| 25,081 |
| — |
| ||
Allowance for equity funds used during construction |
| (6,043 | ) | (1,122 | ) | ||
Regulatory asset/liability deferrals |
| (145,233 | ) | (39,115 | ) | ||
Regulatory assets amortization |
| 102,603 |
| 74,176 |
| ||
Accrued pension and other postretirement benefit costs |
| (35,868 | ) | (60,136 | ) | ||
Cost of removal |
| (17,499 | ) | (13,037 | ) | ||
Changes in current assets and current liabilities: |
|
|
|
|
| ||
Accounts and notes receivable |
| (290,569 | ) | 358,465 |
| ||
Fuel, emission allowances, and supplies |
| (262,408 | ) | (78,502 | ) | ||
Prepayments |
| (381,515 | ) | (70,124 | ) | ||
Accounts payable |
| 698,363 |
| (161,574 | ) | ||
Accrued taxes and interest |
| (13,630 | ) | (88,347 | ) | ||
Other assets |
| (36,224 | ) | (7,295 | ) | ||
Other liabilities |
| (56,363 | ) | 68,087 |
| ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 497,104 |
| 636,133 |
| ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Change in short-term debt |
| 239,760 |
| 783,258 |
| ||
Issuance of long-term debt |
| 54,183 |
| — |
| ||
Redemption of long-term debt |
| (144,799 | ) | (824,411 | ) | ||
Retirement of preferred stock of subsidiaries |
| (31,075 | ) | — |
| ||
Issuance of common stock |
| 403,490 |
| 67,227 |
| ||
Dividends on common stock |
| (282,541 | ) | (253,418 | ) | ||
|
|
|
|
|
| ||
Net cash provided by (used in) financing activities |
| 239,018 |
| (227,344 | ) | ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Construction expenditures (less allowance for equity funds used during construction) |
| (777,382 | ) | (473,354 | ) | ||
Proceeds from notes receivable |
| 14,848 |
| 12,966 |
| ||
Withdrawal of restricted cash held in trust |
| 104,473 |
| 14,861 |
| ||
Acquisitions and other investments |
| (107,147 | ) | (9,734 | ) | ||
Proceeds from distributions by investments and sale of investments and subsidiaries |
| 30,376 |
| 29,726 |
| ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (734,832 | ) | (425,535 | ) | ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| 1,290 |
| (16,746 | ) | ||
Cash and cash equivalents at beginning of period |
| 164,541 |
| 169,120 |
| ||
Cash and cash equivalents at end of period |
| $ | 165,831 |
| $ | 152,374 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest (net of amount capitalized) |
| $ | 204,893 |
| $ | 219,100 |
|
Income taxes |
| $ | 81,259 |
| $ | 46,272 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.
10
THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
| Quarter Ended |
| Year to Date |
|
| Quarter Ended |
| ||||||||||||
|
| September 30 |
| September 30 |
|
| March 31 |
| ||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
| 2006 |
| 2005 |
| ||||||
|
| (dollars in thousands) |
|
| (dollars in thousands) |
| ||||||||||||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric |
| $ | 547,990 |
| $ | 452,074 |
| $ | 1,472,211 |
| $ | 1,303,235 |
|
| $ | 637,509 |
| $ | 464,331 |
|
Gas |
| 69,147 |
| 60,055 |
| 475,970 |
| 478,358 |
|
| 321,965 |
| 306,354 |
| ||||||
Other |
| 61,481 |
| 41,668 |
| 174,257 |
| 83,390 |
|
| 47,633 |
| 52,671 |
| ||||||
Total Operating Revenues |
| 678,618 |
| 553,797 |
| 2,122,438 |
| 1,864,983 |
|
| 1,007,107 |
| 823,356 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fuel, emission allowances, and purchased power |
| 211,968 |
| 140,307 |
| 512,125 |
| 389,462 |
|
| 205,300 |
| 145,702 |
| ||||||
Gas purchased |
| 31,264 |
| 19,721 |
| 295,135 |
| 290,656 |
|
| 232,006 |
| 207,782 |
| ||||||
Costs of fuel resold |
| 47,310 |
| 28,953 |
| 137,528 |
| 66,327 |
|
| 44,291 |
| 40,986 |
| ||||||
Operation and maintenance |
| 176,088 |
| 153,292 |
| 509,712 |
| 453,213 |
|
| 185,126 |
| 142,072 |
| ||||||
Depreciation |
| 45,747 |
| 45,943 |
| 136,117 |
| 135,806 |
| |||||||||||
Depreciation and amortization |
| 67,918 |
| 65,240 |
| |||||||||||||||
Taxes other than income taxes |
| 51,573 |
| 45,316 |
| 163,448 |
| 158,816 |
|
| 68,192 |
| 59,434 |
| ||||||
Total Operating Expenses |
| 563,950 |
| 433,532 |
| 1,754,065 |
| 1,494,280 |
|
| 802,833 |
| 661,216 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating Income |
| 114,668 |
| 120,265 |
| 368,373 |
| 370,703 |
|
| 204,274 |
| 162,140 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Miscellaneous Income – Net |
| 4,434 |
| 7,204 |
| 11,587 |
| 13,247 |
| |||||||||||
Miscellaneous Income — Net |
| 8,487 |
| 3,523 |
| |||||||||||||||
Interest Expense |
| 26,830 |
| 24,083 |
| 73,632 |
| 68,934 |
|
| 29,680 |
| 22,950 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income Before Taxes |
| 92,272 |
| 103,386 |
| 306,328 |
| 315,016 |
|
| 183,081 |
| 142,713 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income Taxes |
| 29,588 |
| 39,313 |
| 105,354 |
| 118,179 |
|
| 66,718 |
| 58,047 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net Income |
| $ | 62,684 |
| $ | 64,073 |
| $ | 200,974 |
| $ | 196,837 |
|
| $ | 116,363 |
| $ | 84,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preferred Dividend Requirement |
| 211 |
| 211 |
| 634 |
| 634 |
|
| 164 |
| 211 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net Income Applicable to Common Stock |
| $ | 62,473 |
| $ | 63,862 |
| $ | 200,340 |
| $ | 196,203 |
|
| $ | 116,199 |
| $ | 84,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net Income |
| $ | 62,684 |
| $ | 64,073 |
| $ | 200,974 |
| $ | 196,837 |
|
| $ | 116,363 |
| $ | 84,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other Comprehensive Income (Loss), Net of Tax |
| 1,772 |
| (2 | ) | 3,501 |
| 2,881 |
| |||||||||||
Other Comprehensive Income, Net of Tax |
| 1,751 |
| 1,718 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Comprehensive Income |
| $ | 64,456 |
| $ | 64,071 |
| $ | 204,475 |
| $ | 199,718 |
|
| $ | 118,114 |
| $ | 86,384 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.
10
12
THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| March 31 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 8,027 |
| $ | 9,674 |
|
Receivables less accumulated provision for doubtful accounts |
| 307,790 |
| 384,444 |
| ||
Accounts receivable from affiliated companies |
| 104,279 |
| 37,718 |
| ||
Fuel, emission allowances, and supplies |
| 210,905 |
| 225,982 |
| ||
Energy risk management current assets |
| 271,236 |
| 543,787 |
| ||
Prepayments and other |
| 109,757 |
| 177,417 |
| ||
Total Current Assets |
| 1,011,994 |
| 1,379,022 |
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment — at Cost |
|
|
|
|
| ||
Property, plant, and equipment |
| 7,902,076 |
| 7,775,765 |
| ||
Accumulated depreciation |
| 2,851,729 |
| 2,815,852 |
| ||
Net Property, Plant, and Equipment |
| 5,050,347 |
| 4,959,913 |
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Regulatory assets |
| 532,503 |
| 555,798 |
| ||
Energy risk management non-current assets |
| 115,780 |
| 180,197 |
| ||
Other |
| 175,645 |
| 158,913 |
| ||
Total Other Assets |
| 823,928 |
| 894,908 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 6,886,269 |
| $ | 7,233,843 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.
11
THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
| September 30 |
| December 31 |
| ||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 8,353 |
| $ | 4,154 |
|
Notes receivable from affiliated companies |
| 32,748 |
| 121,559 |
| ||
Accounts receivable less accumulated provision for doubtful accounts |
| 545,981 |
| 145,105 |
| ||
Accounts receivable from affiliated companies |
| 81,982 |
| 30,916 |
| ||
Fuel, emission allowances, and supplies |
| 222,571 |
| 199,769 |
| ||
Energy risk management current assets |
| 669,897 |
| 148,866 |
| ||
Prepayments and other |
| 263,541 |
| 54,650 |
| ||
Total Current Assets |
| 1,825,073 |
| 705,019 |
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment – at Cost |
|
|
|
|
| ||
Utility plant in service |
|
|
|
|
| ||
Electric |
| 2,305,398 |
| 2,249,352 |
| ||
Gas |
| 1,236,671 |
| 1,179,764 |
| ||
Common |
| 254,138 |
| 249,576 |
| ||
Total Utility Plant In Service |
| 3,796,207 |
| 3,678,692 |
| ||
Construction work in progress |
| 81,306 |
| 45,762 |
| ||
Total Utility Plant |
| 3,877,513 |
| 3,724,454 |
| ||
Non-regulated property, plant, and equipment |
| 3,792,749 |
| 3,660,226 |
| ||
Accumulated depreciation |
| 2,799,014 |
| 2,694,708 |
| ||
Net Property, Plant, and Equipment |
| 4,871,248 |
| 4,689,972 |
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Regulatory assets |
| 506,063 |
| 609,550 |
| ||
Energy risk management non-current assets |
| 207,759 |
| 47,276 |
| ||
Restricted funds held in trust |
| 72,094 |
| 93,671 |
| ||
Other |
| 136,857 |
| 86,871 |
| ||
Total Other Assets |
| 922,773 |
| 837,368 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 7,619,094 |
| $ | 6,232,359 |
|
|
| March 31 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 426,617 |
| $ | 562,887 |
|
Accounts payable to affiliated companies |
| 82,280 |
| 243,793 |
| ||
Accrued taxes |
| 227,286 |
| 177,551 |
| ||
Accrued interest |
| 32,039 |
| 24,438 |
| ||
Notes payable and other short-term obligations (Note 4) |
| 112,100 |
| 112,100 |
| ||
Notes payable to affiliated companies (Note 4) |
| 222,371 |
| 114,252 |
| ||
Long-term debt due within one year |
| 5,111 |
| 5,042 |
| ||
Energy risk management current liabilities |
| 242,393 |
| 552,105 |
| ||
Other |
| 33,500 |
| 35,795 |
| ||
Total Current Liabilities |
| 1,383,697 |
| 1,827,963 |
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt |
| 1,777,872 |
| 1,638,028 |
| ||
Deferred income taxes |
| 1,058,062 |
| 1,055,093 |
| ||
Unamortized investment tax credits |
| 65,771 |
| 67,229 |
| ||
Accrued pension and other postretirement benefit costs |
| 252,130 |
| 245,950 |
| ||
Regulatory liabilities |
| 161,695 |
| 151,670 |
| ||
Energy risk management non-current liabilities |
| 127,121 |
| 183,678 |
| ||
Other |
| 68,795 |
| 68,315 |
| ||
Total Non-Current Liabilities |
| 3,511,446 |
| 3,409,963 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 4,895,143 |
| 5,237,926 |
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock |
|
|
|
|
| ||
Not subject to mandatory redemption |
| — |
| 20,485 |
| ||
|
|
|
|
|
| ||
Common Stock Equity |
|
|
|
|
| ||
Common stock — $8.50 par value; authorized shares — 120,000,000; outstanding shares — 89,663,086 at March 31, 2006, and December 31, 2005 |
| 762,136 |
| 762,136 |
| ||
Paid-in capital |
| 603,249 |
| 603,249 |
| ||
Retained earnings |
| 671,196 |
| 657,254 |
| ||
Accumulated other comprehensive loss |
| (45,455 | ) | (47,207 | ) | ||
Total Common Stock Equity |
| 1,991,126 |
| 1,975,432 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 6,886,269 |
| $ | 7,233,843 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.
12
13
THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS
|
| September 30 |
| December 31 |
| ||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 873,633 |
| $ | 332,316 |
|
Accounts payable to affiliated companies |
| 119,164 |
| 85,127 |
| ||
Accrued taxes |
| 292,459 |
| 149,010 |
| ||
Accrued interest |
| 26,173 |
| 19,408 |
| ||
Notes payable and other short-term obligations (Note 5) |
| 112,100 |
| 112,100 |
| ||
Notes payable to affiliated companies (Note 5) |
| 204,519 |
| 180,116 |
| ||
Long-term debt due within one year |
| — |
| 150,000 |
| ||
Energy risk management current liabilities |
| 740,692 |
| 120,204 |
| ||
Other |
| 33,191 |
| 33,712 |
| ||
Total Current Liabilities |
| 2,401,931 |
| 1,181,993 |
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt |
| 1,594,617 |
| 1,443,668 |
| ||
Deferred income taxes |
| 972,421 |
| 1,090,897 |
| ||
Unamortized investment tax credits |
| 68,702 |
| 73,120 |
| ||
Accrued pension and other postretirement benefit costs |
| 226,858 |
| 228,058 |
| ||
Regulatory liabilities |
| 186,228 |
| 164,846 |
| ||
Energy risk management non-current liabilities |
| 216,727 |
| 40,184 |
| ||
Other |
| 58,870 |
| 70,395 |
| ||
Total Non-Current Liabilities |
| 3,324,423 |
| 3,111,168 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 5,726,354 |
| 4,293,161 |
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock |
|
|
|
|
| ||
Not subject to mandatory redemption |
| 20,485 |
| 20,485 |
| ||
|
|
|
|
|
| ||
Common Stock Equity |
|
|
|
|
| ||
Common stock – $8.50 par value; authorized shares – 120,000,000; outstanding shares – 89,663,086 at September 30, 2005, and December 31, 2004 |
| 762,136 |
| 762,136 |
| ||
Paid-in capital |
| 584,176 |
| 584,176 |
| ||
Retained earnings |
| 560,274 |
| 610,232 |
| ||
Accumulated other comprehensive loss |
| (34,331 | ) | (37,831 | ) | ||
Total Common Stock Equity |
| 1,872,255 |
| 1,918,713 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 7,619,094 |
| $ | 6,232,359 |
|
|
| Quarter Ended |
| ||||
|
| March 31 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
| $ | 116,363 |
| $ | 84,666 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 67,918 |
| 65,240 |
| ||
Deferred income taxes and investment tax credits — net |
| 6,793 |
| (13,253 | ) | ||
Change in net position of energy risk management activities |
| (29,301 | ) | 19,869 |
| ||
Allowance for equity funds used during construction |
| (570 | ) | (130 | ) | ||
Regulatory asset/liability deferrals |
| (799 | ) | 950 |
| ||
Regulatory asset amortization |
| 6,903 |
| 3,773 |
| ||
Accrued pension and other postretirement benefit costs |
| 6,180 |
| 5,746 |
| ||
Cost of removal |
| (1,695 | ) | (1,294 | ) | ||
Changes in current assets and current liabilities: |
|
|
|
|
| ||
Accounts and notes receivable |
| 12,038 |
| 14,775 |
| ||
Fuel, emission allowances, and supplies |
| 15,077 |
| 14,169 |
| ||
Prepayments |
| 67,659 |
| (24,688 | ) | ||
Accounts payable |
| (240,236 | ) | 8,983 |
| ||
Accrued taxes and interest |
| 57,336 |
| 52,063 |
| ||
Other assets |
| (23,232 | ) | (801 | ) | ||
Other liabilities |
| (135 | ) | 7,346 |
| ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 60,299 |
| 237,414 |
| ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Construction expenditures (less allowance for equity funds used during construction) |
| (134,356 | ) | (98,580 | ) | ||
Withdrawal of restricted funds held in trust |
| 8,137 |
| 7,822 |
| ||
Other investments |
| — |
| 103 |
| ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (126,219 | ) | (90,655 | ) | ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Change in short-term debt, including net affiliate notes |
| 48,627 |
| (103,297 | ) | ||
Issuance of long-term debt |
| 139,806 |
| — |
| ||
Redemption of long-term debt |
| (1,255 | ) | — |
| ||
Retirement of preferred stock |
| (20,485 | ) | — |
| ||
Dividends on preferred stock |
| (164 | ) | — |
| ||
Dividends on common stock |
| (102,256 | ) | (38,296 | ) | ||
|
|
|
|
|
| ||
Net cash provided by (used in) financing activities |
| 64,273 |
| (141,593 | ) | ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| (1,647 | ) | 5,166 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 9,674 |
| 4,154 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 8,027 |
| $ | 9,320 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest (net of amount capitalized) |
| $ | 20,505 |
| $ | 20,187 |
|
Income taxes |
| $ | 454 |
| $ | 8,891 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.
13
14
PSI ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSINCOME AND COMPREHENSIVE INCOME
|
| Year to Date |
| ||||
|
| September 30 |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
| $ | 200,974 |
| $ | 196,837 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
| 136,117 |
| 135,806 |
| ||
Deferred income taxes and investment tax credits – net |
| (32,449 | ) | 47,546 |
| ||
Change in net position of energy risk management activities |
| 115,518 |
| (32,032 | ) | ||
Allowance for equity funds used during construction |
| (804 | ) | (699 | ) | ||
Regulatory asset/liability deferrals |
| (1,342 | ) | (11,469 | ) | ||
Regulatory assets amortization |
| 69,501 |
| 41,688 |
| ||
Accrued pension and other postretirement benefit costs |
| (1,200 | ) | (20,287 | ) | ||
Cost of removal |
| (4,969 | ) | (5,490 | ) | ||
Changes in current assets and current liabilities: |
|
|
|
|
| ||
Accounts and notes receivable |
| (363,131 | ) | (20,238 | ) | ||
Fuel, emission allowances, and supplies |
| (76,742 | ) | (49,786 | ) | ||
Prepayments |
| (208,887 | ) | (36,751 | ) | ||
Accounts payable |
| 494,516 |
| 11,201 |
| ||
Accrued taxes and interest |
| 110,459 |
| 31,839 |
| ||
Other assets |
| 586 |
| (14,009 | ) | ||
Other liabilities |
| (2,083 | ) | 5,973 |
| ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 436,064 |
| 280,129 |
| ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Change in short-term debt, including net affiliate notes |
| 24,403 |
| 196,383 |
| ||
Redemption of long-term debt |
| — |
| (110,000 | ) | ||
Dividends on preferred stock |
| (634 | ) | (634 | ) | ||
Dividends on common stock |
| (169,459 | ) | (168,509 | ) | ||
|
|
|
|
|
| ||
Net cash used in financing activities |
| (145,690 | ) | (82,760 | ) | ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Construction expenditures (less allowance for equity funds used during construction) |
| (309,385 | ) | (219,307 | ) | ||
Withdrawal of restricted funds held in trust |
| 23,153 |
| — |
| ||
Other investments |
| 57 |
| 15,321 |
| ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (286,175 | ) | (203,986 | ) | ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| 4,199 |
| (6,617 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 4,154 |
| 15,842 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 8,353 |
| $ | 9,225 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest (net of amount capitalized) |
| $ | 69,717 |
| $ | 65,629 |
|
Income taxes |
| $ | 12,370 |
| $ | 16,646 |
|
|
| Quarter Ended |
| ||||
|
| March 31 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Operating Revenues |
|
|
|
|
| ||
Electric |
| $ | 485,711 |
| $ | 425,408 |
|
|
|
|
|
|
| ||
Operating Expenses |
|
|
|
|
| ||
Fuel, emission allowances, and purchased power |
| 201,068 |
| 132,036 |
| ||
Operation and maintenance |
| 136,862 |
| 113,713 |
| ||
Depreciation and amortization |
| 74,369 |
| 73,704 |
| ||
Taxes other than income taxes |
| 15,504 |
| 15,661 |
| ||
Total Operating Expenses |
| 427,803 |
| 335,114 |
| ||
|
|
|
|
|
| ||
Operating Income |
| 57,908 |
| 90,294 |
| ||
|
|
|
|
|
| ||
Miscellaneous Income — Net |
| 8,450 |
| 3,377 |
| ||
Interest Expense |
| 34,929 |
| 24,765 |
| ||
|
|
|
|
|
| ||
Income Before Taxes |
| 31,429 |
| 68,906 |
| ||
|
|
|
|
|
| ||
Income Taxes |
| 12,682 |
| 26,561 |
| ||
|
|
|
|
|
| ||
Net Income |
| $ | 18,747 |
| $ | 42,345 |
|
|
|
|
|
|
| ||
Preferred Dividend Requirement |
| 113 |
| 647 |
| ||
|
|
|
|
|
| ||
Net Income Applicable to Common Stock |
| $ | 18,634 |
| $ | 41,698 |
|
|
|
|
|
|
| ||
Net Income |
| $ | 18,747 |
| $ | 42,345 |
|
|
|
|
|
|
| ||
Other Comprehensive Income (Loss), Net of Tax |
| 8,004 |
| (1,195 | ) | ||
|
|
|
|
|
| ||
Comprehensive Income |
| $ | 26,751 |
| $ | 41,150 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric CompanyPSI Energy, Inc. are an integral part of these condensed consolidated financial statements.
15
PSI ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETSCONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
| Quarter Ended |
| Year to Date |
| ||||||||
|
| September 30 |
| September 30 |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
| (dollars in thousands) |
| ||||||||||
|
| (unaudited) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Revenues |
|
|
|
|
|
|
|
|
| ||||
Electric |
| $ | 572,930 |
| $ | 480,089 |
| $ | 1,426,795 |
| $ | 1,310,812 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
| ||||
Fuel, emission allowances, and purchased power |
| 234,552 |
| 183,644 |
| 500,668 |
| 493,689 |
| ||||
Operation and maintenance |
| 113,006 |
| 118,914 |
| 356,045 |
| 350,467 |
| ||||
Depreciation |
| 65,860 |
| 54,675 |
| 199,155 |
| 158,565 |
| ||||
Taxes other than income taxes |
| 12,126 |
| 10,481 |
| 38,059 |
| 41,014 |
| ||||
Total Operating Expenses |
| 425,544 |
| 367,714 |
| 1,093,927 |
| 1,043,735 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Income |
| 147,386 |
| 112,375 |
| 332,868 |
| 267,077 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Miscellaneous Income – Net |
| 5,481 |
| 2,213 |
| 15,973 |
| 5,777 |
| ||||
Interest Expense |
| 29,360 |
| 24,864 |
| 81,037 |
| 66,489 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income Before Taxes |
| 123,507 |
| 89,724 |
| 267,804 |
| 206,365 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income Taxes |
| 57,500 |
| 41,237 |
| 116,723 |
| 91,626 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 66,007 |
| $ | 48,487 |
| $ | 151,081 |
| $ | 114,739 |
|
|
|
|
|
|
|
|
|
|
| ||||
Preferred Dividend Requirement |
| 391 |
| 647 |
| 1,685 |
| 1,940 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income Applicable to Common Stock |
| $ | 65,616 |
| $ | 47,840 |
| $ | 149,396 |
| $ | 112,799 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 66,007 |
| $ | 48,487 |
| $ | 151,081 |
| $ | 114,739 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other Comprehensive Income (Loss), Net of Tax |
| 6,676 |
| (614 | ) | 4,946 |
| (248 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive Income |
| $ | 72,683 |
| $ | 47,873 |
| $ | 156,027 |
| $ | 114,491 |
|
|
| March 31 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 28,506 |
| $ | 31,860 |
|
Restricted deposits |
| 35,284 |
| 32,649 |
| ||
Receivables less accumulated provision for doubtful accounts |
| 77,435 |
| 142,280 |
| ||
Accounts receivable from affiliated companies |
| 24,296 |
| 75,698 |
| ||
Fuel, emission allowances, and supplies |
| 182,114 |
| 170,345 |
| ||
Prepayments and other |
| 47,895 |
| 42,415 |
| ||
Total Current Assets |
| 395,530 |
| 495,247 |
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment — at Cost |
|
|
|
|
| ||
Property, plant, and equipment |
| 7,384,372 |
| 7,289,552 |
| ||
Accumulated depreciation |
| 2,484,665 |
| 2,456,183 |
| ||
Net Property, Plant, and Equipment |
| 4,899,707 |
| 4,833,369 |
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Regulatory assets |
| 513,008 |
| 514,056 |
| ||
Other |
| 366,215 |
| 399,510 |
| ||
Total Other Assets |
| 879,223 |
| 913,566 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 6,174,460 |
| $ | 6,242,182 |
|
|
|
|
|
|
|
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.
1716
PSI ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| September 30 |
| December 31 |
| ||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 30,540 |
| $ | 10,794 |
|
Restricted deposits |
| 28,926 |
| 22,063 |
| ||
Notes receivable from affiliated companies |
| 26,996 |
| 72,958 |
| ||
Accounts receivable less accumulated provision for doubtful accounts |
| 90,499 |
| 31,177 |
| ||
Accounts receivable from affiliated companies |
| 9,777 |
| 437 |
| ||
Fuel, emission allowances, and supplies |
| 173,836 |
| 108,793 |
| ||
Prepayments and other |
| 19,445 |
| 11,804 |
| ||
Total Current Assets |
| 380,019 |
| 258,026 |
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment – at Cost |
|
|
|
|
| ||
Utility plant in service |
| 6,846,723 |
| 6,397,776 |
| ||
Construction work in progress |
| 316,401 |
| 287,925 |
| ||
Total Utility Plant |
| 7,163,124 |
| 6,685,701 |
| ||
Accumulated depreciation |
| 2,415,964 |
| 2,284,932 |
| ||
Net Property, Plant, and Equipment |
| 4,747,160 |
| 4,400,769 |
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Regulatory assets |
| 515,215 |
| 420,783 |
| ||
Other investments |
| 74,604 |
| 73,396 |
| ||
Restricted funds held in trust |
| 193,628 |
| 264,335 |
| ||
Other |
| 84,667 |
| 32,587 |
| ||
Total Other Assets |
| 868,114 |
| 791,101 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 5,995,293 |
| $ | 5,449,896 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
| ||
|
| March 31 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 92,854 |
| $ | 116,994 |
|
Accounts payable to affiliated companies |
| 34,168 |
| 53,455 |
| ||
Accrued taxes |
| 63,412 |
| 33,713 |
| ||
Accrued interest |
| 42,413 |
| 34,530 |
| ||
Notes payable and other short-term obligations (Note 4) |
| 185,500 |
| 185,500 |
| ||
Notes payable to affiliated companies (Note 4) |
| 195,878 |
| 249,712 |
| ||
Long-term debt due within one year |
| 329,428 |
| 328,149 |
| ||
Other |
| 63,663 |
| 56,271 |
| ||
Total Current Liabilities |
| 1,007,316 |
| 1,058,324 |
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt |
| 1,889,827 |
| 1,891,713 |
| ||
Deferred income taxes |
| 578,683 |
| 609,569 |
| ||
Unamortized investment tax credits |
| 22,906 |
| 23,624 |
| ||
Accrued pension and other postretirement benefit costs |
| 233,485 |
| 227,435 |
| ||
Regulatory liabilities |
| 403,786 |
| 394,377 |
| ||
Other |
| 63,598 |
| 63,919 |
| ||
Total Non-Current Liabilities |
| 3,192,285 |
| 3,210,637 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 4,199,601 |
| 4,268,961 |
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock |
|
|
|
|
| ||
Not subject to mandatory redemption |
| 11,258 |
| 11,258 |
| ||
|
|
|
|
|
| ||
Common Stock Equity |
|
|
|
|
| ||
Common stock — without par value; $.01 stated value; authorized shares — 60,000,000; outstanding shares — 53,913,701 at March 31, 2006, and December 31, 2005 |
| 539 |
| 539 |
| ||
Paid-in capital |
| 840,692 |
| 840,692 |
| ||
Retained earnings |
| 1,141,826 |
| 1,148,192 |
| ||
Accumulated other comprehensive loss |
| (19,456 | ) | (27,460 | ) | ||
Total Common Stock Equity |
| 1,963,601 |
| 1,961,963 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 6,174,460 |
| $ | 6,242,182 |
|
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.
17
PSI ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| Quarter Ended |
| ||||
|
| March 31 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
| $ | 18,747 |
| $ | 42,345 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 74,369 |
| 73,704 |
| ||
Deferred income taxes and investment tax credits — net |
| (24,601 | ) | 10,158 |
| ||
Allowance for equity funds used during construction |
| (2,494 | ) | (1,857 | ) | ||
Regulatory asset/liability deferrals |
| (20,666 | ) | (28,464 | ) | ||
Regulatory asset amortization |
| 6,464 |
| 4,256 |
| ||
Accrued pension and other postretirement benefit costs |
| 6,054 |
| 6,078 |
| ||
Cost of removal |
| (3,786 | ) | (4,181 | ) | ||
Changes in current assets and current liabilities: |
|
|
|
|
| ||
Accounts and notes receivable |
| 116,247 |
| 44,102 |
| ||
Fuel, emission allowances, and supplies |
| (11,769 | ) | (3,293 | ) | ||
Prepayments |
| (213 | ) | 1,929 |
| ||
Accounts payable |
| (43,428 | ) | (41,126 | ) | ||
Accrued taxes and interest |
| 37,582 |
| 20,272 |
| ||
Other assets |
| (2,234 | ) | (3,877 | ) | ||
Other liabilities |
| 8,418 |
| (330 | ) | ||
Net cash provided by operating activities |
| 158,690 |
| 119,716 |
| ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Construction expenditures (less allowance for equity funds used during construction) |
| (119,180 | ) | (113,801 | ) | ||
Withdrawal of restricted funds held in trust |
| 37,869 |
| 25,276 |
| ||
Other investments |
| (1,028 | ) | (125 | ) | ||
Net cash used in investing activities |
| (82,339 | ) | (88,650 | ) | ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Change in short-term debt, including net affiliate notes |
| (53,834 | ) | 13,794 |
| ||
Redemption of long-term debt |
| (759 | ) | — |
| ||
Dividends on preferred stock |
| (112 | ) | (647 | ) | ||
Dividends on common stock |
| (25,000 | ) | (51,853 | ) | ||
Net cash used in financing activities |
| (79,705 | ) | (38,706 | ) | ||
|
|
|
|
|
| ||
Net decrease in cash and cash equivalents |
| (3,354 | ) | (7,640 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 31,860 |
| 10,794 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 28,506 |
| $ | 3,154 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest (net of amount capitalized) |
| $ | 29,297 |
| $ | 29,435 |
|
Income taxes |
| $ | 12,495 |
| $ | 9,850 |
|
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.
18
PSI ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| September 30 |
| December 31 |
| ||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 126,725 |
| $ | 65,151 |
|
Accounts payable to affiliated companies |
| 81,547 |
| 38,292 |
| ||
Accrued taxes |
| 157,400 |
| 65,871 |
| ||
Accrued interest |
| 30,912 |
| 27,532 |
| ||
Notes payable and other short-term obligations (Note 5) |
| 135,500 |
| 135,500 |
| ||
Notes payable to affiliated companies (Note 5) |
| 373,682 |
| 130,580 |
| ||
Long-term debt due within one year |
| 326,166 |
| 50,000 |
| ||
Other |
| 56,034 |
| 33,326 |
| ||
Total Current Liabilities |
| 1,287,966 |
| 546,252 |
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt |
| 1,468,641 |
| 1,824,219 |
| ||
Deferred income taxes |
| 622,950 |
| 638,061 |
| ||
Unamortized investment tax credits |
| 24,368 |
| 26,603 |
| ||
Accrued pension and other postretirement benefit costs |
| 206,449 |
| 209,992 |
| ||
Regulatory liabilities |
| 392,292 |
| 392,573 |
| ||
Other |
| 72,364 |
| 88,665 |
| ||
Total Non-Current Liabilities |
| 2,787,064 |
| 3,180,113 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 4,075,030 |
| 3,726,365 |
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock |
|
|
|
|
| ||
Not subject to mandatory redemption |
| 11,258 |
| 42,333 |
| ||
|
|
|
|
|
| ||
Common Stock Equity |
|
|
|
|
| ||
Common stock – without par value; $.01 stated value; authorized shares – 60,000,000; outstanding shares – 53,913,701 at September 30, 2005, and December 31, 2004 |
| 539 |
| 539 |
| ||
Paid-in capital |
| 826,019 |
| 626,019 |
| ||
Retained earnings |
| 1,101,479 |
| 1,078,617 |
| ||
Accumulated other comprehensive loss |
| (19,032 | ) | (23,977 | ) | ||
Total Common Stock Equity |
| 1,909,005 |
| 1,681,198 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 5,995,293 |
| $ | 5,449,896 |
|
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.
19
PSI ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| Year to Date |
| ||||
|
| September 30 |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
| $ | 151,081 |
| $ | 114,739 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
| 199,155 |
| 158,565 |
| ||
Deferred income taxes and investment tax credits – net |
| 13,225 |
| 48,045 |
| ||
Allowance for equity funds used during construction |
| (5,238 | ) | (423 | ) | ||
Regulatory asset/liability deferrals |
| (143,891 | ) | (27,646 | ) | ||
Regulatory assets amortization |
| 33,102 |
| 32,488 |
| ||
Accrued pension and other postretirement benefit costs |
| (3,543 | ) | (7,493 | ) | ||
Cost of removal |
| (12,530 | ) | (7,547 | ) | ||
Changes in current assets and current liabilities: |
|
|
|
|
| ||
Accounts and notes receivable |
| (22,700 | ) | 25,120 |
| ||
Fuel, emission allowances, and supplies |
| (110,059 | ) | 21,300 |
| ||
Prepayments |
| 253 |
| (820 | ) | ||
Accounts payable |
| 89,716 |
| (3,147 | ) | ||
Accrued taxes and interest |
| 56,346 |
| 2,855 |
| ||
Other assets |
| (38,164 | ) | 2,856 |
| ||
Other liabilities |
| 18,733 |
| (7,228 | ) | ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 225,486 |
| 351,664 |
| ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Change in short-term debt, including net affiliate notes |
| 243,102 |
| (34,857 | ) | ||
Issuance of long-term debt |
| 48,656 |
| — |
| ||
Redemption of long-term debt |
| (130,000 | ) | — |
| ||
Contribution from parent |
| 200,000 |
| — |
| ||
Retirement of preferred stock |
| (31,075 | ) | — |
| ||
Dividends on preferred stock |
| (1,862 | ) | (1,940 | ) | ||
Dividends on common stock |
| (111,245 | ) | (84,709 | ) | ||
|
|
|
|
|
| ||
Net cash provided by (used in) financing activities |
| 217,576 |
| (121,506 | ) | ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Construction expenditures (less allowance for equity funds used during construction) |
| (397,655 | ) | (217,413 | ) | ||
Withdrawal of restricted funds held in trust |
| 74,800 |
| 14,861 |
| ||
Acquisitions and other investments |
| (100,461 | ) | (2,063 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (423,316 | ) | (204,615 | ) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
| 19,746 |
| 25,543 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 10,794 |
| 6,565 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 30,540 |
| $ | 32,108 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest (net of amount capitalized) |
| $ | 85,455 |
| $ | 74,245 |
|
Income taxes |
| $ | 40,450 |
| $ | 28,302 |
|
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.
