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 March 31,June 30, 2006
or
| oTRANSITION 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 | o |
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large |
| Accelerated |
| Non- |
| |
Cinergy Corp. |
| x |
| o |
| o |
|
The Cincinnati Gas & Electric Company |
| o |
| o |
| x |
|
PSI Energy, Inc. |
| o |
| o |
| x |
|
Indicate by check mark whether the registrant is a shell (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
This combined Form 10-Q is separately filed by Cinergy Corp., The Cincinnati Gas & Electric Company, and PSI Energy, Inc.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 Cincinnati Gas & Electric Company,and PSI Energy, Inc. meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing their company specific information with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
As of April 30,July 31, 2006, shares of common stock outstanding for each registrant were as listed:
follows:
Registrant |
| Description |
| Shares |
|
|
|
|
|
Cinergy Corp. |
| Par value $.01 per share |
|
|
|
|
|
|
|
The Cincinnati Gas & Electric Company |
| Par value $8.50 per share |
| 89,663,086 |
|
|
|
|
|
PSI Energy, Inc. |
| Without par value, stated value $.01 per share |
| 53,913,701 |
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.
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.
2Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
· Factors affecting operations, such as:
(1) unanticipated weather conditions;
(2) unscheduled generation outages;
(3) unusual maintenance or repairs;
(4) unanticipated changes in costs;
(5) environmental incidents; and
(6) electric transmission or gas pipeline system constraints.
· Legislative and regulatory initiatives and legal 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.
· Changing market conditions and other factors related to physical energy and financial trading activities.
· The performance of projects undertaken by Cinergy’s and CG&E’s 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.
· Business uncertainties, contractual restrictions, and the potential inability to attract and retain key personnel.
CINERGY CORP.CinergyAND SUBSIDIARY COMPANIES
, CG&E, and PSI undertake no obligation to update the information contained herein.
3
CINERGY CORP.CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
| Quarter Ended |
| ||||
|
| March 31 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (in thousands, except per |
| ||||
|
| (unaudited) |
| ||||
Operating Revenues |
|
|
|
|
| ||
Electric |
| $ | 1,137,062 |
| $ | 914,359 |
|
Gas |
| 355,556 |
| 313,096 |
| ||
Other |
| 155,920 |
| 98,656 |
| ||
Total Operating Revenues |
| 1,648,538 |
| 1,326,111 |
| ||
|
|
|
|
|
| ||
Operating Expenses |
|
|
|
|
| ||
Fuel, emission allowances, and purchased power |
| 425,896 |
| 300,619 |
| ||
Gas purchased |
| 232,006 |
| 208,600 |
| ||
Costs of fuel resold |
| 146,298 |
| 85,762 |
| ||
Operation and maintenance |
| 422,658 |
| 296,695 |
| ||
Depreciation and amortization |
| 163,758 |
| 151,449 |
| ||
Taxes other than income taxes |
| 87,278 |
| 78,932 |
| ||
Total Operating Expenses |
| 1,477,894 |
| 1,122,057 |
| ||
|
|
|
|
|
| ||
Operating Income |
| 170,644 |
| 204,054 |
| ||
|
|
|
|
|
| ||
Equity in Earnings of Unconsolidated Subsidiaries |
| 4,095 |
| 4,836 |
| ||
Miscellaneous Income — Net |
| 18,648 |
| 2,950 |
| ||
Interest Expense |
| 84,894 |
| 64,003 |
| ||
Preferred Dividend Requirements of Subsidiaries |
| 277 |
| 858 |
| ||
|
|
|
|
|
| ||
Income Before Taxes |
| 108,216 |
| 146,979 |
| ||
|
|
|
|
|
| ||
Income Taxes |
| 21,302 |
| 32,100 |
| ||
|
|
|
|
|
| ||
Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle |
| 86,914 |
| 114,879 |
| ||
|
|
|
|
|
| ||
Discontinued operations, net of tax (Note 8) |
| (4,057 | ) | 2,477 |
| ||
Cumulative effect of a change in accounting principle, net of tax (Note 1(e)(i)) |
| (3,493 | ) | — |
| ||
Net Income |
| $ | 79,364 |
| $ | 117,356 |
|
|
|
|
|
|
| ||
Average Common Shares Outstanding — Basic |
| 200,286 |
| 195,647 |
| ||
|
|
|
|
|
| ||
Earnings Per Common Share — Basic (Note 10) |
|
|
|
|
| ||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| $ | 0.43 |
| $ | 0.59 |
|
Discontinued operations, net of tax |
| (0.02 | ) | 0.01 |
| ||
Cumulative effect of a change in accounting principle, net of tax |
| (0.01 | ) | — |
| ||
Net Income |
| $ | 0.40 |
| $ | 0.60 |
|
|
|
|
|
|
| ||
Average Common Shares Outstanding — Diluted |
| 201,161 |
| 196,712 |
| ||
|
|
|
|
|
| ||
Earnings Per Common Share — Diluted (Note 10) |
|
|
|
|
| ||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| $ | 0.43 |
| $ | 0.59 |
|
Discontinued operations, net of tax |
| (0.02 | ) | 0.01 |
| ||
Cumulative effect of a change in accounting principle, net of tax |
| (0.02 | ) | — |
| ||
Net Income |
| $ | 0.39 |
| $ | 0.60 |
|
|
|
|
|
|
| ||
Cash Dividends Declared Per Common Share |
| $ | 0.64 |
| $ | 0.48 |
|
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
|
| March 31 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 147,557 |
| $ | 146,056 |
|
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 |
| ||
Fuel, emission allowances, and supplies |
| 521,516 |
| 589,152 |
| ||
Energy risk management current assets |
| 595,292 |
| 991,252 |
| ||
Prepayments and other |
| 410,443 |
| 408,975 |
| ||
Total Current Assets |
| 2,838,521 |
| 3,794,846 |
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment — at Cost |
|
|
|
|
| ||
Property, plant, and equipment |
| 16,249,269 |
| 15,990,864 |
| ||
Accumulated depreciation |
| 5,563,590 |
| 5,477,782 |
| ||
Net Property, Plant, and Equipment |
| 10,685,679 |
| 10,513,082 |
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Regulatory assets |
| 1,045,511 |
| 1,069,854 |
| ||
Investments in unconsolidated subsidiaries |
| 481,807 |
| 479,466 |
| ||
Energy risk management non-current assets |
| 302,904 |
| 306,959 |
| ||
Notes receivable, non-current |
| 165,191 |
| 171,325 |
| ||
Goodwill and other intangible assets |
| 176,193 |
| 169,081 |
| ||
Other |
| 637,337 |
| 615,012 |
| ||
Total Other Assets |
| 2,808,943 |
| 2,811,697 |
| ||
|
|
|
|
|
| ||
Assets of Discontinued Operations (Note 8) |
| 22,491 |
| 34,215 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 16,355,634 |
| $ | 17,153,840 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.
5
CINERGY CORP.CONDENSED AND SUBSIDIARY COMPANIES
CINERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
|
| Successor |
|
|
| Predecessor |
| ||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| ||||
|
| Ended |
|
|
| Ended |
| Ended |
| Ended |
| ||||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
| ||||
Non-regulated electric, natural gas, natural gas liquids, and other |
| $ | 464,481 |
|
|
| $ | 551,658 |
| $ | 366,883 |
| $ | 747,282 |
|
Regulated electric |
| 750,149 |
|
|
| 702,701 |
| 591,625 |
| 1,160,544 |
| ||||
Regulated natural gas and natural gas liquids |
| 93,238 |
|
|
| 321,316 |
| 92,640 |
| 392,747 |
| ||||
Total operating revenues |
| 1,307,868 |
|
|
| 1,575,675 |
| 1,051,148 |
| 2,300,573 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
| ||||
Natural gas and petroleum products purchased |
| 50,993 |
|
|
| 232,006 |
| 56,089 |
| 264,689 |
| ||||
Operation, maintenance, and other |
| 360,071 |
|
|
| 400,358 |
| 305,100 |
| 585,782 |
| ||||
Fuel used in electric generation and purchased power |
| 531,296 |
|
|
| 416,531 |
| 298,716 |
| 590,224 |
| ||||
Costs of fuel resold |
| 39,986 |
|
|
| 146,298 |
| 93,087 |
| 178,849 |
| ||||
Depreciation and amortization |
| 183,777 |
|
|
| 162,039 |
| 148,756 |
| 298,801 |
| ||||
Property and other taxes |
| 70,739 |
|
|
| 86,083 |
| 64,056 |
| 141,897 |
| ||||
Total operating expenses |
| 1,236,862 |
|
|
| 1,443,315 |
| 965,804 |
| 2,060,242 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
(Losses) Gains on Sales of Other Assets and Other, net |
| (5,227 | ) |
|
| 26,069 |
| 39,535 |
| 70,345 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Income |
| 65,779 |
|
|
| 158,429 |
| 124,879 |
| 310,676 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other Income and Expenses |
|
|
|
|
|
|
|
|
|
|
| ||||
Equity in earnings of unconsolidated affiliates |
| 5,606 |
|
|
| 4,095 |
| 13,576 |
| 18,411 |
| ||||
Other income and expenses, net |
| 22,968 |
|
|
| 16,667 |
| 14,690 |
| 17,569 |
| ||||
Total other income and expenses |
| 28,574 |
|
|
| 20,762 |
| 28,266 |
| 35,980 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Expense |
| 81,520 |
|
|
| 83,933 |
| 67,893 |
| 131,660 |
| ||||
Preferred dividend requirement of subsidiaries |
| 38 |
|
|
| 277 |
| 858 |
| 1,716 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income from Continuing Operations Before Income Taxes |
| 12,795 |
|
|
| 94,981 |
| 84,394 |
| 213,280 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income Tax Expense from Continuing Operations |
| 5,979 |
|
|
| 16,883 |
| 21,212 |
| 45,776 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income from Continuing Operations |
| 6,816 |
|
|
| 78,098 |
| 63,182 |
| 167,504 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
(Loss) Income from Discontinued Operations, net of tax |
| (6,071 | ) |
|
| 4,759 |
| (12,474 | ) | 560 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cumulative Effect of a Change in Accounting Principle, net of tax |
| — |
|
|
| (3,493 | ) | — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 745 |
|
|
| $ | 79,364 |
| $ | 50,708 |
| $ | 168,064 |
|
See Notes to Unaudited Consolidated Financial Statements
CINERGY CORP.
(dollars in thousands)
(unaudited)
ASSETS
|
| Successor |
|
|
| Predecessor |
| ||
|
| June 30, |
|
|
| December 31, |
| ||
|
| 2006 |
|
|
| 2005 |
| ||
|
|
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 121,010 |
|
|
| $ | 146,056 |
|
Receivables (net of allowance for doubtful accounts of $7,747 at June 30, 2006 and $4,767 at December 31, 2005) |
| 611,955 |
|
|
| 1,659,411 |
| ||
Inventory |
| 308,673 |
|
|
| 473,440 |
| ||
Assets held for sale |
| 1,252,563 |
|
|
| 15,803 |
| ||
Unrealized gains on mark-to-market and hedging transactions |
| 81,022 |
|
|
| 1,002,131 |
| ||
Other |
| 130,270 |
|
|
| 398,096 |
| ||
Total current assets |
| 2,505,493 |
|
|
| 3,694,937 |
| ||
|
|
|
|
|
|
|
| ||
Investments and Other Assets |
|
|
|
|
|
|
| ||
Restricted funds held in trust |
| 261,088 |
|
|
| 301,800 |
| ||
Investments in unconsolidated affiliates |
| 499,248 |
|
|
| 479,466 |
| ||
Goodwill |
| 4,127,697 |
|
|
| 33,352 |
| ||
Intangible assets |
| 977,058 |
|
|
| 310,294 |
| ||
Notes receivable |
| 158,933 |
|
|
| 171,325 |
| ||
Unrealized gains on mark-to-market and hedging transactions |
| 110,266 |
|
|
| 306,959 |
| ||
Assets held for sale |
| 426,111 |
|
|
| 18,412 |
| ||
Other |
| 234,790 |
|
|
| 208,214 |
| ||
Total investments and other assets |
| 6,795,191 |
|
|
| 1,829,822 |
| ||
|
|
|
|
|
|
|
| ||
Property, Plant, and Equipment |
|
|
|
|
|
|
| ||
Cost |
| 16,920,605 |
|
|
| 15,990,864 |
| ||
Less accumulated depreciation and amortization |
| 4,363,848 |
|
|
| 5,477,782 |
| ||
Net property, plant, and equipment |
| 12,556,757 |
|
|
| 10,513,082 |
| ||
|
|
|
|
|
|
|
| ||
Regulatory Assets and Deferred Debits |
|
|
|
|
|
|
| ||
Deferred debt expense |
| 76,071 |
|
|
| 91,538 |
| ||
Regulatory assets related to income taxes |
| 84,551 |
|
|
| 98,146 |
| ||
Other |
| 1,265,701 |
|
|
| 926,315 |
| ||
Total regulatory assets and deferred debits |
| 1,426,323 |
|
|
| 1,115,999 |
| ||
|
|
|
|
|
|
|
| ||
Total Assets |
| $ | 23,283,764 |
|
|
| $ | 17,153,840 |
|
See Notes to Unaudited Consolidated Financial Statements
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
(unaudited)
LIABILITIES AND SHAREHOLDERS’COMMON STOCKHOLDER’S EQUITY
|
| March 31 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 1,347,350 |
| $ | 1,879,528 |
|
Accrued taxes |
| 156,688 |
| 219,469 |
| ||
Accrued interest |
| 86,034 |
| 64,725 |
| ||
Notes payable and other short-term obligations (Note 4) |
| 1,090,765 |
| 923,600 |
| ||
Long-term debt due within one year |
| 704,850 |
| 360,730 |
| ||
Energy risk management current liabilities |
| 464,358 |
| 1,010,585 |
| ||
Other |
| 158,093 |
| 185,221 |
| ||
Total Current Liabilities |
| 4,008,138 |
| 4,643,858 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt |
| 4,285,611 |
| 4,459,695 |
| ||
Deferred income taxes |
| 1,502,784 |
| 1,523,070 |
| ||
Unamortized investment tax credits |
| 88,677 |
| 90,852 |
| ||
Accrued pension and other postretirement benefit costs |
| 719,347 |
| 729,221 |
| ||
Regulatory liabilities |
| 565,481 |
| 546,047 |
| ||
Energy risk management non-current liabilities |
| 330,061 |
| 338,514 |
| ||
Other |
| 244,287 |
| 184,569 |
| ||
Total Non-Current Liabilities |
| 7,736,248 |
| 7,871,968 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Liabilities of Discontinued Operations (Note 8) |
| 25,727 |
| 28,876 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 11,770,113 |
| 12,544,702 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock of Subsidiaries |
|
|
|
|
| ||
Not subject to mandatory redemption |
| 11,258 |
| 31,743 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Common Stock Equity |
|
|
|
|
| ||
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 |
| ||
Paid-in capital |
| 3,017,579 |
| 2,982,625 |
| ||
Retained earnings |
| 1,673,739 |
| 1,721,716 |
| ||
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 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 16,355,634 |
| $ | 17,153,840 |
|
|
| Successor |
|
|
| Predecessor |
| ||
|
| June 30, |
|
|
| December 31, |
| ||
|
| 2006 |
|
|
| 2005 |
| ||
|
|
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
|
|
| ||
Accounts payable |
| $ | 657,624 |
|
|
| $ | 1,647,106 |
|
Notes payable and commercial paper |
| 1,271,590 |
|
|
| 923,600 |
| ||
Taxes accrued |
| 62,934 |
|
|
| 219,469 |
| ||
Interest accrued |
| 75,608 |
|
|
| 64,725 |
| ||
Liabilities associated with assets held for sale |
| 825,019 |
|
|
| 5,721 |
| ||
Current maturities of long-term debt and preferred stock |
| 385,369 |
|
|
| 360,730 |
| ||
Unrealized losses on mark-to-market and hedging transactions |
| 91,827 |
|
|
| 1,010,585 |
| ||
Other |
| 248,307 |
|
|
| 417,643 |
| ||
Total current liabilities |
| 3,618,278 |
|
|
| 4,649,579 |
| ||
|
|
|
|
|
|
|
| ||
Long-term Debt |
| 4,592,755 |
|
|
| 4,459,694 |
| ||
|
|
|
|
|
|
|
| ||
Deferred Credits and Other Liabilities |
|
|
|
|
|
|
| ||
Deferred income taxes |
| 1,813,882 |
|
|
| 1,523,070 |
| ||
Investment tax credit |
| 86,502 |
|
|
| 90,852 |
| ||
Accrued pension and other postretirement benefit costs |
| 1,279,117 |
|
|
| 729,221 |
| ||
Regulatory liabilities |
| 624,924 |
|
|
| 546,047 |
| ||
Unrealized losses on mark-to-market and hedging transactions |
| 91,613 |
|
|
| 341,671 |
| ||
Liabilities associated with assets held for sale |
| 278,009 |
|
|
| 23,155 |
| ||
Asset retirement obligations |
| 59,611 |
|
|
| 57,425 |
| ||
Other |
| 336,171 |
|
|
| 123,988 |
| ||
Total deferred credits and other liabilities |
| 4,569,829 |
|
|
| 3,435,429 |
| ||
|
|
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
|
|
| ||
Cumulative Preferred Stock of Subsidiaries Not Subject to Mandatory Redemption |
| — |
|
|
| 31,743 |
| ||
|
|
|
|
|
|
|
| ||
Common Stockholder’s Equity |
|
|
|
|
|
|
| ||
Common stock, $.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at June 30, 2006; 600,000,000 shares authorized, 199,707,338 shares issued, and 199,565,684 shares outstanding at December 31, 2005 |
| — |
|
|
| 1,997 |
| ||
Paid-in capital |
| 10,542,958 |
|
|
| 2,982,625 |
| ||
Retained earnings |
| 745 |
|
|
| 1,721,716 |
| ||
Treasury shares at cost – 0 shares at June 30, 2006 and 141,654 shares at December 31, 2005 |
| — |
|
|
| (4,823 | ) | ||
Accumulated other comprehensive loss |
| (40,801 | ) |
|
| (124,120 | ) | ||
Total common stockholder’s equity |
| 10,502,902 |
|
|
| 4,577,395 |
| ||
|
|
|
|
|
|
|
| ||
Total Liabilities and Common Stockholder’s Equity |
| $ | 23,283,764 |
|
|
| $ | 17,153,840 |
|
The accompanying notes as they relateSee Notes to Cinergy Corp. are an integral part of these condensed consolidated financial statements.Unaudited Consolidated Financial Statements
6
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKSTOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
| 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 March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at January 1, 2006 (199,565,684 shares) |
| $ | 1,997 |
| $ | 2,982,625 |
| $ | 1,721,716 |
| $ | (4,823 | ) | $ | (124,120 | ) | $ | 4,577,395 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 79,364 |
|
|
|
|
| 79,364 |
| ||||||
Other comprehensive income, net of tax effect of $(5,413) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| 120 |
| 120 |
| ||||||
Unrealized gain on investment trusts |
|
|
|
|
|
|
|
|
| 1,530 |
| 1,530 |
| ||||||
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
| 916 |
| 916 |
| ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| 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 |
|
(dollars in thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
| Accumulated |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
| Other |
| Common |
| ||||||
|
| Common |
| Paid-in |
| Retained |
| Treasury |
| Comprehensive |
| Stockholder’s |
| ||||||
|
| Stock |
| Capital |
| Earnings |
| Stock |
| Income (Loss) |
| Equity |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Successor |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Three Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at April 1, 2006 |
| $ | — |
| $ | 9,088,764 |
| $ | — |
| $ | — |
| $ | — |
| $ | 9,088,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 745 |
|
|
|
|
| 745 |
| ||||||
Other comprehensive loss, net of tax effect of $838 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| 315 |
| 315 |
| ||||||
Unrealized loss on investment trusts |
|
|
|
|
|
|
|
|
| (1,326 | ) | (1,326 | ) | ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| (134 | ) | (134 | ) | ||||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
| (400 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Transfer of generating assets from Duke Energy(1) |
|
|
| 1,452,191 |
|
|
|
|
| (39,656 | ) | 1,412,535 |
| ||||||
Other |
|
|
| 2,003 |
|
|
|
|
|
|
| 2,003 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at June 30, 2006 |
| $ | — |
| $ | 10,542,958 |
| $ | 745 |
| $ | — |
| $ | (40,801 | ) | $ | 10,502,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Three Months Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at January 1, 2006 (199,565,684 shares) |
| $ | 1,997 |
| $ | 2,982,625 |
| $ | 1,721,716 |
| $ | (4,823 | ) | $ | (124,120 | ) | $ | 4,577,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 79,364 |
|
|
|
|
| 79,364 |
| ||||||
Other comprehensive income, net of tax effect of $(5,413) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| 120 |
| 120 |
| ||||||
Unrealized gain on investment trusts |
|
|
|
|
|
|
|
|
| 1,530 |
| 1,530 |
| ||||||
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
| 916 |
| 916 |
| ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| 7,539 |
| 7,539 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 89,469 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock, net (946,650 shares) |
| 10 |
| 28,862 |
|
|
|
|
|
|
| 28,872 |
| ||||||
Treasury shares purchased (4,959 shares) |
|
|
|
|
|
|
| (224 | ) |
|
| (224 | ) | ||||||
Dividends on common stock ($.64 per share) |
|
|
|
|
| (127,314 | ) |
|
|
|
| (127,314 | ) | ||||||
Other |
|
|
| 6,092 |
| (27 | ) |
|
|
|
| 6,065 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at March 31, 2006 (200,507,375 shares) |
| $ | 2,007 |
| $ | 3,017,579 |
| $ | 1,673,739 |
| $ | (5,047 | ) | $ | (114,015 | ) | $ | 4,574,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Six Months Ended June 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
| 168,064 |
|
|
|
|
|
|
| 168,064 |
| ||||||
Other comprehensive income (loss), net of tax effect of $6,635 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
| (13,107 | ) | (13,107 | ) | ||||||
Unrealized loss on investment trusts |
|
|
|
|
|
|
|
|
| (954 | ) | (954 | ) | ||||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| 1,101 |
| 1,101 |
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
| 155,104 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock, net (11,015,306 shares) |
| 110 |
| 377,513 |
|
|
|
|
|
|
| 377,623 |
| ||||||
Treasury shares purchased (10,852 shares) |
|
|
|
|
|
|
| (430 | ) |
|
| (430 | ) | ||||||
Dividends on common stock ($.96 per share) |
|
|
|
|
| (187,076 | ) |
|
|
|
| (187,076 | ) | ||||||
Other |
|
|
| 4,519 |
| (275 | ) |
|
|
|
| 4,244 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at June 30, 2005 (198,528,683 shares) |
| $ | 1,987 |
| $ | 2,941,747 |
| $ | 1,594,053 |
| $ | (4,766 | ) | $ | (67,634 | ) | $ | 4,465,387 |
|
(1)Includes $39,656 (net of tax benefit of $23,793) related to deferred losses on terminated cash flow hedges included in Accumulated Other Comprehensive Income (Loss). See Note 12(b)(v) to the Consolidated Financial Statements.
The accompanying notes as they relateSee Notes to Cinergy Corp. are an integral part of these condensed consolidated financial statements.Unaudited Consolidated Financial Statements
CINERGY CORP.
7CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
|
| Successor |
|
|
| Predecessor |
| |||||
|
| Three Months |
|
|
| Three Months |
| Six Months |
| |||
|
| Ended |
|
|
| Ended |
| Ended |
| |||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| |||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 745 |
|
|
| $ | 79,364 |
| $ | 168,064 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 185,868 |
|
|
| 163,793 |
| 306,011 |
| |||
Return on equity investments |
| 11,887 |
|
|
| 4,857 |
| — |
| |||
(Gains) losses on sales of equity investments and other assets |
| 5,227 |
|
|
| (26,069 | ) | (70,345 | ) | |||
Impairment charges |
| — |
|
|
| 7,398 |
| 7,542 |
| |||
Deferred income taxes |
| 61,198 |
|
|
| (14,309 | ) | 11,094 |
| |||
Equity in earnings of unconsolidated subsidiaries |
| (5,606 | ) |
|
| (4,095 | ) | (18,411 | ) | |||
Accrued pension and postretirement benefit costs |
| 33,310 |
|
|
| 32,330 |
| 57,800 |
| |||
Cumulative effect of change in accounting principle |
| — |
|
|
| 3,493 |
| — |
| |||
Regulatory asset amortization |
| 9,020 |
|
|
| 13,367 |
| 13,436 |
| |||
(Increase) decrease in: |
|
|
|
|
|
|
|
|
| |||
Net realized and unrealized mark-to-market and hedging transactions |
| (20,872 | ) |
|
| (154,665 | ) | 93,461 |
| |||
Receivables |
| 189,570 |
|
|
| 503,549 |
| 209,790 |
| |||
Inventory |
| (44,630 | ) |
|
| 102,863 |
| (66,419 | ) | |||
Other current assets |
| (68,913 | ) |
|
| 8,498 |
| (107,064 | ) | |||
Increase (decrease) in: |
|
|
|
|
|
|
|
|
| |||
Accounts payable |
| (59,585 | ) |
|
| (529,943 | ) | (92,575 | ) | |||
Taxes accrued |
| (128,664 | ) |
|
| (60,576 | ) | (88,091 | ) | |||
Other current liabilities |
| (280,646 | ) |
|
| 21,309 |
| 4,543 |
| |||
Regulatory asset/liability deferrals |
| 89,117 |
|
|
| (21,465 | ) | (66,548 | ) | |||
Other assets |
| 214,636 |
|
|
| 56,245 |
| 49,111 |
| |||
Other liabilities |
| (116,590 | ) |
|
| (19,595 | ) | (93,897 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
Net cash provided by operating activities |
| 75,072 |
|
|
| 166,349 |
| 317,502 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
| |||
Capital expenditures |
| (301,719 | ) |
|
| (298,117 | ) | (523,979 | ) | |||
Purchases of emission allowances |
| (112,096 | ) |
|
| (181,443 | ) | (150,454 | ) | |||
Sale of emission allowances |
| 84,253 |
|
|
| 99,413 |
| 131,805 |
| |||
Net proceeds from the sales of equity investments and other assets, and sales of and collection on notes receivable |
| 5,677 |
|
|
| 5,466 |
| 57,779 |
| |||
Other |
| 894 |
|
|
| (1,581 | ) | 58,965 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net cash used in investing activities |
| (322,991 | ) |
|
| (376,262 | ) | (425,884 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
| |||
Issuance of long-term debt |
| 325,312 |
|
|
| 174,069 |
| 4,612 |
| |||
Issuance of common stock and common stock related to employee benefit plans |
| — |
|
|
| 28,872 |
| 377,623 |
| |||
Redemption of long-term debt |
| (347,656 | ) |
|
| (13,612 | ) | (9,487 | ) | |||
Redemption of preferred stock of subsidiaries |
| (11,258 | ) |
|
| (20,485 | ) | — |
| |||
Notes payable and commercial paper |
| 254,974 |
|
|
| 166,891 |
| (93,653 | ) | |||
Dividends paid |
| — |
|
|
| (127,314 | ) | (187,076 | ) | |||
Other |
| — |
|
|
| 2,993 |
| — |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net cash provided by financing activities |
| 221,372 |
|
|
| 211,414 |
| 92,019 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net (decrease) increase in cash and cash equivalents |
| (26,547 | ) |
|
| 1,501 |
| (16,363 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of period |
| 147,557 |
|
|
| 146,056 |
| 164,541 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at end of period |
| $ | 121,010 |
|
|
| $ | 147,557 |
| $ | 148,178 |
|
|
|
|
|
|
|
|
|
|
| |||
Significant non-cash transactions: |
|
|
|
|
|
|
|
|
| |||
Purchase accounting adjustments |
| $ | 4,514,501 |
|
|
| $ | — |
| $ | — |
|
Allowance for funds used during construction (AFUDC) – equity component |
| (4,661 | ) |
|
| (3,065 | ) | (4,402 | ) | |||
Transfer of generating assets from Duke Energy |
| 1,452,191 |
|
|
| — |
| — |
|
See Notesto Unaudited Consolidated Financial Statements
9
CINERGY CORP.CONDENSED CONSOLIDATED STATEMENTS OF CASH 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 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.THE CINCINNATI GAS & ELECTRIC COMPANY
8AND SUBSIDIARY COMPANIES
THE CINCINNATI GAS & ELECTRIC COMPANY
AND SUBSIDIARY COMPANIESCONSOLIDATED STATEMENTS OF OPERATIONS
9(dollars in thousands)
(unaudited)
|
| Successor |
|
|
| Predecessor |
| ||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| ||||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
| ||||
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
| ||||
Non-regulated electric, natural gas, natural gas liquids, and other |
| $ | 399,385 |
|
|
| $ | 421,069 |
| $ | 307,261 |
| $ | 599,834 |
|
Regulated electric |
| 202,622 |
|
|
| 219,845 |
| 142,263 |
| 294,061 |
| ||||
Regulated natural gas and natural gas liquids |
| 93,827 |
|
|
| 321,965 |
| 100,468 |
| 406,822 |
| ||||
Total operating revenues |
| 695,834 |
|
|
| 962,879 |
| 549,992 |
| 1,300,717 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
| ||||
Natural gas and petroleum products purchased |
| 50,993 |
|
|
| 232,006 |
| 56,089 |
| 263,871 |
| ||||
Operation, maintenance, and other |
| 172,913 |
|
|
| 173,180 |
| 151,464 |
| 290,175 |
| ||||
Fuel used in electric generation and purchased power |
| 249,679 |
|
|
| 195,852 |
| 143,581 |
| 280,171 |
| ||||
Costs of fuel resold |
| 28,534 |
|
|
| 44,291 |
| 49,232 |
| 90,218 |
| ||||
Depreciation and amortization |
| 92,588 |
|
|
| 67,918 |
| 60,533 |
| 125,773 |
| ||||
Property and other taxes |
| 54,843 |
|
|
| 68,192 |
| 52,256 |
| 111,546 |
| ||||
Total operating expenses |
| 649,550 |
|
|
| 781,439 |
| 513,155 |
| 1,161,754 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
(Losses) Gains on Sales of Other Assets and Other, net |
| (5,227 | ) |
|
| 26,069 |
| 39,535 |
| 70,345 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Income |
| 41,057 |
|
|
| 207,509 |
| 76,372 |
| 209,308 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other Income and Expenses, net |
| 6,886 |
|
|
| 8,195 |
| 3,722 |
| 7,298 |
| ||||
Interest Expense |
| 28,395 |
|
|
| 29,680 |
| 23,349 |
| 46,016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income from Continuing Operations Before Income Taxes |
| 19,548 |
|
|
| 186,024 |
| 56,745 |
| 170,590 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income Tax Expense from Continuing Operations |
| 7,336 |
|
|
| 67,810 |
| 12,345 |
| 59,076 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income from Continuing Operations |
| 12,212 |
|
|
| 118,214 |
| 44,400 |
| 111,514 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
(Loss) Income from Discontinued Operations, net of tax |
| (19,613 | ) |
|
| (1,851 | ) | 9,223 |
| 26,775 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net (Loss) Income |
| $ | (7,401 | ) |