20
THE UNION LIGHT, HEAT AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
| Quarter Ended |
| Year to Date |
| ||||||||
|
| September 30 |
| September 30 |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
| (dollars in thousands) |
| ||||||||||
|
| (unaudited) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Revenues |
|
|
|
|
|
|
|
|
| ||||
Electric |
| $ | 71,994 |
| $ | 63,751 |
| $ | 183,002 |
| $ | 176,698 |
|
Gas |
| 13,439 |
| 11,119 |
| 89,887 |
| 85,243 |
| ||||
Total Operating Revenues |
| 85,433 |
| 74,870 |
| 272,889 |
| 261,941 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
| ||||
Electricity purchased from parent company for resale |
| 49,028 |
| 45,461 |
| 128,464 |
| 124,768 |
| ||||
Gas purchased |
| 6,573 |
| 5,214 |
| 57,397 |
| 53,528 |
| ||||
Operation and maintenance |
| 16,978 |
| 14,893 |
| 50,182 |
| 42,448 |
| ||||
Depreciation |
| 5,260 |
| 4,992 |
| 15,547 |
| 14,944 |
| ||||
Taxes other than income taxes |
| 534 |
| (567 | ) | 3,618 |
| 2,110 |
| ||||
Total Operating Expenses |
| 78,373 |
| 69,993 |
| 255,208 |
| 237,798 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Income |
| 7,060 |
| 4,877 |
| 17,681 |
| 24,143 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Miscellaneous Income – Net |
| 656 |
| 294 |
| 2,219 |
| 1,035 |
| ||||
Interest Expense |
| 1,703 |
| 1,263 |
| 5,150 |
| 3,760 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income Before Taxes |
| 6,013 |
| 3,908 |
| 14,750 |
| 21,418 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income Taxes |
| 2,379 |
| 1,608 |
| 5,409 |
| 8,139 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 3,634 |
| $ | 2,300 |
| $ | 9,341 |
| $ | 13,279 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other Comprehensive Loss, Net of Tax |
| (17 | ) | — |
| (17 | ) | — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive Income |
| $ | 3,617 |
| $ | 2,300 |
| $ | 9,324 |
| $ | 13,279 |
|
The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.
22
THE UNION LIGHT, HEAT AND POWER COMPANY
|
| September 30 |
| December 31 |
| ||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
| ||||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 7,888 |
| $ | 4,197 |
|
Notes receivable from affiliated companies |
| 4,800 |
| 20,675 |
| ||
Accounts receivable less accumulated provision for doubtful accounts |
| 1,388 |
| 1,451 |
| ||
Accounts receivable from affiliated companies |
| 537 |
| 5,671 |
| ||
Inventory and supplies |
| 11,132 |
| 8,500 |
| ||
Prepayments and other |
| 883 |
| 285 |
| ||
Total Current Assets |
| 26,628 |
| 40,779 |
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment – at Cost |
|
|
|
|
| ||
Utility plant in service |
|
|
|
|
| ||
Electric |
| 293,347 |
| 285,828 |
| ||
Gas |
| 270,895 |
| 256,667 |
| ||
Common |
| 42,071 |
| 42,176 |
| ||
Total Utility Plant In Service |
| 606,313 |
| 584,671 |
| ||
Construction work in progress |
| 14,275 |
| 6,070 |
| ||
Total Utility Plant |
| 620,588 |
| 590,741 |
| ||
Accumulated depreciation |
| 186,471 |
| 176,726 |
| ||
Net Property, Plant, and Equipment |
| 434,117 |
| 414,015 |
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Regulatory assets |
| 6,786 |
| 10,070 |
| ||
Other |
| 2,628 |
| 2,801 |
| ||
Total Other Assets |
| 9,414 |
| 12,871 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 470,159 |
| $ | 467,665 |
|
The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.
23
THE UNION LIGHT, HEAT AND POWER COMPANY
CONDENSED BALANCE SHEETS
|
| September 30 |
| December 31 |
| ||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
| ||||
LIABILITIES AND SHAREHOLDER’S EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 5,441 |
| $ | 16,028 |
|
Accounts payable to affiliated companies |
| 19,537 |
| 22,236 |
| ||
Accrued interest |
| 1,644 |
| 1,370 |
| ||
Notes payable to affiliated companies (Note 5) |
| 9,563 |
| 11,246 |
| ||
Other |
| 10,094 |
| 7,009 |
| ||
Total Current Liabilities |
| 46,279 |
| 57,889 |
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt |
| 94,392 |
| 94,340 |
| ||
Deferred income taxes |
| 60,592 |
| 58,422 |
| ||
Unamortized investment tax credits |
| 2,436 |
| 2,626 |
| ||
Accrued pension and other postretirement benefit costs |
| 17,535 |
| 17,762 |
| ||
Regulatory liabilities |
| 34,392 |
| 29,979 |
| ||
Other |
| 12,696 |
| 14,136 |
| ||
Total Non-Current Liabilities |
| 222,043 |
| 217,265 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 268,322 |
| 275,154 |
| ||
|
|
|
|
|
| ||
Common Stock Equity |
|
|
|
|
| ||
Common stock – $15.00 par value; authorized shares – 1,000,000; outstanding shares – 585,333 at September 30, 2005, and December 31, 2004 |
| 8,780 |
| 8,780 |
| ||
Paid-in capital |
| 23,455 |
| 23,455 |
| ||
Retained earnings |
| 170,904 |
| 161,562 |
| ||
Accumulated other comprehensive loss |
| (1,302 | ) | (1,286 | ) | ||
Total Common Stock Equity |
| 201,837 |
| 192,511 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholder’s Equity |
| $ | 470,159 |
| $ | 467,665 |
|
The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.
24
THE UNION LIGHT, HEAT AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
|
| Year to Date |
| ||||
|
| September 30 |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
| $ | 9,341 |
| $ | 13,279 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
| 15,547 |
| 14,944 |
| ||
Deferred income taxes and investment tax credits – net |
| 4,296 |
| 3,865 |
| ||
Allowance for equity funds used during construction |
| (445 | ) | 12 |
| ||
Regulatory asset/liability deferrals |
| 944 |
| 2,851 |
| ||
Regulatory assets amortization |
| 2,697 |
| 1,046 |
| ||
Accrued pension and other postretirement benefit costs |
| (227 | ) | (2,124 | ) | ||
Cost of removal |
| (858 | ) | (1,267 | ) | ||
Changes in current assets and current liabilities: |
|
|
|
|
| ||
Accounts and notes receivable |
| 21,072 |
| 17,364 |
| ||
Inventory and supplies |
| (2,632 | ) | (2,853 | ) | ||
Prepayments |
| (598 | ) | (148 | ) | ||
Accounts payable |
| (13,286 | ) | (12,716 | ) | ||
Accrued taxes and interest |
| 3,398 |
| 5,273 |
| ||
Other assets |
| 596 |
| 409 |
| ||
Other liabilities |
| (2,221 | ) | (1,178 | ) | ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 37,624 |
| 38,757 |
| ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Change in short-term debt, including net affiliate notes |
| (1,683 | ) | (8,338 | ) | ||
|
|
|
|
|
| ||
Net cash used in financing activities |
| (1,683 | ) | (8,338 | ) | ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Construction expenditures (less allowance for equity funds used during construction) |
| (32,250 | ) | (24,619 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (32,250 | ) | (24,619 | ) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
| 3,691 |
| 5,800 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 4,197 |
| 1,899 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 7,888 |
| $ | 7,699 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest (net of amount capitalized) |
| $ | 4,638 |
| $ | 3,814 |
|
Income taxes |
| $ | — |
| $ | 4 |
|
The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.
25
NOTES TO CONDENSED FINANCIAL STATEMENTS
2619
NOTES TO CONDENSED FINANCIAL STATEMENTS
In this report Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we,” “our,” or “us.” In addition, when discussing Cinergy’s financial information, it necessarily includes the results of The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), The Union Light, Heat and Power Company (ULH&P)(ULH&P) and all of Cinergy’s other consolidated subsidiaries. When discussing CG&E’s financial information, it necessarily includes the results of ULH&P and all of CG&E’s other consolidated subsidiaries.
1. Organization and Summary of Significant Accounting Policies
(a) Pending Merger
with Duke
On May 8, 2005,In March 2006, Cinergy and Duke, a North Carolina corporation, received final approvals in connection with the merger from Duke and Cinergy shareholders, the North Carolina Utilities Commission (NCUC), and the Indiana Utility Regulatory Commission (IURC) and effective April 3, 2006, Cinergy Corp. entered into an agreement and plan ofconsummated the merger with Duke Energy Corporation (Duke), a North Carolina corporation, whereby Cinergy Corp. will be merged with Duke. Under the merger agreement, each share of Cinergy Corp. common stock will bewas converted into 1.56 shares of common stock of the newly formed company, Duke Energy Holding Corp., a Delaware Corporation (Duke Energy Holding) (subsequently renamed Duke Energy Corporation).
Duke and Cinergy believe that the combination will provide substantial strategic and financial benefits to their shareholders, employees and customers, including:
· increased financial strength and flexibility;
· stronger utility business platform;
· greater scale and fuel diversity, as well as improved operational efficiencies for the merchant generation business;
· broadened electric distribution platform;
· improved reliability and customer service through the sharing of best practices;
· increased scale and scope of the electric and gas businesses with stand-alone strength;
· complementary positions in the midwest;
· greater customer diversity;
· combined expertise; and
· significant cost savings synergies.
As a condition to the merger approval, the Public Utilities Commission of Ohio (PUCO) and the Kentucky Public Service Commission (KPSC) required that certain merger related savings be refunded to customers in each service territory and provided additional conditions that the new company would have to meet. While the merger itself was not subject to approval by the IURC, the IURC approved, subject to similar conditions, certain affiliate agreements in connection with the merger. Key elements of these provisions were:
·CG&E will provide a rate credit of approximately $15 million for one year to facilitate economic development in a time of increasing rates and a credit of approximately $21 million to CG&E’s gas and electric customers in Ohio for one year, with both credits beginning January 1, 2006.
In April 2006, The Office of the Ohio Consumers’ Counsel (OCC) filed a Notice of Appeal with the Supreme Court of Ohio, requesting the Court remand the PUCO’s merger agreement has beenapproval for a full evidentiary hearing. The Office of the Ohio Consumers’ Counsel alleges that the PUCO committed reversible error on both procedural and substantive grounds, in among other things, failing to set the matter for a full evidentiary hearing, failing to consider evidence regarding the transfer of the Duke Energy North America (DENA) assets to CG&E, and failing to lift the stay on discovery. CG&E and the OCC have resolved this matter through settlement and we expect the OCC to withdraw its appeal.
·PSI will provide a rate credit of $40 million to PSI customers over a one year period and $5 million for low-income energy assistance and clean coal technology. In April 2006, Interveners, Citizens Action Coalition of Indiana, Inc., filed a Verified Petition for Rehearing and Reconsideration claiming that PSI
should be ordered to provide an additional $5 million in rate credits to customers to be consistent with the NCUC order. An order on the Petition is expected in the second quarter of 2006.
· ULH&P will provide $7.6 million in rate credits to ULH&P customers over five years, ending when new rates are established in the next rate case after January 1, 2008.
In addition, the Federal Energy Regulatory Commission (FERC) approved by both companies’ Boardsthe merger without conditions. On January 19, 2006, Public Citizen’s Energy Program, Citizen’s Action Coalition of Directors. ConsummationIndiana, Ohio Partners for Affordable Energy and Southern Alliance for Clean Energy requested rehearing of the FERC approval. On February 21, 2006, the FERC issued an order granting rehearing of FERC’s order for further consideration.
The consummation of the merger triggered certain “change in control” provisions that provided enhanced, and/or accelerated benefits to management level employees in the event of a qualifying transaction. See Note 2(b)(iii) for additional information on these payments.
Purchase price allocation and goodwill
Duke has been determined to be the acquirer and Cinergy the acquiree under generally accepted accounting principles. The merger is subjectbeing recorded using the purchase method of accounting whereby the total purchase price of approximately $9 billion is being allocated to customary conditions, including, among others, the approvalCinergy’s identifiable tangible and intangible assets acquired and liabilities assumed based on their fair values. Cinergy Corp.’s results of operations will be included in Duke Energy Holding’s results beginning April 2006.
The allocation of the shareholderspurchase price to the net assets of both companiesCinergy and the approvalsresulting goodwill determination are not yet complete. However, preliminary indications are that the acquisition will result in approximately $4 billion of various regulatory authorities. See Note 13 for further information regardinggoodwill.
Based on management’s review and analysis of relevant Securities and Exchange Commission (SEC) regulations, Cinergy expects the pending merger.
impacts of purchase accounting, including goodwill, to be pushed down and recorded on the financial statements of Cinergy. Management also expects that a portion of the purchase price will be pushed down and recorded on the financial statements of CG&E. Since the merger did not occur until April 2006, all impacts of push-down accounting will be implemented in the second quarter financial statements of Cinergy and CG&E. Our review of SEC regulations has indicated that PSI’s financial statements are not required to use push-down accounting and management does not anticipate electing to do so.
(b) Presentation
Financial Statements
Our Condensed Financial Statements reflect all adjustments (which include normal, recurring adjustments) necessary in the opinion of the registrants for a fair presentation of the interim results. These results are not necessarily indicative of results for a full year. These statements should be read in conjunction with the Financial Statements and the notes thereto included in the registrants’ combined Form 10-K for the year ended December 31, 2004 (20042005 (2005 10-K). CertainWe have restated certain prior-year amounts in Cinergy’s financial statements, including cash flows, to reflect the impact of discontinued operations in 2005 and 2006. For a further discussion of discontinued operations, see Note 8. Also, certain amounts in the 20042005 Condensed Financial Statements have been reclassified to conform to the 20052006 presentation.
Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. Key estimates and judgments include:
•· Valuing derivative contracts used in our energy marketing and trading activities;
•· Evaluating the regulatory recoverability of various costs;
•· Providing reserves for contingencies, including legal, environmental, and income taxes; and
•· Evaluating various non-regulated fixed assets and investments for impairment.
These estimates and judgments are discussed more fully in “Critical Accounting Estimates” in our 20042005 10-K. Actual results could differ, as these estimates and assumptions involve judgment about future events or performance.
(c) Revenue Recognition
(i) Utility Revenues
CG&E, PSI, and ULH&PPSI (collectively, our utility operating companies) record Operating Revenues for electric and gas service when delivered to customers. Customers are billed throughout the month as both gas and electric meters are read. We recognize revenues for retail energy sales that have not yet been billed, but where gas or electricity has been consumed. This is termed “unbilled revenues” and is a widely recognized and accepted practice for utilities. In making our estimates of unbilled revenues, we use systems that consider various factors, including weather, in our calculation of retail customer consumption at the end of each month. Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different results will occur in future periods when these amounts are subsequently billed.
27
Unbilled revenues for Cinergy, CG&E, PSI, and ULH&PPSI as of September 30,March 31, 2006 and 2005, and 2004, were as follows:
|
| 2005 |
| 2004 |
| ||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
Cinergy |
| $ | 152 |
| $ | 137 |
|
CG&E and subsidiaries |
| 80 |
| 68 |
| ||
PSI |
| 72 |
| 69 |
| ||
ULH&P |
| 13 |
| 12 |
| ||
(ii) Energy Marketing and Trading Revenues
We market and trade electricity, natural gas, and other energy-related products. Many of the contracts associated with these products qualify as derivatives in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133). We designate derivative transactions as either trading or non-trading at the time they are originated in accordance with Emerging Issues Task Force Issue 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities. Trading contracts are reported on a net basis and non-trading contracts are reported on a gross basis. Net reporting requires presentation of realized and unrealized gains and losses on trading derivatives on a net basis in Operating Revenues. Gross reporting requires presentation of sales contracts in Operating Revenues and purchase contracts in Fuel, emission allowances, and purchased power expense or Gas purchased expense.
(iii) Other Operating Revenues
Cinergy and CG&E recognize revenue from coal origination, which represents marketing of physical coal. These revenues are included in Other Operating Revenues on the Condensed Consolidated Statements of Income. Other Operating Revenues for Cinergy also includes sales of synthetic fuel.
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
Cinergy |
| $ | 172 |
| $ | 143 |
|
CG&E |
| 105 |
| 86 |
| ||
PSI |
| 67 |
| 57 |
| ||
(d) Derivatives
(i) Hedges of Natural Gas held in Storage
Cinergy designates derivatives as fair value hedges for certain volumes of our natural gas held in storage. Under this accounting election, changes in the fair value of both the derivative as well as the hedged item (the specified gas held in storage) are included in Gas Operating Revenues in Cinergy’s Condensed Consolidated Statements of Income. We assess the effectiveness of the derivatives in offsetting the change in fair value of the gas held in storage on a quarterly basis. Selected information on Cinergy’s hedge accounting activities for the quarterquarters ended March 31, 2006 and year to date ended September 30, 2005 and 2004 were as follows:
|
| Quarter |
| Year to Date |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
| (in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Portion of loss on hedging instruments determined to be ineffective |
| $ | (25 | ) | $ | (3 | ) | $ | (24 | ) | $ | — |
|
Portion of gain (loss) on hedging instruments related to changes in time value excluded from assessment of ineffectiveness |
| 28 |
| (6 | ) | 24 |
| (8 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Total included in Gas Operating Revenues |
| $ | 3 |
| $ | (9 | ) | $ | — |
| $ | (8 | ) |
| 2006 |
| 2005 |
| |||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
Portion of loss on hedging instruments determined to be ineffective |
| $ | (5 | ) | $ | (4 | ) |
Portion of gain on hedging instruments related to changes in time value excluded from assessment of ineffectiveness |
| 36 |
| 4 |
| ||
Total included in Gas operating revenues |
| $ | 31 |
| $ | — |
|
(e) Accounting Changes
(i) (ii) Generation Portfolio OptimizationAsset Retirement Obligations
In March 2005,CG&E attempts to optimize the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (Interpretation 47), an interpretationvalue of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143). Statement 143 requires recognition of legal obligations associated withits non-regulated generation portfolio, which includes generation assets, fuel, and emission allowances. When power is sold forward, we typically purchase the retirement or removal of long-lived assetsfuel and emission allowances required to produce the power to lock in our eventual margin at the time of delivery. The market values of these commodities change independently over time and when economic, CG&E may purchase forward power to be used to deliver against the obligations are incurred. Interpretation 47 clarifies that a conditional asset retirement obligation (which occurs when
28
forward power sales, and in turn sell the timingfuel and/or emission allowances.
Emission allowances and the majority of fuel contracts typically follow the accrual method of settlement are conditional on a future eventaccounting. However, generally accepted accounting principles (GAAP) requires that may or may not be withincertain forward purchases of coal and forward sales of power (those classified as derivatives) use the controlmark-to-market (MTM) method of accounting. This differing accounting treatment for the various components of the entity) isgeneration portfolio can lead to volatility in reported earnings. A hypothetical $1.00 per megawatt hour (MWh) change consistently applied to all forward power prices would have resulted in a legal obligation within the scope of Statement 143. As such, thechange in fair value of these contracts, and therefore unrealized gains or losses, of approximately $7.4 million as of March 31, 2006. A hypothetical $1.00 per ton change consistently
applied to all forward coal prices would have resulted in a conditional asset retirement obligation must be recognized as a liability when incurred if the liability’s fair value can be reasonably estimated. Interpretation 47 also clarifies when sufficient information exists to reasonably estimate thechange in fair value of an asset retirement obligation.these contracts of approximately $3.5 million as of March 31, 2006.
(iii) Trading & Marketing
Cinergy will adopt Interpretation 47 on December 31, 2005. Upon adoption of Interpretation 47and CinergyCG&E will recognizemeasure the impact, if any, of additional liabilities for conditional asset retirement obligationsmarket risk inherent in the trading portfolio employing value at risk (VaR) analysis, as a cumulative effect of adiscussed in the 2005 10-K. The change in accounting principle. We continue to evaluateVaR from the impact of adopting this new interpretation and are currently unable to predict whether the implementation of this accounting standard will be2005 10-K was not material to our financial position or results of operations.
(e) Accounting Changes
(ii)(i) Share-Based Payment
In December 2004, the FASB issued a replacement of Statement of Financial Accounting StandardsSFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, (Statement 148), (Statement 123), Statement of Financial Accounting StandardsSFAS No. 123 (revised 2004), Share-Based Payment (Statement 123R). This standard will require,requires, among other things, accounting for all stock-based compensation arrangements under the fair value method. The standard also requires compensation awards that involve the achievement of a certain company stock price (or similar measure) to have the likelihood of reaching those targets incorporated into the fair value of the award. The number of awards paid out under Cinergy’s performance-based share awards under the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan (LTIP) is based on Cinergy’s expected total shareholder return (TSR) as measured against a pre-defined peer group. Therefore, these awards were required to be re-valued at fair value upon adoption.
We adopted Statement 123R on January 1, 2006 using the modified prospective application. Cinergy recognized a loss of approximately $3.5 million, net of tax, for the cumulative effect of this change in accounting principle. The cumulative effect is due to the use of a new model that incorporates the expected TSR into the fair value of Cinergy’s performance-based share awards under the LTIP. This model is used to value all performance-based share awards under the LTIP, beginning January 1, 2006.
In 2003, we prospectively adopted accounting for our stock-based compensation plans using the fair value recognition provisions of Statement 123, as amended by Statement of Financial Accounting Standards No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure, for all employee awards granted or with terms modified on or after January 1, 2003. Therefore, the impact of implementation of Statement 123R on stock options and remaining awards, other than the aforementioned performance-based share awards, within our stock-based compensation plans iswas not expected to be material. Statement 123R contains certain provisions that will modify the accounting for various types ofSee additional detail regarding Cinergy’s stock-based compensation other than stock options.plans in Note 2(b).
(ii) Accounting for Servicing of Financial Assets
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (Statement156) an amendment of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities. Statement 156 establishes new standards for how entities that service financial assets account for their servicing rights. CG&E retains servicing responsibilities for its role as collection agent for receivables sold to Cinergy Receivables Company, LLC. We are in the process of evaluating the impact of adopting this new standard on Cinergy’s accounts receivable sales program. Currently, we are unable to predict whether the implementation of this accounting standard will be material to our plans.financial position or results of operations. Wewill adopt Statement 156 on January 1, 2007.
(iii) Determining Variability in Application of FASB Interpretation No. 46(R) (FIN 46(R)-6)
In April 2006, the FASB staff issued FASB Interpretation No. 46(R)-6 (FIN 46(R)-6) to address how to determine the variability to be considered in applying FIN 46(R), Consolidation of Variable Interest Entities. The variability that is considered in applying FIN 46(R) affects the determination of whether the entity is a variable interest entity (VIE), which interests are variable interests in the entity, and which party, if any, is the primary beneficiary of the VIE. The variability affects the calculation of expected losses and expected residual returns. This Statement is effective July 1, 2006. Cinergy will adopt Statement 123R on January 1, 2006.
(iii) Income Taxes
In October 2004,does not anticipate that the American Jobs Creation Act (AJCA) was signed into law. The AJCA includes a one-time deductionadoption of 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA. Based on our analysis, repatriation pursuant to this provisionFIN 46(R)-6 will not have a material impact on our financial position or results of operations.
As discussed in the 2004 10-K, in January and February 2005, CinergyCorp. issued a total of 9.2 million shares of common stock pursuant to certain stock purchase contracts that were issued as a component of combined securities in December 2001. Net proceeds from the transaction of $316 million were used to reduce short-term debt.
23
(a) Changes In Common Stock Outstanding
Cinergyissues new Cinergy Corp. common stock shares to satisfy obligations under certain of its employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. During the ninethree months ended September 30, 2005,March 31, 2006, Cinergy issued 2.51.7 million shares under these plans.
In June 2005, Cinergy Corp. contributed $200 million in capital to PSI. The capital contribution was used to repay short-term indebtedness and is consistent with supporting PSI’s current credit ratings.
Cash dividends declared for the quarter ended September 30, 2005 includeMarch 31, 2006 included dividends of $0.48 per share which were declared by the board of directors on July 21January 16, 2006 and partial dividends of $0.48$0.1564 per share which were declared on September 30.March 10, 2006.
In April 2006, CG&E filed a petition with the FERC for a declaratory ruling that CG&E’s payment of dividends out of its paid-in capital account, using the balance transferred from the retained earnings account, resulting from purchase accounting arising from the Duke/Cinergy merger, would not violate section 305(a) of the Federal Power Act, which generally precludes dividends out of paid-in capital. Such a ruling is necessary because purchase/push-down accounting will reset retained earnings to zero as of April 3, 2006, thus precluding CG&E from using pre-merger retained earnings to pay dividends. Until this approval is received, CG&E’s ability to pay dividends will be constrained to earnings since April 3, 2006. The FERC has approved such dividend payments in proceedings involving other mergers. At this time, CG&E cannot predict the outcome of this proceeding.
Cinergy Corp. owns all of the common stock of CG&E and PSI. Effective April 3, 2006, 100 percent of Cinergy’s outstanding stock was converted into 1.56 shares of Duke Energy Holding stock. See Note 1(a) for additional information.
(b) Stock-based Compensation Plans
We currently have the following stock-based compensation plans:
· LTIP;
· SOP;
· Employee Stock Purchase and Savings Plan;
· Retirement Plan for Directors;
· Directors’ Equity Compensation Plan;
· Directors’ Deferred Compensation Plan;
· 401(k) Plans; and
· 401(k) Excess Plan.
The LTIP and SOP are discussed below. The activity in 2006 and 2005 for the remaining stock-based compensation plans was not significant.
In 2003, we prospectively adopted accounting for our stock-based compensation plans using the fair value recognition provisions of Statement 123, as amended by Statement 148, for all employee awards granted or with terms modified on or after January 1, 2003. Effective January 1, 2006, Cinergy adopted Statement 123R. See Note 1(e)(i) for additional information regarding this new accounting standard.
For the three months ended March 31, 2006 and 2005, total compensation cost for the above plans was $22 million and $12 million, respectively. The total income tax benefit recognized for share-based compensation arrangements was $9 million in 2006 and $5 million in 2005. Costs associated with the immediate vesting of shares and options in conjunction with the consummation of the merger with Duke as discussed below, will be accounted for as part of purchase accounting.
(i) LTIP
Under this plan, certain key employees may be granted incentive and non-qualified stock options, stock appreciation rights (SARs), non-vested stock awards, dividend equivalents, phantom stock, the opportunity to earn performance-based shares and certain other stock-based awards. Stock options are granted to participants with an option price equal to or greater than the fair market value on the grant date, and generally with a vesting period of three years. The vesting period begins on the grant date and all options expire within 10 years from that date. Expense for stock options granted to retirement eligible employees is recognized immediately as these employees are deemed to immediately vest in their stock options. There are 14,500,000 shares authorized for issuance under the LTIP plan.
Most options granted prior to May 8, 2005 were immediately vested upon consummation of the April 3, 2006 merger with Duke. Options granted after May 8, 2005 were converted to Duke Energy Corporation options on April 3, 2006 at the 1.56 conversion rate and will continue to be expensed over the remaining portion of the three-year vesting period, unless granted to retirement eligible employees. Duke Energy Corporation plans to issue new Duke Energy Corporation common shares when the above options are exercised.
Previously, performance-based share awards were paid 50 percent in common stock and 50 percent in cash. As of December 31, 2005, all performance shares were classified as liabilities as management intends to pay all outstanding awards in cash. As a result, the expected cash payout portion of the performance shares were reported in Current Liabilities - - Other and Non-Current Liabilities - Other. Total cash paid for the performance-based share liabilities were $5 million and $14 million for the quarters ended March 31, 2006 and 2005, respectively.
Entitlement to performance-based share awards is based on Cinergy’s TSR over designated Cycles as measured against a pre-defined peer group of utility companies (Relative TSR). Target grants of performance-based shares were made for the following Cycles:
Grant | Performance | Target | |||||
Cycle | Date | Period | Grant of Shares | ||||
(in thousands) | |||||||
VIII | 1/2004 | 2004-2006 | 367 | ||||
IX | 1/2005 | 2005-2007 | 342 | ||||
X | 1/2006 | 2006-2008 | 351 |
The target award is earned if Cinergy’s Relative TSR ranking is at the 55th percentile at the end of the performance period. The maximum payout is equal to 200 percent of the target and the minimum payout is zero, depending on Cinergy’s ranking above or below the 55th percentile target.
We use a path-dependent model that incorporates expected Relative TSR into the fair value determination of Cinergy’s performance-based share awards with the adoption of Statement 123R. The model uses three year historical volatilities and correlations for all companies in the pre-defined peer group, including Cinergy, to simulate Cinergy’s Relative TSR as of the end of each Cycle. For each simulation, Cinergy’s Relative TSR associated with the simulated stock price at the end of the cycle period plus expected dividends within the period results in a value per share for the award portfolio. The average of these simulations is the expected portfolio value per share. Actual life to date results of Cinergy’s Relative TSR for each Cycle is incorporated within the model.
All performance shares under Cycles VIII and IX vested immediately at 200 percent of target with the April 3, 2006 consummation of the merger. Cycle X performance shares vested on a pro-rata basis also at 200 percent of target at the consummation of the merger.
(ii) Stock Option Activity
Stock option activity for the three months ended March 31, 2006 is summarized as follows:
| LTIP and SOP |
| |||||||||
|
| Shares |
| Weighted |
| Weighted |
| Aggregate |
| ||
|
|
|
|
|
|
|
| (in millions) |
| ||
Balance at December 31, 2005 |
| 5,484,649 |
| 34.72 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Options granted(1) |
| 674,900 |
| 42.45 |
|
|
|
|
| ||
Options exercised |
| (1,488,171 | ) | 33.37 |
|
|
| $ | 16 |
| |
Options forfeited/expired |
| (6,300 | ) | 41.11 |
|
|
|
|
| ||
Balance at March 31, 2006 |
| 4,665,078 |
| $ | 36.30 |
| 6.32 yrs |
| $ | 43 |
|
|
|
|
|
|
|
|
|
|
| ||
Options Exercisable(2): |
|
|
|
|
|
|
|
|
| ||
At March 31, 2006 |
| 2,433,378 |
| $ | 32.94 |
| 4.27 yrs |
| $ | 30 |
|
(1) Options have not been granted under the SOP since 2001.
(2) 475,867 options exercisable pertain to the SOP.
For the three months ended March 31, 2006, we received $29 million in cash from the exercise of outstanding stock options. The tax benefit realized from these exercised options was $14 million. The total compensation expense related to unvested options at March 31, 2006 was $3 million which will be recognized over a weighted average period of 2.24 years. The total fair-value of options granted during the quarters ended March 31, 2006 and 2005 were $6.66 per share and $5.65 per share, respectively. The total intrinsic value of options exercised was $16 million and $2 million for the three months ended March 31, 2006 and 2005, respectively.
The fair values of options granted were estimated as of the grant date using the Black-Scholes option-pricing model using the assumptions listed in the following table for the three months ended March 31:
| LTIP |
|
| |||
|
| 2006 |
| 2005 |
|
|
Risk-free interest rate(1) |
| 4.33 | % | 3.62 | % |
|
Expected dividend yield(2) |
| 4.41 | % | 4.52 | % |
|
Expected life(3) |
| 5.01 | yrs. | 4.99 | yrs. |
|
Expected volatility(4) |
| 22.43 | % | 21.28 | % |
|
(1) The risk free rate is based upon the U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options.
(2) The expected dividend yield is based upon annualized dividends and the closing stock price on the grant date.
(3) The expected term of options is derived from historical data.
(4) Volatility is based upon the historical volatility with a look back period equal to the expected term of the options.
(iii) Merger-Related Obligations
Several of the Company’s benefit plans contain “change-in-control” clauses that provide enhanced, and/or accelerated benefits to management level employees in the event of a qualifying transaction such as occurred with the consummation of the merger with Duke as discussed in Note 1(a) in April 2006. These include benefits paid pursuant to the LTIP and certain payments under Cinergy’s Annual Incentive Plan. Certain employees are also entitled to additional severance and benefits in the event they are involuntarily terminated without “cause” or voluntarily terminate for “good reason” (as such terms are defined in their employment agreements) in connection with or following the merger.
On December 30, 2005, Cinergy entered into agreements with 28 employees to accelerate the payment of a portion of the amounts discussed above, otherwise expected to be paid after December 31, 2005, in order to mitigate the Company’s taxes and related expenses. Payments totaling $70 million were made in December pursuant to these agreements. The agreements amend the employees’ employment agreements, and benefit plans in which they participate, to accelerate into 2005 the payment of certain amounts that they have previously earned or are expected to earn after December 31, 2005. Among other things, the Company prepaid performance shares under the LTIP and severance payments for certain individuals. In the event an employee who received such amounts voluntarily terminated his employment prior to the closing of the merger, the employee would have been obligated to repay all of the payments, and if the merger did not close on or prior to December 15, 2006, the employee would have been obligated to repay half of the payments, to reflect his or her estimated tax liability upon receipt of the accelerated payments; in each case, less any amounts that the employee has already earned through such date. None of the 28 employees invoked this payback provision. By accelerating these payments, the Company will mitigate taxes and related expenses that it would otherwise incur if it had waited until after 2005 to make these payments.
The majority of these payments were recorded as prepaid compensation in Prepaymentsand other. Approximately half of these payments were accounted for as a retention bonus and expensed over the period between January 1, 2006 and the closing of the merger with Duke. The remainder, representing the half that executives must repay if the merger was never consummated, remained in Prepaymentsand other until the merger closed and were accounted for as part of purchase/push-down accounting.
In addition to payments made in December, based on certain assumptions and using our current best estimates, the Company’s remaining contractual obligations that were triggered upon merger consummation, including severance payments for those executives that have indicated their intention to terminate for “good reason”, was approximately $100 million and these amounts were accounted for in April when the merger closed. These payments only included amounts payable pursuant to existing benefit arrangements, employment contracts, and voluntary severance accepted by employees and contingent on the merger closing. These payments do not include the value of accelerated stock options and retirement benefits earned prior to the merger.
In August 2005,March 2006, PSICG&E redeemed all outstanding shares of its $31.075$16.98 million notional amount 6.875%4% Cumulative Preferred Stock.Stock, and its $3.5 million notional amount 4.75% Cumulative Preferred Stock at a price of $108 per share and $101 per share, respectively, plus accrued and unpaid dividends.
29
In August 2005,May 2006, PSIredeemed all outstanding shares of its $50$3.7 million 6.50% Synthetic Putable Yield Securities due August 1, 2026 through the exercise of call provisions within the securities.notional amount 3.5% Cumulative Preferred Stock, its $3.9 million notional amount 4.32% Cumulative Preferred Stock and its $3.7 million notional amount 4.16% Cumulative Preferred Stock at par, respectively, plus accrued and unpaid dividends.
27
In August 2005, PSI redeemed all of its $50 million principal amount Series ZZ First Mortgage secured 5 ¾% Series 1993B Environmental Revenue Refunding Bonds, due February 15, 2028. PSI redeemed these bonds with the proceeds from the issuance by the Indiana Finance Authority of $50 million principal amount of its Environmental Revenue Refunding Bonds, Series 2005A, due July 1, 2035. The bonds bear a fixed rate of interest through 2035 of 4.50 percent.
In September 2005, PSI redeemed all of its $30 million principal amount 7.125% Series AAA First Mortgage Bonds, due 2024.
In October 2005, PSI borrowed the proceeds from the Indiana Finance Authority’s issuance of $50 million principal amount of its Environmental Revenue Bonds, Series 2005C, due October 1, 2040. The initial interest rate for Series 2005C Bonds was 2.75%. This rate will initially reset on December 2, 2005 and then every 35 days by auction thereafter. Because the holders cannot tender the Series 2005C Bonds for purchase by the issuer while the Series 2005C Bonds are in the auction rate mode, these debt obligations are classified as Long-term debt. PSI is using the proceeds from these borrowings to assist in the acquisition and construction of solid waste disposal facilities located at various generating stations in Indiana.
Also in October 2005, PSI issued $350 million principal amount of its 6.12% Debentures due October 15, 2035. Proceeds from this issuance were used for general corporate purposes and the repayment of outstanding short-term indebtedness.