|
| $ | 116,363 |
| $ | 53,623 |
| $ | 138,289 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dividends and Premiums on Redemption of Preferred and Preference Stock |
| — |
|
|
| 164 |
| 211 |
| 423 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
(Loss) Earnings Available for Common Stockholders |
| $ | (7,401 | ) |
|
| $ | 116,199 |
| $ | 53,412 |
| $ | 137,866 |
|
See Notes to Unaudited Consolidated Financial Statements
THE CINCINNATI GAS & ELECTRIC COMPANY
(dollars in thousands)
(unaudited)
ASSETS
|
| Successor |
|
|
| Predecessor |
| ||
|
| June 30, |
|
|
| December 31, |
| ||
|
| 2006 |
|
|
| 2005 |
| ||
|
|
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 21,338 |
|
|
| $ | 9,674 |
|
Receivables (net of allowance for doubtful accounts of $7,283 at June 30, 2006 and $3,518 at December 31, 2005) |
| 367,409 |
|
|
| 422,162 |
| ||
Inventory |
| 148,912 |
|
|
| 177,638 |
| ||
Assets held for sale |
| 205,414 |
|
|
| — |
| ||
Unrealized gains on mark-to-market and hedging transactions |
| 40,747 |
|
|
| 543,787 |
| ||
Other |
| 88,262 |
|
|
| 177,417 |
| ||
Total current assets |
| 872,082 |
|
|
| 1,330,678 |
| ||
|
|
|
|
|
|
|
| ||
Investments and Other Assets |
|
|
|
|
|
|
| ||
Restricted funds held in trust |
| 51,214 |
|
|
| 58,189 |
| ||
Goodwill |
| 2,173,206 |
|
|
| — |
| ||
Intangible assets |
| 849,952 |
|
|
| 105,275 |
| ||
Unrealized gains on mark-to-market and hedging transactions |
| 33,133 |
|
|
| 180,197 |
| ||
Assets held for sale |
| 89,807 |
|
|
| — |
| ||
Other |
| 21,463 |
|
|
| 27,067 |
| ||
Total investments and other assets |
| 3,218,775 |
|
|
| 370,728 |
| ||
|
|
|
|
|
|
|
| ||
Property, Plant, and Equipment |
|
|
|
|
|
|
| ||
Cost |
| 8,933,359 |
|
|
| 7,775,765 |
| ||
Less accumulated depreciation and amortization |
| 1,810,388 |
|
|
| 2,815,852 |
| ||
Net property, plant, and equipment |
| 7,122,971 |
|
|
| 4,959,913 |
| ||
|
|
|
|
|
|
|
| ||
Regulatory Assets and Deferred Debits |
|
|
|
|
|
|
| ||
Deferred debt expense |
| 21,739 |
|
|
| 30,141 |
| ||
Regulatory assets related to income taxes |
| 73,290 |
|
|
| 79,495 |
| ||
Other |
| 586,974 |
|
|
| 462,888 |
| ||
Total regulatory assets and deferred debits |
| 682,003 |
|
|
| 572,524 |
| ||
|
|
|
|
|
|
|
| ||
Total Assets |
| $ | 11,895,831 |
|
|
| $ | 7,233,843 |
|
See Notes to Unaudited Consolidated Financial Statements
THE CINCINNATI GAS & ELECTRIC COMPANYCONDENSED CONSOLIDATED STATEMENTS OF INCOMEBALANCE SHEETS
(dollars in thousands, except per share amounts)
(unaudited)
LIABILITIES AND COMPREHENSIVE INCOMECOMMON STOCKHOLDER’S EQUITY
|
| Quarter Ended |
| ||||
|
| March 31 |
| ||||
|
| 2006 |
| 2005 |
| ||
|
| (dollars in thousands) |
| ||||
|
| (unaudited) |
| ||||
|
|
|
|
|
| ||
Operating Revenues |
|
|
|
|
| ||
Electric |
| $ | 637,509 |
| $ | 464,331 |
|
Gas |
| 321,965 |
| 306,354 |
| ||
Other |
| 47,633 |
| 52,671 |
| ||
Total Operating Revenues |
| 1,007,107 |
| 823,356 |
| ||
|
|
|
|
|
| ||
Operating Expenses |
|
|
|
|
| ||
Fuel, emission allowances, and purchased power |
| 205,300 |
| 145,702 |
| ||
Gas purchased |
| 232,006 |
| 207,782 |
| ||
Costs of fuel resold |
| 44,291 |
| 40,986 |
| ||
Operation and maintenance |
| 185,126 |
| 142,072 |
| ||
Depreciation and amortization |
| 67,918 |
| 65,240 |
| ||
Taxes other than income taxes |
| 68,192 |
| 59,434 |
| ||
Total Operating Expenses |
| 802,833 |
| 661,216 |
| ||
|
|
|
|
|
| ||
Operating Income |
| 204,274 |
| 162,140 |
| ||
|
|
|
|
|
| ||
Miscellaneous Income — Net |
| 8,487 |
| 3,523 |
| ||
Interest Expense |
| 29,680 |
| 22,950 |
| ||
|
|
|
|
|
| ||
Income Before Taxes |
| 183,081 |
| 142,713 |
| ||
|
|
|
|
|
| ||
Income Taxes |
| 66,718 |
| 58,047 |
| ||
|
|
|
|
|
| ||
Net Income |
| $ | 116,363 |
| $ | 84,666 |
|
|
|
|
|
|
| ||
Preferred Dividend Requirement |
| 164 |
| 211 |
| ||
|
|
|
|
|
| ||
Net Income Applicable to Common Stock |
| $ | 116,199 |
| $ | 84,455 |
|
|
|
|
|
|
| ||
Net Income |
| $ | 116,363 |
| $ | 84,666 |
|
|
|
|
|
|
| ||
Other Comprehensive Income, Net of Tax |
| 1,751 |
| 1,718 |
| ||
|
|
|
|
|
| ||
Comprehensive Income |
| $ | 118,114 |
| $ | 86,384 |
|
|
| Successor |
|
|
| Predecessor |
| ||
|
| June 30, |
|
|
| December 31, |
| ||
|
| 2006 |
|
|
| 2005 |
| ||
|
|
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
|
|
| ||
Accounts payable |
| $ | 457,398 |
|
|
| $ | 629,751 |
|
Notes payable and commercial paper |
| 309,910 |
|
|
| 226,352 |
| ||
Taxes accrued |
| 211,401 |
|
|
| 177,551 |
| ||
Interest accrued |
| 28,448 |
|
|
| 24,438 |
| ||
Liabilities associated with assets held for sale |
| 186,570 |
|
|
| - |
| ||
Current maturities of long-term debt and preferred stock |
| 5,197 |
|
|
| 5,042 |
| ||
Unrealized losses on mark-to-market and hedging transactions |
| 57,876 |
|
|
| 552,105 |
| ||
Other |
| 117,403 |
|
|
| 212,724 |
| ||
Total current liabilities |
| 1,374,203 |
|
|
| 1,827,963 |
| ||
|
|
|
|
|
|
|
| ||
Long-term Debt |
| 1,756,069 |
|
|
| 1,638,027 |
| ||
|
|
|
|
|
|
|
| ||
Deferred Credits and Other Liabilities |
|
|
|
|
|
|
| ||
Deferred income taxes |
| 1,587,368 |
|
|
| 1,055,093 |
| ||
Investment tax credit |
| 64,313 |
|
|
| 67,229 |
| ||
Accrued pension and other postretirement benefit costs |
| 381,242 |
|
|
| 245,950 |
| ||
Regulatory liabilities |
| 164,198 |
|
|
| 151,670 |
| ||
Unrealized losses on mark-to-market and hedging transactions |
| 38,161 |
|
|
| 186,835 |
| ||
Liabilities associated with assets held for sale |
| 91,407 |
|
|
| — |
| ||
Asset retirement obligations |
| 43,157 |
|
|
| 41,423 |
| ||
Other |
| 187,709 |
|
|
| 23,736 |
| ||
Total deferred credits and other liabilities |
| 2,557,555 |
|
|
| 1,771,936 |
| ||
|
|
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
|
|
| ||
Cumulative Preferred Stock Not Subject to Mandatory Redemption |
| — |
|
|
| 20,485 |
| ||
|
|
|
|
|
|
|
| ||
Common Stockholder’s Equity |
|
|
|
|
|
|
| ||
Common stock, $8.50 par value; 120,000,000 shares authorized and 89,663,086 shares outstanding at June 30, 2006 and December 31, 2005 |
| 762,136 |
|
|
| 762,136 |
| ||
Paid-in capital |
| 5,493,135 |
|
|
| 603,249 |
| ||
Retained (deficit) earnings |
| (7,401 | ) |
|
| 657,254 |
| ||
Accumulated other comprehensive loss |
| (39,866 | ) |
|
| (47,207 | ) | ||
Total common stockholder’s equity |
| 6,208,004 |
|
|
| 1,975,432 |
| ||
|
|
|
|
|
|
|
| ||
Total Liabilities and Common Stockholder’s Equity |
| $ | 11,895,831 |
|
|
| $ | 7,233,843 |
|
The accompanying notes as they relateSee Notes to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.Unaudited Consolidated Financial Statements
10
THE CINCINNATI GAS & ELECTRIC COMPANYCONDENSED
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME (LOSS)
ASSETS(dollars in thousands, except per share amounts)
|
| 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(unaudited)
|
|
|
|
|
|
|
| Accumulated |
| Total |
| |||||
|
|
|
|
|
|
|
| Other |
| Common |
| |||||
|
| Common |
| Paid-in |
| Retained |
| Comprehensive |
| Stockholder’s |
| |||||
|
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Equity |
| |||||
Successor |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Three Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at April 1, 2006 |
| $ | 762,136 |
| $ | 4,038,989 |
| $ | - |
| $ | - |
| $ | 4,801,125 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
| (7,401 | ) |
|
| (7,401 | ) | |||||
Other comprehensive loss, net of tax effect of $(345) |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flow hedges |
|
|
|
|
|
|
| (210 | ) | (210 | ) | |||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
| (7,611 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Transfer of generating assets from Duke Energy(1) |
|
|
| 1,452,191 |
|
|
| (39,656 | ) | 1,412,535 |
| |||||
Other |
|
|
| 1,955 |
|
|
|
|
| 1,955 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at June 30, 2006 |
| $ | 762,136 |
| $ | 5,493,135 |
| $ | (7,401 | ) | $ | (39,866 | ) | $ | 6,208,004 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Predecessor |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Three Months Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at January 1, 2006 |
| $ | 762,136 |
| $ | 603,249 |
| $ | 657,254 |
| $ | (47,207 | ) | $ | 1,975,432 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
| 116,363 |
|
|
| 116,363 |
| |||||
Other comprehensive income, net of tax effect of $86 |
|
|
|
|
|
|
|
|
|
|
| |||||
Minimum pension liability adjustment |
|
|
|
|
|
|
| 854 |
| 854 |
| |||||
Cash flow hedges |
|
|
|
|
|
|
| 897 |
| 897 |
| |||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 118,114 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends on common stock |
|
|
|
|
| (102,256 | ) |
|
| (102,256 | ) | |||||
Dividends on preferred stock |
|
|
|
|
| (164 | ) |
|
| (164 | ) | |||||
Other |
|
|
|
|
| (1 | ) | 1 |
| — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at March 31, 2006 |
| $ | 762,136 |
| $ | 603,249 |
| $ | 671,196 |
| $ | (45,455 | ) | $ | 1,991,126 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Six Months Ended June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at January 1, 2005 |
| $ | 762,136 |
| $ | 584,176 |
| $ | 610,232 |
| $ | (37,831 | ) | $ | 1,918,713 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
| 138,289 |
|
|
| 138,289 |
| |||||
Other comprehensive income, net of tax effect of $(1,751) |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flow hedges |
|
|
|
|
|
|
| 1,729 |
| 1,729 |
| |||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 140,018 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends on common stock |
|
|
|
|
| (104,061 | ) |
|
| (104,061 | ) | |||||
Dividends on preferred stock |
|
|
|
|
| (423 | ) |
|
| (423 | ) | |||||
Other |
|
|
|
|
| 1 |
|
|
| 1 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at June 30, 2005 |
| $ | 762,136 |
| $ | 584,176 |
| $ | 644,038 |
| $ | (36,102 | ) | $ | 1,954,248 |
|
(1)Includes $39,656 (net of tax benefit of $23,793) related to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.deferred losses on terminated cash flow hedges included in Accumulated Other Comprehensive Income (Loss). See Note 12(b)(v) to the Consolidated Financial Statements.
See Notes to Unaudited Consolidated Financial Statements
11
THE CINCINNATI GAS & ELECTRIC COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
| 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
THE CINCINNATI GAS & ELECTRIC COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| 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 |
|
(dollars in thousands)
(unaudited)
|
| Successor |
|
|
| Predecessor |
| |||||
|
| Three Months |
|
|
| Three Months |
| Six Months |
| |||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
| |||
Net (loss) income |
| $ | (7,401 | ) |
|
| $ | 116,363 |
| $ | 138,289 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 92,588 |
|
|
| 67,918 |
| 125,773 |
| |||
(Gains) losses on sales of equity investments and other assets |
| 5,227 |
|
|
| (26,069 | ) | (70,345 | ) | |||
Deferred income taxes |
| 8,093 |
|
|
| 6,793 |
| 8,666 |
| |||
Regulatory asset/liability amortization |
| 3,385 |
|
|
| 6,903 |
| 5,314 |
| |||
Accrued pension and postretirement benefit costs |
| 10,626 |
|
|
| 8,234 |
| 14,313 |
| |||
(Increase) decrease in: |
|
|
|
|
|
|
|
|
| |||
Net realized and unrealized mark-to-market and hedging transactions |
| 27,778 |
|
|
| (29,301 | ) | 25,741 |
| |||
Receivables |
| 41,550 |
|
|
| 12,038 |
| 7,707 |
| |||
Inventory |
| (15,658 | ) |
|
| 56,177 |
| (32,071 | ) | |||
Other current assets |
| 25,842 |
|
|
| 67,659 |
| (78,503 | ) | |||
Increase (decrease) in: |
|
|
|
|
|
|
|
|
| |||
Accounts payable |
| 66,812 |
|
|
| (240,236 | ) | 15,356 |
| |||
Taxes accrued |
| (21,585 | ) |
|
| 49,735 |
| 23,006 |
| |||
Other current liabilities |
| (111,124 | ) |
|
| 5,306 |
| 855 |
| |||
Regulatory asset/liability deferrals |
| (7,550 | ) |
|
| (799 | ) | (6,380 | ) | |||
Other assets |
| 118,606 |
|
|
| 17,717 |
| 45,845 |
| |||
Other liabilities |
| (72,306 | ) |
|
| 106 |
| 5,272 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net cash provided by operating activities |
| 164,883 |
|
|
| 118,544 |
| 228,838 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
| |||
Capital expenditures |
| (149,265 | ) |
|
| (134,356 | ) | (201,733 | ) | |||
Purchase of emission allowances |
| (78,623 | ) |
|
| (155,866 | ) | (114,694 | ) | |||
Sale of emission allowances |
| 57,601 |
|
|
| 97,621 |
| 126,676 |
| |||
Net proceeds from the sales of equity investments and other assets, and sales of and collections on notes receivable |
| — |
|
|
| — |
| 46 |
| |||
Withdrawal of restricted funds held in trust |
| — |
|
|
| 8,137 |
| 15,635 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net cash used in investing activities |
| (170,287 | ) |
|
| (184,464 | ) | (174,070 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
| |||
Issuance of long-term debt |
| 80 |
|
|
| 139,806 |
| — |
| |||
Redemption of long-term debt |
| (16,296 | ) |
|
| (1,255 | ) | — |
| |||
Redemption of preferred stock of subsidiaries |
| — |
|
|
| (20,485 | ) | — |
| |||
Notes payable and commercial paper |
| 34,931 |
|
|
| 48,627 |
| 51,824 |
| |||
Dividends paid |
| — |
|
|
| (102,420 | ) | (104,484 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) financing activities |
| 18,715 |
|
|
| 64,273 |
| (52,660 | ) | |||
|
|
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and cash equivalents |
| 13,311 |
|
|
| (1,647 | ) | 2,108 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of period |
| 8,027 |
|
|
| 9,674 |
| 4,154 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at end of period |
| $ | 21,338 |
|
|
| $ | 8,027 |
| $ | 6,262 |
|
|
|
|
|
|
|
|
|
|
| |||
Significant non-cash transactions: |
|
|
|
|
|
|
|
|
| |||
Purchase accounting adjustments |
| $ | 2,809,999 |
|
|
| $ | — |
| $ | — |
|
Allowance for funds used during construction (AFUDC) – equity component |
| (917 | ) |
|
| (570 | ) | (684 | ) | |||
Transfer of generating assets from Duke Energy |
| 1,452,191 |
|
|
| — |
| — |
|
The accompanying notes as they relateSee Notes to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.Unaudited Consolidated Financial Statements
1315
PSI ENERGY, INC.
AND SUBSIDIARY COMPANY
14
PSI ENERGY, INC.CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEOPERATIONS
|
| 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 |
|
(dollars in thousands)
(unaudited)
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Revenues |
|
|
|
|
|
|
|
|
| ||||
Regulated electric |
| $ | 550,478 |
| $ | 428,457 |
| $ | 1,036,189 |
| $ | 853,864 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
| ||||
Operation, maintenance, and other |
| 160,947 |
| 115,658 |
| 297,809 |
| 229,372 |
| ||||
Fuel used in electric generation and purchased power |
| 265,008 |
| 134,080 |
| 466,076 |
| 266,117 |
| ||||
Depreciation and amortization |
| 74,083 |
| 73,258 |
| 148,452 |
| 146,962 |
| ||||
Property and other taxes |
| 14,794 |
| 10,272 |
| 30,298 |
| 25,933 |
| ||||
Total operating expenses |
| 514,832 |
| 333,268 |
| 942,635 |
| 668,384 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating Income |
| 35,646 |
| 95,189 |
| 93,554 |
| 185,480 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other Income and Expenses, net |
| 12,960 |
| 7,114 |
| 21,410 |
| 10,493 |
| ||||
Interest Expense |
| 29,864 |
| 26,912 |
| 64,793 |
| 51,677 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income Before Income Taxes |
| 18,742 |
| 75,391 |
| 50,171 |
| 144,296 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income Tax Expense |
| 6,318 |
| 32,661 |
| 19,000 |
| 59,222 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 12,424 |
| $ | 42,730 |
| $ | 31,171 |
| $ | 85,074 |
|
|
|
|
|
|
|
|
|
|
| ||||
Dividend and Premiums on Redemption of Preferred and Preference Stock |
| 38 |
| 647 |
| 151 |
| 1,293 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings Available for Common Stockholders |
| $ | 12,386 |
| $ | 42,083 |
| $ | 31,020 |
| $ | 83,781 |
|
The accompanying notes as they relateSee Notes to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.Unaudited Consolidated Financial Statements
15
PSI ENERGY, INC.CONDENSED
|
| 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 |
|
|
|
|
|
|
|
(unaudited)
ASSETS
|
| June 30, |
| December 31, |
| ||
|
| 2006 |
| 2005 |
| ||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 7,023 |
| $ | 31,860 |
|
Receivables (net of allowance for doubtful accounts of $436 at June 30, 2006 and $137 at December 31, 2005) |
| 90,589 |
| 217,978 |
| ||
Inventory |
| 132,751 |
| 102,976 |
| ||
Other |
| 34,379 |
| 75,064 |
| ||
Total current assets |
| 264,742 |
| 427,878 |
| ||
|
|
|
|
|
| ||
Investments and Other Assets |
|
|
|
|
| ||
Restricted funds held in trust |
| 209,875 |
| 243,612 |
| ||
Intangible assets |
| 128,687 |
| 113,622 |
| ||
Other |
| 99,971 |
| 91,628 |
| ||
Total investments and other assets |
| 438,533 |
| 448,862 |
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment |
|
|
|
|
| ||
Cost |
| 7,518,436 |
| 7,289,552 |
| ||
Less accumulated depreciation and amortization |
| 2,533,336 |
| 2,456,183 |
| ||
Net property, plant, and equipment |
| 4,985,100 |
| 4,833,369 |
| ||
|
|
|
|
|
| ||
Regulatory Assets and Deferred Debits |
|
|
|
|
| ||
Deferred debt expense |
| 49,024 |
| 49,995 |
| ||
Regulatory assets related to income taxes |
| 11,262 |
| 18,652 |
| ||
Other |
| 422,814 |
| 463,426 |
| ||
Total regulatory assets and deferred debits |
| 483,100 |
| 532,073 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 6,171,475 |
| $ | 6,242,182 |
|
The accompanying notes as they relateSee Notes to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.Unaudited Consolidated Financial Statements
16
PSI ENERGY, INC.CONDENSED
(dollars in thousands, except per share amounts)
(unaudited)
LIABILITIES AND SHAREHOLDERS’COMMON STOCKHOLDER’S 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 |
|
|
| June 30, |
| December 31, |
| ||
|
| 2006 |
| 2005 |
| ||
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 141,125 |
| $ | 170,451 |
|
Notes payable and commercial paper |
| 302,697 |
| 435,212 |
| ||
Taxes accrued |
| 66,232 |
| 33,713 |
| ||
Interest accrued |
| 40,688 |
| 34,530 |
| ||
Current maturities of long-term debt and preferred stock |
| 4,472 |
| 328,149 |
| ||
Other |
| 75,759 |
| 56,269 |
| ||
Total current liabilities |
| 630,973 |
| 1,058,324 |
| ||
|
|
|
|
|
| ||
Long-term Debt |
| 2,214,012 |
| 1,891,713 |
| ||
|
|
|
|
|
| ||
Deferred Credits and Other Liabilities |
|
|
|
|
| ||
Deferred income taxes |
| 581,851 |
| 609,569 |
| ||
Investment tax credit |
| 22,188 |
| 23,624 |
| ||
Accrued pension and other postretirement benefit costs |
| 242,865 |
| 227,435 |
| ||
Regulatory liabilities |
| 436,409 |
| 394,377 |
| ||
Asset retirement obligations |
| 15,454 |
| 15,001 |
| ||
Other |
| 50,662 |
| 48,918 |
| ||
Total deferred credits and other liabilities |
| 1,349,429 |
| 1,318,924 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies |
|
|
|
|
| ||
Cumulative Preferred Stock Not Subject to Mandatory Redemption |
| — |
| 11,258 |
| ||
|
|
|
|
|
| ||
Common Stockholder’s Equity |
|
|
|
|
| ||
Common stock, no par; $.01 stated value; 60,000,000 shares authorized and 53,913,701 shares outstanding at June 30, 2006 and December 31, 2005 |
| 539 |
| 539 |
| ||
Paid-in capital |
| 840,692 |
| 840,692 |
| ||
Retained earnings |
| 1,154,176 |
| 1,148,192 |
| ||
Accumulated other comprehensive loss |
| (18,346 | ) | (27,460 | ) | ||
Total common stockholder’s equity |
| 1,977,061 |
| 1,961,963 |
| ||
|
|
|
|
|
| ||
Total Liabilities and Common Stockholder’s Equity |
| $ | 6,171,475 |
| $ | 6,242,182 |
|
The accompanying notes as they relateSee Notes to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.Unaudited 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 |
|
(dollars in thousands)
(unaudited)
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2006 |
| 2005 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
| ||
Net income |
| $ | 31,171 |
| $ | 85,074 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 148,452 |
| 146,962 |
| ||
Deferred income taxes |
| (22,896 | ) | 17,776 |
| ||
Regulatory asset/liability amortization |
| 12,099 |
| (5,545 | ) | ||
Accrued pension and postretirement benefit costs |
| 21,250 |
| 17,801 |
| ||
(Increase) decrease in: |
|
|
|
|
| ||
Net realized and unrealized mark-to-market and hedging transactions |
| 22,366 |
| 1,822 |
| ||
Receivables |
| 127,389 |
| 20,245 |
| ||
Inventory |
| (29,775 | ) | (26,629 | ) | ||
Other current assets |
| (1,111 | ) | (778 | ) | ||
Increase (decrease) in: |
|
|
|
|
| ||
Accounts payable |
| (29,327 | ) | 19,212 |
| ||
Taxes accrued |
| 32,519 |
| (9,387 | ) | ||
Other current liabilities |
| 6,158 |
| 3,833 |
| ||
Regulatory asset/liability deferrals |
| 70,586 |
| (64,162 | ) | ||
Other assets |
| (21,389 | ) | 2,734 |
| ||
Other liabilities |
| 30,296 |
| (13,877 | ) | ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 397,788 |
| 195,081 |
| ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities |
|
|
|
|
| ||
Capital expenditures |
| (257,419 | ) | (269,341 | ) | ||
Investment expenditures |
| (1,981 | ) | (699 | ) | ||
Purchases of emission allowances |
| (59,051 | ) | (35,761 | ) | ||
Sale of emission allowances |
| 28,445 |
| 5,130 |
| ||
Withdrawal of restricted funds held in trust |
| 37,869 |
| 45,227 |
| ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (252,137 | ) | (255,444 | ) | ||
|
|
|
|
|
| ||
Cash Flows from Financing Activities |
|
|
|
|
| ||
Issuance of long-term debt |
| 325,000 |
| — |
| ||
Redemption of long-term debt |
| (326,528 | ) | — |
| ||
Redemption of preferred stock of subsidiaries |
| (11,258 | ) | — |
| ||
Notes payable and commercial paper |
| (132,515 | ) | (52,155 | ) | ||
Dividends paid |
| (25,187 | ) | (82,561 | ) | ||
Contribution from parent |
| — |
| 200,000 |
| ||
|
|
|
|
|
| ||
Net cash (used in) provided by financing activities |
| (170,488 | ) | 65,284 |
| ||
|
|
|
|
|
| ||
Net (decrease) increase in cash and cash equivalents |
| (24,837 | ) | 4,921 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 31,860 |
| 10,794 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 7,023 |
| $ | 15,715 |
|
|
|
|
|
|
| ||
Significant non-cash transactions: |
|
|
|
|
| ||
Allowance for funds used during construction (AFUDC) – equity component |
| $ | (6,239 | ) | $ | (3,719 | ) |
The accompanying notes as they relateSee Notes to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.Unaudited Consolidated Financial Statements
18
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
1921
In this report Cinergy (which includes Cinergy Corp. and all of ourCinergy’s regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we,” “our,” or “us.”subsidiaries. In addition, when discussing Cinergy’s financial information, it necessarily includes the results of The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), The Union Light, Heat and Power Company (ULH&P) and all of Cinergy’s other consolidated subsidiaries. When discussing CG&E’s financial information, it necessarily includes the results of ULH&P and all of CG&E’s other consolidated subsidiaries.
1. Organization and SummaryBasis of Significant Accounting PoliciesPresentation
(a) MergerNature of Operations and Basis of Consolidation
On April 3, 2006, in accordance with their previously announced merger agreement, Duke
In March 2006, EnergyCorporation (Old Duke Energy) and Cinergy Corp. andmerged into wholly owned subsidiaries of Duke a North Carolina corporation, received final approvalsEnergy Holding Corp. (Duke Energy HC), resulting in Duke Energy HC becoming the parent entity. 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. consummatedclosing of the merger with Duke. Undertransactions, Duke Energy HC changed its name to Duke Energy Corporation (“New Duke Energy” or “Duke Energy”) and Old Duke Energy converted into a limited liability company named Duke Power Company LLC. As a result of the merger agreement,transactions, each outstanding share of Cinergy common stock was converted into 1.56 shares of the newly formed company, Duke Energy Holdingcommon stock, and each share of common stock of Old Duke Energy was converted into one share of Duke Energy common stock, which resulted in the issuance of approximately 1.2 billion shares of Duke Energy common stock. See Note 2 for additional information regarding the merger. Both Old Duke Energy and New Duke Energy are referred to as Duke Energy herein.
Cinergy Corp., a Delaware Corporation (Duke Energy Holding) (subsequently renamedcorporation organized in 1993, owns all outstanding common stock of its public utility companies, CG&E and PSI,as well as Cinergy Investments, Inc. (Investments) and Duke Energy Corporation)Shared Services (DESS). Investments, which is Cinergy’s non-regulated investment holding company, is involved in (a) cogeneration and energy efficiency investments and (b) natural gas and power marketing and trading operations, conducted primarily through one of Cinergy’s subsidiaries, Cinergy Marketing & Trading, LP (Marketing & Trading). DESS provides administrative, management, and support services to Cinergy’s subsidiaries.
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’s principal lines of business include generation, transmission and distribution of electricity, the sale of and/or transportation of natural gas, and power marketing and trading business. CG&E’s principal subsidiary, ULH&P, a Kentucky corporation organized in 1901, provides electric and gas service in northern Kentucky. In June 2006, Cinergy and CG&E reached an agreement to sell CG&E’s power marketing and trading business. See Note 10 for additional information.
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. Its primary line of business is generation, transmission and distribution of electricity.
These Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present Cinergy’s, CG&E’s, and PSI’s financial position and results of operations. Amounts reported in the interim Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods due to the effects of seasonal temperature variations on energy consumption, the timing of maintenance on electric generating units, changes in mark-to-market (MTM) valuations, changing commodity prices, and other factors. These Consolidated Financial Statements and other information included in this quarterly report should be read in conjunction with the Consolidated Financial Statements and Notes in Cinergy’s combined Form 10-K for the year ended December 31, 2005 (2005 10-K).
(b) Predecessor and Successor Reporting
In connection with the Duke Energy merger, Duke Energy acquired all of the outstanding common stock of Cinergy. The merger has been accounted for under the purchase method of accounting with Duke Energy treated as the acquirer for accounting purposes. As a result, the assets and liabilities of Cinergy were recorded at their
respective fair values as of the merger consummation date. Except for an adjustment related to pension and other postretirement benefit obligations, as mandated by Statement of Financial Accounting Standards (SFAS) No. 87, “Employers’ Accounting for Pension” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” the accompanying consolidated financial statements do not reflect any adjustments related to Cinergy’s, CG&E’s, and PSI’s regulated operations that are accounted for pursuant to SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation, (SFAS No. 71)” which are comprised of CG&E’s regulated transmission and distribution, PSI and ULH&P. Under the rate setting and recovery provisions currently in place for these regulated operations which provide revenues derived from cost, the fair values of the individual tangible and intangible assets and liabilities are considered to approximate their carrying values.
Purchase accounting impacts, including goodwill recognition, have been “pushed down” to Cinergy and CG&E, resulting in the assets and liabilities of Cinergy and CG&E being recorded at their respective fair values as of April 3, 2006. For accounting purposes, the effective date of the merger was April 1, 2006. Cinergy’s and CG&E’s Consolidated Statements of Operations subsequent to the merger include amortization expense relating to purchase accounting adjustments and depreciation of fixed assets based upon their fair value. Therefore, the Cinergy and CG&E financial data prior to the merger will not generally be comparable to its financial data subsequent to the merger. A review of the Securities and Exchange Commission (SEC) regulations has indicated that PSI’s financial statements are not required to use push-down accounting, and therefore, management has elected not to do so. See Note 2 for additional information.
Due to the impact of the push-down accounting, the financial statement and certain note presentations separate Cinergy’s and CG&E’s presentations into two distinct periods, the period before the consummation of the merger (labeled “Predecessor”) and the period after that date (labeled “Successor”), to indicate the application of different bases of accounting between the periods presented. The push-down accounting adjustments did not impact cash flows as previously presented.
The fair values of the assets acquired and liabilities assumed for Cinergy and CG&E are preliminary and are subject to change as valuation analyses are finalized and remaining information on the fair values is received. However, Cinergy does not currently anticipate any such changes to have a material impact on its consolidated results of operations, cash flows, or financial position. The portion of the purchase price pushed down to CG&E is based on preliminary estimates of CG&E’s fair value relative to the preliminary fair value of other entities acquired. Adjustments to this preliminary allocation could be material and such adjustments could directly impact the amount recorded in CG&E’s common stock equity. See Note 2 for additional information.
(c) Reclassifications and Revisions
(i) Business Segments and Performance Measures
As a result of the merger with Duke Energy, effective in the second quarter of 2006, Cinergy, CG&E, and PSI adopted new business segments, and the segment performance measure has been changed to earnings before interest and taxes (EBIT) from continuing operations, after deducting minority interest expense related to those profits. As a result, certain prior period amounts have been retroactively adjusted to conform to the new segment presentation and measures. See Note 11 for further discussion of segments.
(d) Conforming Changes in Accounting and Reporting
(i) Emission Allowance Accounting
Effective with the merger between Duke Energy and Cinergy, Cinergy, CG&E, and PSI classifies emission allowances as Intangible Assets in the accompanying Consolidated Balance Sheets and includes cash flows from purchases and sales of emission allowances as investing activities. Historically, Cinergy, CG&E, and PSI classified emission allowances as Inventory and Other non-current assets in the Consolidated Balance Sheets, presented revenues from sales of emission allowances as operating revenues and the cost of emission allowances sold as cost of fuel resold in the Consolidated Statements of Operations and presented cash flows from purchases and sales of emission allowances as operating activities in the accompanying Consolidated Statements of Cash Flows. The classification of Inventory or Other non-current assets was determined by the emission allowances vintage year.
Cinergy believeand CG&E changed their method of accounting for emission allowances in connection with their application in push-down accounting in order to conform to the accounting policies of Duke Energy. While the historical policy of classifying emission allowances as Inventory and Other non-current assets was considered acceptable, PSI changed its method of accounting for emission allowances because it believes the classification of emission allowances as Intangible Assets is preferable since emission allowances are contractual rights, which have no physical substance and meet the intangible definition of identifiable non-monetary assets without physical substance. As a result of this change in classification, gains or losses on sales of emission allowances are presented on a net basis in Gain (Loss) on Sales of Other Assets and Other, net in the accompanying Consolidated Statements of Operations and cash flows from purchases and sales of emission allowances are presented in investing activities in the accompanying Consolidated Statements of Cash Flows.