30
5.4. Notes Payable and Other Short-term Obligations
Cinergy Corp.’s short-term borrowings consist primarily of unsecured revolving lines of credit and the sale of commercial paper. Cinergy Corp.’s revolving credit facility and commercial paper program also support the short-term borrowing needs of CG&E, PSI, and ULH&PPSI. In addition, Cinergy Corp., CG&E, and PSI maintain uncommitted lines of credit. These facilities are not firm sources of capital but rather informal agreements to lend money, subject to availability, with pricing determined at the time of advance. The following table summarizes our Notes payable and other short-term obligations and Notes payable to affiliated companies:
|
| September 30, 2005 |
| December 31, 2004 |
| ||||||||||||
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|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| ||||
|
| Established |
|
|
| Average |
| Established |
|
|
| Average |
| ||||
|
| Lines |
| Outstanding |
| Rate |
| Lines |
| Outstanding |
| Rate |
| ||||
|
| (dollars in millions) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revolving line(1) |
| $ | 2,000 |
| $ | — |
| — | % | $ | 2,000 |
| $ | — |
| — | % |
Uncommitted lines |
| 40 |
| — |
| — |
| 40 |
| — |
| — |
| ||||
Commercial paper(2) |
|
|
| 874 |
| 3.88 |
|
|
| 676 |
| 2.45 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Utility operating companies |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Uncommitted lines |
| 75 |
| — |
| — |
| 75 |
| — |
| — |
| ||||
Pollution control notes |
|
|
| 248 |
| 3.20 |
|
|
| 248 |
| 2.43 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-regulated subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revolving lines(3) |
| 162 |
| 45 |
| 4.29 |
| 158 |
| 8 |
| 5.67 |
| ||||
Short-term debt |
|
|
| 7 |
| 9.39 |
|
|
| 2 |
| 4.50 |
| ||||
Pollution control notes |
|
|
| 25 |
| 3.10 |
|
|
| 25 |
| 2.30 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy Total |
|
|
| $ | 1,199 |
| 3.77 | % |
|
| $ | 959 |
| 2.47 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CG&E and subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Uncommitted lines |
| $ | 15 |
| $ | — |
| — | % | $ | 15 |
| $ | — |
| — | % |
Pollution control notes |
|
|
| 112 |
| 3.11 |
|
|
| 112 |
| 2.34 |
| ||||
Money pool |
|
|
| 205 |
| 3.87 |
|
|
| 180 |
| 2.38 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CG&E Total |
|
|
| $ | 317 |
| 3.60 | % |
|
| $ | 292 |
| 2.36 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
PSI |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Uncommitted lines |
| $ | 60 |
| $ | — |
| — | % | $ | 60 |
| $ | — |
| — | % |
Pollution control notes |
|
|
| 136 |
| 3.28 |
|
|
| 136 |
| 2.49 |
| ||||
Money pool |
|
|
| 373 |
| 3.87 |
|
|
| 130 |
| 2.38 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
PSI Total |
|
|
| $ | 509 |
| 3.71 | % |
|
| $ | 266 |
| 2.44 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
ULH&P |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money pool |
|
|
| $ | 10 |
| 3.87 | % |
|
| $ | 11 |
| 2.38 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
ULH&P Total |
|
|
| $ | 10 |
| 3.87 | % |
|
| $ | 11 |
| 2.38 | % |
|
| March 31, 2006 |
| December 31, 2005 |
| ||||||||||||
|
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| ||||
|
| Established |
|
|
| Average |
| Established |
|
|
| Average |
| ||||
|
| Lines |
| Outstanding |
| Rate |
| Lines |
| Outstanding |
| Rate |
| ||||
|
| (dollars in millions) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revolving line(1) |
| $ | 2,000 |
| $ | — |
| — | % | $ | 2,000 |
| $ | — |
| — | % |
Uncommitted lines |
| 40 |
| — |
| — |
| 40 |
| — |
| — |
| ||||
Commercial paper(2) |
|
|
| 697 |
| 4.86 |
|
|
| 515 |
| 4.43 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Utility operating companies |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Uncommitted lines |
| 75 |
| — |
| — |
| 75 |
| — |
| — |
| ||||
Pollution control notes |
|
|
| 298 |
| 3.68 |
|
|
| 298 |
| 4.00 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-regulated subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revolving lines(3) |
| 150 |
| 60 |
| 5.33 |
| 150 |
| 77 |
| 4.95 |
| ||||
Short-term debt |
|
|
| 11 |
| 9.97 |
|
|
| 9 |
| 9.96 |
| ||||
Pollution control notes |
|
|
| 25 |
| 3.53 |
|
|
| 25 |
| 3.90 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy Total |
|
|
| $ | 1,091 |
| 4.59 | % |
|
| $ | 924 |
| 4.37 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CG&E |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Uncommitted lines |
| $ | 15 |
| $ | — |
| — | % | $ | 15 |
| $ | — |
| — | % |
Pollution control notes |
|
|
| 112 |
| 3.56 |
|
|
| 112 |
| 3.86 |
| ||||
Money pool |
|
|
| 222 |
| 4.84 |
|
|
| 114 |
| 4.41 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CG&E Total |
|
|
| $ | 334 |
| 4.41 | % |
|
| $ | 226 |
| 4.14 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
PSI |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Uncommitted lines |
| $ | 60 |
| $ | — |
| — | % | $ | 60 |
| $ | — |
| — | % |
Pollution control notes |
|
|
| 186 |
| 3.76 |
|
|
| 186 |
| 4.07 |
| ||||
Money pool |
|
|
| 196 |
| 4.84 |
|
|
| 250 |
| 4.41 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
PSI Total |
|
|
| $ | 382 |
| 4.32 | % |
|
| $ | 436 |
| 4.27 | % |
(1) Consists of a five-year facility which was entered into in September 2005, matures in September 2010, and contains $500 million sublimits each for CG&E and PSI, and a $65 million sublimit for ULH&P (which may be increased to $100 million upon the completion of its pending transaction with CG&E in which ULH&P will acquire interests in three of CG&E’s electric generating stations. See Note 12(a) for further information regarding this transaction.).
(2) Cinergy Corp.’s commercial paper program limit is $1.5 billion. The commercial paper program is supported by Cinergy Corp.’s revolving line of credit.
(3) Of the $162 million and $158 million, in 2005 and 2004, respectively, $150 million relatesRelates to a Cinergy Canada, Inc. three-year senior revolving credit facility that Cinergy Canada, Inc. entered into in December 2004 that matures in December 2007.
31
In September 2005, Cinergy Corp., CG&E, PSI, and ULH&P entered into a five-year revolving credit facility with a termination date of September 2010 which can be extended twice, each extension for an additional one-year period. The new credit agreement replaces two existing credit agreements, one dated April 2004 and one dated December 2004.
The new credit agreement provides that the pending merger between Duke and Cinergy Corp. will not be considered a fundamental change or a “Change of Control” for purposes of the credit agreement.
For purposes of making borrowings the new credit agreement does not require certain environmental, litigation or material adverse change representations and warranties that were in the credit agreements it replaced.
At September 30, 2005,March 31, 2006, Cinergy Corp. had $898 million$1.1 billion remaining unused and available capacity relating to its $2 billion revolving credit facility. The revolving credit facility includes the following:
Credit Facility |
| Expiration |
| Established |
| Outstanding |
| Unused and |
| |||
|
|
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
|
|
| |||
Five-year senior revolving |
| September 2010 |
|
|
|
|
|
|
| |||
Commercial paper support |
|
|
|
|
| $ | 874 |
|
|
| ||
Letter of credit support |
|
|
|
|
| 228 |
|
|
| |||
Total(1) |
|
|
| $ | 2,000 |
| 1,102 |
| $ | 898 |
| |
(1)In September 2005, Cinergy Corp. successfully placed a $2 billion senior unsecured revolving credit facility which replaced the $1 billion five-year facility, set to expire in December 2009, and the $1 billion three-year facility, set to expire in April 2007. CG&E and PSI each have $500 million borrowing sublimits on this facility, and ULH&P has a $65 million borrowing sublimit on this facility (which may be increased to $100 million upon the completion of its pending transaction with CG&E in which ULH&P will acquire interests in three of CG&E’s electric generating stations. See Note 12(a) for further information regarding this transaction.)
Credit Facility |
| Expiration |
| Established |
| Outstanding and |
| Unused and |
| |||
|
|
|
| (in millions) |
| |||||||
Five-year senior revolving |
| September 2010 |
|
|
|
|
|
|
| |||
Commercial paper support |
|
|
|
|
| $ | 697 |
|
|
| ||
Letter of credit support |
|
|
|
|
| 165 |
|
|
| |||
Total five-year facility |
|
|
| $ | 2,000 |
| 862 |
| $ | 1,138 |
| |
In our credit facility, Cinergy Corp. has covenanted to maintain:
•· a consolidated net worth of $2 billion; and
•· a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
As part of CG&E’s $500 million sublimit under the $2 billion five-year credit facility, CG&E has covenanted to maintain:
•· a consolidated net worth of $1 billion; and
•· a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
As part of PSI’s $500 million sublimit under the $2 billion five-year credit facility, PSI has covenanted to maintain:
•· a consolidated net worth of $900 million; and
• a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
As part of ULH&P’s $65 million sublimit under the $2 billion five-year credit facility, ULH&P has covenanted to maintain:
• a consolidated net worth of $150 million, provided that in the event that the sublimit has been increased to $100 million the consolidated net worth would be $200 million; and
•· a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
A breach of these covenants could result in the termination of the credit facility and the acceleration of the related indebtedness. In addition to breaches of covenants, certain other events that could result in the termination of available credit and acceleration of the related indebtedness include:
•· bankruptcy;
•· defaults in the payment of other indebtedness; and
•· judgments against the company that are not paid or insured.
The latter two events, however, are subject to dollar-based materiality thresholds. As of September 30, 2005,March 31, 2006, Cinergy, CG&E, and PSIand ULH&P are in compliance with all of their debt covenants.
32
In October 2005, PSI borrowed the proceeds from the Indiana Finance Authority’s issuance of $50 million principal amount of its Environmental Revenue Bonds, Series 2005B, due October 1, 2040. Holders of the Series 2005B Bonds are entitled to credit enhancement in the form of a standby letter of credit, which if drawn upon, provides for the payment of both interest and principal on the Series 2005B Bonds. The initial interest rate for the Series 2005B Bonds was 2.75% and is reset weekly. Because the holders have the right to have their Bonds redeemed on a weekly basis, they are classified as Notes payable and other short-term obligations. PSI is using the proceeds from these borrowings to assist in the acquisition and construction of solid waste disposal facilities located at various generating stations in Indiana.
6.5. Energy Trading Credit Risk
Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written guidelines approved by Cinergy’s Risk Policy Committee document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the Corporate Credit Risk function, which is independent of all trading operations. As of September 30, 2005, 92March 31, 2006, 93 percent of theCinergy’s credit exposure and 88 percent of CG&E’s credit expense, net of credit collateral, related to energy trading and marketing activity was with counterparties rated investment grade or the counterparties’ obligations were guaranteed or secured by an investment grade entity. The majority of these investment grade counterparties are externally rated. If a counterparty has an external rating, the lower of Standard & Poor’s Ratings Services or Moody’s Investors Service is used; otherwise, Cinergy’s internal rating of the counterparty is used. TheCinergy’s remaining eightseven percent represents credit exposure of $99$72 million and CG&E’s remaining 12 percent represents credit exposure of $25 million with counterparties rated non-investment grade.
As of September 30, 2005,March 31, 2006, CG&E had a concentration of trading credit exposure of $54$75 million with one counterpartytwo counterparties accounting for greater than ten10 percent of CG&E’s total trading credit exposure. This counterparty isThese counterparties are rated investment grade.
Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity. Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.
We continually review and monitor our credit exposure to all counterparties and secondary counterparties. WhenIf appropriate, we may adjust our credit reserves to attempt to compensate for increased credit risk within the industry. Counterparty credit limits may be adjusted on a daily basis in response to changes in a counterparty’s financial status or public debt ratings.
We enter into financial derivative contracts for the purpose of managing financial instrument risk. Forward starting swaps are a type of financial derivative that mitigates volatility associated with fluctuations in interest rates between the time of execution of the swap and the date of an expected debt issuance.
In June 2005, PSI executed two forward starting swaps with a combined notional amount of $325 million. The forward starting swaps effectively fix the benchmark interest rate of an anticipated issuance of fixed-rate debt from June 2005 through June 2006, the expected date of issuance of the debt securities. Both forward starting swaps have been designated as cash flow hedges under the provisions of Statement 133. As the terms of these swap agreements mirror the terms of the forecasted debt issuance, we anticipate they will be highly effective hedges. Changes in the fair value of these swaps are recorded in Accumulated other comprehensive income (loss).
8.6. Pension and Other Postretirement Benefits
As discussed in the 20042005 10-K, Cinergy Corp. sponsors both pension and other postretirement benefits plans. Our qualified defined benefit pension plans cover substantially all United States employees meeting certain minimum age and service requirements. Funding for the qualified defined benefit pension plans is based on actuarially determined contributions, the maximum of which is generally the amount deductible for income tax purposes and the minimum being that required by the Employee Retirement Income Security Act of 1974, as amended. The
33
pension plans’ assets consist of investments in equity and debt securities. In addition, we sponsor non-qualified pension plans (plans that do not meet the criteria for certain tax benefits) that cover officers, certain other key employees, and non-employee directors. We also provide certain health care and life insurance benefits to retired United States employees and their eligible dependents. These benefits are subject to minimum age and service requirements. The health care benefits include medical coverage, dental coverage, and prescription drug coverage and are subject to certain limitations, such as deductibles and co-payments.
QualifiedThere were no qualified pension benefit contributions for the first ninethree months of 2005 were $1022006. Cinergy expects to make approximately $120 million which is an increase from the $72 million disclosed in the 2004 10-K. This $30 million increase is primarily the result of a change in the retirement age assumption which increased the near-term funding estimates. No additionalqualified pension contributions are expected forduring the remainder of 2005.2006.
Our benefit plans’ costs for the quarterquarters ended March 31, 2006 and year to date ended September 30, 2005, and 2004, included the following components:
|
| Qualified |
| Non-Qualified |
| Other Postretirement |
|
| Qualified |
| Non-Qualified |
| Other Postretirement |
| ||||||||||||||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| |||||||||||||||||||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Quarter Ended September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Quarter Ended March 31 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
| ||||||||||||||||||||||
Service cost |
| $ | 9.6 |
| $ | 8.8 |
| $ | 1.4 |
| $ | 1.2 |
| $ | 1.6 |
| $ | 1.2 |
|
| $ | 10.9 |
| $ | 9.6 |
| $ | 1.4 |
| $ | 1.4 |
| $ | 1.6 |
| $ | 1.6 |
|
Interest cost |
| 24.1 |
| 22.1 |
| 1.8 |
| 1.7 |
| 5.7 |
| 5.4 |
|
| 24.7 |
| 24.1 |
| 2.1 |
| 1.8 |
| 5.6 |
| 5.7 |
| ||||||||||||
Expected return on plans’ assets |
| (22.0 | ) | (20.1 | ) | — |
| — |
| — |
| — |
|
| (23.4 | ) | (22.0 | ) | — |
| — |
| — |
| — |
| ||||||||||||
Amortization of transition (asset) obligation |
| (0.1 | ) | (0.1 | ) | — |
| — |
| 0.1 |
| 0.1 |
|
| — |
| — |
| — |
| — |
| — |
| 0.1 |
| ||||||||||||
Amortization of prior service cost |
| 1.1 |
| 1.1 |
| 0.5 |
| 0.5 |
| (0.1 | ) | — |
|
| 0.9 |
| 1.1 |
| 0.6 |
| 0.5 |
| (0.2 | ) | (0.1 | ) | ||||||||||||
Recognized actuarial (gain) loss |
| 2.0 |
| 0.5 |
| 0.6 |
| 0.7 |
| 2.7 |
| 1.9 |
| |||||||||||||||||||||||||
Amortization of actuarial losses |
| 4.6 |
| 1.9 |
| 1.0 |
| 0.6 |
| 2.5 |
| 2.7 |
| |||||||||||||||||||||||||
Net periodic benefit cost |
| $ | 14.7 |
| $ | 12.3 |
| $ | 4.3 |
| $ | 4.1 |
| $ | 10.0 |
| $ | 8.6 |
|
| $ | 17.7 |
| $ | 14.7 |
| $ | 5.1 |
| $ | 4.3 |
| $ | 9.5 |
| $ | 10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Year to Date September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Service cost |
| $ | 28.8 |
| $ | 26.4 |
| $ | 4.2 |
| $ | 3.6 |
| $ | 4.8 |
| $ | 3.8 |
| |||||||||||||||||||
Interest cost |
| 72.2 |
| 66.3 |
| 5.4 |
| 5.1 |
| 17.1 |
| 16.8 |
| |||||||||||||||||||||||||
Expected return on plans’ assets |
| (66.1 | ) | (60.3 | ) | — |
| — |
| — |
| — |
| |||||||||||||||||||||||||
Amortization of transition (asset) obligation |
| (0.2 | ) | (0.3 | ) | — |
| — |
| 0.3 |
| 1.0 |
| |||||||||||||||||||||||||
Amortization of prior service cost |
| 3.4 |
| 3.3 |
| 1.5 |
| 1.5 |
| (0.5 | ) | — |
| |||||||||||||||||||||||||
Recognized actuarial (gain) loss |
| 5.9 |
| 1.5 |
| 1.8 |
| 2.1 |
| 8.2 |
| 5.9 |
| |||||||||||||||||||||||||
Net periodic benefit cost |
| $ | 44.0 |
| $ | 36.9 |
| $ | 12.9 |
| $ | 12.3 |
| $ | 29.9 |
| $ | 27.5 |
|
The net periodic benefit costs by registrant for the quarter and year to date ended September 30,March 31, 2006 and 2005, and 2004, were as follows:
|
| Qualified |
| Non-Qualified |
| Other Postretirement |
| ||||||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter Ended September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cinergy(1) |
| $ | 14.7 |
| $ | 12.3 |
| $ | 4.3 |
| $ | 4.1 |
| $ | 10.0 |
| $ | 8.6 |
|
CG&E and subsidiaries |
| 4.4 |
| 3.7 |
| 0.1 |
| 0.2 |
| 2.6 |
| 2.0 |
| ||||||
PSI |
| 3.8 |
| 3.2 |
| 0.3 |
| 0.2 |
| 4.8 |
| 4.7 |
| ||||||
ULH&P |
| 0.4 |
| 0.4 |
| — |
| — |
| 0.3 |
| 0.2 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Year to Date September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cinergy(1) |
| $ | 44.0 |
| $ | 36.9 |
| $ | 12.9 |
| $ | 12.3 |
| $ | 29.9 |
| $ | 27.5 |
|
CG&E and subsidiaries |
| 13.1 |
| 11.1 |
| 0.5 |
| 0.6 |
| 7.8 |
| 6.6 |
| ||||||
PSI |
| 11.3 |
| 9.6 |
| 0.6 |
| 0.6 |
| 14.7 |
| 14.7 |
| ||||||
ULH&P |
| 1.2 |
| 1.2 |
| — |
| — |
| 0.8 |
| 0.6 |
|
|
| Qualified |
| Non-Qualified |
| Other Postretirement |
| ||||||||||||
Quarter Ended March 31 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||
|
| (in millions) |
| ||||||||||||||||
Cinergy(1) |
| $ | 17.7 |
| $ | 14.7 |
| $ | 5.1 |
| $ | 4.3 |
| $ | 9.5 |
| $ | 10.0 |
|
CG&E and subsidiaries |
| 5.5 |
| 4.4 |
| 0.2 |
| 0.2 |
| 2.5 |
| 2.6 |
| ||||||
PSI |
| 4.4 |
| 3.8 |
| 0.2 |
| 0.2 |
| 4.6 |
| 4.9 |
| ||||||
(1) The results of Cinergy also include amounts related to non-registrants.
30
34
9.7. Commitments and Contingencies
(a) Environmental
(i) Emission Reduction Rulemakings
In October 1998, the Environmental Protection Agency (EPA) finalized its ozone transport rule, also known as the nitrogen oxides (NOX) State Implementation Plan (SIP) Call, which addresses wind-blown ozone and ozone precursors that impact air quality in downwind states. The EPA’s final rule, which applies to 22 states in the eastern United States including the three states in which our electric utilities operate, required states to develop rules to reduce NOX emissions from utility and industrial sources. In a related matter, in response to petitions filed by several states alleging air quality impacts from upwind sources located in other states, the EPA issued a rule pursuant to Section 126 of the Clean Air Act (CAA) that required reductions similar to those required under the NOX SIP Call. Various states and industry groups challenged the final rules in the Court of Appeals for the District of Columbia Circuit, but the court upheld the key provisions of the rules.
The EPA has proposed withdrawal of the Section 126 rule in states with approved rules under the final NOX SIP Call, which includes Indiana, Kentucky, and Ohio.All three states have adopted a cap and trade program as the mechanism to achieve the required reductions. Cinergy, CG&E, and PSI have installed selective catalytic reduction units (SCR) and other pollution controls and implemented certain combustion improvements at various generating stations to comply with the NOX SIP Call. Cinergy also utilizes the NOX emission allowance market to buy or sell NOX emission allowances as appropriate. We currently estimate thatAs of March 31, 2006, we will incur capital costs ofhave incurred approximately $4$823 million in addition to $820 million already incurredcapital costs to comply with this program.
program and do not anticipate significant additional costs.
In March 2005, the EPA issued the Clean Air Interstate Rule (CAIR) which would require states to revise their SIP by September 2006 to address alleged contributions to downwind non-attainment with the revised National Ambient Air Quality Standards for ozone and fine particulate matter. The rule established a two-phase, regional cap and trade program for sulfur dioxide (SO2) and NOX, affecting 28 states, including Ohio, Indiana, and Kentucky, and requires SO2 and NOX emissions to be cut 70 percent and 65 percent, respectively, by 2015. SIPs must comply with the prescribed reduction levels under CAIR; however, the states have the ability to introduce more stringent requirements if desired. Under CAIR, companies have flexible compliance options including installation of pollution controls on large plants where such controls are particularly efficient and utilization of emission allowances for smaller plants where controls are not cost effective.
In August 2005, the EPA proposed a Federal Implementation Plan (FIP), which would implement phase 1 of CAIR by 2009 and 2010 for NOX and SO2, respectively, for any state that does not develop a CAIR SIP in a timely manner. On March 15, 2006, the EPA finalized the FIP to insure timely CAIR emissions reductions. Numerous states, environmental organizations, industry groups, including some of which Cinergy is a member, and individual companies have challenged various portions of the rules. Those challenges are currently pending in the United States Circuit Court for the District of Columbia. In December 2005 and again in January 2006, the EPA reconsidered portions of the CAIR, but did not propose any regulatory changes. On March 15, 2006, the EPA took final action on the issues being reconsidered and determined that its original decisions within the regulations were reasonable and should not be changed. At this time we cannot predict the same time,outcome of these matters.
Also in March 2005, the EPA issued the Clean Air Mercury Rule (CAMR) which requires national reductions in mercury emissions from coal-fired power plants beginning in 2010. Accompanying the CAMR publication in the Federal Register was the EPA’s determination that it was not appropriate and necessary to regulate mercury emissions from utilities under Section 112 of the CAA, requiring maximum achievable control technology, so that it would be possible to regulate those emissions under Section 111 of the CAA with the CAMR. The final regulation also adopts a two-phase cap and trade approach that requires mercury emissions to be cut by 70 percent by 2018. SIPs must comply with the prescribed reduction levels under CAIR and CAMR; however, the states have the ability to introduce more stringent requirements if desired. Under both CAIR and CAMR, companies have flexible compliance options including installation of pollution controls on large plants where such controls are particularly efficient and utilization of emission allowances for smaller plants where controls are not cost effective. In August 2005, the EPA proposed a Federal Implementation Plan (FIP) to act as a backstop to ensure that states implement the CAIR in a timely manner. If a state fails to develop a CAIR SIP, the EPA intends to finalize the FIP in time to implement phase 1 of CAIR for the state by 2009 and 2010 for NOX and SO2, respectively.
Numerous states, environmental organizations, industry groups, including some of which Cinergy is a member, and individual companies have challenged various portions of boththe rules. Those challenges are currently pending in the FederalUnited States Circuit Court for the District of Columbia. On October 21, 2005, the EPA agreed to reconsider certain aspects of the CAMR andas well as the determination not to regulate mercury under Section 112 of the CAA. At this time we cannot predict the outcome of these matters.
Over the 2005-20092006-2010 time period, we expect to spend approximately $1.8$1.5 billion to reduce mercury, SO2, and NOX emissions. These estimatesprojected expenditures include estimated costs to comply at plants that we own but do not operate and could change when taking into consideration compliance plans of co-owners or operators involved. Moreover, as market conditions change, additional compliance options may become available and our plans will be adjusted accordingly. Approximately 6055 percent of these estimated environmental costs would be incurred at PSI’s coal-fired plants, for which recovery would be pursued in accordance with regulatory statutes governing environmental cost recovery. See (b)(i) for more details. CG&E would receivereceives partial recovery of depreciation and financing costs related to environmental compliance projects for 2005-2008 through its recently approved rate stabilization plan (RSP). See (b)(ii) for more details.
The EPA made final state non-attainment area designations to implement the revised ozone standard and to implement the new fine particulate standard in June 2004 and April 2005, respectively. Several counties in which
35
we operate have been designated as being in non-attainment with the new ozone standard and/or fine particulate standard. States with counties that are designated as being in non-attainment with the new ozone and/or fine particulate standards are required to develop a plan of compliance by June 2007 and April 2008, respectively. Industrial sources in or near those counties are potentially subject to requirements for installation of additional pollution controls. In March 2005, various states, local governments, environmental groups, and industry groups, including some of which Cinergy is a member, filed petitions for review in the United States Court of Appeals for the D.C. Circuit to challenge the EPA’s particulate matter non-attainment designations. Although the EPA has attempted to structure CAIR to resolve purported utility contributions to ozone and fine particulate non-attainment, at this time, Cinergy cannot predict the effect of current or future non-attainment designations on its financial position or results of operations.
In July 2005, the EPA issued its final regional haze rules and implementing guidelines in response to a 2002 judicial ruling overturning key provisions of the original program. The regional haze program is aimed at reducing certain emissions impacting visibility in national parks and wilderness areas. The EPA has announced that it can foresee no circumstances where the requirements of the regional haze rule would require utility controls beyond those required under CAIR. The EPA also found that states participating in the CAIR cap and trade program need not require electric generating units to adhere to best available retrofit technology requirements. The states have until December 2007 to finalize their SIPs addressing compliance with EPA regulations. The states may choose to implement more stringent guidelines than promulgated by the EPA, and therefore it is not possible to predict whether the regional haze rule will have a material effect on our financial position or results of operations.
(ii) Section 126 Petitions
In March 2004, the state of North Carolina filed a petition under Section 126 of the CAA in which it alleges that sources in 13 upwind states including Ohio, Indiana, and Kentucky, significantly contribute to North Carolina’s non-attainment with certain ambient air quality standards. In August 2005, the EPA issued a proposed response to the petition. The EPA proposed to deny the ozone portion of the petition based upon a lack of contribution to air quality by the named states. The EPA also proposed to deny the particulate matter portion of the petition based upon the CAIR FIP, described earlier, that would address the air quality concerns from neighboring states. We expect a final FIP and ruling fromIn March 2006, the EPA on this matter by March 2006.denied North Carolina’s petition based upon the final CAIR FIP described above. It is unclear at this time whether any additional reductions would be necessary beyond those required underNorth Carolina will pursue legal action on the CAIR.
denial.
(iii) Clean Air Act Lawsuit
In November 1999, and through subsequent amendments, the United States brought a lawsuit in the United States Federal District Court for the Southern District of Indiana against Cinergy, CG&E, and PSI alleging various violations of the CAA. Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana SIP permits for
various projects at our owned and co-owned generating stations. Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the EPA and Cinergy relating to alleged violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Station. The suit seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s W.C. Beckjord and Miami Fort Stations, and PSI’s Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civil penalties in amounts of up to $27,500 per day for each violation. In addition, three northeast states and two environmental groups have intervened in the case. In August 2005, the district court issued a ruling regarding the emissions test that it will apply to Cinergy at the trial of the case. Contrary to Cinergy’s argument, the district court ruled that in determining whether a project was projected to increase annual emissions, it would not hold hours of operation constant. However, the district court subsequently certified the matter for interlocutory appeal to the Seventh Circuit Court of Appeals, which has the discretion to accept or not acceptaccepted the appeal at this time. Thereand set oral arguments for June 2006. In February 2006, the district court ruled that in carrying its burden of proof, the defendant can look to industry practice in proving a particular project was routine. The district court has removed the trial from the calendar and will reset a trial date, if necessary, after the Seventh Circuit rules. Notwithstanding the appeal, there are a number of other legal issues currently before the district court judge, and the case is currently set for trial by jury commencing in February 2006.judge.
In March 2000, the United States also filed in the United States District Court for the Southern District of Ohio an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by Columbus Southern Power Company (CSP) and jointly-owned by CSP, The Dayton Power and Light Company (DP&L), and CG&E. The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. This suit is
36
being defended by CSP. In April 2001, the United States District Court for the Southern District of Ohio in that case ruled that the Government and the intervening plaintiff environmental groups cannot seek monetary damages for alleged violations that occurred prior to November 3, 1994; however, they are entitled to seek injunctive relief for such alleged violations. Neither party appealed that decision. This matter was heard in trial in July 2005. A decision is expected by the end of 2005.
pending.
In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a Notice of Violation (NOV) to DP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at a station operated by DP&L and jointly-owned by DP&L, CSP, and CG&E. The NOV indicated the EPA may (1) issue an order requiring compliance with the requirements of the Ohio SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. In September 2004, Marilyn Wall and the Sierra Club brought a lawsuit against CG&E, DP&L and CSP for alleged violations of the CAA at this same generating station. This case is currently in discovery.discovery in front of the same judge who has the CSP case.
We are unable to predict whether resolution of these matters would have a material effect on our financial position or results of operations.We intend to vigorously defend against these allegations.
(iv) Carbon Dioxide (CO2) Lawsuit
In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York brought a lawsuit in the United States District Court for the Southern District of New York against Cinergy, American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc. That same day, a similar lawsuit was filed in the United States District Court for the Southern District of New York against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire. These lawsuits allege that the defendants’ emissions of CO2 from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance. The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO2. The plaintiffs are seeking an injunction requiring each defendant to cap its CO2 emissions and then reduce them by a specified percentage each year for at least a decade. In September 2005, the district court granted the defendants’ motion to dismiss the lawsuit. The plaintiffs have appealed this ruling to the Second Circuit Court of Appeals.Appeals, and oral argument is scheduled for June 2006. We are not able to predict whether resolution of these matters would have a material effect on our financial position or results of operations.
(v) Selective Catalytic Reduction Units at Gibson Zimmer Generating Station
In May 2004, SCRs and other pollution control equipment became operational at Units 4 and 5 of PSI’s Gibson Station in accordance with compliance deadlines under the NOX SIP Call. In June and July 2004, Gibson Station temporarily shut down the equipment on these units due to a concern that portions of the plume from those units’ stacks appeared to break apart and descend to ground level, at certain times, under certain weather conditions. As a result, and, working with the City of Mt. Carmel, Illinois, Illinois EPA, Indiana Department of Environmental Management (IDEM), EPA, and the State of Illinois, we developed a protocol regarding the use of the SCRs while we explored alternatives to address this issue. After the protocol was finalized, the Illinois Attorney General brought an action in Wabash County Circuit Court against PSI seeking a preliminary injunction to enforce the protocol. In August 2004, the court granted that preliminary injunction. PSI is appealing that decision to the Fifth District Appellate Court, but we cannot predict the ultimate outcome of that appeal or of the underlying action by the Illinois Attorney General.
In April 2005, we completed the installation of a permanent control system to address this issue. The new control system will support all five Gibson generating units. We will seek recovery of any related capital as well as increased emission allowance expenditures through the regulatory process. We do not believe costs related to resolving this matter will have a material impact on our financial position or results of operations.
37
(vi) Zimmer Station (Zimmer Station) Lawsuit
In November 2004, a citizen of the Village of Moscow, Ohio, the town adjacent to CG&E’s&E’s Zimmer Station, brought a purported class action in the United States District Court for the Southern District of Ohio seeking monetary damages and injunctive relief against CG&E for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisance and common law nuisance. The plaintiffs have filed a number of additional notices of intent to sue and two lawsuits raising claims similar to those in the original claim. One lawsuit was dismissed on procedural grounds and the remaining two have been consolidated. The plaintiff filed a motion for class certification, which is fully briefed and pending decision. At this time, we cannot predict whether the outcome of this matter will have a material impact on our financial position or results of operations. We intend to defend this lawsuit vigorously in court.
(vii)(vi) Manufactured Gas Plant (MGP) Sites
Coal tar residues, related hydrocarbons, and various metals have been found in at least 22 sites that PSI or its predecessors previously owned and sold in a series of transactions with Northern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc. (IGC). The 22 sites are in the process of being studied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and PSI entered into Site Participation and Cost Sharing Agreements to allocate liability and responsibilities between them. Thus far, PSI has primary responsibility for investigating, monitoring and, if necessary, remediating nine of these sites. In December 2003, PSI entered into a voluntary remediation plan with the state of Indiana, providing a formal framework for the investigation and cleanup of the nine sites. The IDEMIndiana Department of Environmental Management oversees investigation and cleanup of all of these sites.
In April 1998, PSI filed suit in Hendricks County in the state of Indiana against its general liability insurance carriers. PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites; or (2) pay PSI’s cost of defense. PSI settled, in principle, its claims with all but one of the insurance carriers in January 2005 prior to commencement of the trial. With respect to the lone insurance carrier, a jury returned a verdict against PSI in February 2005. PSI has appealed this decision. At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeal.
PSI has accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated. We will continue to investigate and remediate the sites as outlined in the voluntary remediation plan. As additional facts become known and investigation is completed, we will assess whether the likelihood of incurring additional costs becomes probable. Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.
CG&E and ULH&P havehas performed site assessments on certain of their sites where we believe MGP activities have occurred at some point in the past and have found no imminent risk to the environment. At the present time, CG&E and ULH&Pcannot predict whether investigation and/or remediation will be required in the future at any of these sites.
(viii)(vii) Asbestos Claims Litigation
PSI
and CG&E and PSI, have been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations. Currently, there are approximately 130 pending lawsuits.lawsuits (the majority of which are PSI cases). In these lawsuits, plaintiffs claim to have been exposed to asbestos-containing products in the course of their work atas outside contractors in the construction and maintenance of CG&E and PSI generating stations. The plaintiffs further claim that as the property owner of the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure. A majority of the lawsuits to date have been brought against PSI. The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.
Of these lawsuits, one case filed against PSI has been tried to verdict. The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and a verdict for PSI on punitive damages. PSI appealed this decision up to the Indiana Supreme Court. In JulyOctober 2005, the Indiana Supreme Court upheld the jury’s verdict. PSI paid the judgment of
approximately $630,000 in the fourth quarter of 2005. In addition, PSI has settled a number ofover 150 other lawsuitsclaims for amounts, which neither individually nor in the aggregate,
38
are material to PSI’s financial position or results of operations. WeBased on estimates under varying assumptions, concerning such uncertainties, such as, among others: (i) the number of contractors potentially exposed to asbestos during construction or maintenance of PSI generating plants; (ii) the possible incidence of various illnesses among exposed workers, and (iii) the potential settlement costs without federal or other legislation that addresses asbestos tort actions, PSI estimates that the range of reasonably possible exposure in existing and future suits over the next 50 years could range from an immaterial amount to approximately $60 million, exclusive of costs to defend these cases. This estimated range of exposure may change as additional settlements occur and claims are currently evaluating the effect of themade in Indiana Supreme Court’s ruling on our existing docket of cases.and more case law is established.