SFAS No. 154, “Accounting Changes and Error Corrections—A Replacement of Accounting Principles Board (APB) Opinion No. 20 and SFAS No. 3”, requires that Cinergy, CG&E, and PSI report this change in accounting policy through retrospective application of the combination willnew policy to all prior periods presented. This change does not impact income from continuing operations, net income, or total assets as previously presented. A summary of the financial statement items affected by the retroactive application of this change in accounting principle is as follows:
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| Successor(1) |
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| Predecessor(1) |
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Cinergy |
| Three Months |
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| Three Months |
| Three Months |
| Six Months |
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| (in millions) |
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Total Operating Revenues |
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Before reclassification of emission allowances |
| $ | 1,372 |
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| $ | 1,620 |
| $ | 1,101 |
| $ | 2,391 |
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Effect of emission allowance reclassification |
| (64 | ) |
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| (44 | ) | (50 | ) | (90 | ) | ||||
After reclassification of emission allowances |
| $ | 1,308 |
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| $ | 1,576 |
| $ | 1,051 |
| $ | 2,301 |
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Total Operating Expenses |
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Before reclassification of emission allowances |
| $ | 1,306 |
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| $ | 1,461 |
| $ | 976 |
| $ | 2,080 |
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Effect of emission allowance reclassification |
| (69 | ) |
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| (18 | ) | (10 | ) | (20 | ) | ||||
After reclassification of emission allowances |
| $ | 1,237 |
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| $ | 1,443 |
| $ | 966 |
| $ | 2,060 |
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(Losses) Gains on Sales of Other Assets and Other, net |
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Before reclassification of emission allowances |
| $ | - |
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| $ | - |
| $ | - |
| $ | - |
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Effect of emission allowance reclassification |
| (5 | ) |
|
| 26 |
| 40 |
| 70 |
| ||||
After reclassification of emission allowances |
| $ | (5 | ) |
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| $ | 26 |
| $ | 40 |
| $ | 70 |
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(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
| Successor(1) |
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| Predecessor(1) |
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| June 30, |
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| December 31, |
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Cinergy |
| 2006 |
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| 2005 |
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| (in millions) |
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Inventory |
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Before reclassification of emission allowances |
| $ | 501 |
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| $ | 589 |
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Effect of emission allowance reclassification |
| (192 | ) |
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| (116 | ) | ||
After reclassification of emission allowances |
| $ | 309 |
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| $ | 473 |
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Other Assets |
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Before reclassification of emission allowances |
| $ | 730 |
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| $ | 185 |
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Effect of emission allowance reclassification |
| (495 | ) |
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| (59 | ) | ||
After reclassification of emission allowances |
| $ | 235 |
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| $ | 208 |
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Intangible Assets |
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Before reclassification of emission allowances |
| $ | 290 |
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| $ | 135 |
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Effect of emission allowance reclassification |
| 687 |
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| 175 |
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After reclassification of emission allowances |
| $ | 977 |
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| $ | 310 |
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(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
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| Successor(1) |
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| Predecessor(1) |
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| Three Months |
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| Three Months |
| Six Months |
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| Ended |
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| Ended |
| Ended |
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Cinergy |
| June 30, 2006 |
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| March 31, 2006 |
| June 30, 2005 |
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Cash Flows from Operating Activities |
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Before reclassification of emission allowances |
| $ | 47 |
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| $ | 84 |
| $ | 299 |
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Effect of emission allowance reclassification |
| 28 |
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| 82 |
| 19 |
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After reclassification of emission allowances |
| $ | 75 |
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| $ | 166 |
| $ | 318 |
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Cash Flows from Investing Activities |
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Before reclassification of emission allowances |
| $ | (295 | ) |
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| $ | (294 | ) | $ | (407 | ) |
Effect of emission allowance reclassification |
| (28 | ) |
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| (82 | ) | (19 | ) | |||
After reclassification of emission allowances |
| $ | (323 | ) |
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| $ | (376 | ) | $ | (426 | ) |
(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
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| Successor(1) |
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| Predecessor(1) |
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CG&E |
| Three Months |
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| Three Months |
| Three Months |
| Six Months |
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Total Operating Revenues |
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Before reclassification of emission allowances |
| $ | 738 |
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| $ | 1,007 |
| $ | 600 |
| $ | 1,391 |
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Effect of emission allowance reclassification |
| (42 | ) |
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| (44 | ) | (50 | ) | (90 | ) | ||||
After reclassification of emission allowances |
| $ | 696 |
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| $ | 963 |
| $ | 550 |
| $ | 1,301 |
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Total Operating Expenses |
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Before reclassification of emission allowances |
| $ | 697 |
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| $ | 799 |
| $ | 523 |
| $ | 1,182 |
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Effect of emission allowance reclassification |
| (47 | ) |
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| (18 | ) | (10 | ) | (20 | ) | ||||
After reclassification of emission allowances |
| $ | 650 |
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| $ | 781 |
| $ | 513 |
| $ | 1,162 |
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(Losses) Gains on Sales of Other Assets and Other, net |
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Before reclassification of emission allowances |
| $ | - |
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| $ | - |
| $ | - |
| $ | - |
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Effect of emission allowance reclassification |
| (5 | ) |
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| 26 |
| 40 |
| 70 |
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After reclassification of emission allowances |
| $ | (5 | ) |
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| $ | 26 |
| $ | 40 |
| $ | 70 |
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(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
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| Successor(1) |
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| Predecessor(1) |
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| June 30, |
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| December 31, |
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CG&E |
| 2006 |
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| 2005 |
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| (in millions) |
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Inventory |
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Before reclassification of emission allowances |
| $ | 288 |
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| $ | 226 |
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Effect of emission allowance reclassification |
| (139 | ) |
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| (48 | ) | ||
After reclassification of emission allowances |
| $ | 149 |
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| $ | 178 |
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Other Assets |
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Before reclassification of emission allowances |
| $ | 466 |
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| $ | 46 |
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Effect of emission allowance reclassification |
| (445 | ) |
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| (19 | ) | ||
After reclassification of emission allowances |
| $ | 21 |
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| $ | 27 |
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Intangible Assets |
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Before reclassification of emission allowances |
| $ | 266 |
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| $ | 38 |
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Effect of emission allowance reclassification |
| 584 |
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| 67 |
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After reclassification of emission allowances |
| $ | 850 |
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| $ | 105 |
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(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
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| Successor(1) |
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| Predecessor(1) |
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| Three Months |
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| Three Months |
| Six Months |
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| Ended |
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| Ended |
| Ended |
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CG&E |
| June 30, 2006 |
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| March 31, 2006 |
| June 30, 2005 |
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Cash Flows from Operating Activities |
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Before reclassification of emission allowances |
| $ | 144 |
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| $ | 61 |
| $ | 241 |
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Effect of emission allowance reclassification |
| 21 |
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| 58 |
| (12 | ) | |||
After reclassification of emission allowances |
| $ | 165 |
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| $ | 119 |
| $ | 229 |
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Cash Flows from Investing Activities |
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Before reclassification of emission allowances |
| $ | (149 | ) |
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| $ | (126 | ) | $ | (186 | ) |
Effect of emission allowance reclassification |
| (21 | ) |
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| (58 | ) | 12 |
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After reclassification of emission allowances |
| $ | (170 | ) |
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| $ | (184 | ) | $ | (174 | ) |
(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
The change in accounting principle for emission allowances had no impact on PSI’s historical Consolidated Statements of Operations. For these three months ended June 30, 2006, the change in accounting principle resulted in a decrease of $22 million in Operating Revenues and Operating Expenses compared to amounts which would have been reported under PSI’s previous method of accounting.
| June 30, |
| December 31, |
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| 2006 |
| 2005 |
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PSI |
| (in millions) |
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Inventory |
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Before reclassification of emission allowances |
| $ | 186 |
| $ | 170 |
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Effect of emission allowance reclassification |
| (53 | ) | (67 | ) | ||
After reclassification of emission allowances |
| $ | 133 |
| $ | 103 |
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Other Assets |
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Before reclassification of emission allowances |
| $ | 150 |
| $ | 132 |
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Effect of emission allowance reclassification |
| (50 | ) | (40 | ) | ||
After reclassification of emission allowances |
| $ | 100 |
| $ | 92 |
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Intangible Assets |
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Before reclassification of emission allowances |
| $ | 26 |
| $ | 7 |
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Effect of emission allowance reclassification |
| 103 |
| 107 |
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After reclassification of emission allowances |
| $ | 129 |
| $ | 114 |
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| Six Months Ended |
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| June 30 |
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PSI |
| 2006 |
| 2005 |
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| (in millions) |
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Cash Flows from Operating Activities |
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Before reclassification of emission allowances |
| $ | 367 |
| $ | 164 |
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Effect of emission allowance reclassification |
| 31 |
| 31 |
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After reclassification of emission allowances |
| 398 |
| 195 |
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Cash Flows from Investing Activities |
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Before reclassification of emission allowances |
| $ | (221 | ) | $ | (224 | ) |
Effect of emission allowance reclassification |
| (31 | ) | (31 | ) | ||
After reclassification of emission allowances |
| (252 | ) | (255 | ) |
(ii) Assets Held for Sale
When a determination was made that a long-lived asset or asset group should be classified as an asset “held for sale” pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the long-lived asset or asset group are presented on the Consolidated Balance Sheet with the current and noncurrent portions separately presented based upon their previous classification (prior to meeting the “held for sale” criteria). Prior period balance sheets are not retrospectively adjusted for current period discontinued operations to conform to the current year presentation. Historically, Cinergy and CG&E classified all “held for sale” amounts as noncurrent and adjusted their Consolidated Balance Sheets retrospectively to conform to the current presentation. This change in presentation has been adopted in order for the Cinergy and CG&E financial statements to conform to the Duke Energy presentation as a result of push-down accounting. PSI does not have “held for sale” amounts for any of the periods presented. See Note 10 for additional information.
(iii) Reclassifications
The financial statements have been reclassified to conform with Duke Energy’s format. Certain other prior period amounts have been reclassified to conform to current year presentation. Such reclassifications include the reclassification of income from continuing operations from Cinergy’s commercial marketing and trading business to discontinued operations. See Note 10 for additional information.
(e) Use of Estimates
To conform with generally accepted accounting principles (GAAP) in the United States, management makes estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and Notes. Although these estimates are based on management’s best available knowledge at the time, actual results could differ.
(f) Accounting for Excise Taxes
Certain excise taxes levied by state or local governments are collected by Cinergy, CG&E, and PSI from its customers. These taxes, which are required to be paid regardless of Cinergy’s, CG&E’s, and PSI’s ability to collect from the customer, are accounted for on a gross basis. When Cinergy, CG&E, or PSI acts as an agent, and the tax is not required to be remitted if it is not collected from the customer, the taxes are accounted for on a net basis. Cinergy’s and CG&E’s excise taxes accounted for on a gross basis and recorded as revenues in the accompanying Consolidated Statements of Operations for the three months ended June 30, 2006, March 31, 2006, and June 30, 2005 and the six months ended June 30, 2005 were as follows:
| Successor(1) |
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| Predecessor(1) |
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| Three Months |
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| Three Months |
| Three Months |
| Six Months |
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| Ended |
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| Ended |
| Ended |
| Ended |
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| June 30, 2006 |
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| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
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| (in millions) |
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Cinergy |
| $ | 33 |
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| $ | 44 |
| $ | 32 |
| $ | 73 |
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CG&E |
| 27 |
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| 38 |
| 26 |
| 62 |
| ||||
(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
PSI’s excise taxes accounted for on a gross basis and recorded in the accompanying Consolidated Statements of Operations for the three months ended June 30, 2006 and 2005 and the six months ended June 30, 2006 and 2005 were as follows:
| Three Months Ended |
| Six Months Ended |
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|
| June 30 |
| June 30 |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
|
|
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| ||||
PSI |
| $ | 6 |
| $ | 5 |
| $ | 12 |
| $ | 11 |
|
(g) Regulation
Cinergy’s utility operating companies use the same accounting policies and practices for financial reporting purposes as non-regulated companies under GAAP. However, sometimes actions by the Federal Energy Regulatory Commission (FERC) and the state utility commissions result in accounting treatment different from that used by non-regulated companies. When this occurs, Cinergy, CG&E, and PSI apply the provisions of SFAS No. 71. In accordance with SFAS No. 71, Cinergy, CG&E, and PSI record regulatory assets and liabilities (expenses deferred for future recovery from customers or amounts provided in current rates to cover costs to be incurred in the future, respectively) on their Balance Sheets.
Pursuant to the consummation of the merger between Duke Energy and Cinergy and the application of purchase accounting, a revaluation of the defined benefit plans was completed and resulted in the recognition of a regulatory asset of approximately $425 million for Cinergy and $157 million for CG&E. For additional information on purchase accounting, see Notes 1 and 2.
On April 3, 2006, the previously announced merger between Duke Energy and Cinergy was consummated (see Note 1(a) for additional information on the merger and Note 1(b) for additional information on purchase accounting and Predecessor and Successor reporting). For accounting purposes, the effective date of the merger was April 1, 2006. The merger combines the Duke Energy and Cinergy regulated franchises as well as deregulated generation in the Midwestern United States (Midwest). The merger is anticipated to provide substantialmore regulatory, geographic, and weather diversity to Duke Energy’s earnings. In connection with the merger, Duke Energy issued 1.56 shares of Duke Energy common stock for each outstanding share of Cinergy common stock, which resulted in the issuance of approximately 313 million shares of Duke Energy common stock. Based on the market price of Duke Energy common stock during the period, including the two trading days before, through the two trading days after, May 9,
2005, the date Duke Energy and Cinergy announced the merger, the transaction is valued at approximately $9.1 billion and has resulted in preliminary goodwill for Cinergy and CG&E of approximately $4.3 billion and $2.2 billion, respectively. The amount of goodwill results from significant strategic and financial benefits expected to their shareholders, employeesbe realized by Cinergy and customers,CG&E 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;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 customersdiscussed in each service territory and provided additional conditions that the new company wouldNote 1(b) above, purchase accounting impacts, including goodwill recognition, 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 millionbeen “pushed down” 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 approval 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&ECinergy and CG&E, resulting in the OCC have resolved this matter through settlementassets and we expect the OCC to withdraw its appeal.
·liabilities of PSICinergy will provide a rate creditand CG&E being recorded at their respective fair values as 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 PSI3, 2006.
should be orderedPurchase price allocation and goodwill
The following table summarizes the differences between the estimated fair values and the carrying values of the Cinergy and CG&E assets and liabilities at the date of acquisition (the fair values are preliminary and are subject to providechange including the amount of goodwill in total and the amount allocated to CG&E) as fair value analyses are finalized and remaining information on the fair values is received:
|
| As of April 3, 2006 |
| ||||||||||
|
| Cinergy |
| CG&E |
| ||||||||
|
| (in millions, except per share amount) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Purchase price |
|
|
|
|
|
|
|
|
| ||||
Cinergy common shares outstanding |
|
|
| 200.51 |
|
|
|
|
| ||||
Exchange ratio |
|
|
| 1.56 |
|
|
|
|
| ||||
Duke Energy HC common shares issued |
|
|
| 312.80 |
|
|
|
|
| ||||
Purchase price per Duke Energy HC common share(1) |
|
|
| $ | 28.75 |
|
|
|
|
| |||
|
|
|
| $ | 8,993 |
|
|
|
|
| |||
Fair value of vested employee stock options issued |
|
|
| 59 |
|
|
|
|
| ||||
Duke Energy HC direct acquisition costs |
|
|
| 37 |
|
|
|
|
| ||||
Total purchase price |
|
|
| $ | 9,089 |
|
|
| $ | 4,801 | (2) | ||
Less Cinergy/CG&E net book value at acquisition |
|
|
| (4,574 | ) |
|
| (1,991 | ) | ||||
Excess purchase price |
|
|
| $ | 4,515 |
|
|
| $ | 2,810 |
| ||
|
|
|
|
|
|
|
|
|
| ||||
Fair value adjustments to assets acquired |
|
|
|
|
|
|
|
|
| ||||
Current assets |
| $ | 46 |
|
|
| $ | 5 |
|
|
| ||
Property, plant, and equipment(3) |
| (212 | ) |
|
| (440 | ) |
|
| ||||
Intangibles |
| (677 | ) |
|
| (738 | ) |
|
| ||||
Regulatory assets and deferred debits |
| (439 | ) |
|
| (150 | ) |
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Fair value adjustments to liabilities assumed |
|
|
|
|
|
|
|
|
| ||||
Current liabilities |
| 124 |
|
|
| 12 |
|
|
| ||||
Accrued pension and post-retirement benefit costs |
| 564 |
|
|
| 124 |
|
|
| ||||
Deferred taxes |
| 171 |
|
|
| 390 |
|
|
| ||||
Other non-current liabilities |
| 197 |
|
|
| 160 |
|
|
| ||||
|
|
|
| (226 | ) |
|
| (637 | ) | ||||
Goodwill resulting from merger |
|
|
| $ | 4,289 |
|
|
| $ | 2,173 |
| ||
Less: Preliminary goodwill associated with Assets held for sale(4) |
|
|
| (161 | ) |
|
| — |
| ||||
Goodwill at June 30, 2006 |
|
|
| $ | 4,128 |
|
|
| $ | 2,173 |
| ||
(1)Price based on average price of Duke Energy stock during the period two days prior to merger announcement through two days after.
(2)Allocation of purchase price to CG&E was based on relative fair value of entities acquired (including CG&E) compared to a total purchase price of $9.089 billion. See Note 1(b) for additional information.
(3) Amounts recorded for regulated property, plant, and equipment by Cinergy and CG&E on the acquisition date include approximately $3,995 million and $1,510 million, respectively, related to accumulated depreciation of acquired assets.
(4)In June 2006, an agreement was reached to sell Marketing & Trading. Approximately $161 million of goodwill has been preliminarily allocated to that business and was classified as held for sale at June 30, 2006. See Note 10 for additional $5information.
Goodwill recorded as of June 30, 2006 resulting from Duke Energy’s merger with Cinergy is $4,289 million. Of this amount, approximately $161 million has been allocated to assets held for sale related to the disposition of Marketing & Trading and Cinergy Canada, Inc. See Note 10 for additional information. The valuation and other assessment procedures required to allocate this goodwill to the appropriate reporting units and reportable segments is currently in rate credits to customersprocess and is anticipated to be consistentcompleted during 2006. While the allocation is not yet complete, Cinergy anticipates that the goodwill will be allocated to the U.S. Franchised Electric & Gas and Commercial Power segments, as well as Other, and the majority of the goodwill will be allocated to the U.S. Franchised Electric & Gas segment. See Note 11 for additional information.
The following unaudited consolidated pro forma financial results are presented as if the merger with Duke Energy had occurred at the NCUC order. An orderbeginning of each of the periods presented:
Unaudited Consolidated Pro Forma Results
Cinergy
| Three Months Ended |
| Three Months Ended |
| Six Months Ended |
| ||||
|
| March 31, |
| June 30, |
| June 30, |
| |||
|
| 2006 |
| 2005 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
| |||
Operating revenues |
| $ | 1,579 |
| $ | 1,055 |
| $ | 2,308 |
|
Income from continuing operations |
| 49 |
| 34 |
| 110 |
| |||
Net income |
| 51 |
| 22 |
| 110 |
| |||
Unaudited Consolidated Pro Forma Results
CG&E
| Three Months Ended |
| Three Months Ended |
| Six Months Ended |
| ||||
|
| March 31, |
| June 30, |
| June 30, |
| |||
|
| 2006 |
| 2005 |
| 2005 |
| |||
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
| |||
Operating revenues |
| $ | 966 |
| $ | 554 |
| $ | 1,308 |
|
Income from continuing operations |
| 85 |
| 11 |
| 45 |
| |||
Net income |
| 83 |
| 20 |
| 72 |
| |||
Earnings available for common stockholders |
| 83 |
| 20 |
| 72 |
| |||
Pro forma results for the three months ended June 30, 2006 are not presented since the merger occurred at the beginning of the period presented. Additionally, pro forma results do not include any significant transactions completed by Cinergy other than the merger with Duke Energy. The pre-tax impacts of purchase accounting on the Petition isresults of operations of Cinergy and CG&E are expected in the second quarterto be charges of approximately $130 million to $140 million during 2006.
· ULH&P will provide $7.6 million in rate creditsPrior 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) approvedconsummation of the merger, without conditions. On January 19, 2006, Public Citizen’s Energy Program, Citizen’s Action Coalition of Indiana, Ohio Partnerscertain regulatory approvals were received from the state utility commissions and the FERC. See Note 13(a) for Affordable Energy and Southern Alliance for Clean Energy requested rehearinga discussion of the FERC approval. On February 21, 2006,regulatory impacts of the FERC issued an order granting rehearing of FERC’s order for further consideration.merger.
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)(19(iiii) for additional information on these payments.
Purchase price allocation3. Common Stock and goodwill
Duke has been determined to be the acquirer and Cinergy the acquiree under generally accepted accounting principles. The merger is being recorded using the purchase method of accounting whereby the total purchase price of approximately $9 billion is being allocated to Cinergy’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 purchase price to the net assets of Cinergy and the resulting goodwill determination are not yet complete. However, preliminary indications are that the acquisition will result in approximately $4 billion of goodwill.
Based on management’s review and analysis of relevant Securities and Exchange Commission (SEC) regulations, 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 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, 2005 (2005 10-K). We 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 2005 Condensed Financial Statements have been reclassified to conform to the 2006 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 2005 10-K. Actual results could differ, as these estimates and assumptions involve judgment about future events or performance.
(c) Revenue Recognition
Utility Revenues
CG&E, and PSI (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.
Unbilled revenues for Cinergy, CG&E, and PSI as of March 31, 2006 and 2005, were as follows:
| 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 quarters ended March 31, 2006 and 2005 were as follows:
| 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 |
| $ | — |
|
(ii) Generation Portfolio Optimization
CG&E attempts to optimize the value of its non-regulated generation portfolio, which includes generation assets, fuel, and emission allowances. When power is sold forward, we typically purchase the fuel 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 forward power sales, and in turn sell the fuel and/or emission allowances.
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 earnings. A hypothetical $1.00 per megawatt hour (MWh) change consistently applied to all forward power prices would have resulted in a change 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 change in fair value of these contracts of approximately $3.5 million as of March 31, 2006.
(iii) Trading & Marketing
Cinergy and CG&E measure the market risk inherent in the trading portfolio employing value at risk (VaR) analysis, as discussed in the 2005 10-K. The change in VaR from the 2005 10-K was not material to our financial position or results of operations.
(e) Accounting Changes
(i) Share-Based Payment
In December 2004, the FASB issued a replacement of SFAS No. 123, Accounting for Stock-BasedStock-based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, (Statement 148), (Statement 123), SFAS No. 123 (revised 2004), Share-Based Payment (Statement 123R). This standard 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 148, 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 was not material. See additional detail regarding Cinergy’s stock-based compensation 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 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 does not anticipate that the adoption of FIN 46(R)-6 will have a material impact on our financial position or results of operations.
23
(a) Changes In Common Stock Outstanding
Prior to its merger with Duke Energy, Cinergyissues issued 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 three months ended March 31, 2006, Cinergy issued 1.7 million shares of stockunder these plans.plans in the quarter ended March 31, 2006. After the merger, obligations under these plans were satisfied through open market purchases of Duke Energy common stock.
Cash dividends declared for the quarter ended March 31, 2006 included dividends of $0.48 per share, which were declared by the boardBoard of directorsDirectors on January 16, 2006 and partial dividends of $0.1564 per share, which were declared on March 10, 2006.
In April 2006, CG&E filed a petition with the FERC for a declaratory ruling that CG&E’sits 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/Duke Energy/CinergyCinergy merger, would not violate section 305(a) of the Federal Power Act, which generally precludes dividends out of paid-in capital. Such a ruling iswas 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. UntilWithout this approval, is received, CG&E’s ability to pay dividends will bewould have been constrained to earnings since April 3, 2006. TheIn May 2006, the FERC has approved such dividend payments in proceedings involving other mergers. At this time,issued an order approving CG&E&E’s cannot predict the outcome of this proceeding.petition.
Cinergy Corp. owns all of the common stock of CG&E and PSI. EffectiveIn April 3, 2006, Duke Energy acquired 100 percent of Cinergy’s outstanding stock was converted intofor 1.56 shares of Duke Energy Holdingcommon stock per outstanding share of Cinergy common stock. This conversion resulted in the issuance of approximately 313 million shares of Duke Energy common stock. See Note 1(a)2 for additional information.
(b) Stock-based Compensation Plans
We currentlySubsequent to the closing of the merger, Cinergy and its subsidiaries are allocated stock-based compensation expense from Duke Energy as certain of its employees participate in Duke Energy’s stock-based compensation programs. In December of 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. For Cinergy, timing for implementation of SFAS No. 123(R) was January 1, 2006. Cinergy is required to determine an appropriate expense for stock-based compensation and record compensation expense in the Consolidated Statements of Operations for stock options. Cinergy implemented SFAS No. 123(R) using the modified prospective transition method. In 2003, Cinergy prospectively adopted accounting for its stock-based compensation plans using the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123;” for all employee awards granted or with terms modified on or after January 1, 2003. Therefore, the impact of implementation of SFAS No. 123(R) on stock options and remaining awards was not material. See Note 17 for additional information regarding this new standard.
Compensation expense for awards with graded vesting provisions is recognized in accordance with FASB Interpretation No. (FIN) 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” Duke Energy and Cinergy elected to adopt the modified prospective application method as provided by SFAS No.123(R), and accordingly, financial statement amounts from the prior periods presented in this Form 10-Q have not been restated. There were no modifications to outstanding stock options prior to the adoption of SFAS No. 123(R). See Note 17 for additional information regarding this new standard.
Prior to the merger with Duke Energy, Cinergy had the following stock-based compensation plans:
· LTIP;Cinergy Corp. 1996 Long-term Incentive Compensation Plan (LTIP);
· SOP;Cinergy Corp. Stock Option Plan (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 programs 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)recorded stock-based compensation expense for additional information regarding this new accounting standard.
For the three months ended March 31, 2006 and June 30, 2006, and June 30, 2005 total compensation costand the six months ended June 30, 2005 as follows, the components of which are further described below:
| Successor(1) |
|
|
| Predecessor(1) |
| |||||||||
|
| Three Months Ended |
|
|
| Three Months Ended |
| Three Months Ended |
| Six Months Ended |
| ||||
|
|
|
|
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock Options |
| $ | 2 |
|
|
| $ | 3 |
| $ | 4 |
| $ | 5 |
|
Phantom Stock |
| 3 |
|
|
| 1 |
| 1 |
| 2 |
| ||||
Performance Awards |
| 1 |
|
|
| 12 |
| (3 | ) | — |
| ||||
Other Stock Awards |
| — |
|
|
| — |
| 1 |
| 2 |
| ||||
Total |
| $ | 6 |
|
|
| $ | 16 |
| $ | 3 |
| $ | 9 |
|
(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
Compensation expense for CG&E and PSI was not material for any of the periods presented. The tax benefit associated with the recorded expense for the above plansthree months ended March 31 and June 30, 2006 and the six months ended June 30, 2005 was $22$6 million, $2 million, and $12$4 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 Energy, as discussed below, will bewere accounted for as part of purchase accounting.
(i) LTIP
Under thisthe LTIP 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, 2005Duke Energy, and all such options were converted tointo Duke Energy Corporation options on April 3, 2006 at the 1.56 conversion rate andrate. All options granted after May 8, 2005 will continue to be expensed over the remaining portion of the three-year vesting period unless granted to retirement eligible employees.employees in which case they are expensed immediately. 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 -Deferred Credits and Other. Liabilities. All performance awards vested immediately with the consummation of the merger. Management paid all outstanding awards in cash. Total cash paid for the performance-based share liabilities for the three months ended March 31 and June 30, 2006 and the six months ended June 30, 2005 were $5 million, $60 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 |
|
|
|
IX |
| 1/2005 |
| 2005-2007 |
|
|
|
X |
| 1/2006 |
| 2006-2008 |
| 351 |
|
The target award is earned if Cinergy’s Relative TSR ranking isAll performance shares under Cycles VIII and IX vested immediately at the 55th percentile at the end of the performance period. The maximum payout is equal to 200 percent of target upon consummation of the merger. Cycle X performance shares vested on a pro-rata basis also at 200 percent of target andat the minimum payout is zero, dependingconsummation of the merger. Executives who left Cinergy received the remaining prorated share of Cycle X shares paid out at target.
Stock-based performance awards outstanding vest over three years. Certain performance awards granted in 2006 contain market conditions based on Cinergy’s ranking above or below the 55th percentile target.
We usetotal shareholder return (TSR) of Duke Energy stock. These awards are valued using a path-dependent model that incorporates expected Relativerelative TSR into the fair value determination of Cinergy’sDuke Energy’s performance-based share awards with the adoption of Statement 123R.SFAS No. 123(R). The model uses three year historical volatilities and correlations for all companies in the pre-defined peer group, including Cinergy,Duke Energy, to simulate Cinergy’s RelativeDuke Energy’s relative TSR as of the end of each Cycle.the performance period. For each simulation, Cinergy’s RelativeDuke Energy’s relative TSR associated with the simulated stock price at the end of the cycleperformance 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 RelativeDuke Energy’s relative TSR for each Cyclegrant is incorporated within the model. Other awards not containing market conditions are measured at grant date price. Duke Energy awarded 482,600 shares (fair value of approximately $12 million) in the six months ended June 30, 2006.
The following table summarizes information about stock-based performance awards issued to Cinergy employees and outstanding at June 30, 2006:
| Shares |
| Weighted |
| ||
|
|
|
|
|
| |
Number of Stock-based Performance Awards: |
|
|
|
|
| |
Outstanding at April 1, 2006 |
| — |
| $ | — |
|
Granted |
| 482,600 |
| 25 |
| |
Vested |
| — |
| — |
| |
Forfeited |
| (1,010 | ) | 18 |
| |
Canceled |
| — |
| — |
| |
Outstanding at June 30, 2006 |
| 481,590 |
| $ | 25 |
|
As of June 30, 2006, Cinergy had approximately $11 million of compensation expense which is expected to be recognized over a weighted-average period of 2.5 years.
All performancePhantom stock awards outstanding vest over periods from one to five years. Duke Energy awarded 364,570 shares to Cinergy employees (fair value of approximately $11 million based on the market price of Duke Energy’s common stock at the grant dates) in the six months ended June 30, 2006. Converted Cinergy phantom stock awards are paid in cash and are measured and recorded as liability awards.
34
The following table summarizes information about phantom stock awards issued to Cinergy employees and outstanding at June 30, 2006:
| Shares |
| Weighted |
| ||
|
|
|
|
|
| |
Number of Phantom Stock Awards: |
|
|
|
|
| |
Outstanding at April 1, 2006(1) |
| 31,530 |
| $ | 29 |
|
Granted |
| 364,570 |
| 29 |
| |
Vested |
| (23,398 | ) | 29 |
| |
Forfeited |
| (5,229 | ) | 29 |
| |
Canceled |
| — |
| — |
| |
Outstanding at June 30, 2006 |
| 367,473 |
| $ | 29 |
|
(1) Balance of converted Cinergy awards.
The total fair value of the shares vested during the three months ended June 30, 2006 was approximately $1 million. As of June 30, 2006, Cinergy had approximately $8 million of compensation expense which is expected to be recognized over a weighted-average period of 3.1 years.
Cinergy had other stock awards outstanding under Cycles VIII and IXthe LTIP that vested immediately at 200 percent of target withupon the April 3, 2006change in control due to the consummation of the merger. Cycle X performanceThe fair value of the shares vested on a pro-rata basis also at 200 percent of target atduring the consummation of the merger.
three months ended June 30, 2006 was approximately $1 million.
(ii) Stock Option Activity
Most options granted prior to May 8, 2005 under the LTIP and SOP plans were immediately vested upon consummation of the merger with Duke Energy, and all such options were converted into Duke Energy options at the 1.56 conversion rate. All options granted after May 8, 2005 will continue to be expensed over the remaining portion of the three-year vesting period unless granted to retirement eligible employees in which case they are expensed immediately. Duke Energy plans to issue new Duke Energy common shares when the above options are exercised.
Stock option activity for options issued to Cinergy employees for the three months ended March 31, 2006 is summarized as follows:
| LTIP and SOP |
|
| LTIP and SOP - Predecessor |
| |||||||||||||||||
|
| Shares |
| Weighted |
| Weighted |
| Aggregate |
|
| Shares |
| Weighted |
| Weighted |
| Aggregate |
| ||||
|
|
|
|
|
|
|
| (in millions) |
|
|
|
|
|
|
|
| (in millions) |
| ||||
Balance at December 31, 2005 |
| 5,484,649 |
| 34.72 |
|
|
|
|
|
| 5,484,649 |
| $ | 34.72 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options granted(1) |
| 674,900 |
| 42.45 |
|
|
|
|
| |||||||||||||
Options granted(1) |
| 674,900 |
| 42.45 |
|
|
|
|
| |||||||||||||
Options exercised |
| (1,488,171 | ) | 33.37 |
|
|
| $ | 16 |
|
| (1,488,171 | ) | 33.37 |
|
|
| $ | 16 |
| ||
Options forfeited/expired |
| (6,300 | ) | 41.11 |
|
|
|
|
|
| (6,300 | ) | 41.11 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at March 31, 2006 |
| 4,665,078 |
| $ | 36.30 |
| 6.32 yrs |
| $ | 43 |
|
| 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 |
| |||||||||||
Options Exercisable at March 31, 2006(2) |
| 2,433,378 |
| $ | 32.94 |
| 4.27 yrs |
| $ | 30 |
|
(1)Options have not been granted underto Cinergy employees upon consummation of the SOP since 2001.merger with Duke Energy.