At this time,CG&E has been named in fewer than 10 cases and as a resulthas virtually no settlement history for asbestos cases. Thus, CG&E and PSI areis not able to predictreasonably estimate the ultimate outcomerange of these lawsuitspotential loss from current or the impact onfuture lawsuits. However, potential judgments or settlements of existing or future claims could be material to CG&E’s&E and PSI’s financial position or results of operations.
.
(ix)(viii) Dunavan Waste Superfund Site
In July and October 2005, PSI received notices from the EPA that it has been identified as a de minimus potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act at the Dunavan Waste Oil Site in Oakwood, Vermilion County, Illinois. At this time, PSI does not have any further information regarding the scope of potential liability associated with this matter.
(x)(ix) Ontario, Canada Lawsuit
We understand through newspaper reports that a class action lawsuit was filed in Superior Court in Ontario, Canada against us and approximately 20 other utility and power generation companies alleging various claims relating to environmental emissions from coal-fired power generation facilities in the United States and Canada and damages of approximately $50 billion, with continuing damages in the amount of approximately $4 billion annually. We understand that the lawsuit also claims entitlement to punitive and exemplary damages in the amount of $1 billion. We have not yet been served in this lawsuit, however, if served, we intend to defend this lawsuit vigorously in court. We are not able to predict whether resolution of this matter would have a material effect on our financial position or results of operations.
On April 19, 2006, Cinergy was named in the third amended complaint of a purported class action filed in the United States District Court for the Southern District of Mississippi. Plaintiffs claim that Cinergy, along with numerous other utilities, oil companies, coal companies and chemical companies, is liable for damages relating to losses suffered by victims of Hurricane Katrina. Plaintiffs claim that Cinergy’s, and others, greenhouse gas emissions contributed to the frequency and intensity of storms such as Hurricane Katrina. Cinergy has not been served with this lawsuit. At this time, we are not able to predict whether resolution of this matter would have a material effect on our financial position or results of operations.
(x) Hurricane Katrina Lawsuit
On April 19, 2006, Cinergy was named in the third amended complaint of a purported class action filed in the United States District Court for the Southern District of Mississippi. Plaintiffs claim that Cinergy, along with numerous other utilities, oil companies, coal companies and chemical companies, is liable for damages relating to losses suffered by victims of Hurricane Katrina. Plaintiffs claim that Cinergy’s, and others, greenhouse gas emissions contributed to the frequency and intensity of storms such as Hurricane Katrina. Cinergy has not been served with this lawsuit. At this time, we are not able to predict whether resolution of this matter would have a material effect on our financial position or results of operations.
(b) Regulatory
(i) PSI Environmental Compliance Case
In November 2004, PSI filed a compliance plan case with the Indiana Utility Regulatory Commission (IURC)IURC seeking approval of PSI’s plan for complying with SO2, NOX, and mercury emission reduction requirements discussed previously in (a)(i), including approval of cost recovery and an overall rate of return of eight percent related to certain projects. PSI requested approval to recover the financing, depreciation, and operation and maintenance costs, among others, related to $1.08 billion in capital projects designed to reduce emissions of SO2, NOX, and mercury at PSI’s coal-burning generating stations. An evidentiary hearing was held in May 2005. In December 2005, PSI, the Indiana Office of the Utility Consumer Counselor, and the PSI Industrial Group filed a settlement agreement providing for approval of PSI’s compliance plan, and approval of financing, depreciation, and operation and maintenance cost recovery. The settlement agreement provides for 20-year depreciation in lieu of PSI’s originally requested 18-year depreciation, the use of PSI’s then weighted cost of capital to determine the overall rate of return rather than eight percent as originally requested, caps the amount of cost recovery for the Gallagher Generating Station baghouse projects, and removes the Activated Carbon Injection component of those projects. A final IURC Order is expected in the fourth quarterfirst half of 2005.
2006.
(ii) CG&E Electric Rate Filings
In response to the Public Utilities Commission of Ohio (PUCO’s) request that CG&E propose a RSP to mitigate the potential for significant rate increases when the market development period comes tooperates under an end, CG&E filed a proposed RSP which was approved by the PUCO in November 2004. The major features2004, and which expires December 31, 2008.
One of the RSP are as follows:
• Providercomponents of Last Resort (POLR) Charge:CG&E began collecting a POLR charge from non-residential customers effective January 1, 2005, and will begin to collect a POLR charge from residential customers effective January 1, 2006. The POLR charge includes several discrete charges, the most significant being an annually adjusted component (AAC) intended to provide cost recovery primarily for environmental compliance expenditures; an infrastructure maintenance fund charge (IMF) intended to provide compensation to CG&E for committing its physical capacity to meet its POLR obligation; anda system reliability tracker (SRT) intended to provide cost recovery for capacity purchases, purchased power, reserve capacity, and related market costs for purchases to meet capacity needs. We anticipate the collection of the AAC and IMF will result in an approximate $36 million increase in revenues in 2005 and an additional $50 million in 2006. The SRT will be billed based on dollar-for-dollar costs incurred. A portion of these charges is avoidable by certain customers who switch to an alternative generation supplier and provide notice to CG&E that they will remain switched through December 31, 2008. Therefore, these estimates are subject to change, depending on the level of switching that occurs in future periods. CG&E has filed an application for approval of its SRT (2005 actual and 2006 estimated) with the PUCO. In October, a settlement agreement unopposed by any party to the case was filed with the PUCO providing for implementation of the 2006 SRT at a 15 percent reserve margin and approval of the 2005 SRT price. A Commission decision is expected on this matter in the fourth quarter of 2005. In 2007 and 2008, CG&E could seek additional increases in the AAC component of the POLR based on CG&E’s actual net costs for the specified expenditures.
39
• Generation Rates and Fuel Recovery: A new rate has been established for generation service after the market development period ends. In addition,RSP is a fuel cost recovery mechanism that is adjusted quarterly has been established to recover costs for fuel, emission allowances, and certain purchased power costs, that exceed the amount originally included in the rates frozen in the CG&E transition plan. These new rates were applied to non-residential customers beginning January 1, 2005 and will be applied to residential customers beginning January 1, 2006. The fuel clause recovery mechanism, which was recently audited by the PUCO’s auditor. The auditauditor recommended alternate methodologies for administration of the fuel clause recovery mechanism that varyvaries from CG&E’s current practice. A hearing before PUCO hearingexaminers was held in early November at which the PUCO staff took positions contrary to CG&E's&E’s current practice. CG&E officials also testified at the hearing concerning our current practices. An order from the PUCO on these matters is expected in the fourth quarter of this year. While we cannot predict the outcome of these proceedings, an outcome resulting in administrative methodologies substantially different from those being employed byIn January 2006, CG&E couldsigned a settlement on the RSP with the PUCO staff. The two intervening parties have agreed not to oppose the settlement. In February 2006, the PUCO issued an order approving the settlement agreement. We do not expect the agreement to have a material impact on CG&E&E’s andor Cinergy’s results of operations.
• Generation Rate Reduction: The existing five percent generation rate reduction required by statute for residential customers implemented under CG&E’s 2000 plan will end on December 31, 2005.
• Transmission Cost Recovery: A transmission cost recovery mechanism was established beginning January 1, 2005 for non-residential customers and will be established beginning January 1, 2006 for residential customers. The transmission cost recovery mechanism is designed to permit CG&E to recover Midwest Independent Transmission System Operator, Inc. charges, all Federal Energy Regulatory Commission (FERC) approved transmission costs, and all congestion costs allocable to retail ratepayers that are provided service by CG&E.
• Distribution Cost Recovery: CG&E will have the ability to defer certain capital-related distribution costs from July 1, 2004 through December 31, 2005 with recovery from non-residential customers to be provided through a rider beginning January 1, 2006 through December 31, 2010.
CG&E had also filed an electric distribution base rate case for residential and non-residential customers to be effective January 1, 2005. Under the terms of the RSP described previously, CG&E withdrew this base rate case and, in February 2005, CG&E filed a new distribution base rate case with rates to become effective January 1, 2006. The originally requested amount of the increase was $78 million, which was subsequently updated to $69.5 million. On September 9, 2005, the PUCO issued its Staff Report recommending a revenue increase range between approximately $43 million and $49 million. The hearing for this case is set to begin December 12, 2005.
In March 2005, the Ohio Consumers’ Counsel askedappealed the OhioCommission’s approval of the RSP to the Supreme Court of Ohio. The Supreme Court of Ohio recently ruled on the rate stabilization plan for another Ohio utility, and in that ruling, upheld the market prices charged by the utility to overturnits consumers as approved by the RSP.Commission but overturned the competitive bid process approved by the Commission on the basis that the Commission rejected the bid price on behalf on consumers and the applicable statute requires customer involvement. CG&E’s RSP does not contain a competitive bid process pursuant to a statutory exception. CG&E does not expect a significant, if any, change to its RSP as a result of this case but cannot predict the outcome of its case. We expect the court to decide the case in 2006; however,2006.
CG&E has also filed a distribution rate case to recover certain distribution costs with rates becoming effective on January 1, 2006 and CG&E has deferred certain costs in 2004 and 2005 pursuant to its RSP. The parties to the proceeding agreed upon and filed a settlement setting the recommended annual revenue increase at this time we cannot predictapproximately $51 million. In December 2005, the outcome of this matter.
PUCO issued an order approving the settlement agreement.
(iii) ULH&P Gas Rate Case
In 2002, the Kentucky Public Service Commission (KPSC)KPSC approved ULH&P’s gas base rate case requesting, among other things, recovery of costs associated with an accelerated gas main replacement program of up to $112 million over ten years. The approval allowed the costs to be recovered through a tracking mechanism for an initial three yearthree-year period expiring on September 30, 2005, with the possibility of renewal for up to ten years. The tracking mechanism allows ULH&P to recover depreciation costs and rate of return annually over the life of the deferred assets. As of September 30, 2005March 31, 2006, we have capitalized $60$64.5 million in costs associated with the accelerated gas main replacement program through this tracking mechanism, of which ULH&P has recovered $8.6$8.9 million. The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the tracking mechanism rates. In October 2005, both the Company and the KPSC filed with the Franklin Circuit Court, requesting dismissal of the case for failure to prosecute by the Kentucky Attorney General. At the present time, ULH&P cannot predict the timing or outcome of this litigation.
In February 2005, ULH&P filed a gas base rate case with the KPSC requesting approval to continue the tracking mechanism in addition to its request for a $14 million annual increase in base rates. A portion of the increase is attributable to including recovery of the current cost of the accelerated main replacement program in base rates. The KPSC did not rule on thisthe base rate case request or the request to continue the tracking mechanism by October 1, 2005 causing2005; consequently the initial tracking mechanism to expire.expired on September 30, 2005. In accordance with Kentucky law, ULH&P implemented the full amount of the requested rate increase on October 1, 2005. Any revenue collected pursuantIn December 2005, the KPSC approved an annual rate increase of $8.1 million and reapproved the tracking mechanism through 2011. Pursuant to the rate increase will be subject toKPSC’s order, ULH&P filed a refund ifplan in January 2006 for the excess revenues collected since October 1, 2005. In February 2006, the KPSC does not approveissued an additional order responding to a rehearing request made by the full requested amount. ULH&P expectsAttorney General. Its rehearing order approved the Company’s refund plan, which resulted in refunds being provided to customers beginning in March 2006. In February 2006, the Attorney General appealed the KPSC’s order to the Franklin Circuit Court, claiming that the KPSC will issueorder improperly allows ULH&P to increase its decision duringrates for gas main replacement costs in between general rate cases, and also claiming that the fourth quarterorder improperly allows ULH&P to earn a return on investment for the costs recovered under the tracking mechanism which permits ULH&P to recover its gas main replacement costs. At this time, ULH&P cannot predict the outcome of 2005.
40
this litigation.
(iv) Gas Distribution Plant
In June 2003, the PUCO approved an amended settlement agreement between CG&E and the PUCO Staffstaff in a gas distribution safety case arising out of a gas leak at a service head-adapter (SHA) style riser on CG&E’s distribution system. The amended settlement agreement required CG&E to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, and to file a comprehensive plan addressing all SHA risers on its distribution system. CG&E filed a comprehensive plan with the PUCO in December 2004 providing for replacement of approximately 5,000 risers in 2005 with continued monitoring thereafter. CG&E estimates the replacement cost of these risers will not be material. In April 2005, the PUCO issued an order closing this case. The PUCO issued a separate order
opening a statewide investigation into riser leaks in gas pipeline systems throughout Ohio. At this time, Cinergy and CG&E cannot predict the outcome or the impact of the statewide investigation.
(v) PUCO Merger Approval Appeal to the Supreme Court
In April 2006, The Office of the Ohio Consumers’ Counsel filed a Notice of Appeal with the Supreme Court of Ohio, requesting the Court remand the Commission’s merger approval for a full evidentiary hearing. The Office of the Ohio Consumers’ Counsel alleges that the Commission committed reversible error on both procedural and substantive grounds, in among other things, failing to set the matter for a full evidentiary hearing, failing to consider evidence regarding the transfer of the DENA assets to CG&E, and failing to lift the stay on discovery. While CG&E cannot predict the outcome of this matter, it is unlikely that the Court’s decision will affect the consummation of the merger.
(vi) IURC Merger Approval Request for Rehearing and Reconsideration
In April 2006, Interveners, Citizens Action Coalition of Indiana, Inc., filed a Verified Petition for Rehearing and Reconsideration claiming that PSI should be ordered to provide an additional $5 million in rate credits to customers to be consistent with the NCUC order. An order on the Petition is expected in the second quarter of 2006.
(c) Other
(i) Energy Market Investigations
In August 2003, Cinergy, along with Cinergy Marketing & Trading, LP (Marketing & Trading) and 37 other companies, were named as defendants in civil litigation filed as a purported class action on behalf of all persons who purchased and/or sold New York Mercantile Exchange natural gas futures and options contracts between January 1, 2000, and December 31, 2002. The complaint alleges that improper price reporting caused damages to the class. Two similar lawsuits have subsequently been filed, and these three lawsuits have been consolidated for pretrial purposes. The plaintiffs filed a consolidated class action complaint in January 2004. Cinergy’s motion to dismiss was granted in September 2004 leaving only Marketing & Trading in the lawsuit. We intend to defend this lawsuit vigorously in court.
Cinergy continues to provide various Assistant United States Attorneys with information with respect to their investigations into energy market practices.
At this time, we do not believe the outcome of these investigations and litigation will have a material impact on Cinergy’s financial position or results of operations.
(ii) Synthetic Fuel Production
Cinergy produces synthetic fuel from two facilities synthetic fuel that qualifiesqualify for tax credits (through 2007) in accordance with Section 2929/45K of the Internal Revenue Code (IRC) if certain requirements are satisfied.
These credits reduceCinergy’s income tax liability and thereforeCinergy’s effective tax rate. Cinergy’s sale of synthetic fuel has generated $306$339 million in tax credits through September 30,December 31, 2005 and an additional $18 million, after reducing for phase-out, through March 31, 2006. Section 29/45K provides for a phase-out of the credit if the average price of crude oil during a calendar year exceeds a specified threshold. The phase-out is based on a prescribed calculation and definition of crude oil prices. Based on current crude oil prices, we believe that for 2006 and 2007 the amount of the tax credits will be reduced, perhaps significantly. If oil prices are high enough, we may idle the plants, as the value of the credits would not exceed the net costs to produce the synthetic fuel. During the first quarter of 2006, an agreement was in place with the plant operator which $27 million related to the new facility purchasedwould indemnifyCinergy in the second quarter of 2005. event that tax credits are insufficient to support operating expenses. Cinergy’s net investment in the plants at March 31, 2006 was approximately $37 million.
The Internal Revenue Service (IRS) is currently auditingCinergy for the 2002, 2003, and 20032004 tax years and has recently challenged certain other taxpayers’ Section 29 tax credits.years. We expect the IRS will evaluate the various key requirements for claiming our Section 2929/45K credits related to synthetic fuel. If the IRS challenges our Section 2929/45K tax credits related to synthetic fuel, and such challenges wereare successful, this could result in the disallowance of up to all $306$357 million in previously claimed Section 29 tax credits for synthetic fuel produced by the applicableCinergy facilities and a loss of our ability to claim future Section 29 tax credits for synthetic fuel produced by such facilities. We believe that we operate in conformity with all the necessary requirements to be allowed such tax credits under Section 29. Upon consummation of the pending merger of Duke and Cinergy29/45K. , the synthetic fuel produced by Cinergy’s new facility pursuant to the existing commercial arrangement would cease to qualify for the Section 29 credit. Cinergy is evaluating transactions for the disposition of a portion of the affected facility that Cinergy believes would enable the fuel produced by the facility to continue to qualify for credit under IRC Section 29. In the event a suitable transaction is not achieved, Cinergy anticipates that its production of synthetic fuel at the affected facility would be suspended upon consummation of the pending merger with Duke.
Section 29 also provides for a phase-out of the credit based on the average price of crude oil during a calendar year. The phase-out is based on a prescribed calculation and definition of crude oil prices. Based on current crude oil prices and the recent volatility of such prices, we believe it is possible that for 2006 and 2007, the amount of the tax credits could be reduced. If oil prices are high enough, we may idle the plants, as the value of the credits would not
41
exceed the net costs to produce the synthetic fuel. Net income related to these facilities for the nine months ended September 30, 2005 was approximately $30 million. The net book value of our plants at September 30, 2005 was approximately $50 million.
(iii)(ii) FirstEnergy Lawsuit
FirstEnergy has filed a lawsuit in the Court of Common Pleas in Summit County, Ohio against Cinergy with respect to a transaction between Cinergy and a subsidiary of FirstEnergy, relating to a joint venture company, Avon Energy Partners Holdings (Avon). In 1999, the FirstEnergy subsidiary acquired Cinergy’s share of Avon which it subsequently sold to a third party. The original transaction documents included an indemnity by Cinergy with respect to a certain investment owned by Avon. FirstEnergy claims that this indemnity was triggered by its sale of Avon to a third party, and is seeking to recover $15 million from Cinergy. Both parties have filed motionsOn April 28, 2006, the court granted Cinergy’s motion for summary judgment.judgment, thus ruling that Cinergy intendsis not obligated to defendpay the $15 million sought by FirstEnergy. FirstEnergy has appealed this lawsuit vigorously in court. decision. At this time, we cannot predict the outcome of this matter.
(iv)(iii) Guarantees
In the ordinary course of business, Cinergy enters into various agreements providing financial or performance assurances to third parties on behalf of certain unconsolidated subsidiaries and joint ventures. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to these entities on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish their intended commercial purposes. The guarantees have various termination dates, from short-term (less than one year) to open-ended.
In many cases, the maximum potential amount of an outstanding guarantee is an express term, set forth in the guarantee agreement, representing the maximum potential obligation of Cinergy under that guarantee (excluding, at times, certain legal fees to which a guaranty beneficiary may be entitled). In those cases where there is no maximum potential amount expressly set forth in the guarantee agreement, we calculate the maximum potential amount by considering the terms of the guaranteed transactions, to the extent such amount is estimable.
Cinergy had guaranteed borrowings by individuals under the Director, Officer, and Key Employee Stock Purchase Program. Under these guarantees, Cinergy would have been obligated to pay the debt’s principal and any related interest in the event of an unexcused breach of a guaranteed payment obligation by certain directors, officers, and key employees. This program terminated pursuant to its terms during the first quarter of 2005 and as of March 31, 2005, all borrowings had been repaid by the participants.
Cinergy Corp. has also provided performance guarantees on behalf of certain unconsolidated subsidiaries and joint ventures. These guarantees support performance under various agreements and instruments (such as construction contracts, operation and maintenance agreements, and energy service agreements). Cinergy Corp. may be liable in the event of an unexcused breach of a guaranteed performance obligation by an unconsolidated subsidiary. Cinergy Corp. has estimated its maximum potential liability to be $52 million under these guarantees as of September 30, 2005.March 31, 2006. Cinergy Corp. may also have recourse to third parties for claims required to be paid under certain of these guarantees. The majority of these guarantees expire at the completion of the underlying performance agreement, the majority of which expire from 2016 to 2019.
Cinergy has entered into contracts that include indemnification provisions as a routine part of its business activities. Examples of these contracts include purchase and sale agreements and operating agreements. In general, these provisions indemnify the counterparty for matters such as breaches of representations and warranties and covenants contained in the contract. In some cases, particularly with respect to purchase and sale agreements, the potential liability for certain indemnification obligations is capped, in whole or in part (generally at an aggregate amount not exceeding the sale price), and subject to a deductible amount before any payments would become due.In other cases (such as indemnifications for willful misconduct of employees in a joint venture), the maximum potential liability is not estimable given that the magnitude of any claims under those indemnifications would be a function of the extent of damages actually incurred. Cinergy has estimated the maximum potential liability, where estimable, to
42
be $103$137 million under these indemnification provisions. The termination period for the majority of matters provided by indemnification provisions in these types of agreements generally ranges from 20052006 to 2009.
2010.
We believe the likelihood that Cinergy would be required to perform or otherwise incur any significant losses associated with any or all of the guarantees described in the preceding paragraphs is remote.
In December 2005, 10.Cinergy completed the sale of a wholly-owned subsidiary in the Czech Republic that was engaged in the generation and sale of heat and electricity. At the time of the sale, the subsidiary had assets of approximately $113 million and liabilities of approximately $12 million. The net, after-tax, gain from the sale was approximately $18 million (including a net, after-tax, cumulative currency translation gain of approximately $24 million).
In December 2005, Cinergy began taking steps to sell its wholly-owned North American energy management and energy performance contracting business. In December 2005, Cinergy recognized a $17 million pre-tax impairment charge to value this business to its estimated fair value less cost to sell in accordance with being deemed held for sale. In April 2006, Cinergy completed the sale of this business. The net, after tax, loss on the sale was approximately $19 million (including the $17 million impairment charge recognized in December 2005).
These consolidated entities have been presented as Discontinued operations, net of tax in Cinergy’s Condensed Consolidated Statements of Income and as Assets/Liabilities of Discontinued Operations in Cinergy’s Condensed Consolidated Balance Sheets. The discontinued operations were part of Commercial Business Unit (Commercial).
38
The accompanying financial statements and prior year financial statements have been reclassified to account for these entities as such.
The following table reflects the assets and liabilities, the results of operations, and the income (loss) on disposal related to investments accounted for as discontinued operations for the quarters ended March 31, 2006 and 2005.
| March 31 |
| |||||
|
| 2006 |
| 2005 |
| ||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
Revenues(1) |
| $ | 5 |
| $ | 18 |
|
|
|
|
|
|
| ||
Income (Loss) Before Taxes |
| $ | (3 | ) | $ | 3 |
|
|
|
|
|
|
| ||
Income Taxes Expense (Benefit) |
| $ | (1 | ) | $ | 1 |
|
|
|
|
|
|
| ||
Income (Loss) from Discontinued Operations |
|
|
|
|
| ||
Income (Loss) from operations, net of tax |
| $ | (2 | ) | $ | 2 |
|
Loss on disposal, net of tax |
| (2 | ) | — |
| ||
|
|
|
|
|
| ||
Total Income (Loss) from Discontinued Operations |
| $ | (4 | ) | $ | 2 |
|
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Current assets |
| $ | 9 |
| $ | 34 |
|
Property, plant, and equipment-net |
| — |
| 120 |
| ||
Other assets |
| 13 |
| 29 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 22 |
| $ | 183 |
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Current liabilities |
| $ | 8 |
| $ | 7 |
|
Long-term debt (including Long-term debt due within one year) |
| 13 |
| 17 |
| ||
Other |
| 5 |
| 16 |
| ||
|
|
|
|
|
| ||
Total Liabilities |
| $ | 26 |
| $ | 40 |
|
|
|
|
|
|
| ||
Cash Flows |
|
|
|
|
| ||
Operating Activities |
| $ | 3 |
| $ | 10 |
|
Investing Activities |
| 2 |
| 3 |
| ||
Financing Activities |
| (5 | ) | (8 | ) | ||
|
|
|
|
|
| ||
Total Cash Flows |
| $ | — |
| $ | 5 |
|
(1) Presented for informational purposes only. All results of operations are reported net in our Statements of Income.
9. Financial Information by Business Segment
As discussed in the 20042005 10-K, we conduct operations through our subsidiaries and manage our businesses through the following three reportable segments:
•· Regulated Business Unit (Regulated);
•· Commercial Business Unit (Commercial);Commercial; and
•· Power Technology and Infrastructure Services Business Unit (Power Technology and Infrastructure).
Regulated consists of PSI’s regulated generation and transmission and distribution operations, and CG&E and its subsidiaries’ regulated electric and gas transmission and distribution systems.systems and its subsidiaries’ regulated electric generation. Regulated plans, constructs, operates, and maintains Cinergy’s transmission and distribution systems and delivers gas and electric energy to consumers. Regulated also earns revenues from wholesale customers primarily by these customers transmitting electric power through Cinergy’s transmission system. These businesses are subject to cost of service rate making where rates to be charged to customers are based on prudently incurred costs over a test period plus a reasonable rate of return.
Commercial manages our wholesale generation and energy marketing and trading activities. Commercial also performs energy risk management activities, provides customized energy solutions and is responsible for all of our international operations.
Power Technology and Infrastructure primarily manages Cinergy Ventures, LLC (Ventures), Cinergy’s venture capital subsidiary. Ventures identifies, invests in, and integrates new energy technologies into Cinergy’s existing businesses, focused primarily on operational efficiencies and clean energy technologies. In addition, Power Technology and Infrastructure manages our investments in other energy infrastructure and telecommunication service providers.
Following are the financial results by business unit. Certain prior yearprior-year amounts have been reclassified to conform to the current presentation.
43
40
Financial results by business unit for the quarters ended September 30,March 31, 2006, and March 31, 2005, and September 30, 2004, are as indicated below.
|
| Cinergy Business Units |
|
|
|
|
| ||||||||||||
|
| Regulated |
| Commercial |
| Power Technology |
| Total |
| Reconciling |
| Consolidated |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External customers |
| $ | 853 |
| $ | 512 |
| $ | — |
| $ | 1,365 |
| $ | — |
| $ | 1,365 |
|
Intersegment revenues |
| 10 |
| 54 |
| — |
| 64 |
| (64 | ) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross margins |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric |
| 512 |
| 163 |
| — |
| 675 |
| — |
| 675 | (2) | ||||||
Gas |
| 37 |
| 17 |
| — |
| 54 |
| — |
| 54 | (3) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Segment profit (loss) |
| 92 |
| 41 |
| (1 | ) | 132 |
| — |
| 132 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External customers |
| $ | 727 |
| $ | 402 |
| $ | — |
| $ | 1,129 |
| $ | — |
| $ | 1,129 |
|
Intersegment revenues |
| 18 |
| 63 |
| — |
| 81 |
| (81 | ) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross margins |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric |
| 441 |
| 170 |
| — |
| 611 |
| — |
| 611 | (2) | ||||||
Gas |
| 40 |
| 6 |
| — |
| 46 |
| — |
| 46 | (3) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Segment profit (loss) |
| 59 |
| 45 |
| (11 | ) | 93 |
| — |
| 93 |
|
|
| Cinergy Business Units |
|
|
|
|
| ||||||||||||
|
| Regulated |
| Commercial |
| Power Technology |
| Total |
| Reconciling |
| Consolidated |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External customers |
| $ | 1,026 |
| $ | 623 |
| $ | — |
| $ | 1,649 |
| $ | — |
| $ | 1,649 |
|
Intersegment revenues |
| — |
| 1 |
| — |
| 1 |
| (1 | ) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross margins |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric(2) |
| 478 |
| 233 |
| — |
| 711 |
| — |
| 711 |
| ||||||
Gas(3) |
| 90 |
| 34 |
| — |
| 124 |
| — |
| 124 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Discontinued operations, net of tax(4) |
| — |
| (4 | ) | — |
| (4 | ) | — |
| (4 | ) | ||||||
Cumulative effect of a change in accounting principle, net of tax(5) |
| (2 | ) | (1 | ) | — |
| (3 | ) | — |
| (3 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income (loss) |
| 34 |
| 50 |
| (5 | ) | 79 |
| — |
| 79 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External customers |
| $ | 912 |
| $ | 414 |
| $ | — |
| $ | 1,326 |
| $ | — |
| $ | 1,326 |
|
Intersegment revenues |
| 12 |
| 45 |
| — |
| 57 |
| (57 | ) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross margins |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric(2) |
| 442 |
| 172 |
| — |
| 614 |
| — |
| 614 |
| ||||||
Gas(3) |
| 98 |
| 6 |
| — |
| 104 |
| — |
| 104 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Discontinued operations, net of tax(4) |
| — |
| 2 |
| — |
| 2 |
| — |
| 2 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income (loss) |
| 76 |
| 45 |
| (4 | ) | 117 |
| — |
| 117 |
|
(1) The Reconciling Eliminations category eliminates the intersegment revenues of Commercial and Regulated.
(2) Electric gross margin ismargins are calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.
(3) Gas gross margin ismargins are calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.
(4)See Note 8 for additional information.
44(5)See Note 1(e)(i) for additional information.
Financial results by business unit for year to date September 30,Total segment assets at March 31, 2006 and December 31, 2005, and September 30, 2004, are as indicated below.below:
|
| Cinergy Business Units |
|
|
|
|
| ||||||||||||
|
| Regulated |
| Commercial |
| Power Technology |
| Total |
| Reconciling Eliminations(1) |
| Consolidated |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Year to Date September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External customers |
| $ | 2,471 |
| $ | 1,353 |
| $ | — |
| $ | 3,824 |
| $ | — |
| $ | 3,824 |
|
Intersegment revenues |
| 24 |
| 137 |
| — |
| 161 |
| (161 | ) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross margins |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric |
| 1,388 |
| 509 |
| — |
| 1,897 |
| — |
| 1,897 | (2) | ||||||
Gas |
| 179 |
| 3 |
| — |
| 182 |
| — |
| 182 | (3) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Segment profit (loss) |
| 217 |
| 90 |
| (7 | ) | 300 |
| — |
| 300 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Year to Date September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External customers |
| $ | 2,327 |
| $ | 1,144 |
| $ | — |
| $ | 3,471 |
| $ | — |
| $ | 3,471 |
|
Intersegment revenues |
| 49 |
| 165 |
| — |
| 214 |
| (214 | ) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross margins |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric |
| 1,243 |
| 504 |
| — |
| 1,747 |
| — |
| 1,747 | (2) | ||||||
Gas |
| 188 |
| 45 |
| — |
| 233 |
| — |
| 233 | (3) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Segment profit (loss) |
| 173 |
| 121 |
| (40 | ) | 254 |
| — |
| 254 |
|
|
| Cinergy Business Units |
| ||||||||||
|
| Regulated |
| Commercial(1) |
| Power Technology and Infrastructure |
| Total |
| ||||
|
| (in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Segment assets from continuing operations |
| $ | 10,285 |
| $ | 5,927 |
| $ | 122 |
| $ | 16,334 |
|
Segment assets from discontinued operations |
| — |
| 22 |
| — |
| 22 |
| ||||
Total segment assets at March 31, 2006 |
| $ | 10,285 |
| $ | 5,949 |
| $ | 122 |
| $ | 16,356 |
|
|
|
|
|
|
|
|
|
|
| ||||
Segment assets from continuing operations |
| $ | 9,963 |
| $ | 7,025 |
| $ | 132 |
| $ | 17,120 |
|
Segment assets from discontinued operations |
| — |
| 34 |
| — |
| 34 |
| ||||
Total segment assets at December 31, 2005 |
| $ | 9,963 |
| $ | 7,059 |
| $ | 132 |
| $ | 17,154 |
|
(1) The Reconciling Eliminations category eliminates the intersegment revenues of Commercialdecrease in Commercial’s assets was primarily due to decreases in energy risk management assets and Regulated.decreases in trade receivables.
(2)Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.42
(3)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.
45
Total segment assets at September 30, 2005, and December 31, 2004, are as indicated below:
|
| Cinergy Business Units |
|
|
| |||||||||||
|
| Regulated |
| Commercial |
| Power Technology |
| Total |
| Consolidated |
| |||||
|
| (in millions) |
|
|
| |||||||||||
Total segment assets at September 30, 2005 |
| $ | 9,503 |
| $ | 7,830 |
| $ | 133 |
| $ | 17,466 |
| $ | 17,466 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total segment assets at December 31, 2004 |
| $ | 9,097 |
| $ | 5,746 |
| $ | 139 |
| $ | 14,982 |
| $ | 14,982 |
|
46
11.10. Earnings Per Common Share (EPS)
A reconciliation of EPS –— basic to EPS –— diluted from continuing operations is presented below for the quarters ended September 30, 2005March 31, 2006 and 2004:2005:
|
| Income |
| Shares |
| EPS |
| ||
|
| (in thousands, except per share amounts) |
| ||||||
Quarter Ended September 30, 2005 |
|
|
|
|
|
|
| ||
EPS – basic: |
| $ | 131,937 |
| 199,069 |
| $ | 0.67 |
|
|
|
|
|
|
|
|
| ||
Effect of dilutive securities: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 828 |
|
|
| ||
Directors’ compensation plans |
|
|
| 150 |
|
|
| ||
Contingently issuable common stock |
|
|
| 120 |
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS – diluted: |
| $ | 131,937 |
| 200,167 |
| $ | 0.66 |
|
|
|
|
|
|
|
|
| ||
Quarter Ended September 30, 2004 |
|
|
|
|
|
|
| ||
EPS – basic: |
| $ | 92,923 |
| 180,881 |
| $ | 0.51 |
|
|
|
|
|
|
|
|
| ||
Effect of dilutive securities: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 616 |
|
|
| ||
Directors’ compensation plans |
|
|
| 148 |
|
|
| ||
Contingently issuable common stock |
|
|
| 710 |
|
|
| ||
Stock purchase contracts |
|
|
| 1,123 |
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS – diluted: |
| $ | 92,923 |
| 183,478 |
| $ | 0.50 |
|
|
| Income |
| Shares |
| EPS |
| ||
|
| (in thousands, except per share amounts) |
| ||||||
Quarter Ended March 31, 2006 |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS — basic: |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
Income from continuing operations — basic |
| $ | 86,914 |
| 200,286 |
| $ | 0.43 |
|
|
|
|
|
|
|
|
| ||
EPS — diluted: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 713 |
|
|
| ||
Directors’ compensation plans |
|
|
| 162 |
|
|
| ||
|
|
|
|
|
|
|
| ||
Income from continuing operations — diluted |
| $ | 86,914 |
| 201,161 |
| $ | 0.43 |
|
|
|
|
|
|
|
|
| ||
Quarter Ended March 31, 2005 |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS — basic: |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
Income from continuing operations — basic |
| $ | 114,879 |
| 195,647 |
| $ | 0.59 |
|
|
|
|
|
|
|
|
| ||
EPS — diluted: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 627 |
|
|
| ||
Directors’ compensation plans |
|
|
| 148 |
|
|
| ||
Stock purchase contracts |
|
|
| 290 |
|
|
| ||
|
|
|
|
|
|
|
| ||
Income from continuing operations — diluted |
| $ | 114,879 |
| 196,712 |
| $ | 0.59 |
|
Options to purchase shares of common stock are excluded from the calculation of EPS –— diluted, if they are considered to be anti-dilutive. Share amounts of 0.71.3 million and 0.91.5 million were excluded from the EPS –— diluted calculation for the quarters ended September 30,March 31, 2006 and 2005, and 2004, respectively.