(2)475,867 options exercisable pertain to the SOP.
Stock option activity for options issued to Cinergy employees for the three months ended June 30, 2006 is summarized as follows:
| LTIP and SOP - Successor |
| |||||||||
|
| Shares Subject |
| Weighted |
| Weighted |
| Aggregate |
| ||
|
|
|
|
|
|
|
| (in millions) |
| ||
Balance at April 1, 2006 |
| 7,277,522 |
| $ | 23 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| ||
Options granted(1) |
| 1,877,646 |
| 29 |
|
|
|
|
| ||
Options exercised |
| (968,170 | ) | 20 |
|
|
| $ | 8 |
| |
Options forfeited/expired |
| (52,260 | ) | 27 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Balance at June 30, 2006 |
| 8,134,738 |
| $ | 25 |
| 6.9 yrs |
| $ | 36 |
|
|
|
|
|
|
|
|
|
|
| ||
Options Exercisable at June 30, 2006 |
| 5,511,412 |
| $ | 23 |
| 5.6 yrs |
| $ | 34 |
|
(1) Options granted to Cinergy employees upon consummation of the merger with Duke Energy.
For the three months ended June 30 and March 31, 2006, weCinergy received $20 million and $29 million, respectively, in cash from the exercise of outstanding stock options. The tax benefit realized from these exercised options for the three months ended March 31, 2006 was $14 million. The total compensation expense related to unvested options at March 31,June 30, 2006 was $3$12 million which will be recognized over a weighted average period of 2.242.7 years. The total fair-value of options granted during the quartersthree months ended March 31 and June 30, 2006 and the six months ended June 30, 2005, were $6.66was $6.07 per share, $5.45 per share, and $5.65 per share, respectively. The total intrinsic value of options exercised was $16 million, $8 million, and $2$4 million for the three months ended March 31 and June 30, 2006 and the six months ended June 30, 2005, respectively.
The fair valuesvalue of options granted were estimated as of the grant datewas determined using thea Black-Scholes option-pricing model using the assumptions listed in the following table for the three months ended March 31:periods presented:
| 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 | % |
|
| LTIP |
| |||||||
|
| Successor(1) |
|
|
| Predecessor(1)(2) |
| ||
|
| Three Months |
|
|
| Three Months |
| Six Months |
|
|
| Ended |
|
|
| Ended |
| Ended |
|
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
| 4.78 | %(7) |
|
| 4.33 | %(3) | 3.62 | %(3) |
Expected dividend yield |
| 4.40 | %(8) |
|
| 4.41 | %(4) | 4.52 | %(4) |
Expected life(5) |
| 6.29 | yrs |
|
| 5.01 | yrs | 4.99 | yrs |
Expected volatility |
| 24.00 | %(9) |
|
| 22.43 | %(6) | 21.28 | % |
(1) | See Note 1(b) for additional information on Predecessor and Successor reporting. | |
(2) | There were no stock options granted during the three months ended June 30, 2005. | |
(3) | 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. | |
(4) | The expected dividend yield is based upon annualized dividends and the closing stock price on the grant date. | |
(5) | The expected term of options is derived from historical data. | |
(6) | Volatility is based upon the historical volatility with a look back period equal to the expected term of the options. | |
(7) | The risk-free rate is based upon the U.S. Treasury Constant Maturity rates as of the grant date. | |
(8) | The expected dividend yield is based upon annualized dividends and the 1-year average closing stock price. | |
(9) | Volatility is based upon 50 percent historical and 50 percent implied volatility. Historic volatility is based on the weighted average between Duke Energy and Cinergy historical volatility over six years using daily stock prices. Implied volatility is the average for all option contracts with a term greater than six months using the strike price closest to the stock price on the valuation date. |
(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.
3. Cumulative4. Preferred Stock
In March 2006, CG&E redeemed all outstanding shares of its $16.98 million notional amount 4% Cumulative Preferred 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.
In May 2006, PSI redeemed all outstanding shares of its $3.7 million 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.
Inventory is recorded at the lower of cost or market value, primarily using the average cost method.
| Successor(1) |
|
|
| Predecessor(1) |
| |||
|
| June 30, |
|
|
| December 31, |
| ||
Cinergy |
| 2006 |
|
|
| 2005 |
| ||
|
| (in millions) |
| ||||||
Inventory |
|
|
|
|
|
|
| ||
Fuel for use in electric production |
| $ | 186 |
|
|
| $ | 121 |
|
Other materials and supplies |
| 119 |
|
|
| 109 |
| ||
Gas stored for current use |
| 4 |
|
|
| 243 |
| ||
Total Inventory |
| $ | 309 |
|
|
| $ | 473 |
|
(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
| Successor(1) |
|
|
| Predecessor(1) |
| |||
|
| June 30, |
|
|
| December 31, |
| ||
CG&E |
| 2006 |
|
|
| 2005 |
| ||
|
| (in millions) |
| ||||||
Inventory |
|
|
|
|
|
|
| ||
Fuel for use in electric production |
| $ | 89 |
|
|
| $ | 58 |
|
Other materials and supplies |
| 56 |
|
|
| 49 |
| ||
Gas stored for current use |
| 4 |
|
|
| 71 |
| ||
Total Inventory |
| $ | 149 |
|
|
| $ | 178 |
|
(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
| June 30, |
|
|
| December 31, |
| |||
PSI |
| 2006 |
|
|
| 2005 |
| ||
|
| (in millions) |
| ||||||
Inventory |
|
|
|
|
|
|
| ||
Fuel for use in electric production |
| $ | 81 |
|
|
| $ | 51 |
|
Other materials and supplies |
| 52 |
|
|
| 52 |
| ||
Total Inventory |
| $ | 133 |
|
|
| $ | 103 |
|
During June 2006, Cinergy Corp. and its subsidiaries amended their multi-year syndicated $2 billion revolving credit facility to extend the expiration date, reduce costs, and conform the terms to those found in the legacy Duke Energy facilities.
4. Notes PayableCinergy’s credit agreements contain various financial and Other Short-term Obligationsother covenants. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements. As of June 30, 2006, Cinergy was in compliance with those covenants. In addition, some credit agreements may allow for acceleration of payments or termination of the agreements due to nonpayment or to the acceleration of other
significant indebtedness of the borrower or some of its subsidiaries. None of the credit agreements contain material adverse change clauses or any covenants based on credit ratings.
Cinergy Corp.’s short-term borrowings consist primarily of unsecured revolving lines of credit, and the sale of commercial paper.paper, and pollution control notes. Cinergy Corp.’s revolving credit facility and commercial paper program also support the short-term borrowing needs of CG&E and PSI. Cinergy’s pollution control notes are tax-exempt notes that are obtained to finance equipment or land development for pollution control purposes. In addition, Cinergy Corp., CG&E, and PSI. 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 the Notes payable and other short-term obligations and Commercial paper:
Notes Payable and Commercial Paper Summary June 30, 2006
|
|
|
|
| Amounts Outstanding |
| ||||||||||||
|
|
|
| Credit |
|
|
|
|
| Pollution |
|
|
| |||||
|
| Expiration |
| Facilities |
| Commercial |
| Letters of |
| Control |
|
|
| |||||
|
| Date |
| Capacity |
| Paper |
| Credit |
| Notes |
| Total |
| |||||
|
|
|
|
|
| (in millions) |
| |||||||||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy Corp.(1) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
$2,000 multi-year syndicated(2) |
| June 2011 |
| $ | 2,000 |
| $ | 949 |
| $ | 93 |
| $ | — |
| $ | 1,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Utility operating companies |
|
|
|
|
| — |
| — |
| 298 |
| 298 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-regulated subsidiaries |
|
|
|
|
| — |
| — |
| 25 |
| 25 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Cinergy |
|
|
|
|
| $ | 949 |
| $ | 93 |
| $ | 323 |
| $ | 1,365 | (3) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E(4) |
|
|
|
|
| $ | — |
| $ | — |
| $ | 112 |
| $ | 112 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI(5) |
|
|
|
|
| $ | — |
| $ | — |
| $ | 186 |
| $ | 186 |
| |
(1) | Excludes $150 million credit facility at Cinergy Canada, Inc., which has $63 million outstanding as of June 30, 2006 classified on the Consolidated Balance Sheets as Liabilities associated with assets held for sale. 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. | |
(2) | Credit facility contains an option allowing borrowing up to the full amount of the facility on the day of initial expiration for up to one year. Credit facility also contains a covenant requiring the debt-to-total capitalization ratio to not exceed 65 percent and contains $500 million sublimits each for CG&E and PSI. In June 2006, credit facility expiration date was extended from September 2010 to June 2011. | |
(3) | Includes $93 million in letters of credit which are not included on Cinergy’s Consolidated Balance Sheets. | |
(4) | Excludes $198 million outstanding as notes payable to affiliated companies under the money pool arrangement. | |
(5) | Excludes $117 million outstanding as notes payable to affiliated companies under the money pool arrangement. |
In June 2006, PSI issued $325 million principal amount of 6.05% senior unsecured notes due June 15, 2016. Proceeds from the issuance were used to affiliated companies:
|
| 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 $500repay $325 million sublimits each for CG&E6.65% First Mortgage Bonds that matured on June 15, 2006. and PSI.
(2)In August 2006, ULH&P issued approximately $77 million principal amount of floating rate tax-exempt notes due August 1, 2027. Proceeds from the issuance will be used to refund a like amount of debt on September 1, 2006 currently outstanding at Cinergy Corp.’sCG&E. The CG&E commercial paper program limit is $1.5 billion. The commercial paper program is supporteddebt was assumed by ULH&P as part of the recent transfer of generating assets from Cinergy Corp.’sCG&E revolving lineto ULH&P. Approximately $27 million of credit.
(3) Relatesthe floating rate debt was swapped to a Cinergy Canada, Inc. three-year senior revolving credit facility that matures in December 2007.
(a) Short-term Notes
At March 31, 2006, Cinergy Corp. had $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 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.
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 March 31, 2006, Cinergy, CG&E, and PSI are in compliancefixed rate concurrent with all of their debt covenants.closing.
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 March 31, 2006, 93 percent of Cinergy’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. Cinergy’s remaining seven percent represents credit exposure of $72 million and CG&E’s remaining 12 percent represents credit exposure of $25 million with counterparties rated non-investment grade.
As of March 31, 2006, CG&E had a concentration of trading credit exposure of $75 million with two counterparties accounting for greater than 10 percent of CG&E’s total trading credit exposure. These 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. If appropriate, we may adjust our credit reserves to attempt to compensate for increased credit risk within the industry. Counterparty credit limits may be adjusted on a daily basis in response to changes in a counterparty’s financial status or public debt ratings.
6. Pension and Other Postretirement Benefits7. Employee Benefit Obligations
As discussed in the 2005 10-K, Cinergy Corp. sponsors both pension and other postretirement benefits plans. OurCinergy Corp.’s 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 tax purposes and the minimum being that required by the Employee Retirement Income Security Act of 1974, as amended. The pension plans’ assets consist of investments in equity and debt securities. In addition, we sponsorCinergy sponsors 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 Cinergy also provideprovides 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.
There were no qualified pension benefit contributions for either the first three months ofended March 31, 2006 or June 30, 2006. Cinergy expects to make approximately $120 million in qualified pension contributions during the remainder of 2006.
Our Cinergy’s benefit plans’ costs for the quarters ended March 31, 2006 and 2005, includedperiods presented include the following components:
|
| Qualified |
| Non-Qualified |
| Other Postretirement |
|
| Successor(1) |
|
|
| Predecessor(1) |
| ||||||||||||||||||||
Quarter Ended March 31 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| |||||||||||||||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| |||||||||||||||||||||||
|
|
|
|
|
| (in millions) |
|
|
| |||||||||||||||||||||||||
Qualified Pension Benefits |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
| (in millions) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Service cost |
| $ | 10.9 |
| $ | 9.6 |
| $ | 1.4 |
| $ | 1.4 |
| $ | 1.6 |
| $ | 1.6 |
|
| $ | 14.5 |
|
|
| $ | 10.9 |
| $ | 9.6 |
| $ | 19.2 |
|
Interest cost |
| 24.7 |
| 24.1 |
| 2.1 |
| 1.8 |
| 5.6 |
| 5.7 |
|
| 30.5 |
|
|
| 24.7 |
| 24.0 |
| 48.1 |
| ||||||||||
Expected return on plans’ assets |
| (23.4 | ) | (22.0 | ) | — |
| — |
| — |
| — |
|
| (24.7 | ) |
|
| (23.4 | ) | (22.1 | ) | (44.1 | ) | ||||||||||
Amortization of transition (asset) obligation |
| — |
| — |
| — |
| — |
| — |
| 0.1 |
|
| — | (2) |
|
| — |
| (0.1 | ) | (0.1 | ) | ||||||||||
Amortization of prior service cost |
| 0.9 |
| 1.1 |
| 0.6 |
| 0.5 |
| (0.2 | ) | (0.1 | ) |
| — | (2) |
|
| 0.9 |
| 1.2 |
| 2.3 |
| ||||||||||
Amortization of actuarial losses |
| 4.6 |
| 1.9 |
| 1.0 |
| 0.6 |
| 2.5 |
| 2.7 |
| |||||||||||||||||||||
Amortization of actuarial loss |
| — | (2) |
|
| 4.6 |
| 2.0 |
| 3.9 |
| |||||||||||||||||||||||
Net periodic benefit cost |
| $ | 17.7 |
| $ | 14.7 |
| $ | 5.1 |
| $ | 4.3 |
| $ | 9.5 |
| $ | 10.0 |
|
| $ | 20.3 |
|
|
| $ | 17.7 |
| $ | 14.6 |
| $ | 29.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Non-Qualified Pension Benefits |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Service cost |
| $ | 0.5 |
|
|
| $ | 1.4 |
| $ | 1.4 |
| $ | 2.8 |
| |||||||||||||||||||
Interest cost |
| 1.5 |
|
|
| 2.1 |
| 1.8 |
| 3.6 |
| |||||||||||||||||||||||
Amortization of prior service cost |
| — | (2) |
|
| 0.6 |
| 0.5 |
| 1.0 |
| |||||||||||||||||||||||
Amortization of actuarial loss |
| — | (2) |
|
| 1.0 |
| 0.6 |
| 1.2 |
| |||||||||||||||||||||||
Net periodic benefit cost |
| $ | 2.0 |
|
|
| $ | 5.1 |
| $ | 4.3 |
| $ | 8.6 |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Other Postretirement Benefits |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Service cost |
| $ | 2.3 |
|
|
| $ | 1.6 |
| $ | 1.6 |
| $ | 3.2 |
| |||||||||||||||||||
Interest cost |
| 8.7 |
|
|
| 5.6 |
| 5.7 |
| 11.4 |
| |||||||||||||||||||||||
Amortization of transition (asset) obligation |
| — | (2) |
|
| — |
| 0.1 |
| 0.2 |
| |||||||||||||||||||||||
Amortization of prior service cost |
| — | (2) |
|
| (0.2 | ) | (0.3 | ) | (0.4 | ) | |||||||||||||||||||||||
Amortization of actuarial loss |
| — | (2) |
|
| 2.5 |
| 2.8 |
| 5.5 |
| |||||||||||||||||||||||
Net periodic benefit cost |
| $ | 11.0 |
|
|
| $ | 9.5 |
| $ | 9.9 |
| $ | 19.9 |
|
(1) |
| See Note 1(b) for additional information on Predecessor and Successor reporting. |
(2) | All of these previously unrecognized amounts were eliminated with the application of purchase accounting. |
The net periodic benefit costs by registrant for the quarter and year to datethree months ended June 30, 2006, March 31, 2006, and June 30, 2005, and the six months ended June 30, 2005, were as follows:
| Successor(1) |
|
|
| Predecessor(1) |
| |||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| ||||
|
|
|
|
|
| (in millions) |
|
|
| ||||||
Qualified Pension Benefits |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy(2) |
| $ | 20.3 |
|
|
| $ | 17.7 |
| $ | 14.6 |
| $ | 29.3 |
|
CG&E and subsidiaries |
| 7.4 |
|
|
| 5.5 |
| 4.3 |
| 8.7 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-Qualified Pension Benefits |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy(2) |
| $ | 2.0 |
|
|
| $ | 5.1 |
| $ | 4.3 |
| $ | 8.6 |
|
CG&E and subsidiaries |
| 0.2 |
|
|
| 0.2 |
| 0.2 |
| 0.4 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other Postretirement Benefits |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy(2) |
| $ | 11.0 |
|
|
| $ | 9.5 |
| $ | 9.9 |
| $ | 19.9 |
|
CG&E and subsidiaries |
| 3.0 |
|
|
| 2.5 |
| 2.6 |
| 5.2 |
|
(1) | See Note 1(b) for additional information on Predecessor and Successor reporting. | |
(2) | The results of Cinergy also include amounts related to non-registrants. |
|
| 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 |
| ||||||
PSI |
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
|
| (in millions) |
| ||||||||||
Qualified Pension Benefits |
| $ | 6.1 |
| $ | 3.7 |
| $ | 10.5 |
| $ | 7.5 |
|
Non-Qualified Pension Benefits |
| 0.2 |
| 0.1 |
| 0.4 |
| 0.3 |
| ||||
Other Postretirement Benefits |
| 5.7 |
| 5.0 |
| 10.3 |
| 9.9 |
| ||||
Upon consummation of the merger with Duke Energy, all defined benefit plan obligations were remeasured. Cinergy, CG&E, and PSI updated the assumptions used to determine their accrued benefit obligations and prospective net periodic benefit cost. The weighted-average assumptions used to determine benefit obligations are as follows:
|
| Qualified |
| Non-Qualified |
| Other |
|
|
|
|
| ||||
Discount rate |
| 6.00 | % | 6.00 | % | 6.00 | % |
Salary increase |
| 5.00 | % | 5.00 | % | 5.00 | % |
Expected long-term rate of return on plan assets |
| 8.50 | % | N/A |
| N/A |
|
The assumed health care cost trend rates are as follows:
| Not |
| Medicare |
| |
Health care cost trend rate assumed for 2006 |
| 8.50 | % | 11.50 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |
| 5.50 | % | 5.50 | % |
Year that the rate reaches the ultimate trend rate |
| 2009 |
| 2012 |
|
8. Acquisitions and Dispositions
(a) Transfer of Duke Energy Generating Assets to CG&E
In April 2006, Duke Energy contributed to CG&E its ownership interest in five plants, representing a mix of combined cycle and peaking plants, with a combined capacity of 3,600 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 |
| 480 |
|
Washington |
| Washington County, Ohio |
| 100 |
| Gas |
| 620 |
|
|
|
|
|
|
|
|
| 3,600 |
|
The transaction was effective in April 2006 and was accounted for at Duke Energy’s net book value for these assets. The entities holding these generating plants, which were indirect subsidiaries of Duke Energy, were first distributed to Duke Energy, which then contributed them to Cinergy which, in turn, contributed them to CG&E. In the final step, the entities 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 Energy all payment, performance, and other obligations of Duke Energy, with respect to certain deferred tax liabilities related to the assets. The following table summarizes this transaction for CG&E:
| (in millions) |
| ||
|
|
|
| |
Assets Received |
|
|
| |
Generating Assets |
| $ | 1,563 |
|
Other Assets |
| 74 |
| |
Total Assets Received |
| $ | 1,637 |
|
|
|
|
| |
Liabilities Assumed |
|
|
| |
Deferred Tax Liabilities |
| $ | 181 |
|
Other |
| 4 |
| |
Total Liabilities Assumed |
| $ | 185 |
|
|
|
|
| |
Contributed Capital from Duke Energy |
| $ | 1,452 |
|
As part of this transaction, Duke Capital LLC, a subsidiary of Duke Energy, agreed to reimburse CG&E through April 2016 in the event of certain cash shortfalls that may result from CG&E’s ownership of the five stations.