Also excluded from the EPS – diluted calculation for the quarter ended September 30, 2004 are 9.7 million shares, issuable pursuant to the stock purchase contracts issued by Cinergy Corp. in December 2001 associated with the preferred trust securities transaction. As discussed in the 2004 10-K, in January11. Acquisition and February 2005, Cinergy Corp. issued a total of 9.2 million shares of common stock associated with these preferred stock securities.
A reconciliation of EPS – basic to EPS – diluted is presented below for the year to date September 30, 2005 and 2004:
|
| Income |
| Shares |
| EPS |
| ||
|
| (in thousands, except per share amounts) |
| ||||||
Year to Date September 30, 2005 |
|
|
|
|
|
|
| ||
EPS – basic: |
| $ | 300,001 |
| 197,741 |
| $ | 1.52 |
|
|
|
|
|
|
|
|
| ||
Effect of dilutive securities: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 706 |
|
|
| ||
Directors’ compensation plans |
|
|
| 149 |
|
|
| ||
Contingently issuable common stock |
|
|
| 84 |
|
|
| ||
Stock purchase contracts |
|
|
| 97 |
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS – diluted: |
| $ | 300,001 |
| 198,777 |
| $ | 1.51 |
|
|
|
|
|
|
|
|
| ||
Year to Date September 30, 2004 |
|
|
|
|
|
|
| ||
EPS – basic: |
| $ | 254,442 |
| 180,129 |
| $ | 1.41 |
|
|
|
|
|
|
|
|
| ||
Effect of dilutive securities: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 675 |
|
|
| ||
Directors’ compensation plans |
|
|
| 148 |
|
|
| ||
Contingently issuable common stock |
|
|
| 585 |
|
|
| ||
Stock purchase contracts |
|
|
| 1,027 |
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS – diluted: |
| $ | 254,442 |
| 182,564 |
| $ | 1.39 |
|
47
Options to purchase shares of common stock are excluded from the calculation of EPS – diluted, if they are considered to be anti-dilutive. Share amounts of 0.8 million and 0.9 million were excluded from the EPS – diluted calculation for the year to date September 30, 2005 and 2004, respectively.
Also excluded from the EPS – diluted calculation for the year to date September 30, 2004 are 9.8 million shares issuable pursuant to the stock purchase contracts issued by Cinergy Corp. in December 2001 associated with the preferred trust securities transaction. As discussed in the 2004 10-K, in January and February 2005, Cinergy Corp. issued a total of 9.2 million shares of common stock associated with these preferred stock securities.
12.Transfer and Acquisition of Generating Assets
(a) Transfer of Duke Generating Assets to ULH&P
CG&E — Subsequent Event
The KPSC and the FERC have approvedIn April 2006, Duke contributed to ULH&P’s planned acquisition of CG&E’s&E approximately 69 percentits ownership interest in the East Bend Station, locatedfive plants, representing a mix of combined cycle and peaking plants, with a combined capacity of 3,760 megawatts (MWs), as follows:
Generating Plant |
| Location |
| Ownership |
| Fuel Type |
| Owned |
|
|
|
|
|
|
|
|
|
|
|
Fayette |
| Fayette County, Pennsylvania |
| 100 | % | Gas |
| 620 |
|
Hanging Rock |
| Lawrence County, Ohio |
| 100 |
| Gas |
| 1,240 |
|
Lee |
| Lee County, Illinois |
| 100 |
| Gas |
| 640 |
|
Vermillion |
| Vermillion County, Indiana |
| 75 |
| Gas |
| 640 |
|
Washington |
| Washington County, Ohio |
| 100 |
| Gas |
| 620 |
|
|
|
|
|
|
|
|
| 3,760 |
|
The transaction was effective in Boone County, Kentucky, the Woodsdale Station, located in Butler County, Ohio,April 2006 and one generating unitwas accounted for at the four-unit Miami Fort Station, located in Hamilton County, Ohio, and associated transactions. ULH&P is currently seeking approval of the transaction in a proceeding before the Securities and Exchange Commission (SEC), wherein the Ohio Consumers’ Counsel has intervened in opposition. The transfer, which will be atDuke’s net book value will not affect current electric ratesfor these assets. The LLCs holding these generating plants, which were indirect subsidiaries of Duke, were first distributed to Duke, which then contributed them to Cinergy which, in turn, contributed them to CG&E. In the final step, these LLCs were then merged into CG&E.
In connection with the contribution of these assets, CG&E assumed certain related liabilities. In particular, CG&E assumed from Duke all payment, performance, and other obligations of Duke, with respect to certain deferred tax liabilities related to the assets. The following table summarizes this transaction for ULH&P’sCG&E customers, as power will be provided under the same terms as under the current wholesale power contract with:
| (in millions) |
| ||
|
|
|
| |
Assets Received |
|
|
| |
Generating Assets |
| $ | 1,563 |
|
Other Assets |
| 15 |
| |
Total Assets Received |
| $ | 1,578 |
|
|
|
|
| |
Liabilities Assumed |
|
|
| |
Deferred Tax Liabilities |
| $ | 181 |
|
Other |
| 11 |
| |
Total Liabilities Assumed |
| $ | 192 |
|
|
|
|
| |
Contributed Capital from Duke |
| $ | 1,386 |
|
As part of this transaction, Duke Capital LLC, a subsidiary of Duke, agreed to reimburse CG&E through December 31, 2006. Assuming receipt of SEC approval, we would anticipate the transfer to take placeApril 2016 in the first quarterevent of 2006.
(b)Wheatland Generating Facility Acquisition
On May 6, 2005, we signed a definitive agreement with subsidiaries of Allegheny Energy, Inc. whereby, subject to the terms and upon satisfaction of the conditions to closing provided in the purchase agreement, PSI and/or CG&E had the right to acquire the 512-megawatt Wheatland generating facility for approximately $100 million. The Wheatland facility, located in Knox County, Indiana, has four natural gas-fired simple cycle combustion turbines and is directly connected to the Cinergy transmission system. In June and August 2005, respectively, the FERC and IURC approved the acquisition and the Department of Justice and Federal Trade Commission completed their review of the transaction pursuant to the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act. In August 2005, PSI acquired 100 percent of the Wheatland facility. Its output will be used to bolster the reserve margins on the PSI system.
On May 8, 2005, Cinergy Corp. entered into an agreement and plan of merger with Duke, a North Carolina corporation, whereby Cinergy Corp. will be merged with Duke. Under the merger agreement, each share of Cinergy Corp. common stock will be converted into 1.56 shares of the newly formed company, Duke Energy Holding Corp (Duke Energy Holding).
The merger agreement has been approved by both companies’ Boards of Directors. Consummation of the merger is subject to customary conditions, including, among others, the approval of the shareholders of both companies and the approvals of various regulatory authorities.
Immediately following consummation of the merger, former Cinergy shareholders will own approximately 24 percent of Duke Energy Holding’s common stock. Paul Anderson, Duke’s CEO and Chairman of the Board will remain Chairman of the combined company and Jim Rogers, Cinergy’s CEO and Chairman of the Board, will become the President and CEO of the combined company. The new Duke Energy Holding board will be comprised of 10 members appointed by Duke and five members appointed by Cinergy.
The merger will be recorded using the purchase method of accounting whereby the total purchase price of approximately $9 billion will be allocated to Cinergy’s identifiable tangible and intangible assets acquired and liabilities assumed based on their fair values as of the closing of the merger.
48
The merger is expected to close in the first half of 2006. However, the actual timing is contingent on the receipt of several approvals including: FERC, Federal Communications Commission (FCC), Nuclear Regulatory Commission (NRC), state regulatory commissions of Ohio, Indiana, Kentucky, North Carolina, and South Carolina, and shareholders of each company. The status of these matters is as follows:
• In June 2005, Duke and Cinergy filed an application with the PUCO for approval of a change in control with respect to CG&E and to modify certain accounting procedures to defer certain merger-related costs. We expect that the PUCO will set a procedural schedule in the fourth quarter of 2005. The PUCO issued a procedural order on October 26, 2005 ordering the Staff to issue recommendations no later than November 14, 2005. A final order is expected in January 2006.
• In June 2005, PSI filed a petition with the IURC concerning, among other things, certain merger-related affiliate agreements, the sharing of merger-related benefits with customers, and deferred accounting of certain merger-related costs. An evidentiary hearing is scheduled for December 2005.
• In August 2005, Duke and Cinergy filed an application with the KPSC seeking approval of a transfer and acquisition of control of ULH&P. In October 2005, Duke and Cinergy reached a settlement with the parties to the case, the Kentucky Attorney General and The Kroger Company. The settlement was filed with the KPSC and a hearing was held before the KPSC in October 2005. A final order is expected by December 2005.
• In July 2005, Duke and Cinergy filed an application with the FERC requesting approval of the merger and the subsequent internal restructuring and consolidation of the merged company to establish a more efficient corporate structure. A final order is expected in January 2006.
• In July 2005, Duke filed an application with the state utility regulatory agency in North Carolina. The application requests both the authorization to enter into a business combination transaction and the approval of various affiliate agreements. A hearing is scheduled for December 2005.
• In July 2005, Duke filed an application with the state utility regulatory agency in South Carolina. The application requested authorization to enter into a business combination. In November 2005, the Public Servie Commission of South Carolina approved the application.
• On August 11, 2005, the United States Department of Justice and the Federal Trade Commission granted early termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
• In light of the repeal of the Public Utility Holding Company Act, as amended (PUHCA), effective February 2006, the merger will no longer require SEC authorization under PUHCA.
• The FCC merger filings were filed in October 2005 and a decision by the FCC is expected by December 2005.
• Duke filed for NRC merger approval in the third quarter of 2005 and a final order is expected in January 2006.
• A special meeting of shareholders for the purpose of voting on the merger is expected to be held in the first quarter of 2006.
The merger agreement also provides that Duke and Cinergy will use their reasonable best efforts to transfer five generating stations located in the Midwest from Duke to CG&E. This transfer will require regulatory approval by the FERC and the IURC. There can be no guarantee that such approvals will be obtained or will be obtained on terms or with conditions acceptable to Duke, Cinergy, and Duke Energy Holding. Duke intends to effectuate the transfer as an equity infusion into CG&E at book value. In conjunction with the transfer, Duke and CG&E intend to enter into a financial arrangement over a multi-year period, to eliminate any potential cash shortfalls that may result from CG&E&E’s owning and operating the assets. At this time, we cannot predict the outcome of this matter.
49
The merger agreement contains certain termination rights for both Duke and Cinergy, and further provides that, upon terminationownership of the merger agreement under specified circumstances, a party would be requiredfive stations.
(b) Transfer of Generating Assets from CG&E to pay the other party’s fees and expenses in an amount not to exceed $35 million and/or a termination fee of $300 million in the case of a fee payable by Cinergy to Duke or a termination fee of $500 million in the case of a fee payable by Duke to Cinergy. Any termination fee would be reduced by the amount of any fees and expenses previously reimbursed by the party required to pay the termination fee.
ULH&P
In May,January 2006, CG&E contributed 100 percent of its ownership interest in one generating unit and one peaking plant with a purported shareholder class actioncombined capacity of 727 MWs and its 69 percent interest in another generating station with an owned capacity of 414 MWs to ULH&P, its wholly owned subsidiary. The transaction was filed in the Courteffective as of Common Pleas in Hamilton County, Ohio against Cinergy and each of the members of the Board of Directors. The lawsuit alleges that the defendants breached their duties of due care and loyalty to shareholders by agreeing to the merger agreement between Duke and Cinergy and is seeking to either enjoin or amend the terms of the merger. Cinergy and the individual defendants filedJanuary 1, 2006 at a motion to dismiss this lawsuit in July. We believe this lawsuit is without merit and Cinergy intends to defend this lawsuit vigorously in court. We are unable to predict the outcome of this matter, including whether resolution of this matter will impact our pending merger.
Although Management believes that the merger should close in the first half of 2006, the actual timing of the transaction could be delayed or the merger could be abandoned by the parties in the event of the inability to obtain one or more of the required regulatory approvals on acceptable terms.
In October 2005, Cinergy entered into a definitive agreement to sell a wholly-owned subsidiary in Europe engaged in the generation and sale of heat and electricity. We anticipate recognizing a gain on salenet book value of approximately $15 million and expect the sale to close in December 2005, subject to certain regulatory approvals. As of September 30, 2005, this subsidiary had approximately $5 million of current assets and $105 million of plant, property, and equipment.$140 million.
50
CAUTIONARY STATEMENTS
In this report, Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we,” “our,” or “us.”
This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on management’s beliefs and assumptions. These forward-looking statements are identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similar expressions.
Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
•· Factors affecting operations, such as:
(1) unanticipated weather conditions;
(2) unscheduled generation outages;
(3) unusual maintenance or repairs;
(4) unanticipated changes in costs, including costs of coal and emission allowances;costs;
(5) environmental incidents; and
(6) electric transmission or gas pipeline system constraints.
•· Legislative and regulatory initiatives and legal developments.
developments including costs of compliance with existing and future environmental requirements.
•· Additional competition in electric or gas markets and continued industry consolidation.
•· Financial or regulatory accounting principles including costs of compliance with existing and future environmental requirements.
principles.
•· Changing market conditions and other factors related to physical energy and financial trading activities.
•· The performance of projects undertaken by our non-regulated businesses and the success of efforts to invest in and develop new opportunities.
•· Availability of, or cost of, capital.
•· Employee workforce factors.
•· Delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures.
•· Costs and effects of legal and administrative proceedings, settlements, investigations, and claims.
• The Regulatory approval process for the Duke Energy Corporation and Cinergy pending merger could delay the consummation of the pending merger or impose conditions that could materially impact the combined company.
•· Business uncertainties, contractual restrictions, and the potential inability to attract and retain key personnel due to the pending merger.
personnel.
We undertake no obligation to update the information contained herein.
45
51
MD&A - PENDING MERGER
In this report, Cinergy (which includes Cinergy Corp. and all of its regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we,” “our,”“we”, “our”, or “us.”“us”.
The following discussion should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report and the combined Form 10-K for the year ended December 31, 2004 (20042005 (2005 10-K). We have reclassified certain prior-year amounts in the financial statements of Cinergy, The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI), and The Union Light, Heat and Power Company (ULH&P) to conform to current presentation. The following discussions of results are not necessarily indicative of the results to be expected in any future period.
On May 8, 2005,In March 2006, Cinergy and Duke, a North Carolina corporation, received final approvals in connection with the merger from Duke and Cinergy shareholders, the North Carolina Utilities Commission (NCUC), and the Indiana Utility Regulatory Commission (IURC) and effective April 3, 2006, Cinergy Corp. entered into an agreement and plan ofconsummated the merger with Duke Energy Corporation (Duke), a North Carolina corporation, whereby Cinergy Corp. will be merged with Duke. Under the merger agreement, each share of Cinergy Corp. common stock will bewas converted into 1.56 shares of the newly formed company, Duke Energy Holding CorpCorp., a Delaware Corporation (Duke Energy Holding) (subsequently renamed Duke Energy Corporation).
Duke and Cinergy believe that the combination will provide substantial strategic and financial benefits to their shareholders, employees and customers, including:
The merger agreement has been approved by both companies’ Boards· increased financial strength and flexibility;
· stronger utility business platform;
· greater scale and fuel diversity, as well as improved operational efficiencies for the merchant generation business;
· broadened electric distribution platform;
· improved reliability and customer service through the sharing of Directors. Consummationbest practices;
· increased scale and scope of the electric and gas businesses with stand-alone strength;
· complementary positions in the midwest;
· greater customer diversity;
· combined expertise; and
· significant cost savings synergies.
As a condition to the merger isapproval, the Public Utilities Commission of Ohio (PUCO) and the Kentucky Public Service Commission (KPSC) required that certain merger related savings be refunded to customers in each service territory and provided additional conditions that the new company would have to meet. While the merger itself was not subject to customaryapproval by the IURC, the IURC approved, subject to similar conditions, including, among others,certain affiliate agreements in connection with the approvalmerger. Key elements of these provisions were:
·CG&E will provide a rate credit of approximately $15 million for one year to facilitate economic development in a time of increasing rates and a credit of approximately $21 million to CG&E’s gas and electric customers in Ohio for one year, with both credits beginning January 1, 2006.
In April 2006, The Office of the shareholdersOhio Consumers’ Counsel (OCC) filed a Notice of Appeal with the Supreme Court of Ohio, requesting the Court remand the PUCO’s merger approval for a full evidentiary hearing. The Office of the Ohio Consumers’ Counsel alleges that the PUCO committed reversible error on both companiesprocedural and substantive grounds, in among other things, failing to set the matter for a full evidentiary hearing, failing to consider evidence regarding the transfer of the Duke Energy North America (DENA) assets to CG&E, and failing to lift the stay on discovery. CG&E and the approvals of various regulatory authorities.OCC have resolved this matter through settlement and we expect the OCC to withdraw its appeal.
Immediately following·PSI will provide a rate credit of $40 million to PSI customers over a one year period and $5 million for low-income energy assistance and clean coal technology. In April 2006, Interveners, Citizens Action Coalition of Indiana, Inc., filed a Verified Petition for Rehearing and Reconsideration claiming that PSI should be ordered to provide an additional $5 million in rate credits to customers to be consistent with the NCUC order. An order on the Petition is expected in the second quarter of 2006.
· ULH&P will provide $7.6 million in rate credits to ULH&P customers over five years, ending when new rates are established in the next rate case after January 1, 2008.
In addition, the Federal Energy Regulatory Commission (FERC) approved the merger without conditions. On January 19, 2006, Public Citizen’s Energy Program, Citizen’s Action Coalition of Indiana, Ohio Partners for Affordable Energy and Southern Alliance for Clean Energy requested rehearing of the FERC approval. On February 21, 2006, the FERC issued an order granting rehearing of FERC’s order for further consideration.
The consummation of the merger formertriggered certain change in control provisions that provided enhanced, and/or accelerated benefits to management level employees in the event of a qualifying transaction. See Note 2(b)(iii) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Information” for additional information on these payments.
Purchase price allocation and goodwill
Duke has been determined to be the acquirer and Cinergy shareholders will own approximately 24 percent of Duke Energy Holding’s common stock. Paul Anderson, Duke’s CEO and Chairman of the Board will remain Chairman of the combined company and Jim Rogers, Cinergy’s CEO and Chairman of the Board, will become the President and CEO of the combined company. The new Duke Energy Holding board will be comprised of 10 members appointed by Duke and five members appointed by Cinergy.
acquiree under generally accepted accounting principles. The merger will beis being recorded using the purchase method of accounting whereby the total purchase price of approximately $9 billion will beis being allocated to Cinergy’s identifiable tangible and intangible assets acquired and liabilities assumed based on their fair values asvalues. Cinergy Corp.’s results of operations will be included in Duke Energy Holding’s results beginning April 3, 2006.
The allocation of the closingpurchase price to the net assets of the merger.
The merger is expected to close in the first half of 2006. However, the actual timing is contingent on the receipt of several approvals including: Federal Energy Regulatory Commission (FERC), Federal Communications Commission (FCC), Nuclear Regulatory Commission (NRC), state regulatory commissions of Ohio, Indiana, Kentucky, North Carolina, and South Carolina, and shareholders of each company. The status of these matters is as follows:
• In June 2005, Duke and Cinergy filed an application withand the Public Utilities Commission of Ohio (PUCO) for approval of a change in control with respect to CG&E and to modify certain accounting procedures to defer certain merger-related costs. We expectresulting goodwill determination are not yet complete. However, preliminary indications are that the PUCOacquisition will set a procedural scheduleresult in the fourth quarterapproximately $4 billion of 2005. The PUCO issued a procedural ordergoodwill.
Based on October 26, 2005 ordering the Staff to issue recommendations no later than November 14, 2005. A final order is expected in January 2006.
• In June 2005, PSI filed a petition with the Indiana Utility Regulatory Commission (IURC) concerning, among other things, certain merger-related affiliate agreements, the sharingmanagement’s review and analysis of merger-related benefits with customers, and deferred accounting of certain merger-related costs. An evidentiary hearing is scheduled for December 2005.
• In August 2005, Duke and Cinergy filed an application with the Kentucky Public Service Commission (KPSC) seeking approval of a transfer and acquisition of control of ULH&P. In October 2005, Duke and Cinergy reached a settlement with the parties to the case, the Kentucky Attorney General and The
52
Kroger Company. The settlement was filed with the KPSC and a hearing was held before the KPSC in October 2005. A final order is expected by December 2005.
• In July 2005, Duke and Cinergy filed an application with the FERC requesting approval of the merger and the subsequent internal restructuring and consolidation of the merged company to establish a more efficient corporate structure. A final order is expected in January 2006.
• In July 2005, Duke filed an application with the state utility regulatory agency in North Carolina. The application requests both the authorization to enter into a business combination transaction and the approval of various affiliate agreements. A hearing is scheduled for December 2005.
• In July 2005, Duke filed an application with the state utility regulatory agency in South Carolina. The application requested authorization to enter into a business combination. In November 2005, the Public Servie Commission of South Carolina approved the application.
• On August 11, 2005, the United States Department of Justice and the Federal Trade Commission granted early termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
• In light of the repeal of the Public Utility Holding Company Act, as amended (PUHCA), effective February 2006, the merger will no longer requirerelevant Securities and Exchange Commission (SEC) authorization under PUHCA. For further details, see “Energy Bill” in “Liquidity and Capital Resources.”
• The FCC merger filings were filed in October 2005 and a decision by the FCC is expected by December 2005.
• Duke filed for NRC merger approval in the third quarter of 2005 and a final order is expected in January 2006.
• A special meeting of shareholders for the purpose of voting on the merger is expected to be held in the first quarter of 2006.
The merger agreement also provides that Duke andregulations, Cinergy expects the impacts of purchase accounting, including goodwill, to be pushed down and recorded on the financial statements of Cinergy. Management also expects that a portion of the purchase price will use their reasonable best efforts to transfer five generating stations located inbe pushed down and recorded on the Midwest from Duke tofinancial statements of CG&E. This transfer will require regulatory approval bySince the FERC and the IURC. There can be no guarantee that such approvalsmerger did not occur until April 2006, all impacts of push-down accounting will be obtained or will be obtained on terms or with conditions acceptable to Duke,implemented in the second quarter financial statements of Cinergy, and Duke Energy Holding. Duke intends to effectuate the transfer as an equity infusion into CG&E at book value. In conjunction with the transfer, Duke and CG&E intend to enter into a. Our review of SEC regulations has indicated that PSI’s financial arrangement over a multi-year period, to eliminate any potential cash shortfalls that may result from CG&E owning and operating the assets. At this time, we cannot predict the outcome of this matter.
The merger agreement contains certain termination rights for both Duke and Cinergy, and further provides that, upon termination of the merger agreement under specified circumstances, a party would bestatements are not required to pay the other party’s feesuse push-down accounting and expenses in an amountmanagement does not anticipate electing to exceed $35 million and/or a termination fee of $300 million in the case of a fee payable by Cinergy to Duke or a termination fee of $500 million in the case of a fee payable by Duke to Cinergy. Any termination fee would be reduced by the amount of any fees and expenses previously reimbursed by the party required to pay the termination fee.do so.
Although Management believes that the merger should close in the first half of 2006, the actual timing of the transaction could be delayed or the merger could be abandoned by the parties in the event of the inability to obtain one or more of the required regulatory approvals on acceptable terms.
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MD&A - EXECUTIVE SUMMARY
In MD&A, we explain our general operating environment, as well as our results
• factors affecting current and future operations;
• why results changed from period to period;
• potential sources of cash for future capital expenditures; and
• how these items affect our overall financial condition.
Cinergy Corp., a Delaware corporation organized in 1993, owns all outstanding common stockThe Results of CG&E and PSI, both of which are public utilities. As a result of this ownership, we are considered a utility holding company. Because we are a holding company with material utility subsidiaries operating in multiple states, we are registered with and are subject to regulation by the SEC under the PUHCA. For aOperations discussion of the PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.” Our other principal subsidiaries are Cinergy Services, Inc. (Services) and Cinergy Investments, Inc. (Investments).
CG&E, an Ohio corporation organized in 1837, is a combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through ULH&P, in nearby areas of Kentucky. CG&E is responsible for the majority of our power marketing and trading activity. CG&E’s principal subsidiary, ULH&P, a Kentucky corporation organized in 1901, provides electric and gas service in northern Kentucky.
PSI, an Indiana corporation organized in 1942, is a vertically integrated and regulated electric utility that provides service in north central, central, and southern Indiana.
The following table presents further information related to the operations of our domestic utility companies CG&E, PSI, and ULH&P (our utility operating companies):
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(1) See “Kentucky” in “Future Expectations/Trends” for further discussion of the possible transfer of generation assets.
Services is a service company that provides our subsidiaries with a variety of centralized administrative, management, and support services. Investments holds most of our non-regulated, energy-related businesses and investments, including natural gas marketing and trading operations (which are primarily conducted through Cinergy Marketing & Trading, LP (Marketing & Trading), one of its subsidiaries).
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Net income for Cinergy for the quarter and nine months ended September 30, 2005, and 2004 was as follows:
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| Cinergy |
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| 2005 |
| 2004 |
| Change |
| % Change |
| |||
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| (in millions) |
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Quarter ended September 30 |
| $ | 132 |
| $ | 93 |
| $ | 39 |
| 42 | % |
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| |||
Nine months ended September 30 |
| $ | 300 |
| $ | 254 |
| $ | 46 |
| 18 | % |
The increaseis presented in net income was primarily due to an increase in electric gross margins as a result of warmer weather in the third quarter of 2005, as compared to 2004.
These increases were partially offset by the following factors:
• A decrease in Commercial Business Unit (Commercial) electric gross margins due to timing differences in revenue recognition between certain components of our generation portfolio partially offset by sales of emission allowances; and
• Increased fuel, emission allowances, and purchased power costs attributable to CG&E’s fixed price residential customers.
For further information, see “2005 Quarterly Results of Operations – Cinergy”.
The increase in net income was primarily due to the following factors:
• Increased gross margins resulting from PSI’s 2004 base retail electric rate increase and the implementation of CG&E’s rate stabilization plan (RSP) in January 2005; and
• Increased gross margins due to warmer weather in the third quarter of 2005, as compared to 2004.
These increases were partially offset by the following factors:
• Increased fuel, emission allowances, and purchased power costs attributable to CG&E’s fixed price residential customers;
• Decreases in Commercial gas gross margins from trading results in the second quarter of 2005;
• Increased Operation and maintenance expense primarily due to regulatory asset amortization, synthetic fuel costs, and expenses associated with the pending Duke-Cinergy merger; and
• Increased Depreciation expense due to increased depreciation rates and the addition of depreciable plant.
For further information, see “2005 Year to Date Results of Operations – Cinergy”.
The pending merger between Duke and Cinergy presents significant challenges. The integration of the two companies will be complex and time-consuming, due to the size and complexity of each organization. The principal challenges will be integrating the combined regulated electric utility operations and combining each of the
55
unregulated wholesale power generation businesses. All of these businesses are complex, and some of the business units are dispersed. Such efforts could also divert management’s focus and resources from other strategic opportunities during the integration process. The pending merger is subject to approvals of numerous governmental agencies and approval of the shareholders of both companies, all of which are discussed in more detail in “Pending Merger.” The approval process could delay consummation of the pending merger, impose conditions that could materially impact the combined company, or cause the merger to be abandoned. Both companies will incur significant transaction and merger-related integration costs. Additionally, we will be subject to business uncertainties and contractual restrictions while the merger is pending which could adversely affect our businesses. Although both companies are taking steps to reduce any adverse effects, these uncertainties may impair our ability to attract and retain key personnel until the merger is consummated and for a period of time thereafter, and could cause customers, suppliers, and others to seek to change their existing business relationships with us.
Cinergy faces many uncertainties with regard to future environmental legislation and the impact of this legislation on our generating assets and our decisions to construct new assets. In March 2005, the Environmental Protection Agency (EPA) finalized two rulemakings that will require significant reductions in sulfur dioxide (SO2), nitrogen oxides (NOX), and mercury emissions from power plants. Numerous states, environmental organizations, industry groups, including some of which Cinergy is a member, and individual companies have challenged various portions of both rules. Additionally, multi-emissions reductions legislation is still being discussed in the Senate, although the outcome of these discussions is still highly uncertain at this time. Presently, greenhouse gas (GHG) emissions, which principally consist of carbon dioxide (CO2), are not regulated, and while several legislative proposals have been introduced in Congress to reduce utility GHG emissions, none have been passed. Nevertheless, we anticipate a mandatory program to reduce GHG emissions will exist in the future. In 2004, Cinergy’s utility operating companies began an environmental construction program to reduce overall plant emissions that is estimated to cost approximately $1.8 billion over the next five years. We believe that our construction program optimally balances these uncertainties and provides a level of emission reduction that will be required and/or economical to Cinergy under a variety of possible regulatory outcomes. See “Environmental Issues” in “Liquidity and Capital Resources” for further information.
The prices of coal and SO2 emission allowances increased dramatically in 2004, as compared to 2003, and have continued to increase in 2005. Contributing to the increases in coal and SO2 prices have been (1) increases in demand for electricity, (2) environmental regulation, and (3) decreases in the number of suppliers of coal from prior years. CG&E’s RSP allows for recovery of fuel and emission allowance expenses effective January 1, 2005 for retail non-residential customers in Ohio. As part of the RSP, we will begin recovering these costs from residential customers in Ohio effective January 1, 2006. We continue to recover these costs from PSI retail customers through previously established rate recovery mechanisms. To the extent that these increased fuel and SO2 prices are not offset by regulatory recovery or increases in the market price of power for wholesale transactions, they will negatively impact ongoing earnings. The impact of these price increases on earnings in 2005 is discussed in more detail in “2005 Quarterly Results of Operations” and “2005 Year to Date Results of Operations”.
Cinergy produces synthetic fuel that qualifies for tax credits (through 2007)reduced disclosure format in accordance with Section 29General Instruction H(2)(a) of the Internal Revenue Code (IRC) if certain requirements are satisfied. Cinergy currently faces two major uncertainties that could impact our ability to continue to recognize the previous and/or future credits. The Internal Revenue Service (IRS) has recently challenged certain other taxpayers’ Section 29 tax credits and could challenge Cinergy’s. If the IRS were to successfully challenge our credits, this could result in the disallowance of up to all previously claimed and future Section 29 tax credits for Cinergy’s facilities. We believe that we operate in conformity with all the necessary requirements to qualify for tax credits under Section 29.
Section 29 also provides for a phase-out of the tax credits based on the average price of crude oil during a calendar year. The phase-out is based on a prescribed calculation and definition of crude oil prices. Based on current crude oil prices and the recent volatility of such prices, we believe it is possible that for 2006 and 2007, the amount of the
56
tax credits could be reduced. If oil prices are high enough, we may idle the plants, as the value of the credits would not exceed the net costs to produce the synthetic fuel. Net income related to these facilities for the nine months ended September 30, 2005 was approximately $30 million. The net book value of our plants at September 30, 2005 was approximately $50 million. See “Synthetic Fuel Production” in “Future Expectations/Trends” for further information.Form 10-Q.
57
MD&A – 2005 QUARTERLY RESULTS OF OPERATIONS - CINERGY
Given the dynamics of our business, which include regulatory revenues with directly offsetting expenses and commodity trading operations for which results are primarily reported on a net basis, we have concluded that a discussion of our results on a gross margin basis is most appropriate. Electric gross margins represent electric operating revenues less the related direct costs of fuel, emission allowances, and purchased power. Gas gross margins represent gas operating revenues less the related direct cost of gas purchased. Within each of these areas, we will discuss the key drivers of our results. Gross
Electric and gas gross margins and net income for Cinergy for the Regulated Business Unit (Regulated)quarters ended March 31, 2006 and Commercial2005 were as follows:
| Cinergy |
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| 2006 |
| 2005 |
| Change |
| % Change |
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| (in millions) |
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Electric gross margin(1) |
| $ | 711 |
| $ | 614 |
| $ | 97 |
| 16 | % |
Gas gross margin(2) |
| 124 |
| 104 |
| 20 |
| 19 |
| |||
Net income |
| 79 |
| 117 |
| (38 | ) | (32 | ) | |||
(1) Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Statements of Income.
(2) Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Statements of Income.
Gross Margins
The 16 percent increase in electric gross margins was primarily due to the following factors:
· An increase in retail margins from CG&E’s rate stabilization plan (RSP), primarily due to its implementation for residential customers in January 2006 and increased margins from non-residential customers related to the timing of collection of fuel, purchased power, and emission allowance costs;
· An increase due to timing differences in revenue recognition between certain components of our generation portfolio, some of which are accounted for on a mark-to-market basis and some on an accrual basis; and
· An increase in the average price received per megawatt hour (MWh), due to the return of certain CG&E retail customers to full electric service and a CG&E retail distribution base rate increase implemented in January 2006.
Partially offsetting these increases were:
· A decline in margins from power marketing and trading contracts, primarily due to strong results in the first quarter of 2005;
· A decline in PSI’s non-retail margins, primarily driven by an adverse ruling from the IURC on a fuel-related matter; and
· A decline due to milder weather in the first quarter of 2006, as compared to 2005.
The 19 percent increase in gas gross margins was primarily due to timing differences in revenue recognition between physical storage activities (which are accounted for on an accrual basis) and the associated derivative contracts that hedge the physical storage (which are accounted for on a mark-to-market basis).
Net Income
The 32 percent decrease in net income was primarily due to the following factors:
· An increase in Operation and maintenance expense resulting primarily from:
· Significant merger related costs incurred in the first quarter of 2006, see Note 2(b)(iii) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Information” for further information;
· An increase in health care costs and incentive compensation; and
· Increased costs at our synthetic fuel facilities primarily related to production costs at a facility purchased in the second quarter of 2005.
· An increase in Interest Expense, primarily due to an increase in interest expense related to a tax contingency and an increase in average long-term debt outstanding.
Partially offsetting these increased expenses were increases in electric and gas gross margins as previously discussed and an increase in Miscellaneous Income — Net primarily due to impairment and disposal charges recognized in 2005 on certain investments.
2006 QUARTERLY RESULTS OF OPERATIONS - CG&E
The Results of Operations discussion for CG&E is presented in a reduced disclosure format in accordance with General Instruction H(2)(a) of Form 10-Q.
Electric and gas gross margins and net income for CG&E for the quarters ended September 30,March 31, 2006 and 2005 and 2004 were as follows:
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| Cinergy |
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| CG&E |
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| Regulated |
| Commercial |
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| 2006 |
| 2005 |
| Change |
| % Change |
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| 2005 |
| 2004 |
| Change |
| % Change |
| 2005 |
| 2004 |
| Change |
| % Change |
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Electric gross margin(1) |
| $ | 432 |
| $ | 319 |
| $ | 113 |
| 35 | % | |||||||||||||||||||||||
Gas gross margin(2) |
| 90 |
| 99 |
| (9 | ) | (9 | ) | ||||||||||||||||||||||||||
Net income |
| 116 |
| 85 |
| 31 |
| 36 |
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Electric gross margin(1) |
| $ | 512 |
| $ | 441 |
| $ | 71 |
| 16 | % | $ | 163 |
| $ | 170 |
| $ | (7 | ) | (4 | )% | ||||||||||||
Gas gross margin(2) |
| 37 |
| 40 |
| (3 | ) | (8 | ) | 17 |
| 6 |
| 11 |
| N/M |
|
(1) Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.
(2)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.
N/M Not meaningful to an understanding of the change.
Cooling degree days and heating degree days are metrics commonly used in the utility industry as a measure of the impact weather has on results of operations. Cooling degree days and heating degree days in Cinergy’s service territory for the quarters ended September 30, 2005, and 2004 were as follows:
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| Cinergy |
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| 2005 |
| 2004 |
| Change |
| % Change |
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Cooling degree days(1) |
| 916 |
| 544 |
| 372 |
| 68 | % |
Heating degree days(2)(3) |
| 6 |
| 5 |
| 1 |
| 20 |
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(1)Cooling degree days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is greater than 65 degrees.
(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.
(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior. Prior year amounts have been updated to reflect this change.
The 16 percent increase in Regulated’s electric gross margins was primarily due to the following factors:
• A $45 million increase resulting from warmer weather in the third quarter of 2005, as compared to 2004;
• A $6 million increase resulting from growth in non-weather related demand; and
• A $5 million increase in PSI’s non-retail margins, primarily attributable to margins realized from wholesale sales from generation available after serving regulated retail customers.
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The four percent decrease in Commercial’s electric gross margins was primarily due to:
• A $32 million decline in non-retail margins. We actively manage our non-regulated generation portfolio through a mix of real-time and forward sales of power and the corresponding purchase of fuel (primarily coal) and emission allowances. When power is sold forward, we typically purchase the fuel and emission allowances required to produce the power, thereby locking in our eventual margin at the time of delivery. The market values of these commodities change independently over time. At times, the value of the fuel and emission allowances becomes greater than that of the output of electricity. In these instances, we will purchase forward power to be used to deliver against forward power sales, and in turn sell the fuel and/or emission allowances. Margins declined due to:
• During the third quarter of 2005, we recognized margins of $69 million less than the comparable period in 2004 due to timing differences in revenue recognition between certain components of our generation portfolio. Emission allowances and the majority of fuel contracts typically follow the accrual method of accounting. However, generally accepted accounting principles (GAAP) requires that certain forward purchases of coal and forward sales of power (those classified as derivatives) use the mark-to-market (MTM) method of accounting. This differing accounting treatment for the various components of the generation portfolio can lead to volatility in reported results. Our gross margins reflect $72 million of unrealized losses in 2005 and $3 million of unrealized losses in 2004 (representing a $69 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting. A substantial portion of these unrealized losses are expected to reverse in the fourth quarter of 2005 and the first quarter of 2006.
• Higher fuel costs during the quarter.
Partially offsetting these declines were margins of $37 million more than the comparable period in 2004 as a result of selling emission allowances which were no longer needed to meet our non-retail forward power sales commitments. This gain reflects significant increases in prices of SO2 emission allowances throughout much of 2004 and 2005. Based on projected generation, we have sufficient fuel and emission allowances to meet our non-retail forward power sales commitments over the next several years, and we will continue to evaluate and optimize our generation resources to produce the best economic returns for these assets.
• A $22 million increase in margins from power marketing and trading contracts.
• Higher retail margins of $3 million reflecting:
• A $14 million increase resulting from implementation of CG&E’s RSP in January 2005; and
• A $12 million increase resulting from warmer weather in the third quarter of 2005, as compared to 2004.
Partially offsetting these increases was a $23 million increase in fuel, emission allowance, and purchased power costs attributable to CG&E’s fixed price residential customers.
The increase in Commercial’s gas gross margins was primarily due to the following factors:
• A $14 million increase in physical trading margins resulting from favorable price movements in the third quarter of 2005; and
• A $7 million increase due to timing differences in revenue recognition between physical storage activities and the associated derivative contracts that hedge the physical storage. These agreements with pipelines to store natural gas and deliver in a future period with higher prices (typically winter) follow the accrual method of accounting. However, the derivative contracts hedging the gas are required under GAAP to be accounted for under the MTM method of accounting. The differing accounting treatments can lead to volatility in reported results. Our quarter-to-date gross margins reflect $8 million of
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unrealized losses in 2005 and $15 million of unrealized losses in 2004 (representing a $7 million change quarter on quarter) as a result of derivative contracts and the use of MTM accounting.
Partially offsetting these increases was an $8 million decline in financial trading margins.
The 32 percent increase in Other Operating Revenues was primarily due to the following factors:
• A $21 million increase in Commercial’s revenues from coal origination resulting from increases in coal prices and tons of coal sold; and
• A $16 million increase in Commercial’s revenues from the sale of synthetic fuel, due in part to revenues from a new facility purchased in the second quarter of 2005.
Costs of fuel resold include Commercial’s costs of coal origination activities and the production of synthetic fuel. These costs have increased in 2005, which is consistent with the increases in the associated revenues as previously discussed.
The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for Cinergy. However, only the line items that varied significantly from prior periods are discussed.
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| Cinergy |
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| 2005 |
| 2004 |
| Change |
| % Change |
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| (in millions) |
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Operation and maintenance |
| $ | 342 |
| $ | 326 |
| $ | 16 |
| 5 | % |
Depreciation |
| 130 |
| 115 |
| 15 |
| 13 |
| |||
Taxes other than income taxes |
| 65 |
| 57 |
| 8 |
| 14 |
| |||
The five percent increase in Operation and maintenance expense was primarily due to the following factors:
• Increased regulatory asset amortization of $15 million related to CG&E’s Regulatory Transition Charge (RTC). This increase reflects accelerated recovery of the regulatory asset due to both (a) the cessation of deferrals for non-residential customers due to the end of the market development period for those customers at the end of 2004 and (b) a reduction in revenues lost from switched customers, which is also recovered through the RTC;
• An increase of $11 million in costs at our synthetic fuel facilities primarily related to production costs at a new facility purchased in the second quarter of 2005; and
• Increased costs of $5 million associated with the sales of accounts receivable to an unconsolidated affiliate, primarily due to increased fees charged by the buyer of the receivables and an increase in the volume of receivables sold.
These increases were partially offset by the following factors:
• A decrease of $6 million in power supply expense primarily related to decreases in brokerage and Midwest Independent System Operator, Inc. (Midwest ISO) administrative fees; and
• Costs relating to an information technology system replacement project that occurred in 2004.
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The 13 percent increase in Depreciation expense was primarily due to the addition of depreciable plant for pollution control equipment which is recovered from ratepayers.
The 14 percent increase in Taxes other than income taxes was primarily due to an increase in real estate and personal property taxes.
The increase in Miscellaneous Income (Expense) – Net was primarily due to $15 million in impairment and disposal charges recognized in the third quarter of 2004 on certain investments in the Power Technology and Infrastructure Services Business Unit (Power Technology and Infrastructure).
The seven percent increase in Interest Expense was primarily due to an increase in amount and in interest rates for our variable rate debt. This expense was partially offset by interest income received on restricted deposits obtained through these incremental borrowings, which was recorded in Miscellaneous Income (Expense) – Net associated with the additional debt outstanding.
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MD&A – 2005 QUARTERLY RESULTS OF OPERATIONS – CG&E
Net income for CG&E for the quarters ended September 30, 2005, and 2004 was as follows:
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| CG&E and subsidiaries |
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| 2005 |
| 2004 |
| Change |
| % Change |
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| (in millions) |
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Net income |
| $ | 63 |
| $ | 64 |
| $ | (1 | ) | (2 | )% |
Net income for CG&E was relatively flat for the third quarter of 2005, as compared to 2004. The increased electric gross margins due to warmer weather in the third quarter of 2005, as compared to 2004, and rate tariff adjustments resulting from the implementation of the RSP in January 2005 were offset by decreased non-retail margins and increased Operation and maintenance expenses.
Gross margins for CG&E for the quarters ended September 30, 2005, and 2004 were as follows:
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| CG&E and subsidiaries |
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| 2005 |
| 2004 |
| Change |
| % Change |
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| (in millions) |
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Electric gross margin(1) |
| $ | 336 |
| $ | 312 |
| $ | 24 |
| 8 | % |
Gas gross margin(2) |
| 38 |
| 40 |
| (2 | ) | (5 | ) | |||
(1) Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.
(2) Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.
Cooling degree days and heating degree days in CG&E’s service territory for the quarters ended September 30, 2005, and 2004 were as follows:
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| CG&E and subsidiaries |
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| 2005 |
| 2004 |
| Change |
| % Change |
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Cooling degree days(1) |
| 954 |
| 552 |
| 402 |
| 73 | % |
Heating degree days(2)(3) |
| 5 |
| 5 |
| — |
| — |
|
(1) Cooling degree days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is greater than 65 degrees.
(2) Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.
(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior. Prior year amounts have been updated to reflect this change.
The eight percent increase in CG&E’s electric gross margins was primarily due to:
• Higher retail margins of $36 million reflecting:
• A $33 million increase resulting from warmer weather in the third quarter of 2005, as compared to 2004; and
• A $19 million increase in rate tariff adjustments resulting from implementation of the RSP in January 2005.
Partially offsetting these increases was a $23 million increase in fuel, emission allowance, and purchased power costs attributable to fixed price residential customers.
• A $22 million increase in margins from power marketing and trading contracts.
62
• A decline of $34 million in non-retail margins. We actively manage our non-regulated generation portfolio through a mix of real-time and forward sales of power and the corresponding purchase of fuel (primarily coal) and emission allowances. When power is sold forward, we typically purchase the fuel and emission allowances required to produce the power, thereby locking in our eventual margin at the time of delivery. The market values of these commodities change independently over time. At times, the value of the fuel and emission allowances becomes greater than that of the output of electricity. In these instances, we will purchase forward power to be used to deliver against forward power sales, and in turn sell the fuel and/or emission allowances. Margins declined due to:
• During the third quarter of 2005, we recognized margins of $69 million less than the comparable period in 2004 due to timing differences in revenue recognition between certain components of our generation portfolio. Emission allowances and the majority of fuel contracts typically follow the accrual method of accounting. However, GAAP requires that certain forward purchases of coal and forward sales of power (those classified as derivatives) use the MTM method of accounting. This differing accounting treatment for the various components of the generation portfolio can lead to volatility in reported results. Our gross margins reflect $72 million of unrealized losses in 2005 and $3 million of unrealized losses in 2004 (representing a $69 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting. A substantial portion of these unrealized losses are expected to reverse in the fourth quarter of 2005 and the first quarter of 2006.
• Higher fuel costs during the quarter.
Partially offsetting these declines were margins of $37 million more than the comparable period in 2004 as a result of selling emission allowances which were no longer needed to meet our non-retail forward power sales commitments. This gain reflects significant increases in prices of SO2 emission allowances throughout much of 2004 and 2005. Based on projected generation, we have sufficient fuel and emission allowances to meet our non-retail forward power sales commitments over the next several years, and we will continue to evaluate and optimize our generation resources to produce the best economic returns for these assets.
The 48 percent increase in Other Operating Revenues was due to a $20 million increase in revenues from coal origination resulting from increases in coal prices and tons of coal sold.
Costs of fuel resold represents the costs of coal origination activities. These costs have increased in 2005, which is consistent with the increase in the associated revenues as previously discussed.
The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for CG&E. However, only the line items that varied significantly from prior periods are discussed.
|
| CG&E and subsidiaries |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Operation and maintenance |
| $ | 176 |
| $ | 153 |
| $ | 23 |
| 15 | % |
Depreciation |
| 46 |
| 46 |
| — |
| — |
| |||
Taxes other than income taxes |
| 52 |
| 45 |
| 7 |
| 16 |
| |||
63
The 15 percent increase in Operation and maintenance expense was primarily due to the following factors:
• Increased regulatory asset amortization of $15 million related to CG&E’s RTC. This increase reflects accelerated recovery of the regulatory asset due to both (a) the cessation of deferrals for non-residential customers due to the end of the market development period for those customers at the end of 2004 and (b) a reduction in revenues lost from switched customers, which is also recovered through the RTC;
• Increased costs of $4 million primarily associated with the sales of accounts receivable to an unconsolidated affiliate due to increased fees charged by the buyer of the receivables and an increase in the volume in receivables sold; and
• An increase of $4 million of labor expenses primarily resulting from employee incentives was partially offset by a decrease in severance payments.
The 16 percent increase in Taxes other than income taxes was primarily due to increases in property taxes and increases in gross receipts taxes.
The effective income tax rate decreased for the quarter ended September 30, 2005, as compared to 2004. The decrease was primarily a result of finalizing the 2004 tax return and other reconciliation adjustments.
64
MD&A – 2005 QUARTERLY RESULTS OF OPERATIONS – PSI
2005 QUARTERLY RESULTS OF OPERATIONS - PSI
Net income for PSI for the quarters ended September 30, 2005, and 2004 was as follows:
|
| PSI |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 66 |
| $ | 48 |
| $ | 18 |
| 38 | % |
The increase in net income was primarily due to warmer weather in the third quarter of 2005, as compared to 2004. This increase was partially offset by an increase in depreciation primarily due to the addition of pollution control equipment.
Gross margins for PSI for the quarters ended September 30, 2005, and 2004 were as follows:
|
| PSI |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Electric gross margin(1) |
| $ | 338 |
| $ | 296 |
| $ | 42 |
| 14 | % |
(1)Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.
Cooling degree days and heating degree days in PSI’s service territory for the quarters ended September 30, 2005, and 2004 were as follows:
|
| PSI |
| ||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
|
|
|
|
|
|
|
|
|
|
|
Cooling degree days(1) |
| 877 |
| 536 |
| 341 |
| 64 | % |
Heating degree days(2)(3) |
| 6 |
| 4 |
| 2 |
| 50 |
|
(1)Cooling degree days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is greater than 65 degrees.
(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.
(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior. Prior year amounts have been updated to reflect this change.
The 14 percent increase in PSI’s electric gross margins was primarily due to the following factors:
• A $24 million increase resulting from warmer weather in the third quarter of 2005, as compared to 2004;
• A $6 million increase resulting from growth in non-weather related demand; and
• A $5 million increase in non-retail margins, primarily attributable to margins realized from wholesale sales from generation available after serving regulated retail customers.
65
The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for PSI. However, only the line items that varied significantly from prior periods are discussed.
|
| PSI |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Operation and maintenance |
| $ | 113 |
| $ | 119 |
| $ | (6 | ) | (5 | )% |
Depreciation |
| 66 |
| 55 |
| 11 |
| 20 |
| |||
Taxes other than income taxes |
| 12 |
| 10 |
| 2 |
| 20 |
| |||
The five percent decrease in Operation and maintenance expense was primarily due to the following factors:
• Decreased labor expenses of $5 million related to decreased severance payments and employee incentive costs; and
• A decrease of outside services costs of $4 million primarily related to decreased litigation and other consulting costs.
These decreases are partially offset by increased costs associated with the sales of accounts receivable to an unconsolidated affiliate primarily related to increased fees charged by the buyer of the receivables and an increase in the volume of receivables sold.
The 20 percent increase in Depreciation expense was primarily due to the addition of depreciable plant for pollution control equipment which is recovered from ratepayers.
The 18 percent increase in Interest Expense was primarily due to an increase in average long-term debt outstanding and an increase in interest rates for our variable rate debt. This expense was partially offset by interest income received on restricted deposits obtained through these incremental borrowings, which was recorded in Miscellaneous Income – Net associated with the additional debt outstanding.
66
MD&A – 2005 YEAR TO DATE RESULTS OF OPERATIONS - CINERGY
Given the dynamics of our business, which include regulatory revenues with directly offsetting expenses and commodity trading operations for which results are primarily reported on a net basis, we have concluded that a discussion of our results on a gross margin basis is most appropriate. Electric gross margins represent electric operating revenues less the related direct costs of fuel, emission allowances, and purchased power. Gas gross margins represent gas operating revenues less the related direct cost of gas purchased. Within each of these areas, we will discuss the key drivers of our results. Gross margins for Cinergy for Regulated and Commercial for the nine months ended September 30, 2005, and 2004 were as follows:
|
| Cinergy |
| ||||||||||||||||||||
|
| Regulated |
| Commercial |
| ||||||||||||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| 2005 |
| 2004 |
| Change |
| % Change |
| ||||||
|
| (in millions) |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric gross margin(1) |
| $ | 1,388 |
| $ | 1,243 |
| $ | 145 |
| 12 | % | $ | 509 |
| $ | 504 |
| $ | 5 |
| 1 | % |
Gas gross margin(2) |
| 179 |
| 188 |
| (9 | ) | (5 | ) | 3 |
| 45 |
| (42 | ) | (93 | ) | ||||||
(1)Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.
(2)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.
Cooling degree days and heating degree days are metrics commonly used in the utility industry as a measure of the impact weather has on results of operations. Cooling degree days and heating degree days in Cinergy’s service territory for the nine months ended September 30, 2005, and 2004 were as follows:
|
| Cinergy |
| ||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
|
|
|
|
|
|
|
|
|
|
|
Cooling degree days(1) |
| 1,252 |
| 880 |
| 372 |
| 42 | % |
Heating degree days(2)(3) |
| 2,325 |
| 2,450 |
| (125 | ) | (5 | ) |
(1)Cooling degree days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is greater than 65 degrees.
(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.
(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior. Prior year amounts have been updated to reflect this change.
The 12 percent increase in Regulated’s electric gross margins was primarily due to the following factors:
• A $68 million increase resulting from a higher price received per megawatt hour (MWh) in the first half of 2005 due primarily to PSI’s 2004 base retail electric rate increase;
• A $42 million increase resulting primarily from warmer weather in the third quarter of 2005, as compared to 2004;
• A $16 million increase in PSI’s non-retail margins, primarily resulting from reduced fuel expense reflecting adjustments to PSI’s cost of synthetic fuel; and
• A $9 million increase due to growth in non-weather related demand.
These increases were partially offset by a decline of $15 million reflecting rate reductions associated with a property tax adjustment for PSI.
The five percent decrease in Regulated’s gas gross margins was due, in part, to a decline in non-weather related demand.
67
The one percent increase in Commercial’s electric gross margins was primarily due to:
• A $29 million increase in margins from power marketing and trading contracts.
• Higher retail margins of $7 million reflecting:
• A $31 million increase resulting from implementation of CG&E’s RSP in January 2005; and
• A $9 million increase resulting primarily from warmer weather in the third quarter of 2005, as compared to 2004.
Also contributing to retail margins were increased volumes, due in part to the return of certain CG&E retail customers to full electric service. Partially offsetting these increases was a $40 million increase in fuel, emission allowance, and purchased power costs attributable to CG&E’s fixed price residential customers.
• A $31 million decline in non-retail margins, caused primarily by higher fuel costs. We actively manage our non-regulated generation portfolio through a mix of real-time and forward sales of power and the corresponding purchase of fuel (primarily coal) and emission allowances. When power is sold forward, we typically purchase the fuel and emission allowances required to produce the power, thereby locking in our eventual margin at the time of delivery. The market values of these commodities change independently over time. At times, the value of the fuel and emission allowances becomes greater than that of the output of electricity. In these instances, we will purchase forward power to be used to deliver against forward power sales, and in turn sell the fuel and/or emission allowances.
During 2005, we recognized margins of $107 million less than the comparable period in 2004 due to timing differences in revenue recognition between certain components of our generation portfolio. Emission allowances and the majority of fuel contracts typically follow the accrual method of accounting. However, GAAP requires that certain forward purchases of coal and forward sales of power (those classified as derivatives) use the MTM method of accounting. This differing accounting treatment for the various components of the generation portfolio can lead to volatility in reported results. Our gross margins reflect $104 million of unrealized losses in 2005 and $3 million of unrealized gains in 2004 (representing a $107 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting. A substantial portion of these unrealized losses are expected to reverse in the fourth quarter of 2005 and the first quarter of 2006.
Largely offsetting these declines were margins of $103 million more than the comparable period in 2004 as a result of selling emission allowances which were no longer needed to meet our non-retail forward power sales commitments. This gain reflects significant increases in prices of SO2 emission allowances throughout much of 2004 and 2005. Based on projected generation, we have sufficient fuel and emission allowances to meet our non-retail forward power sales commitments over the next several years, and we will continue to evaluate and optimize our generation resources to produce the best economic returns for these assets.
The 93 percent decrease in Commercial’s gas gross margins was primarily due to the following factors:
• A $35 million decrease in financial trading margins primarily from trading results in the second quarter of 2005; and
• An $11 million decrease due to timing differences in revenue recognition between physical storage activities and the associated derivative contracts that hedge the physical storage. These agreements with pipelines to store natural gas and deliver in a future period with higher prices (typically winter) follow the accrual method of accounting. However, the derivative contracts hedging the gas are required under GAAP to be accounted for under the MTM method of accounting. The differing accounting treatments can lead to volatility in reported results. Our year-to-date gross margins reflect $25 million of unrealized losses in 2005 and $14 million of unrealized losses in 2004 (representing an $11 million change period to period) as a result of derivative contracts and the use of MTM accounting.
68
Partially offsetting these decreases was a $13 million increase in physical trading margins primarily resulting from favorable price movements in the third quarter of 2005.
The 40 percent increase in Other Operating Revenues was primarily due to the following factors:
• A $79 million increase in Commercial’s revenues from coal origination resulting from increases in coal prices and tons of coal sold; and
• A $42 million increase in Commercial’s revenues from the sale of synthetic fuel primarily reflecting revenues from a new facility purchased in the second quarter of 2005.
Partially offsetting these increases was a $15 million decrease in revenues from non-regulated energy service subsidiaries.
Costs of fuel resold include Commercial’s costs of coal origination activities and the production of synthetic fuel. These costs have increased in 2005, which is consistent with the increases in the associated revenues as previously discussed.
The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for Cinergy. However, only the line items that varied significantly from prior periods are discussed.
|
| Cinergy |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Operation and maintenance |
| $ | 1,025 |
| $ | 969 |
| $ | 56 |
| 6 | % |
Depreciation |
| 387 |
| 334 |
| 53 |
| 16 |
| |||
Taxes other than income taxes |
| 209 |
| 204 |
| 5 |
| 2 |
| |||
The six percent increase in Operation and maintenance expense was primarily due to the following factors:
• Increased regulatory asset amortization of $27 million related to CG&E’s RTC. This increase reflects accelerated recovery of the regulatory asset due to both (a) the cessation of deferrals for non-residential customers due to the end of the market development period for those customers at the end of 2004 and (b) a reduction in revenues lost from switched customers, which is also recovered through the RTC;
• An increase of $13 million in costs at our synthetic fuel facilities primarily related to production costs at a new facility purchased in the second quarter of 2005;
• Expenses of $13 million related to outside services costs for the pending Duke-Cinergy merger;
• Increased costs of $10 million associated with the sales of accounts receivable to an unconsolidated affiliate primarily due to increased fees charged by the buyer of the receivables and an increase in the volume of receivables sold; and
• Increased labor costs due to severance payments of $9 million.
These increases were partially offset by decreased employee incentive costs of $12 million and a decrease in outside service costs of $10 million related to our continuous improvement initiative in 2004.
The 16 percent increase in Depreciation expense was primarily due to (a) higher depreciation rates, as a result of changes in useful lives of production assets and an increased rate for cost of removal, (b) recovery of deferred
69
depreciation costs, and (c) the addition of depreciable plant for pollution control equipment, all of which are recovered from ratepayers.
The 39 percent increase in Equity in Earnings of Unconsolidated Subsidiaries is primarily due to $5 million in equity in earnings of a cogeneration project that became fully operational in April of 2004.
The increase in Miscellaneous Income (Expense) – Net was due to $49 million in impairment and disposal charges recognized in the first nine months of 2004 on certain investments in Power Technology and Infrastructure. The increase was partially offset by $8 million in gains on the sale of other investments during 2004.
The effective income tax rate decreased for the nine months ended September 30, 2005, as compared to 2004. The decrease was primarily a result of an increase in the amount of estimated annual tax credits associated with the production and sale of synthetic fuel. Cinergy’s 2005 effective tax rate is expected to be approximately 22 percent.
70
MD&A – 2005 YEAR TO DATE RESULTS OF OPERATIONS – CG&E
Net income for CG&E for the nine months ended September 30, 2005, and 2004 was as follows:
|
| CG&E and subsidiaries |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 201 |
| $ | 197 |
| $ | 4 |
| 2 | % |
Net income for CG&E was relatively flat for the first nine months of 2005, as compared to 2004. Net income increased due to increased rate tariff adjustments resulting from implementation of the RSP in January 2005 and increased margins due to warmer weather in the third quarter of 2005, as compared to 2004.
These increases were partially offset by increased fuel, emission allowances, and purchased power costs attributable to fixed price residential customers and increased Operation and maintenance expense due primarily to increased regulatory asset amortization and increased expenses related to the pending Duke-Cinergy merger.
Gross margins for CG&E for the nine months ended September 30, 2005, and 2004 were as follows:
|
| CG&E and subsidiaries |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Electric gross margin(1) |
| $ | 960 |
| $ | 914 |
| $ | 46 |
| 5 | % |
Gas gross margin(2) |
| 181 |
| 188 |
| (7 | ) | (4 | ) | |||
(1)Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.
(2)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.
Cooling degree days and heating degree days in CG&E’s service territory for the nine months ended September 30, 2005, and 2004 were as follows:
|
| CG&E and subsidiaries |
| ||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
|
|
|
|
|
|
|
|
|
|
|
Cooling degree days(1) |
| 1,294 |
| 879 |
| 415 |
| 47 | % |
Heating degree days(2)(3) |
| 2,218 |
| 2,391 |
| (173 | ) | (7 | ) |
(1)Cooling degree days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is greater than 65 degrees.
(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.
(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior. Prior year amounts have been updated to reflect this change.
71
The five percent increase in CG&E’s electric gross margins was primarily due to:
• Higher retail margins of $48 million reflecting:
• A $39 million increase in rate tariff adjustments resulting from implementation of the RSP in January 2005; and
• A $30 million increase resulting primarily from warmer weather in the third quarter of 2005, as compared to 2004.
Also contributing to retail margins were increased volumes, due in part to the return of certain retail customers to full electric service. Partially offsetting these increases was a $40 million increase in fuel, emission allowance, and purchased power costs attributable to fixed price residential customers.
• A $29 million increase in margins from power marketing and trading contracts.
• A $31 million decline in non-retail margins, caused primarily by higher fuel costs. We actively manage our non-regulated generation portfolio through a mix of real-time and forward sales of power and the corresponding purchase of fuel (primarily coal) and emission allowances. When power is sold forward, we typically purchase the fuel and emission allowances required to produce the power, thereby locking in our eventual margin at the time of delivery. The market values of these commodities change independently over time. At times, the value of the fuel and emission allowances becomes greater than that of the output of electricity. In these instances, we will purchase forward power to be used to deliver against forward power sales, and in turn sell the fuel and/or emission allowances.
During 2005, we recognized margins of $107 million less than the comparable period in 2004 due to timing differences in revenue recognition between certain components of our generation portfolio. Emission allowances and the majority of fuel contracts typically follow the accrual method of accounting. However, GAAP requires that certain forward purchases of coal and forward sales of power (those classified as derivatives) use the MTM method of accounting. This differing accounting treatment for the various components of the generation portfolio can lead to volatility in reported results. Our gross margins reflect $104 million of unrealized losses in 2005 and $3 million of unrealized gains in 2004 (representing a $107 million change period to period) as a result of forward purchases of coal and forward sales of power and the use of MTM accounting. A substantial portion of these unrealized losses are expected to reverse in the fourth quarter of 2005 and the first quarter of 2006.
Largely offsetting these declines were margins of $103 million more than the comparable period in 2004 as a result of selling emission allowances which were no longer needed to meet our non-retail forward power sales commitments. This gain reflects significant increases in prices of SO2 emission allowances throughout much of 2004 and 2005. Based on projected generation, we have sufficient fuel and emission allowances to meet our non-retail forward power sales commitments over the next several years, and we will continue to evaluate and optimize our generation resources to produce the best economic returns for these assets.
The four percent decrease in CG&E’s gas gross margins was due, in part, to a decline in non-weather related demand.
The increase in Other Operating Revenues was due to a $91 million increase in revenues from coal origination resulting from increases in coal prices and tons of coal sold.
Costs of fuel resold represents the costs of coal origination activities. These costs have increased in 2005, which is consistent with the increase in the associated revenues as previously discussed.
The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for CG&E. However, only the line items that varied significantly from prior periods are discussed.
72
|
| CG&E and subsidiaries |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Operation and maintenance |
| $ | 510 |
| $ | 453 |
| $ | 57 |
| 13 | % |
Depreciation |
| 136 |
| 136 |
| — |
| — |
| |||
Taxes other than income taxes |
| 163 |
| 159 |
| 4 |
| 3 |
| |||
The 13 percent increase in Operation and maintenance expense was primarily due to the following factors:
• Increased regulatory asset amortization of $27 million related to CG&E’s RTC. This increase reflects accelerated recovery of the regulatory asset due to both (a) the cessation of deferrals for non-residential customers due to the end of the market development period for those customers at the end of 2004 and (b) a reduction in revenues lost from switched customers, which is also recovered through the RTC;
• Expenses of $11 million related to outside service costs for the pending Duke-Cinergy merger;
• Increased labor expenses of $7 million primarily resulting from employee incentive costs and severance payments; and
• Increased costs of $7 million primarily associated with the sales of accounts receivable to an unconsolidated affiliate primarily related to increased fees charged by the buyer of the receivables and an increase in the volume of receivables sold.
These increases were partially offset by a decrease in outside service costs of $5 million related to our continuous improvement initiative in 2004.
The three percent increase in Taxes other than income taxes was primarily due to increases in gross receipts taxes.
The seven percent increase in Interest Expense was primarily due to an increase in average long-term debt outstanding and an increase in interest rates for our variable rate debt.
The effective income tax rate decreased for the nine months ended September 30, 2005, as compared to 2004. The decrease was primarily a result of a change in Ohio law to phase-out the Ohio franchise tax and finalizing the 2004 tax return. The phase-out of the Ohio franchise tax resulted in the elimination of state income tax deferrals under GAAP thus reducing the effective income tax rate during the period. See “Ohio Taxes” in “Future Expectation/Trends” for additional information.
73
MD&A – 2005 YEAR TO DATE RESULTS OF OPERATIONS – PSI
Net income for PSI for the nine months ended September 30, 2005, and 2004 was as follows:
|
| PSI |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
| |||||||||
Net income |
| $ | 151 |
| $ | 115 |
| $ | 36 |
| 31 | % |
The increase in net income was primarily due to the impact of PSI’s 2004 base retail electric rate increase and warmer weather in the third quarter of 2005, as compared to 2004.
These increases were partially offset by an increase in depreciation due to increased depreciation rates and the addition of depreciable plant.
Gross margins for PSI for the nine months ended September 30, 2005, and 2004 were as follows:
|
| PSI |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Electric gross margin(1) |
| $ | 926 |
| $ | 817 |
| $ | 109 |
| 13 | % |
(1) Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.
Cooling degree days and heating degree days in PSI’s service territory for the nine months ended September 30, 2005, and 2004 were as follows:
|
| PSI |
| ||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
|
|
|
|
|
|
|
|
|
|
|
Cooling degree days(1) |
| 1,210 |
| 880 |
| 330 |
| 38 | % |
Heating degree days(2)(3) |
| 2,432 |
| 2,509 |
| (77 | ) | (3 | ) |
(1)Cooling degree days are the differences between the average temperature for each day and 65 degrees, assuming the average temperature is greater than 65 degrees.
(2)Heating degree days are the differences between the average temperature for each day and 59 degrees, assuming the average temperature is less than 59 degrees.
(3)Beginning in January 2005, we modified our heating degree days base temperature from 65 degrees to 59 degrees to more accurately reflect current consumer behavior. Prior year amounts have been updated to reflect this change.
The 13 percent increase in PSI’s electric gross margins was primarily due to the following factors:
• A $68 million increase resulting from a higher price received per MWh in the first half of 2005 due primarily to PSI’s 2004base retail electric rate increase;
• A $21 million increase resulting primarily from warmer weather in the third quarter of 2005, as compared to 2004;
• A $16 million increase in non-retail margins, primarily resulting from reduced fuel expense reflecting adjustments to PSI’s cost of synthetic fuel; and
• A $9 million increase due to growth in non-weather related demand.
74
These increases were partially offset by a decline of $15 million reflecting rate reductions associated with a property tax adjustment.
The following explanations correspond with the line items on the Condensed Consolidated Statements of Income for PSI. However, only the line items that varied significantly from prior periods are discussed.
|
| PSI |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Operation and maintenance |
| $ | 356 |
| $ | 350 |
| $ | 6 |
| 2 | % |
Depreciation |
| 199 |
| 159 |
| 40 |
| 25 |
| |||
Taxes other than income taxes |
| 38 |
| 41 |
| (3 | ) | (7 | ) | |||
The two percent increase in Operation and maintenance expense was primarily due to various increases in operating costs and increased distribution system maintenance cost. These increases were partially offset by decreased regulatory commission expenses and decreased labor costs primarily related to employee incentives.
The 25 percent increase in Depreciation expense was primarily due to (a) higher depreciation rates, as a result of changes in useful lives of production assets and an increased rate for cost of removal, (b) recovery of deferred depreciation costs, and (c) the addition of depreciable plant for pollution control equipment, all of which are recovered from ratepayers.
The increase in Miscellaneous Income – Net was primarily due to an increase in the rate for allowance for funds used during construction and interest income on restricted deposits.
The 22 percent increase in Interest Expense was primarily due to an increase in average long-term debt outstanding and an increase in interest rates for our variable rate debt. This expense was partially offset by interest income received on restricted deposits obtained through these incremental borrowings, which was recorded in Miscellaneous Income – Net associated with the additional debt outstanding.
75
MD&A – 2005 YEAR TO DATE RESULTS OF OPERATIONS – ULH&P
The Results of Operations discussion for ULH&P is presented only for the nine months ended September 30, 2005, in accordance with General Instruction H(2)(a) of Form 10-Q.
Electric and gas gross margins and net income for ULH&P for the nine months ended September 30, 2005, and 2004 were as follows:
|
| ULH&P |
| |||||||||
|
| 2005 |
| 2004 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Electric gross margin(1) |
| $ | 55 |
| $ | 52 |
| $ | 3 |
| 6 | % |
Gas gross margin(2) |
| 32 |
| 32 |
| — |
| — |
| |||
Net income |
| 9 |
| 13 |
| (4 | ) | (31 | ) | |||
(1)Electric gross margin is calculated as Electric operating revenues less Electricity purchased from parent company for resale expense from the Condensed Statements of Income.
(2) Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Statements of Income.
Gross Margins
The six35 percent increase in electric gross margins was primarily due to the following factors:
· An increase in retail margins from the RSP, primarily due to its implementation for residential customers in January 2006 and increased demand caused by warmermargins from non-residential customers related to the timing of collection of fuel, purchased power, and emission allowance costs;
· An increase due to timing differences in revenue recognition between certain components of our generation portfolio, some of which are accounted for on a mark-to-market basis and some on an accrual basis; and
· An increase in the average price received per MWh, due to the return of certain retail customers to full electric service and a retail distribution base rate increase implemented in January 2006.
Partially offsetting these increases were:
· A decline in margins from power marketing and trading contracts, primarily due to strong results in the first quarter of 2005; and
· A decline due to milder weather in the thirdfirst quarter of 2005,2006, as compared to 2004. Gas2005.
The nine percent decrease in gas gross margins remained flatwas primarily due to milder weather in the first quarter of 2006, as an increase in rate tariff adjustments associated with the gas main replacement programcompared to 2005, and the demand-side management program, which encourages efficient customer gas usage, was partially offset by a decline in non-weather related demand. Partially offsetting these declines was a ULH&P base rate increase implemented in October 2005.
Net Income
The 3136 percent decreaseincrease in net income was partiallyprimarily due to higher operation and maintenance costs associated with the transmission of electricity. Operation and maintenance cost also increased due to increased expense related to the pending Duke-Cinergy merger and increased costs associated with sales of accounts receivables to an unconsolidated affiliate. Also contributing to the decrease in net income were increased property taxes. There were also increases in Interest Expense related to an increase in average long-term debt outstanding. These decreases were partially offset by the increase in electric gross margins, as previously discussed.
76
MD&A - LIQUIDITY AND CAPITAL RESOURCES
Environmental Protection Agency Regulations
In March 2005,Partially offsetting the EPA issued the Clean Air Interstate Rule (CAIR) which would require states to revise their State Implementation Plan (SIP) by September 2006 to address alleged contributions to downwind non-attainmentincreased margins was an increase in Operation and maintenance expenses associated with the revised National Ambient Air Quality Standards for ozone and fine particulate matter. The rule established a two-phase, regional cap and trade program for SO2 and NOX, affecting 28 states,various increases in operating expenses, including Ohio, Indiana, and Kentucky, and requires SO2 and NOX emissions to be cut 70 percent and 65 percent, respectively, by 2015. At the same time, the EPA issued the Clean Air Mercury Rule (CAMR) which requires reductions in mercury emissions from coal-fired power plants beginning in 2010. The final regulation also adopts a two-phase cap and trade approach that requires mercury emissions to be cut by 70 percent by 2018. SIPs must comply with the prescribed reduction levels under CAIR and CAMR; however, the states have the ability to introduce more stringent requirements if desired. Under both CAIR and CAMR, companies have flexible compliance options including installation of pollution controls on large plants where such controls are particularly efficient and utilization of emission allowances for smaller plants where controls are not cost effective. In August 2005, the EPA proposed a Federal Implementation Plan (FIP) to act as a backstop to ensure that states implement the CAIR in a timely manner. If a state fails to develop a CAIR SIP, the EPA intends to finalize the FIP in time to implement phase 1 of CAIR for the state by 2009 and 2010 for NOX and SO2, respectively. Numerous states, environmental organizations, industry groups, including some of which Cinergy is a member, and individual companies have challenged various portions of both rules. Those challenges are currently pendingsignificant merger related costs in the Federal Circuit Court for the District of Columbia. On October 21, 2005, the EPA agreed to reconsider certain aspects of the CAMR and the determination not to regulate mercury under Section 112 of the Clean Air Act (CAA). At this time we cannot predict the outcome of these matters.
Over the 2005-2009 time period, we expect to spend approximately $1.8 billion to reduce mercury, SO2, and NOX emissions. These estimates include estimated costs to comply at plants that we own but do not operate and could change when taking into consideration compliance plans of co-owners or operators involved. Moreover, as market conditions change, additional compliance options may become available and our plans will be adjusted accordingly. Approximately 60 percent of these estimated environmental costs would be incurred at PSI’s coal-fired plants, for which recovery would be pursued in accordance with regulatory statutes governing environmental cost recovery. See “PSI Environmental Compliance Case” in “Future Expectations/Trends” for more details. CG&E would receive partial recovery of depreciation and financing costs related to environmental compliance projects for 2005-2008 through its recently approved RSP. See “CG&E Electric Rate Filing” in “Future Expectations/Trends” for more details.
The EPA made final state non-attainment area designations to implement the revised ozone standard and to implement the new fine particulate standard in June 2004 and April 2005, respectively. Several counties in which we operate have been designated as being in non-attainment with the new ozone standard and/or fine particulate standard. States with counties that are designated as being in non-attainment with the new ozone and/or fine particulate standards are required to develop a plan of compliance by June 2007 and April 2008, respectively. Industrial sources in or near those counties are potentially subject to requirements for installation of additional pollution controls. In March 2005, various states, local governments, environmental groups, and industry groups, including some of which Cinergy is a member, filed petitions for review in the United States Court of Appeals for the D.C. Circuit to challenge the EPA’s particulate matter non-attainment designations. Although the EPA has attempted to structure CAIR to resolve purported utility contributions to ozone and fine particulate non-attainment, at this time, Cinergy cannot predict the effect of current or future non-attainment designations on its financial position or results of operations.
In July 2005, the EPA issued its final regional haze rules and implementing guidelines in response to a 2002 judicial ruling overturning key provisions of the original program. The regional haze program is aimed at reducing certain emissions impacting visibility in national parks and wilderness areas. The EPA has announced that it can foresee no circumstances where the requirements of the regional haze rule would require utility controls beyond those required
77
under CAIR. The EPA also found that states participating in the CAIR cap and trade program need not require electric generating units to adhere to best available retrofit technology requirements. The states have until December 2007 to finalize their SIPs addressing compliance with EPA regulations. The states may choose to implement more stringent guidelines than promulgated by the EPA, and therefore it is not possible to predict whether the regional haze rule will have a material effect on our financial position or results of operations.
Clear Skies Legislation
President Bush has proposed environmental legislation that would combine a series of CAA requirements, including the recent mercury, SO2, and NOX reduction regulations for coal-fired power plants with a legislative solution that includes trading and specific emissions reductions and timelines to meet those reductions. The President’s “Clear Skies Initiative” would seek an overall 70 percent reduction in emissions from power plants over a phased-in reduction schedule beginning in 2010 and continuing through 2018. When the Clear Skies Initiative was stalled in Congress, the EPA finalized the CAIR and CAMR regulations to accomplish Clear Skies’ goals within the existing framework of the CAA. Clear Skies has been reintroduced in the Senate in 2005, but its prospects for passage are uncertain in the current session. At this time, we cannot predict whether this or any multi-emissions bill will be passed.
Energy Bill
A comprehensive energy bill (the Energy Policy Act of 2005) passed Congress in July 2005 and was signed by President Bush on August 8, 2005. The bill, among other things:
• Repeals PUHCA effective six months after the bill’s enactment (i.e., February 9, 2006);
• Amends certain provisions of the Federal Power Act, including new provisions related to consumer protection and enforcement and expands FERC’s authority to impose civil and criminal penalties for, among other things, reliability infractions and power trading irregularities;
• Revises the Public Utility Regulatory Policies Act of 1978, including the removal of restrictions on ownership by electric utilities of qualifying facilities and the removal of the utility’s requirement to purchase power from facilities under certain circumstances;
• Provides FERC with expanded authority in the electric industry to review mergers, acquisitions and asset dispositions, effective six months after the bill’s enactment;
• Provides FERC with authority to oversee and enforce, through the creation of a new Electric Reliability Organization, reliability standards, and promotes rules that provide incentives to enhance transmission facilities;
• Includes tax incentives for the development of wind and other renewable technologies;
• Includes tax incentives for integrated coal gasification combined cycle (IGCC) facilities; and
• Accelerates the tax depreciation rates for pollution control equipment on power plants built after 1975.
Under terms of the bill, Cinergy’s pending merger with Duke is grandfathered under existing FERC authority. In addition, the bill authorizes a significant number of programs and grants that may be of help in, among other things, lowering the cost of adding IGCC facilities and furthering carbon sequestration activities. However, those authorizations must be appropriated next year by Congress. It is too early to determine if any of the programs will be appropriated dollars in order to carry them out, or if Cinergy will be a direct beneficiary of those programs. At this time, it is too early to predict the overall impact this new legislation will have on our financial position or results of operations.
78
Environmental Lawsuits
We are currently involved in the following lawsuits which are discussed in more detail in Note 9(a) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements.” An unfavorable outcome of any of these lawsuits could have a material impact on our liquidity and capital resources.
• CAA Lawsuit
• CO2 Lawsuit
• Selective Catalytic Reduction Units at Gibson Station
• Zimmer Station Lawsuit
• Manufactured Gas Plant Sites
• Asbestos Claims Litigation
Cinergy maintains qualified defined benefit pension plans covering substantially all United States employees meeting certain minimum age and service requirements. Plan assets consist of investments in equity and debt securities. Funding for the qualified defined benefit pension plans is based on actuarially determined contributions, the maximum of which is generally the amount deductible for tax purposes and the minimum being that required by the Employee Retirement Income Security Act of 1974, as amended (ERISA). Although mitigated by strong performance in 2003 and 2004, ongoing retiree payments and the decline in market value of the investment portfolio in 2002 reduced the assets held in trust to satisfy plan obligations. Additionally, continuing low long-term interest rates have increased the liability for funding purposes. As a result of these events, our near term funding targets have increased substantially. Cinergy has adopted a five-year plan to reduce, or eliminate, the unfunded pension obligation initially measured as of January 1, 2003. This unfunded obligation will be recalculated as of January 1 of each year in the five-year plan. Because this unfunded obligation is the difference between the liability determined actuarially on an ERISA basis and the fair value of plan assets, the liability determined by this calculation is different than the pension liability calculated for accounting purposes reported on Cinergy’s Condensed Consolidated Balance Sheets.
Cinergy’s minimum required contributions in calendar year 2004 totaled $16 million. Actual contributions in 2004 were $117 million, reflecting additional discretionary contributions of $101 million under the aforementioned five-year plan. Due to the significant 2004 and previous calendar year contributions, Cinergy’s minimum required contributions in calendar year 2005 are zero. Actual discretionary contributions for the nine months ended September 30, 2005 were $102 million, which is an increase from the $72 million disclosed in the 2004 10-K. This $30 million increase is primarily the result of a change in the retirement age assumption which increased the near-term funding estimates. Cinergy may consider making discretionary contributions in 2006 and future periods; however, at this time, we are unable to determine the amount of those contributions. Estimated contributions fluctuate based on changes in market performance of plan assets and actuarial assumptions. Absent the occurrence of interim events that could materially impact these targets, we will update our expected target contributions annually as the actuarial funding valuations are completed and make decisions about future contributions at that time.
Our ability to invest in growth initiatives is limited by certain legal and regulatory requirements, including the PUHCA. The PUHCA limits the types of non-utility businesses in which Cinergy and other registered holding companies under the PUHCA can invest as well as the amount of capital that can be invested in permissible non-utility businesses. These investment restrictions will terminate upon the repeal of PUHCA. For a discussion of the PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.” Also, the timing and amount of investments in the non-utility businesses is dependent on the development and favorable evaluations of opportunities. Under the PUHCA restrictions, we are allowed to invest, or commit to invest, in certain non-utility businesses, including:
79
• Exempt Wholesale Generators (EWG) and Foreign Utility Companies (FUCO)
An EWG is an entity, certified by the FERC, devoted exclusively to owning and/or operating, and selling power from one or more electric generating facilities. An EWG whose generating facilities are located in the United States is limited to making only wholesale sales of electricity. An entity claiming status as an EWG must provide notification thereof to the SEC under the PUHCA.
A FUCO is a company all of whose utility assets and operations are located outside the United States and which are used for the generation, transmission, or distribution of electric energy for sale at retail or wholesale, or the distribution of gas at retail. A FUCO may not derive any income, directly or indirectly, from the generation, transmission, or distribution of electric energy for sale or the distribution of gas at retail within the United States. An entity claiming status as a FUCO must provide notification thereof to the SEC under the PUHCA.
In June 2005, the SEC issued an order under PUHCA authorizing Cinergy to invest (including by way of guarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) our average consolidated retained earnings from time to time plus (2) $2 billion through the earlier of (a) the closing of the pending Duke-Cinergy merger or (b) June 23, 2006. As of September 30, 2005, we had invested or committed to invest $0.7 billion in EWGs and FUCOs, leaving available investment capacity under the order of $2.9 billion.
• Qualifying Facilities and Energy-Related Non-Utility Entities
SEC regulations under the PUHCA permit Cinergy and other registered holding companies to invest and/or guarantee an amount equal to 15 percent of consolidated capitalization (consolidated capitalization is the sum of Notes payable and other short-term obligations, Long-term debt (including amounts due within one year), CumulativePreferred Stock of Subsidiaries, and Total Common Stock Equity) in domestic qualifying cogeneration and small power production plants (qualifying facilities) and certain other domestic energy-related non-utility entities. At September 30, 2005, we had invested and/or guaranteed $1.3billion of the $1.5 billion available. In August 2004, Cinergy filed an application with the SEC requesting authority under the PUHCA to increase its investment and/or guarantee authority by $2 billion above the current authorized amount. In light of our existing unused capacity, together with the repeal of PUHCA and the pending merger with Duke, Cinergy withdrew this application in the thirdfirst quarter of 2005.
• Energy-Related Assets
Cinergy has been granted SEC authority under the PUHCA to invest up to $1 billion in non-utility Energy-Related Assets within the United States, Canada, and Mexico. Energy-Related Assets include natural gas exploration, development, production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated assets, facilities, and equipment, but would exclude any assets, facilities, or equipment that would cause the owner or operator thereof to be deemed a public utility company. As of September 30, 2005, we did not have any investments in these Energy-Related Assets.
• Infrastructure Services Companies
In July 2005, the SEC issued an order under the PUHCA authorizing Cinergy to invest up to $100 million (including existing investments and guarantees) through June 30, 2008 in companies that derive or will derive substantially all of their operating revenues from the sale of Infrastructure Services including:
• Design, construction, retrofit, and maintenance of utility transmission and distribution systems;
80
• Installation and maintenance of natural gas pipelines, water and sewer pipelines, and underground and overhead telecommunications networks; and
• Installation and servicing of meter reading devices and related communications networks, including fiber optic cable.
At September 30, 2005, we had invested $30 million in Infrastructure Services companies.
On June 23, 2005, the SEC issued an order under the PUHCA authorizing Cinergy Corp. to provide guarantees in an aggregate amount not to exceed $3.0 billion. For a discussion of the PUHCA Repeal,2006, see “Energy Bill” in “Liquidity and Capital Resources.” As of September 30, 2005, we had $1.2 billion outstanding under the guarantees issued, of which 81 percent represents guarantees of obligations reflected on Cinergy’s Condensed Consolidated Balance Sheets. The amount outstanding represents Cinergy Corp.’s guarantees of liabilities and commitments of its consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures.
See Note 9(c)2(b)(iviii) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Statements”Information” for further information.
The Results of Operations discussion for PSI is presented in a discussion of guaranteesreduced disclosure format in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45, General Instruction H(2)(a) of Form 10-Q.
Guarantor’s AccountingElectric gross margins and Disclosure Requirementsnet income for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45). Interpretation 45 requires disclosure of maximum potential liabilities for guarantees issued on behalf of unconsolidated subsidiaries and joint ventures and under indemnification clauses in various contracts. The Interpretation 45 disclosure differs from the PUHCA restrictions in that it requires a calculation of maximum potential liability, rather than actual amounts outstanding; it excludes guarantees issued on behalf of consolidated subsidiaries and it includes potential liabilities under indemnification clauses.
Cinergy has certain contracts in place, primarily with trading counterparties, that require the issuance of collateral in the event our debt ratings are downgraded below investment grade. Based upon our September 30, 2005 trading portfolio, if such an event were to occur, Cinergy would be required, based on contractual provisions, to post up to $551 million in additional collateral related to its gas and power trading operations, of which $108 million is related to CG&E.
As a consequence of rising commodity prices, as of September 30, 2005, Cinergy has posted $481 million in total cash collateral, of which $240 million is related to CG&E, and received total cash collateral of $387 million, of which $260 million is related to CG&E. Also, Cinergy has posted non-cash collateral in the form of letters of credit totaling $232 million, of which $225 million is related to CG&E, and received letters of credit totaling $482 million, of which $136 million is related to CG&E.
Cinergy, CG&E, PSI, for the quarters ended March 31, 2006 and ULH&P meet their current and future capital requirements through a combination of funding sources including, but not limited to, internally generated cash flows, tax-exempt bond issuances, capital lease and operating lease structures, the securitization of certain asset classes, short-term bank borrowings, issuance of commercial paper, and issuances of long-term debt and equity. Funding decisions are based on market conditions, market access, relative pricing information, borrowing duration and current versus forecasted cash needs. Cinergy, CG&E, PSI, and ULH&P are committed to maintaining balance sheet health, responsibly managing capitalization, and maintaining adequate credit ratings. Cinergy, CG&E, PSI, and ULH&P believe that they have adequate financial resources to meet their future needs.
CG&E, PSI, and ULH&P have an agreement with Cinergy Receivables Company, LLC (Cinergy Receivables), an affiliate, to sell, on a revolving basis, nearly all of the retail accounts receivable and related collections of CG&E, PSI, and ULH&P. Cinergy Receivables funds its purchases with borrowings from commercial paper conduits that obtain a security interest in the receivables. This program accelerates the collection of cash for CG&E, PSI, and ULH&P related to these retail receivables. Cinergy Corp. does not consolidate Cinergy Receivables because it meets the requirements to be accounted for2005 was as a qualifying special purpose entity (SPE).
81
We are required to secure authority to issue short-term debt from the SEC under the PUHCA and from the PUCO. The SEC under the PUHCA regulates the issuance of short-term debt by Cinergy Corp., PSI, and ULH&P. The PUCO has regulatory jurisdiction over the issuance of short-term debt by CG&E. For a discussion of the PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.”follows:
|
| Short-term Regulatory Authority |
| ||||
|
| (in millions) |
| ||||
|
| Authority |
| Outstanding |
| ||
Cinergy Corp. |
| $ | 4,000 | (1) | $ | 874 |
|
CG&E and subsidiaries |
| 665 | (2) | 205 |
| ||
PSI |
| 600 |
| 373 |
| ||
ULH&P |
| 65 | (2) | 10 |
| ||
| PSI |
| ||||||||||
|
| 2006 |
| 2005 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Electric gross margin(1) |
| $ | 285 |
| $ | 293 |
| $ | (8 | ) | (3 | )% |
Net income |
| 19 |
| 42 |
| (23 | ) | (55 | ) | |||
(1) In June 2005, the SEC issued an order under PUHCA authorizing Cinergy to increase itstotal capitalization (excludingElectric gross margin is calculated as retained earningsElectric operating revenues less Fuel, emission allowances, and purchased power and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $4 billion over the September 30, 2004 levels. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.
(2)In December 2004, Cinergy and ULH&P requested approvalexpense from the SEC for an increase in ULH&P’s authority from $65 million to $150 million to coincide with the completionCondensed Statements of its pending transaction with CG&E in which ULH&P will acquire interests in three of CG&E’s electric generating stations. At this time, we are unable to predict whether the SEC will approve this request.Income.
For the purposes of quantifying regulatory authority, short-term debt includes revolving credit line borrowings, uncommitted credit line borrowings, intercompany money pool obligations, and commercial paper.
82
Cinergy Corp.’s short-term borrowings consist primarily of unsecured revolving lines of credit and the sale of commercial paper. Cinergy Corp.’s revolving credit facility and commercial paper program also support the short-term borrowing needs of CG&E, PSI, and ULH&P. In addition, Cinergy Corp., CG&E, and PSI maintain uncommitted lines of credit. These facilities are not firm sources of capital but rather informal agreements to lend money, subject to availability, with pricing determined at the time of advance. The following table summarizes our Notes payable and other short-term obligations and Notes payable to affiliated companies:
|
| Short-term Borrowings |
| |||||||||||||
|
| September 30, 2005 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| Available |
| |||||
|
|
|
|
|
|
|
|
|
| Revolving |
| |||||
|
| Established |
|
|
|
|
| Standby |
| Lines of |
| |||||
|
| Lines |
| Outstanding |
| Unused |
| Liquidity(1) |
| Credit |
| |||||
|
| (in millions) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy Corp. |
|
|
|
|
|
|
|
|
|
|
| |||||
Revolving line(2) |
| $ | 2,000 |
| $ | — |
| $ | 2,000 |
| $ | 1,102 |
| $ | 898 |
|
Uncommitted lines |
| 40 |
| — |
| 40 |
|
|
|
|
| |||||
Commercial paper(3) |
|
|
| 874 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Utility operating companies |
|
|
|
|
|
|
|
|
|
|
| |||||
Uncommitted lines |
| 75 |
| — |
| 75 |
|
|
|
|
| |||||
Pollution control notes |
|
|
| 248 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-regulated subsidiaries |
|
|
|
|
|
|
|
|
|
|
| |||||
Revolving lines(4) |
| 162 |
| 45 |
| 117 |
| — |
| 117 |
| |||||
Short-term debt |
|
|
| 7 |
|
|
|
|
|
|
| |||||
Pollution control notes |
|
|
| 25 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy Total |
|
|
| $ | 1,199 |
|
|
|
|
| $ | 1,015 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E and subsidiaries |
|
|
|
|
|
|
|
|
|
|
| |||||
Uncommitted lines |
| $ | 15 |
| $ | — |
| $ | 15 |
|
|
|
|
| ||
Pollution control notes |
|
|
| 112 |
|
|
|
|
|
|
| |||||
Money pool |
|
|
| 205 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E Total |
|
|
| $ | 317 |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI |
|
|
|
|
|
|
|
|
|
|
| |||||
Uncommitted lines |
| $ | 60 |
| $ | — |
| $ | 60 |
|
|
|
|
| ||
Pollution control notes |
|
|
| 136 |
|
|
|
|
|
|
| |||||
Money pool |
|
|
| 373 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI Total |
|
|
| $ | 509 |
|
|
|
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Money pool |
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| $ | 10 |
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ULH&P Total |
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| $ | 10 |
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(1)Standby liquidity is reserved against the revolving line of credit to support the commercial paper program and outstanding letters of credit (currently $874 million and $228 million, respectively).
(2)Consists of a five-year facility which was entered into in September 2005, matures in September 2010, and contains $500 million sublimits each for CG&E and PSI, and a $65 million sublimit for ULH&P (which may be increased to $100 million upon the completion of its pending transaction with CG&E in which ULH&P will acquire interests in three of CG&E’s electric generating stations. See “Regulatory Outlook – Kentucky” in “Future Expectations/Trends” for further information regarding this transaction.).
(3)Cinergy Corp.’s commercial paper program limit is $1.5 billion. The commercial paper program is supported by Cinergy Corp.’s revolving lines of credit.
(4)Of the $162 million, $150 million relates to a three-year senior revolving credit facility that Cinergy Canada, Inc. entered into in December 2004 and that matures in December 2007.
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Short-term NotesGross Margins
The three percent decrease in electric gross margins was primarily due to the following factors:
In September 2005, Cinergy Corp·., CG&E, PSI, and ULH&P entered into A decline in non-retail margins, primarily driven by an adverse ruling from the IURC on a five-year revolving credit facility with a termination date of September 2010 which can be extended twice, each extension for an additional one-year period. The new credit agreement replaces two existing credit agreements, one dated April 2004 and one dated December 2004.
The new credit agreement provides that the pending merger between Duke and Cinergy Corp. will not be considered a fundamental change or a “Change of Control” for purposes of the credit agreement.
For purposes of making borrowings the new credit agreement does not require certain environmental, litigation or material adverse change representations and warranties that were in the credit agreements it replaced.
At September 30, 2005, Cinergy Corp. had $898 million remaining unused and available capacity relating to its $2 billion revolving credit facility. The revolving credit facility includes the following:
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| $ | 874 |
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Letter of credit support |
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| 228 |
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Total(1) |
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| $ | 2,000 |
| 1,102 |
| $ | 898 |
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(1)In September 2005, Cinergy Corp. successfully placed a $2 billion senior unsecured revolving credit facility which replaced the $1 billion five-year facility, set to expire in December 2009, and the $1 billion three-year facility, set to expire in April 2007. CG&E and PSI each have $500 million borrowing sublimits on this facility, and ULH&P has a $65 million borrowing sublimit on this facility (which may be increased to $100 million upon the completion of its pending transaction with CG&E in which ULH&P will acquire interests in three of CG&E’s electric generating stations. See Note 12(a) for further information regarding this transaction.)
In our credit facility, Cinergy Corp. has covenanted to maintain:
• a consolidated net worth of $2 billion;fuel-related matter; and
•· a ratio of consolidated indebtednessA decline due to consolidated total capitalization not in excess of 65 percent.
As part of CG&E’s $500 million sublimit under the $2 billion five-year credit facility, CG&E has covenanted to maintain:
• a consolidated net worth of $1 billion; and
• a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
As part of PSI’s $500 million sublimit under the $2 billion five-year credit facility, PSI has covenanted to maintain:
• a consolidated net worth of $900 million; and
• a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
As part of ULH&P’s $65 million sublimit under the $2 billion five-year credit facility, ULH&P has covenanted to maintain:
• a consolidated net worth of $150 million, provided that in the event that the sublimit has been increased to $100 million the consolidated net worth would be $200 million; and
• a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
A breach of these covenants could result in the termination of the credit facility and the acceleration of the related indebtedness. In addition to breaches of covenants, certain other events that could result in the termination of available credit and acceleration of the related indebtedness include:
• bankruptcy;
• defaults in the payment of other indebtedness; and
• judgments against the company that are not paid or insured.
The latter two events, however, are subject to dollar-based materiality thresholds. As of September 30, 2005, Cinergy, CG&E, PSI, and ULH&P are in compliance with all of their debt covenants.
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Variable Rate Pollution Control Notes
In October 2005, PSI borrowed the proceeds from the Indiana Finance Authority’s issuance of $50 million principal amount of its Environmental Revenue Bonds, Series 2005B, due October 1, 2040. Holders of the Series 2005B Bonds are entitled to credit enhancement in the form of a standby letter of credit, which if drawn upon, provides for the payment of both interest and principal on the Series 2005B Bonds. The initial interest rate for the Series 2005B Bonds was 2.75% and is reset weekly. Because the holders have the right to have their Bonds redeemed on a weekly basis, they are classified as Notes payable and other short-term obligations. PSI is using the proceeds from these borrowings to assist in the acquisition and construction of solid waste disposal facilities located at various generating stations in Indiana.
We are required to secure authority to issue long-term debt from the SEC under the PUHCA and the state utility commissions of Ohio, Kentucky, and Indiana. For a discussion of the PUHCA Repeal, see “Energy Bill” in “Liquidity and Capital Resources.” The SEC under the PUHCA regulates the issuance of long-term debt by Cinergy Corp. The respective state utility commissions regulate the issuance of long-term debt by our utility operating companies.
A summary of our long-term debt authorizations at September 30, 2005, was as follows:
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| $ | 657 |
| $ | 3,343 |
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| $ | 575 |
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| 94 |
| 156 |
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| $ | 500 |
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| 50 |
| 200 |
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| $ | 75 |
| $ | — |
| $ | 75 |
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(1)In June 2005, the SEC issued an order under PUHCA authorizing Cinergy to increase its total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $4 billion over the September 30, 2004 levels. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.
(2)Includes amounts for ULH&P.
(3)In October 2005, PSI issued $350 million principal amount of its 6.12% Debentures due October 15, 2035.
(4) �� In June 2005, the IURC granted PSI financing authority to borrow the proceeds from the issuance and sale of up to $250 million principal amount of tax exempt securities through December 31, 2005. In October 2005, PSI borrowed the proceeds from the Indiana Finance Authority’s issuance of its $100 million principal amount of its Environmental Revenue Bonds.
(5)In April 2005, the KPSC granted ULH&P financing authority to issue and sell up to $500 million principal amount of secured and unsecured debt; enter into inter-company promissory notes up to an aggregate principal amount of $200 million; and borrow up to a maximum of $200 million aggregate principal amount of tax-exempt debt through December 31, 2006. This authority is contingent upon the completion of its pending transaction with CG&E in which ULH&P will acquire interests in three of CG&E’s electric generating stations. See “Regulatory Outlook – Kentucky” in “Future Expectations/Trends” for further information regarding this transaction.
Cinergy Corp. has an effective shelf registration statement with the SEC relating to the issuance of up to $750 million in any combination of common stock, preferred stock, stock purchase contracts or unsecured debt securities, of which $323 million remains available for issuance. CG&E has an effective shelf registration statement with the SEC relating to the issuance of up to $800 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, all of which remains available for issuance. PSI has an effective shelf registration statement with the SEC relating to the issuance of up to $800 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, all of which remains available for issuance. ULH&P has an
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effective shelf registration statement with the SEC for the issuance of up to $125 million in any combination of unsecured and secured debt securities.
As discussed in the 2004 10-K, Cinergy uses off-balance sheet arrangements from time to time to facilitate financing of various projects. Cinergy’s primary off-balance sheet arrangement involves the sale of accounts receivable to a qualifying SPE.
In 2001, Cinergy Corp. issued $316 million notional amount of combined securities, a component of which was stock purchase contracts. These contracts obligated the holder to purchase common shares of Cinergy Corp. stock by February 2005. Since the stock purchase contracts were detachable and classified in equity, the change in their fair value was not recorded in equity or earnings and therefore the stock purchase contracts were considered off-balance sheet arrangements. In January and February 2005, the stock purchase contracts were settled, resulting in the issuance of common stock that is recorded on Cinergy’s Condensed Consolidated Balance Sheets as Common Stock Equity.
As of September 30, 2005, the major credit rating agencies rated our securities as follows:
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(1)Fitch Ratings (Fitch)
(2)Moody’s Investors Service (Moody’s)
(3)Standard & Poor’s Ratings Services (S&P)
The highest investment grade credit rating for Fitch is AAA, Moody’s is Aaa1, and S&P is AAA.
The lowest investment grade credit rating for Fitch is BBB-, Moody’s is Baa3, and S&P is BBB-.
On May 10, 2005, S&P placed its ratings of Cinergy Corp. and its subsidiaries on CreditWatch with negative implications. This action was in response to the announcement of the pending merger of Duke and Cinergy and the uncertainty around the final details of the transaction. Fitch has affirmed its existing ratings, noting that it anticipates the combined entity to achieve a credit profile similar to that of Cinergy. Moody’s has also affirmed its ratings, anticipating that no incremental debt will be issued as a result of the merger. See “Pending Merger” for a further discussion of the transaction.
A security rating is not a recommendation to buy, sell, or hold securities. These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.
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As discussed in the 2004 10-K, in January and February 2005, CinergyCorp. issued a total of 9.2 million shares of common stock pursuant to certain stock purchase contracts that were issued as a component of combined securities in December 2001. Net proceeds from the transaction of $316 million were used to reduce short-term debt.
Cinergy issues new Cinergy Corp. common stock shares to satisfy obligations under certain of its employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. During the nine months ended September 30, 2005, Cinergy issued 2.5 million shares under these plans.
In June 2005, Cinergy Corp. contributed $200 million in capital to PSI. The capital contribution was used to repay short-term indebtedness and is consistent with supporting PSI’s current credit ratings.
Cash dividends declared for the quarter ended September 30, 2005 include dividends of $0.48 per share which were declared by the board of directors on July 21 and dividends of $0.48 per share which were declared on September 30.
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MD&A - FUTURE EXPECTATIONS/TRENDS
In the “Future Expectations/Trends” section, we discuss developments in the electric and gas industry and other matters. Each of these discussions will address the current status and potential future impact on our financial position or results of operations.
Ohio
Transfer of Duke Generating Assets
The merger agreement provides that Duke and Cinergy will use their reasonable best efforts to transfer five generating stations located in the Midwest from Duke to CG&E. This transfer will require regulatory approval by the FERC and the IURC. There can be no guarantee that such approvals will be obtained or will be obtained on terms or with conditions acceptable to Duke, Cinergy, and Duke Energy Holding. Duke intends to effectuate the transfer as an equity infusion into CG&E at book value. In conjunction with the transfer, Duke and CG&E intend to enter into a financial arrangement over a multi-year period, to eliminate any potential cash shortfalls that may result from CG&E owning and operating the assets. At this time, we cannot predict the outcome of this matter.
CG&E Electric Rate Filing
In response to the PUCO’s request that CG&E propose a RSP to mitigate the potential for significant rate increases when the market development period comes to an end, CG&E filed a proposed RSP which was approved by the PUCO in November 2004. The major features of the RSP are as follows:
•Provider of Last Resort (POLR) Charge:CG&E began collecting a POLR charge from non-residential customers effective January 1, 2005, and will begin to collect a POLR charge from residential customers effective January 1, 2006. The POLR charge includes several discrete charges, the most significant being an annually adjusted component (AAC) intended to provide cost recovery primarily for environmental compliance expenditures; an infrastructure maintenance fund charge (IMF) intended to provide compensation to CG&E for committing its physical capacity to meet its POLR obligation; anda system reliability tracker (SRT) intended to provide cost recovery for capacity purchases, purchased power, reserve capacity, and related market costs for purchases to meet capacity needs. We anticipate the collection of the AAC and IMF will result in an approximate $36 million increase in revenues in 2005 and an additional $50 million in 2006. The SRT will be billed based on dollar-for-dollar costs incurred. A portion of these charges is avoidable by certain customers who switch to an alternative generation supplier and provide notice to CG&E that they will remain switched through December 31, 2008. Therefore, these estimates are subject to change, depending on the level of switching that occurs in future periods. CG&E has filed an application for approval of its SRT (2005 actual and 2006 estimated) with the PUCO. In October, a settlement agreement unopposed by any party to the case was filed with the PUCO providing for implementation of the 2006 SRT at a 15 percent reserve margin and approval of the 2005 SRT price. A Commission decision is expected on this matter in the fourth quarter of 2005. In 2007 and 2008, CG&E could seek additional increases in the AAC component of the POLR based on CG&E’s actual net costs for the specified expenditures.
•Generation Rates and Fuel Recovery: A new rate has been established for generation service after the market development period ends. In addition, a fuel cost recovery mechanism that is adjusted quarterly has been established to recover costs for fuel, emission allowances, and certain purchased power costs, that exceed the amount originally included in the rates frozen in the CG&E transition plan. These new rates were applied to non-residential customers beginning January 1, 2005 and will be applied to residential customers beginning January 1, 2006. The fuel clause recovery mechanism was recently audited by the PUCO’s auditor. The audit recommended alternate methodologies for administration of the fuel clause recovery mechanism that vary from CG&E’s current practice. A hearing before PUCO hearing examiners was held in early November at which the PUCO staff took positions contrary to CG&E's current practice. CG&E officials also testified at the hearing concerning our current practices. An order from the PUCO on these matters is expected in the fourth quarter of this year. While we cannot predict the outcome of these proceedings, an outcome resulting in administrative methodologies substantially different from those being employed by CG&E could have a material impact on CG&E and Cinergy’s results of operations.
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•Generation Rate Reduction: The existing five percent generation rate reduction required by statute for residential customers implemented under CG&E’s 2000 plan will end on December 31, 2005.
•Transmission Cost Recovery: A transmission cost recovery mechanism was established beginning January 1, 2005 for non-residential customers and will be established beginning January 1, 2006 for residential customers. The transmission cost recovery mechanism is designed to permit CG&E to recover Midwest ISO charges, all FERC approved transmission costs, and all congestion costs allocable to retail ratepayers that are provided service by CG&E.
•Distribution Cost Recovery: CG&E will have the ability to defer certain capital-related distribution costs from July 1, 2004 through December 31, 2005 with recovery from non-residential customers to be provided through a rider beginning January 1, 2006 through December 31, 2010.
CG&E had also filed an electric distribution base rate case for residential and non-residential customers to be effective January 1, 2005. Under the terms of the RSP described previously, CG&E withdrew this base rate case and, in February 2005, CG&E filed a new distribution base rate case with rates to become effective January 1, 2006. The originally requested amount of the increase was $78 million, which was subsequently updated to $69.5 million. On September 9, 2005, the PUCO issued its Staff Report recommending a revenue increase range between approximately $43 million and $49 million. The hearing for this case is set to begin December 12, 2005.
In March 2005, the Ohio Consumers’ Counsel asked the Ohio Supreme Court to overturn the RSP. We expect the court to decide the case in 2006; however, at this time we cannot predict the outcome of this matter.
Kentucky
The KPSC and the FERC have approved ULH&P’s planned acquisition of CG&E’s approximately 69 percent ownership interest in the East Bend Station, located in Boone County, Kentucky, the Woodsdale Station, located in Butler County, Ohio, and one generating unit at the four-unit Miami Fort Station, located in Hamilton County, Ohio, and associated transactions. ULH&P is currently seeking approval of the transaction in a proceeding before the SEC, wherein the Ohio Consumers’ Counsel has intervened in opposition. The transfer, which will be at net book value, will not affect current electric rates for ULH&P’s customers, as power will be provided under the same terms as under the current wholesale power contract with CG&E through December 31, 2006. Assuming receipt of SEC approval, we would anticipate the transfer to take placemilder weather in the first quarter of 2006.2006, as compared to 2005.
Partially offsetting these declines was growth in non-weather related demand.
Net Income
The 55 percent decrease in net income was primarily due to the following factors:
· An increase in Operation and maintenance expense due in part to significant merger related costs in the first quarter of 2006, see Note 2(b)(iii) of the “Notes to Condensed Financial Statements” in “Item 1. Financial Information” for further information.
· The decrease in electric gross margins, as previously discussed; and
· An increase in Interest Expense, primarily due to an increase in average long-term debt outstanding and an increase in interest expense related to a tax contingency.
Partially offsetting these increased expenses and decreased margins was an increase in Miscellaneous Income — Net.
Indiana
Wheatland Generating Facility Acquisition
On May 6, 2005, we signed a definitive agreement with subsidiaries of Allegheny Energy, Inc. whereby, subject to the terms and upon satisfaction of the conditions to closing provided in the purchase agreement, PSI and/or CG&E had the right to acquire the 512-megawatt Wheatland generating facility for approximately $100 million. The Wheatland facility, located in Knox County, Indiana, has four natural gas-fired simple cycle combustion turbines and is directly connected to the Cinergy transmission system. In June and August 2005, respectively, the FERC and IURC approved the acquisition and the Department of Justice and Federal Trade Commission completed their review of the transaction pursuant to the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act. In August 2005, PSI acquired 100 percent of the Wheatland facility. Its output will be used to bolster the reserve margins on the PSI system.
Integrated Coal Gasification Combined Cycle
Cinergy is studying the feasibility of constructing a commercial IGCC generating station to help meet increased demand over the next decade. PSI would be a majority owner of the facility and operate it. Cinergy will partner with Bechtel Corporation and General Electric Company to complete this study. An IGCC plant turns coal to gas, removing most of the SO2 and other emissions before the gas is used to fuel a combustion turbine generator. The technology uses less water and has fewer emissions than a conventional coal-fired plant with currently required
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pollution control equipment. Another benefit is the potential to remove mercury and CO2 upstream of the combustion process at a lower cost than conventional plants. In August 2005, PSI and Vectren Energy Delivery of Indiana, Inc. (Vectren) filed a joint petition at the IURC seeking cost recovery of the feasibility study as well as engineering and preconstruction costs associated with the consideration and exploration of constructing an IGCC plant. If a decision is reached to move forward with constructing such a plant, PSI would seek approval from the IURC to begin construction. If approved, we would anticipate the IURC’s subsequent approval to include the assets in PSI’s rate base.
PSI Environmental Compliance Case
In November 2004,PSI filed a compliance plan case with the IURC seeking approval of PSI’s plan for complying with SO2, NOX, and mercury emission reduction requirements discussed previously in “Environmental Protection Agency Regulations” in “Liquidity and Capital Resources”, including approval of cost recovery and an overall rate of return of eight percent related to certain projects. PSI requested approval to recover the financing, depreciation, and operation and maintenance costs, among others, related to $1.08 billion in capital projects designed to reduce emissions of SO2, NOX, and mercury at PSI’s coal-burning generating stations. An evidentiary hearing was held in May 2005 and a final IURC Order is expected in the fourth quarter of 2005.
FERC
The FERC has issued several notices of proposed rulemaking and inquiry on a variety of matters to implement provisions of the Energy Bill, among other things. At this time, we cannot predict the outcome of these proposals.
The Midwest ISO is a regional transmission organization established in 1998 as a non-profit organization which maintains functional control over the combined transmission systems of its members, including Cinergy. In March 2004, the Midwest ISO filed with the FERC proposed changes to its existing transmission tariff to add terms and conditions to implement a centralized economic dispatch platform supported by a Day-Ahead and Real-Time Energy Market design, including Locational Marginal Pricing (LMP) and Financial Transmission Rights (FTRs) (Energy Markets Tariff). The FERC has issued orders that, among other things, conditionally approve the start-up of the Energy Markets Tariff which occurred April 1, 2005. The FERC issued orders in response to requests for rehearing on certain matters in the FERC’s original orders. Cinergyhas appealedthe FERC orders to a federal appeals court.
Specifically, the Energy Markets Tariff manages system reliability through the use of a market-based congestion management system and includes a centralized dispatch platform, the intent of which is to dispatch the most economic resources to meet load requirements reliably and efficiently in the Midwest ISO region, which covers a large portion of 15 Midwestern states and one Canadian province. The Energy Markets Tariff uses LMP (i.e., the energy price for the next megawatt (MW) may vary throughout the Midwest ISO market based on transmission congestion and energy losses), and the allocation or auction of FTRs, which are instruments that hedge against congestion costs occurring in the Day-Ahead market. The Energy Markets Tariff also includes market monitoring and mitigation measures as well as a resource adequacy proposal, that proposes both an interim solution for participants providing and having access to adequate generation resources and a proposal to develop a long-term solution to resource adequacy concerns. The Midwest ISO performs a day-ahead unit commitment and dispatch forecast for all resources in its market and also performs the real-time resource dispatch for resources under its control on a five minute basis. The Cinergy utility operating companies are seeking recovery of costs that they incur related to the Energy Markets Tariff. We have been operating under the Energy Markets Tariff sinceApril 2005. We continue to work with the Midwest ISO to monitor the implementation of the new market and at this time we do not believe it will have a material impact on our results of operations or financial position.
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Presently, GHG emissions, which principally consist of CO2, are not regulated, and while several legislative proposals have been introduced in Congress to reduce utility GHG emissions, none have been passed. Nevertheless, we anticipate a mandatory program to reduce GHG emissions will exist in the future. We expect that any regulation of GHGs will impose costs on Cinergy. Depending on the details, any GHG regulation could mean:
• Increased capital expenditures associated with investments to improve plant efficiency or install CO2 emission reduction technology (to the extent that such technology exists) or construction of alternatives to coal generation;
• Increased operation and maintenance expense;
• Our older, more expensive to operate generating stations may operate fewer hours each year because the addition of CO2 costs could cause their generation to be less economic; and
• Increased expenses associated with the purchase of CO2 emission allowances, should such an emission allowances market be created.
We would plan to seek recovery of the costs associated with a GHG program in rate regulated states where cost recovery is permitted.
In September 2003, Cinergy announced a voluntary GHG management commitment to reduce its GHG emissions during the period from 2010 through 2012 by five percent below our 2000 level, maintaining those levels through 2012. Cinergy expects to spend $21 million between 2004 and 2010 on projects to reduce or offset its GHG emissions. Cinergy is committed to supporting the President’s voluntary initiative, addressing shareholder interest in the issue, and building internal expertise in GHG management and GHG markets. Our voluntary commitment includes the following:
• Measuring and inventorying company-related sources of GHG emissions;
• Identifying and pursuing cost-effective GHG emission reduction and offsetting activities;
• Funding research of more efficient and alternative electric generating technologies;
• Funding research to better understand the causes and consequences of climate change;
• Encouraging a global discussion of the issues and how best to manage them; and
• Participating in discussions to help shape the policy debate.
Cinergy is also studying the feasibility of constructing a commercial IGCC generating station which would be “carbon capture ready” or have the potential to capture CO2 and then potentially sequester it underground. See “Integrated Coal Gasification Combined Cycle” discussed previously for more information.
ULH&P Gas Rate Case
In 2002, the KPSC approved ULH&P’s gas base rate case requesting, among other things, recovery of costs associated with an accelerated gas main replacement program of up to $112 million over ten years. The approval allowed the costs to be recovered through a tracking mechanism for an initial three year period expiring on September 30, 2005, with the possibility of renewal up to ten years. The tracking mechanism allows ULH&P to recover depreciation costs and rate of return annually over the life of the deferred assets. As of September 30, 2005 we have capitalized $60 million in costs associated with the accelerated gas main replacement program through this tracking mechanism of which ULH&P has recovered $8.6 million. The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the tracking mechanism rates. In October 2005, both the Company and the KPSC filed with the Franklin Circuit Court, requesting dismissal of the case for failure to prosecute by the Attorney General. At the present time, ULH&P cannot predict the timing or outcome of this litigation.
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In February 2005, ULH&P filed a gas base rate case with the KPSC requesting approval to continue the tracking mechanism in addition to its request for a $14 million increase in base rates. The KPSC did not rule on this request by October 1, 2005 causing the initial tracking mechanism to expire. In accordance with Kentucky law, ULH&P implemented the full amount of the requested rate increase on October 1, 2005. Any revenue collected pursuant to the rate increase will be subject to refund if the KPSC does not approve the full requested amount. ULH&P expects that the KPSC will issue its decision during the fourth quarter of 2005.
Natural gas prices remained in the $8 - $9 per thousand cubic feet (Mcf) range through most of the summer due primarily to the warmer than normal summer and the increased use of gas to fire electric generation peaking units. Extensive damage to the natural gas infrastructure along the Gulf Coast caused by Hurricanes Katrina and Rita pushed the price of natural gas into the $12 - $14 per Mcf range by late September. Winter delivery prices for 2005 and early 2006 assuming normal winter weather, are expected to range from $11 to $13 per Mcf in the Midwest or about 50 percent greater than last winter. Price movement is usually driven by the effects of weather conditions, availability of supply, and changes in demand and storage inventories. Currently, neither CG&E’s nor ULH&P’s gas delivery operations profit from changes in the cost of natural gas since natural gas purchase costs are passed directly to the customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.
ULH&P utilizes a price mitigation program designed to mitigate the effects of gas price volatility on customers, which the KPSC has approved through April 2008. The program allows the pre-arranging of between 20-75 percent of winter heating season base load gas requirements and up to 50 percent of summer season base load gas requirements. CG&E similarly mitigates its gas procurement costs; however, CG&E’s gas price mitigation program has not been pre-approved by the PUCO but rather it is subject to PUCO review as part of the normal gas cost recovery process.
CG&E and ULH&P use primarily long-term fixed price contracts and contracts with a ceiling and floor on the price. These contracts employ the normal purchases and sales scope exception, and do not involve hedge accounting under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133).
Cinergy produces from two facilities synthetic fuel that qualifies for tax credits (through 2007) in accordance with Section 29 of the IRC if certain requirements are satisfied.
Cinergy’s sale of synthetic fuel has generated $306 million in tax credits through September 30, 2005 of which $27 million related to the new facility purchased in the second quarter of 2005. The IRS is currently auditing Cinergy for the 2002 and 2003 tax years and has recently challenged certain other taxpayers’ Section 29 tax credits. We expect the IRS will evaluate the various key requirements for claiming our Section 29 credits related to synthetic fuel. If the IRS challenges our Section 29 tax credits related to synthetic fuel, and such challenges were successful, this could result in the disallowance of up to all $306 million in previously claimed Section 29 tax credits for synthetic fuel produced by the applicable Cinergy facilities and a loss of our ability to claim future Section 29 tax credits for synthetic fuel produced by such facilities. We believe that we operate in conformity with all the necessary requirements to be allowed such tax credits under Section 29. Upon consummation of the pending merger of Duke and Cinergy, the synthetic fuel produced by Cinergy’s new facility pursuant to the existing commercial arrangement would cease to qualify for the Section 29 credit. Cinergy is evaluating transactions for the disposition of a portion of the affected facility that Cinergy believes would enable the fuel produced by the facility to continue to qualify for credit under IRC Section 29. In the event a suitable transaction is not achieved, Cinergy anticipates that its production of synthetic fuel at the affected facility would be suspended upon consummation of the pending merger with Duke.
Section 29 also provides for a phase-out of the credit based on the average price of crude oil during a calendar year. The phase-out is based on a prescribed calculation and definition of crude oil prices. Based on current crude oil
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prices and the recent volatility of such prices, we believe it is possible that for 2006 and 2007, the amount of the tax credits could be reduced. If oil prices are high enough, we may idle the plants, as the value of the credits would not exceed the net costs to produce the synthetic fuel. Net income related to these facilities for the nine months ended September 30, 2005 was approximately $30 million. The net book value of our plants at September 30, 2005 was approximately $50 million.
The Ohio legislature has approved sweeping changes to Ohio’s tax law which will phase out the Ohio corporate franchise tax over five years. The franchise tax will be replaced by a “Commercial Activity Tax”, a tax imposed on gross receipts. We do not expect the tax law changes to have a material impact on our cash flows. The phase-out of the Ohio franchise tax resulted in the elimination of state income tax deferrals under GAAP thus reducing the effective income tax rate during the period. However, we do not expect these changes to have a material impact on our results of operations or financial position going forward over the remainder of the phase-out period.
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MD&A - MARKET RISK SENSITIVE INSTRUMENTS
The transactions associated with Commercial’s energy marketing and trading activities and substantial investment in generation assets give rise to various risks, including price risk. Price risk represents the potential risk of loss from adverse changes in the market price of electricity or other energy commodities. As Commercial continues to develop its energy marketing and trading business, its exposure to movements in the price of electricity and other energy commodities may become greater. As a result, we may be subject to increased future earnings volatility.
As discussed in the 2004 10-K, Commercial’s energy marketing and trading activities principally consist of Marketing & Trading’s natural gas marketing and trading operations and CG&E’s power marketing and trading operations.
The changes in fair value of the energy risk management assets and liabilities for Cinergy and CG&E for the nine months ended September 30, 2005 and 2004 are presented in the table below.
|
| Change in Fair Value |
| ||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| ||||||||
|
| Cinergy(1) |
| CG&E |
| Cinergy(1) |
| CG&E |
| ||||
|
| (in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Fair value of contracts outstanding at the beginning of the year |
| $ | 82 |
| $ | 36 |
| $ | 41 |
| $ | 20 |
|
|
|
|
|
|
|
|
|
|
| ||||
Changes in fair value attributable to changes in valuation techniques and assumptions(2) |
| (3 | ) | (3 | ) | — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other changes in fair value(3) |
| (122 | ) | (36 | ) | 129 |
| 60 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Option premiums paid/(received) |
| 15 |
| 14 |
| 1 |
| 4 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Contracts settled |
| (154 | ) | (91 | ) | (93 | ) | (32 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Fair value of contracts outstanding at end of period |
| $ | (182 | ) | $ | (80 | ) | $ | 78 |
| $ | 52 |
|
(1)The results of Cinergy also include amounts related to non-registrants.
(2)Represents changes in fair value recognized in income, caused by changes in assumptions used in calculating fair value or changes in modeling techniques.
(3)Represents changes in fair value recognized in income, primarily attributable to fluctuations in price. This amount includes both realized and unrealized gains on energy trading contracts.
The following are the balances at September 30, 2005 and 2004 of our energy risk management assets and liabilities:
|
| September 30, 2005 |
| September 30, 2004 |
| ||||||||
|
| Cinergy(1) |
| CG&E |
| Cinergy(1) |
| CG&E |
| ||||
|
| (in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Energy risk management assets - current |
| $ | 1,260 |
| $ | 670 |
| $ | 470 |
| $ | 178 |
|
Energy risk management assets - non-current |
| 397 |
| 208 |
| 137 |
| 48 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Energy risk management liabilities - current |
| 1,419 |
| 741 |
| 396 |
| 126 |
| ||||
Energy risk management liabilities - non-current |
| 420 |
| 217 |
| 133 |
| 48 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | (182 | ) | $ | (80 | ) | $ | 78 |
| $ | 52 |
|
(1) The results of Cinergy also include amounts related to non-registrants.
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The following table presents the expected maturity of the energy risk management assets and liabilities as of September 30, 2005 for Cinergy and CG&E:
|
| Fair Value of Contracts at September 30, 2005 |
| |||||||||||||
|
| Maturing |
|
|
| |||||||||||
Source of Fair Value(1) |
| Within 12 |
| 12-36 |
| 36-60 |
| Thereafter |
| Total |
| |||||
|
| (in millions) |
| |||||||||||||
Cinergy(2) |
|
|
|
|
|
|
|
|
|
|
| |||||
Prices actively quoted |
| $ | (190 | ) | $ | (23 | ) | $ | — |
| $ | — |
| $ | (213 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Prices based on models and other valuation methods(3) |
| 31 |
| (4 | ) | 7 |
| (3 | ) | 31 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ | (159 | ) | $ | (27 | ) | $ | 7 |
| $ | (3 | ) | $ | (182 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E |
|
|
|
|
|
|
|
|
|
|
| |||||
Prices actively quoted |
| $ | (82 | ) | $ | (8 | ) | $ | — |
| $ | — |
| $ | (90 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Prices based on models and other valuation methods(3) |
| 11 |
| (2 | ) | 2 |
| (1 | ) | 10 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ | (71 | ) | $ | (10 | ) | $ | 2 |
| $ | (1 | ) | $ | (80 | ) |
(1)While liquidity varies by trading regions, active quotes are generally available for two years for standard electricity transactions and three years for standard gas transactions. Non-standard transactions are classified based on the extent, if any, of modeling used in determining fair value. Long-term transactions can have portions in both categories depending on the length.
(2)The results of Cinergy also include amounts related to non-registrants.
(3)A substantial portion of these amounts include option values.
Cinergy optimizes the value of its non-regulated portfolio. The portfolio includes generation assets (power and capacity), fuel, and emission allowances and we manage all of these components as a portfolio. We use models that forecast future generation output, fuel requirements, and emission allowance requirements based on forward power, fuel and emission allowance markets. The component pieces of the portfolio are bought and sold based on this model in order to manage the economic value of the portfolio. With the issuance of Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (Statement 149), most forward power transactions from management of the portfolio are accounted for at fair value. The other component pieces of the portfolio are typically not subject to Statement 149 and are accounted for using the accrual method, where changes in fair value are not recognized. As a result, we are subject to earnings volatility via MTM gains or losses from changes in the value of the contracts accounted for using fair value. A hypothetical $1.00 per MWh increase or decrease consistently applied to all forward power prices would have resulted in an increase or decrease in fair value of these contracts of approximately $6.7 million as of September 30, 2005. See “2005 Quarterly Results of Operations” and “2005 Year to Date Results of Operations” for further discussion of the impact on current quarter and year to date results.
Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written guidelines approved by Cinergy’s Risk Policy Committee document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures. Cinergy analyzes net credit exposure and establishes credit reserves based on the counterparties’ credit rating, payment history, and length of the outstanding obligation. Exposures to credit risks are monitored daily by the Corporate Credit Risk function, which is independent of all trading operations. Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity. Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.
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The following tables provide information regarding Cinergy’s and CG&E’s exposure on energy trading contracts as of September 30, 2005. The tables include accounts receivable and energy risk management assets, which are net of accounts payable and energy risk management liabilities with the same counterparties when we have the right of offset. The credit collateral shown in the following tables includes cash and letters of credit.
Cinergy(1)
Rating |
| Total Exposure |
| Credit |
| Net Exposure |
| Percentage |
| Number of |
| Net Exposure of |
| ||||
|
| (in millions) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment Grade(2) |
| $ | 1,360 |
| $ | 358 |
| $ | 1,002 |
| 81 | % | — |
| $ | — |
|
Internally Rated-Investment Grade(3) |
| 326 |
| 194 |
| 132 |
| 11 |
| — |
| — |
| ||||
Non-Investment Grade |
| 134 |
| 95 |
| 39 |
| 3 |
| — |
| — |
| ||||
Internally Rated-Non-Investment Grade |
| 170 |
| 110 |
| 60 |
| 5 |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 1,990 |
| $ | 757 |
| $ | 1,233 |
| 100 | % | — |
| $ | — |
|
(1)Includes amounts related to non-registrants.
(2)Includes counterparties rated Investment Grade or the counterparties’ obligations are guaranteed or secured by an Investment Grade entity.
(3)Counterparties include a variety of entities, including investor-owned utilities, privately held companies, cities and municipalities. Cinergy assigns internal credit ratings to all counterparties within our credit risk portfolio, applying fundamental analytical tools. Included in this analysis is a review of (but not limited to) counterparty financial statements with consideration given to off-balance sheet obligations and assets, specific business environment, access to capital, and indicators from debt and equity capital markets.
(4)Exposures, positive or negative, with counterparties that are related to one another are not aggregated when no right of offset exists and as a result, credit is extended and evaluated on a separate basis.
CG&E
Rating |
| Total Exposure |
| Credit |
| Net Exposure |
| Percentage of |
| Number of |
| Net Exposure of |
| ||||
|
| (in millions) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment Grade(1) |
| $ | 384 |
| $ | 160 |
| $ | 224 |
| 85 | % | 1 |
| $ | 54 |
|
Internally Rated-Investment Grade(2) |
| 151 |
| 138 |
| 13 |
| 5 |
| — |
| — |
| ||||
Non-Investment Grade |
| 47 |
| 37 |
| 10 |
| 4 |
| — |
| — |
| ||||
Internally Rated-Non-Investment Grade |
| 30 |
| 14 |
| 16 |
| 6 |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ | 612 |
| $ | 349 |
| $ | 263 |
| 100 | % | 1 |
| $ | 54 |
|
(1)Includes counterparties rated Investment Grade or the counterparties’ obligations are guaranteed or secured by an Investment Grade entity.
(2)Counterparties include various cities and municipalities.
(3)Exposures, positive or negative, with counterparties that are related to one another are not aggregated when no right of offset exists and as a result, credit is extended and evaluated on a separate basis.
96
MD&A - ACCOUNTING MATTERS
Preparation of financial statements and related disclosures in compliance with GAAP requires the use of assumptions and estimates regarding future events, including the likelihood of success of particular investments or initiatives, estimates of future prices or rates, legal and regulatory challenges, and anticipated recovery of costs. Therefore, the possibility exists for materially different reported amounts under different conditions or assumptions. We consider an accounting estimate to be critical if: 1) the accounting estimate requires us to make assumptions about matters that were reasonably uncertain at the time the accounting estimate was made, and 2) changes in the estimate are reasonably likely to occur from period to period.
Cinergy’s 2004 10-K includes a discussion of accounting policies that are critical to the presentation of Cinergy’s financial position and results of operations. These include:
• Fair Value Accounting for Energy Marketing and Trading;
• Regulatory Accounting;
• Income Taxes;
• Contingencies;
• Impairment of Long-Lived Assets; and
• Impairment of Unconsolidated Investments.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (Interpretation 47), an interpretation of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143). Statement 143 requires recognition of legal obligations associated with the retirement or removal of long-lived assets at the time the obligations are incurred. Interpretation 47 clarifies that a conditional asset retirement obligation (which occurs when the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity) is a legal obligation within the scope of Statement 143. As such, the fair value of a conditional asset retirement obligation must be recognized as a liability when incurred if the liability’s fair value can be reasonably estimated. Interpretation 47 also clarifies when sufficient information exists to reasonably estimate the fair value of an asset retirement obligation.
Cinergy will adopt Interpretation 47 on December 31, 2005. Upon adoption of Interpretation 47 Cinergy will recognize the impact, if any, of additional liabilities for conditional asset retirement obligations as a cumulative effect of a change in accounting principle. We continue to evaluate the impact of adopting this new interpretation and are currently unable to predict whether the implementation of this accounting standard will be material to our financial position or results of operations.
In December 2004, the FASB issued a replacement of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123), Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123R). This standard will require, among other things, accounting for all stock-based compensation arrangements under the fair value method.
In 2003, we prospectively adopted accounting for our stock-based compensation plans using the fair value recognition provisions of Statement 123, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, for all employee awards granted or with terms modified on or after January 1, 2003. Therefore, the impact of implementation of Statement 123R on stock options within our stock-based compensation plans is not expected to be material. Statement 123R contains certain
97
provisions that will modify the accounting for various types of stock-based compensation other than stock options. We are in the process of evaluating the impact of this new standard on our plans. Cinergy will adopt Statement 123R on January 1, 2006.
In October 2004, the American Jobs Creation Act (AJCA) was signed into law. The AJCA includes a one-time deduction of 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA. Based on our analysis, repatriation pursuant to this provision will not have a material impact on our financial position or results of operations.
98
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is provided in, and incorporated by reference from, the “Market Risk Sensitive Instruments” section in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
99
CONTROLS AND PROCEDURES
Disclosure controls and procedures are our controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported, within the time periods specified by the Securities and Exchange Commission’s (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2005,March 31, 2006, and, based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective in providing reasonable assurance that information requiring disclosure is recorded, processed, summarized, and reported within the timeframe specified by the SEC’s rules and forms.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2005March 31, 2006 and found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
52
100
In November 1999, and through subsequent amendments, the United States brought a lawsuit in the United States Federal District Court for the Southern District of Indiana against Cinergy, The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI) alleging various violations of the CAA. Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana State Implementation Planstate implementation plan (SIP) permits for various projects at our owned and co-owned generating stations. Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the Environmental Protection Agency (EPA) and Cinergy relating to alleged violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Station. The suit seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s W.C. Beckjord and Miami Fort Stations, and PSI’s Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civil penalties in amounts of up to $27,500 per day for each violation. In addition, three northeast states and two environmental groups have intervened in the case. In August 2005, the district court issued a ruling regarding the emissions test that it will apply to Cinergy at the trial of the case. Contrary to Cinergy’s argument, the district court ruled that in determining whether a project was projected to increase annual emissions, it would not hold hours of operation constant. However, the district court subsequently certified the matter for interlocutory appeal to the Seventh Circuit Court of Appeals, which has the discretion to acceptaccepted the appeal at this time. Thereand set oral arguments for June 2006. In February 2006, the district court ruled that in carrying its burden of proof, the defendant can look to industry practice in proving a particular project was routine. The district court has removed the trial from the calendar and will reset a trial date, if necessary, after the Seventh Circuit rules. Notwithstanding the appeal, there are a number of other legal issues currently before the district court judge, and the case is currently set for trial by jury commencing in February 2006.judge.
In March 2000, the United States also filed in the United States District Court for the Southern District of Ohio an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by Columbus Southern Power Company (CSP) and jointly-owned by CSP, The Dayton Power and Light Company (DP&L), and CG&E. The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. This suit is being defended by CSP. In April 2001, the United States District Court for the Southern District of Ohio in that case ruled that the Government and the intervening plaintiff environmental groups cannot seek monetary damages for alleged violations that occurred prior to November 3, 1994; however, they are entitled to seek injunctive relief for such alleged violations. Neither party appealed that decision. This matter was heard in trial in July 2005. A decision is expected by the end of 2005.pending.
In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a Notice of Violation (NOV) to DP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at a station operated by DP&L and jointly-owned by DP&L, CSP, and CG&E. The NOV indicated the EPA may (1) issue an order requiring compliance with the requirements of the Ohio SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. In September 2004, Marilyn Wall and the Sierra Club brought a lawsuit against CG&E, DP&L and CSP for alleged violations of the CAA at this same generating station. This case is currently in discovery.discovery in front of the same judge who has the CSP case.
We are unable to predict whether resolution of these matters would have a material effect on our financial position or results of operations.We intend to vigorously defend against these allegations.
In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York brought a lawsuit in the United States District Court for the Southern District of New York against Cinergy, American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc. That same day, a similar
lawsuit was filed in the United States District Court for the Southern District of New York against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire. These lawsuits allege that the defendants’ emissions of CO2 from the combustion of fossil fuels at
101
electric generating facilities contribute to global warming and amount to a public nuisance. The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO2. The plaintiffs are seeking an injunction requiring each defendant to cap its CO2 emissions and then reduce them by a specified percentage each year for at least a decade. In September 2005, the district court granted the defendants’ motion to dismiss the lawsuit. The plaintiffs have appealed this ruling to the Second Circuit Court of Appeals.Appeals, and oral argument is scheduled for June 2006. We are not able to predict whether resolution of these matters would have a material effect on our financial position or results of operations.
In May 2004, SCRs and other pollution control equipment became operational at Units 4 and 5 of PSI’s Gibson Station in accordance with compliance deadlines under the nitrogen oxide SIP Call. In June and July 2004, Gibson Station temporarily shut down the equipment on these units due to a concern that portions of the plume from those units’ stacks appeared to break apart and descend to ground level, at certain times, under certain weather conditions. As a result, and, working with the City of Mt. Carmel, Illinois, Illinois EPA, Indiana Department of Environmental Management (IDEM), EPA, and the State of Illinois, we developed a protocol regarding the use of the SCRs while we explored alternatives to address this issue. After the protocol was finalized, the Illinois Attorney General brought an action in Wabash County Circuit Court against PSI seeking a preliminary injunction to enforce the protocol. In August 2004, the court granted that preliminary injunction. PSI is appealing that decision to the Fifth District Appellate Court, but we cannot predict the ultimate outcome of that appeal or of the underlying action by the Illinois Attorney General.
In April 2005, we completed the installation of a permanent control system to address this issue. The new control system will support all five Gibson generating units. We will seek recovery of any related capital as well as increased emission allowance expenditures through the regulatory process. We do not believe costs related to resolving this matter will have a material impact on our financial position or results of operations.
In November 2004, a citizen of the Village of Moscow, Ohio, the town adjacent to CG&E’s&E’s Zimmer Station, brought a purported class action in the United States District Court for the Southern District of Ohio seeking monetary damages and injunctive relief against CG&E for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisance and common law nuisance. The plaintiffs have filed a number of additional notices of intent to sue and two lawsuits raising claims similar to those in the original claim. One lawsuit was dismissed on procedural grounds and the remaining two have been consolidated. The plaintiff filed a motion for class certification, which is fully briefed and pending decision. At this time, we cannot predict whether the outcome of this matter will have a material impact on our financial position or results of operations. We intend to defend this lawsuit vigorously in court.
Coal tar residues, related hydrocarbons, and various metals have been found in at least 22 sites that PSI or its predecessors previously owned and sold in a series of transactions with Northern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc. (IGC). The 22 sites are in the process of being studied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and PSI entered into Site Participation and Cost Sharing Agreements to allocate liability and responsibilities between them. The IDEM oversees investigation and cleanup of all of these sites. Thus far, PSI has primary responsibility for investigating, monitoring and, if necessary, remediating nine of these sites. In December 2003, PSI entered into a voluntary remediation plan with the state of Indiana, providing a formal framework for the investigation and cleanup of the nine sites. The Indiana Department of Environmental Management oversees investigation and cleanup of all of these sites.
In April 1998, PSI filed suit in Hendricks County in the state of Indiana against its general liability insurance carriers. PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites; or (2) pay PSI’s cost of defense. PSI settled, in principle, its claims with all but one of the insurance carriers in January 2005 prior to commencement of the trial. With respect to the lone insurance
102
carrier, a jury returned a verdict against PSI in February 2005. PSI has appealed this decision. At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeal.
PSI has accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated. We will continue to investigate and remediate the sites as outlined in the voluntary remediation plan. As additional facts become known and investigation is completed, we will assess whether the likelihood of incurring additional costs becomes probable. Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.
CG&E and ULH&P havehas performed site assessments on certain of their sites where we believe MGP activities have occurred at some point in the past and have found no imminent risk to the environment. At the present time, CG&E and ULH&Pcannot predict whether investigation and/or remediation will be required in the future at any of these sites.
PSI and CG&E and PSI, have been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations. Currently, there are approximately 130 pending lawsuits.lawsuits (the majority of which are PSI cases). In these lawsuits, plaintiffs claim to have been exposed to asbestos-containing products in the course of their work atas outside contractors in the construction and maintenance of CG&E and PSI generating stations. The plaintiffs further claim that as the property owner of the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure. A majority of the lawsuits to date have been brought against PSI. The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.
Of these lawsuits, one case filed against PSI has been tried to verdict. The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and a verdict for PSI on punitive damages. PSI appealed this decision up to the Indiana Supreme Court. In JulyOctober 2005, the Indiana Supreme Court upheld the jury’s verdict. PSI paid the judgment of approximately $630,000 in the fourth quarter of 2005. In addition, PSI has settled a number ofover 150 other lawsuitsclaims for amounts, which neither individually nor in the aggregate, are material to PSI’s financial position or results of operations. WeBased on estimates under varying assumptions, concerning such uncertainties, such as, among others: (i) the number of contractors potentially exposed to asbestos during construction or maintenance of PSI generating plants; (ii) the possible incidence of various illnesses among exposed workers, and (iii) the potential settlement costs without federal or other legislation that addresses asbestos tort actions, PSI estimates that the range of reasonably possible exposure in existing and future suits over the next 50 years could range from an immaterial amount to approximately $60 million, exclusive of costs to defend these cases. This estimated range of exposure may change as additional settlements occur and claims are currently evaluating the effect of themade in Indiana Supreme Court’s ruling on our existing docket of cases.and more case law is established.
At this time,CG&E has been named in fewer than 10 cases and as a resulthas virtually no settlement history for asbestos cases. Thus, CG&E and PSI areis not able to predictreasonably estimate the ultimate outcomerange of these lawsuitspotential loss from current or the impact onfuture lawsuits. However, potential judgments or settlements of existing or future claims could be material to CG&E’s&E and PSI’s financial position or results of operations..
In May, a purported shareholder class action was filed in the Court of Common Pleas in Hamilton County, Ohio against Cinergy and each of the members of the Board of Directors. The lawsuit alleges that the defendants breached their duties of due care and loyalty to shareholders by agreeing to the merger agreement between Duke and Cinergy and is seeking to either enjoin or amend the terms of the merger. Cinergy and the individual defendants filed a motion to dismiss this lawsuit in July. We believe this lawsuit is without merit and Cinergy intends to defend this lawsuit vigorously in court. We are unable to predict the outcome of this matter, including whether resolution of this matter will impact our pending merger.
In July and October 2005, PSI received notices from the EPA that it has been identified as a de minimus potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act at the Dunavan Waste Oil Site in Oakwood, Vermilion County, Illinois. At this time, PSI does not have any further information regarding the scope of potential liability associated with this matter.
103We understand that a class action lawsuit was filed in Superior Court in Ontario, Canada against us and approximately 20 other utility and power generation companies alleging various claims relating to environmental emissions from coal-fired power generation facilities in the United States and Canada and damages of approximately $50 billion, with continuing damages in the amount of approximately $4 billion annually. We understand that the lawsuit also claims entitlement to punitive and exemplary damages in the amount of $1 billion. We have not yet been served in this lawsuit, however, if served, we intend to defend this lawsuit vigorously in court. We are not able to predict whether resolution of this matter would have a material effect on our financial position or results of operations.
In October 2005,On April 19, 2006, Cinergy was named in the Ohio EPA proposedthird amended complaint of a civil penaltypurported class action filed in the United States District Court for the Southern District of $102,000Mississippi. Plaintiffs claim that Cinergy, along with numerous other utilities, oil companies, coal companies and chemical companies, is liable for damages relating to losses suffered by victims of Hurricane Katrina. Plaintiffs claim that Cinergy’s, and others, greenhouse gas emissions contributed to the frequency and intensity of storms such as Hurricane Katrina. Cinergy has not been served with this lawsuit. At this time, we are not able to predict whether resolution of this matter would have a material effect on Cinergy Power Generation Services to settle multiple, unrelated alleged violations occurring at multiple CG&E generating stations over the past several years. CG&E is currently reviewing the settlement proposal.our financial position or results of operations.
104
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The number of shares (or units) providedrisks described in our Annual Report on Form 10-K are not the table below represent shares exchanged in connection with employee option exercisesonly risks facing our Company. Additional risks and shares purchased by the plan trustee on behalf of the 401(k) Excess Plan.uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
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The documents listed below are being furnishedfiled, or have previously been filed, on behalf of Cinergy Corp., The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI), and The Union Light, Heatare incorporated herein by reference from the documents indicated and Power Company (ULH&P).made a part hereof. Exhibits not identified as previously furnished or filed are furnished or filed herewith:
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| Certification by James L. Turner pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||||||
31-d | CG&E | Certification by Myron L. Caldwell pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||||||
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32-c | CG&E | Certification by James L. Turner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||||
32-d | CG&E | Certification by Myron L. Caldwell pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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10657
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Cinergy Corp., The Cincinnati Gas & Electric Company, and PSI Energy, Inc. each Securities Exchange Act of 1934, each of the Registrants has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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