(a) Goodwill
Cinergy evaluates the impairment of goodwill under the guidance of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). As discussed further in Note 2, in April 2006, Duke Energy and Cinergy consummated the merger, which resulted in Cinergy and CG&E recording preliminary goodwill of approximately $4.3 billion and $2.2 billion, respectively. The annual impairment testing date for goodwill is August 31. The following table shows the components of goodwill for Cinergy and CG&E at June 30, 2006:
Carrying Amount of Goodwill
| Successor (1) |
|
|
| Predecessor (1) |
| |||||||||||||||
|
| Balance at |
|
|
| Balance at |
|
|
| Balance at |
|
|
| Balance at |
| ||||||
|
| April 1, 2006 |
| Changes |
| June 30, 2006 |
|
|
| December 31, 2005 |
| Changes |
| March 31, 2006(2) |
| ||||||
|
| (in millions) |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cinergy |
| $ | 4,289 |
| $ | (161 | )(3) | $ | 4,128 |
|
|
| $ | 33 |
| $ | 4 |
| $ | 37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
CG&E |
| $ | 2,173 |
| $ | — |
| $ | 2,173 |
|
|
| $ | — |
| $ | — |
| $ | — |
|
(1) | See Note 1(b) for additional information on Predecessor and Successor reporting. | |
(2) | All existing goodwill at March 31, 2006 was eliminated in purchase accounting. | |
(3) | Relates to goodwill allocated to the distribution of Marketing & Trading and Cinergy Canada, Inc. See Note 10 for additional information. |
(b) Intangible Assets
Effective with the merger between Duke Energy and Cinergy, Cinergy’s, CG&E’s, and PSI’s emission allowances are classified as and accounted for as Intangible assets under SFAS No. 142. The predecessor amounts also have been reclassified to show this presentation. Emission allowances were previously included in Inventory and Other non-current assets. See Note 1(d)(i) for more information on this change in accounting principle.
The carrying amount and accumulated amortization of intangible assets are as follows:
| Successor(1) |
|
|
| Predecessor(1) |
| Weighted |
| |||
Cinergy |
| June 30, |
|
|
| December 31, |
| June 30, |
| ||
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| ||
Emission allowances |
| $ | 687 |
|
|
| $ | 175 |
|
|
|
Gas, coal, and power contracts |
| 297 |
|
|
| 32 |
| 19 yrs. |
| ||
Other |
| 12 |
|
|
| 120 |
| 8 yrs. |
| ||
Total intangible assets |
| $ | 996 |
|
|
| $ | 327 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Accumulated amortization - gas, coal, and power contracts |
| (17 | ) |
|
| (10 | ) |
|
| ||
Accumulated amortization - other |
| (2 | ) |
|
| (7 | ) |
|
| ||
Total accumulated amortization |
| $ | (19 | ) |
|
| $ | (17 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Total intangible assets, net |
| $ | 977 |
|
|
| $ | 310 |
|
|
|
(1) | See Note 1(b) for additional information on Predecessor and Successor reporting. | |
(2) | Emission allowances do not have a contractual term or expiration date. |
| Successor(1) |
|
|
| Predecessor(1) |
| Weighted |
| |||
CG&E |
| June 30, |
|
|
| December 31, |
| June 30, |
| ||
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| ||
Emission allowances |
| $ | 584 |
|
|
| $ | 67 |
|
|
|
Gas, coal, and power contracts |
| 276 |
|
|
| 29 |
| 19 yrs. |
| ||
Other |
| 5 |
|
|
| 18 |
| 5 yrs. |
| ||
Total intangible assets |
| $ | 865 |
|
|
| $ | 114 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Accumulated amortization - gas, coal, and power contracts |
| (15 | ) |
|
| (7 | ) |
|
| ||
Accumulated amortization - other |
| — |
|
|
| (2 | ) |
|
| ||
Total accumulated amortization |
| $ | (15 | ) |
|
| $ | (9 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Total intangible assets, net |
| $ | 850 |
|
|
| $ | 105 |
|
|
|
(1) | See Note 1(b) for additional information on Predecessor and Successor reporting. | |
(2) | Emission allowances do not have a contractual term or expiration date. |
|
|
|
|
| Weighted |
| |||
PSI |
| June 30, |
| December |
| June 30, |
| ||
|
| (in millions) |
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
Emission allowances |
| $ | 103 |
| $ | 107 |
|
|
|
Gas, coal, and power contracts |
| 24 |
| 3 |
| 15 yrs. |
| ||
Other |
| 6 |
| 6 |
|
|
| ||
Total intangible assets |
| $ | 133 |
| $ | 116 |
|
|
|
|
|
|
|
|
|
|
| ||
Accumulated amortization – gas, coal, and power contracts |
| (4 | ) | (2 | ) |
|
| ||
Total accumulated amortization |
| $ | (4 | ) | $ | (2 | ) |
|
|
|
|
|
|
|
|
|
| ||
Total intangible assets, net |
| $ | 129 |
| $ | 114 |
|
|
|
(1) | Emission allowances do not have a contractual term or expiration date. | |
(2) | Other represents intangible assets related to pensions which does not have a definitive life. |
Emission allowances consist of many discrete emission allowance certificates, none of which have an expiration date, and will be recognized in earnings as they are sold or consumed. When emission allowances are sold or
consumed, their carrying value is recorded in Fuel used in electric generation and purchased power on the Consolidated Statements of Operations.
The carrying value of emission allowances sold or consumed for Cinergy and CG&E were as follows:
| Successor(1) |
|
|
| Predecessor(1) |
| |||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| ||||
|
| Ended |
|
|
| Ended |
| Ended |
| Ended |
| ||||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
| ||||
|
|
|
|
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy |
| $ | 117 |
|
|
| $ | 70 |
| $ | 68 |
| $ | 112 |
|
CG&E |
| 88 |
|
|
| 42 |
| 53 |
| 91 |
| ||||
(1) | See Note 1(b) for additional information on Predecessor and Successor reporting. |
The carrying value of emission allowances sold or consumed for PSI were as follows:
| Three Months Ended |
| Six Months Ended |
| |||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
|
| (in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
PSI |
| $ | 29 |
| $ | 15 |
| $ | 58 |
| $ | 22 |
|
Amortization expense for Cinergy and CG&E for the remaining intangible assets is presented for the periods below:
| Successor(1) |
|
|
| Predecessor(1) |
| |||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| ||||
|
| Ended |
|
|
| Ended |
| Ended |
| Ended |
| ||||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
| ||||
|
|
|
|
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy |
| $ | 19 |
|
|
| $ | 7 |
| $ | 2 |
| $ | 3 |
|
CG&E |
| 15 |
|
|
| 1 |
| 1 |
| 1 |
| ||||
(1) | See Note 1(b) for additional information on Predecessor and Successor reporting. |
Amortization expense for PSI was $4 million for the three and six months ended June 30, 2006. The amounts were immaterial for the three and six months ended June 30, 2005.
The table below shows the expected amortization expense for the next five years for intangibles (including emission allowances) as of June 30, 2006:
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy |
| $ | 186 |
| $ | 104 |
| $ | 92 |
| $ | 34 |
| $ | 41 |
|
CG&E |
| 153 |
| 101 |
| 73 |
| 32 |
| 39 |
| |||||
PSI |
| 33 |
| 3 |
| 19 |
| 1 |
| 1 |
| |||||
The amortization amounts discussed above are estimates. Actual amounts may differ from these estimates due to such factors as changes in consumption patterns, sales or impairments of emission allowances, additional intangible asset acquisitions and other events.
(c)Intangible Liabilities
Cinergy has intangible liabilities of $157 million associated with CG&E’s Market-Based Standard Service Offer (MBSSO) and other power sale contracts, which are $107 million and $50 million, respectively, that will be
recognized in earnings over their contractual lives. The amounts to be recognized in earnings over the next five years are as follows:
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy |
| $ | 61 |
| $ | 73 |
| $ | 6 |
| $ | 6 |
| $ | 4 |
|
CG&E |
| 61 |
| 73 |
| 6 |
| 6 |
| 4 |
| |||||
In June 2006, Duke Energy announced it had reached an agreement to sell Marketing & Trading and Cinergy Canada, Inc., as well as certain CG&E trading contracts to Fortis, a Benelux-based financial services group. Duke Energy will receive a base purchase price of approximately $210 million. In addition, Fortis will pay an amount equal to the value of the portfolio of contracts and net working capital, including collateral, associated with the business, both of which will be determined at closing and are subject to market and operating changes up until that time. Duke Energy expects pre-tax cash proceeds from the sale to be at least $550 million, including the value of the portfolio of contracts and net working capital. The sale is subject to FERC and Federal Reserve Board approval, as well as Canadian regulatory approvals, and is anticipated to close in the third quarter of 2006. Results of operations for Marketing & Trading, Cinergy Canada, Inc., and certain CG&E trading contracts have been reflected in (Loss) Income from Discontinued Operations, net of tax, including prior periods for Cinergy and CG&E. Cinergy and CG&E do not currently expect a material gain or loss to be recognized in connection with this transaction. As of June 30, 2006, assets and liabilities to be disposed of under the exit plan were classified as Assets held for sale in the Consolidated Balance Sheets.
In December 2005, 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 it being deemed held for sale. In April 2006, Cinergy completed the sale of this business. The net, after tax, loss on the sale was immaterial (excluding the $17 million impairment charge recognized in December 2005).
These consolidated entities have been presented as (Loss) Income from Discontinued Operations, net of tax, in Cinergy’s Consolidated Statements of Operations and as Assets held for sale and Liabilities associated with assets held for sale in Cinergy’s Consolidated Balance Sheets. The discontinued operations were part of Commercial Power and Other.
44
The following tables reflect the assets and liabilities, the results of operations, and the income (loss) on disposal related to investments accounted for as discontinued operations for the three months ended June 30, 2006, March 31, 2006, and June 30, 2005, and the six months ended June 30, 2005:
|
| Successor(1) |
|
|
| Predecessor(1) |
| ||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| ||||
|
| Ended |
|
|
| Ended |
| Ended |
| Ended |
| ||||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
| ||||
|
|
|
|
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
| ||||
Revenues(2) |
| $ | 2.2 |
|
|
| $ | 42.5 |
| $ | 12.7 |
| $ | 67.6 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating (Loss) Income |
|
|
|
|
|
|
|
|
|
|
| ||||
(Loss) Income Before Taxes |
| (10.9 | ) |
|
| 10.2 |
| (20.1 | ) | 1.0 |
| ||||
Income Tax (Benefit) Expense |
| (2.7 | ) |
|
| 3.4 |
| (7.6 | ) | 0.4 |
| ||||
(Loss) Income from Discontinued Operations, net of tax |
| (8.2 | ) |
|
| 6.8 |
| (12.5 | ) | 0.6 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Loss on Dispositions |
|
|
|
|
|
|
|
|
|
|
| ||||
Pre-tax loss on dispositions |
| (6.4 | ) |
|
| (3.0 | ) | — |
| — |
| ||||
Income tax (benefit) |
| (8.5 | ) |
|
| (1.0 | ) | — |
| — |
| ||||
Gain (Loss) on dispositions, net of tax |
| 2.1 |
|
|
| (2.0 | ) | — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Income (Loss) from Discontinued Operations, net of tax |
| $ | (6.1 | ) |
|
| $ | 4.8 |
| $ | (12.5 | ) | $ | 0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CG&E |
|
|
|
|
|
|
|
|
|
|
| ||||
Revenues(2) |
| $ | (29.0 | ) |
|
| $ | 8.7 |
| $ | 20.0 |
| $ | 52.7 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating (Loss) Income |
|
|
|
|
|
|
|
|
|
|
| ||||
(Loss) Income Before Taxes |
| (31.2 | ) |
|
| (2.9 | ) | 14.6 |
| 43.5 |
| ||||
Income Tax (Benefit) Expense |
| (11.6 | ) |
|
| (1.0 | ) | 5.4 |
| 16.7 |
| ||||
(Loss) Income from Discontinued Operations, net of tax |
| (19.6 | ) |
|
| (1.9 | ) | 9.2 |
| 26.8 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Loss on Dispositions |
|
|
|
|
|
|
|
|
|
|
| ||||
Pre-tax loss on dispositions |
| — |
|
|
| — |
| — |
| — |
| ||||
Income tax (benefit) expense |
| — |
|
|
| — |
| — |
| — |
| ||||
Loss on dispositions, net of tax |
| — |
|
|
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Income (Loss) from Discontinued Operations, net of tax |
| $ | (19.6 | ) |
|
| $ | (1.9 | ) | $ | 9.2 |
| $ | 26.8 |
|
(1) TheSee Note 1(b) for additional information on Predecessor and Successor reporting.
(2)Presented for informational purposes only. All results of operations are reported net in Cinergy’s and CG&E’s Statements of Operations.
| Successor(1) |
|
|
| Predecessor(1) |
| |||
|
| June 30, |
|
|
| December 31, |
| ||
|
| 2006 |
|
|
| 2005 |
| ||
|
| (in millions) |
| ||||||
|
|
|
|
|
|
|
| ||
Cinergy |
|
|
|
|
|
|
| ||
Assets |
|
|
|
|
|
|
| ||
Current assets |
| $ | 1,253 |
|
|
| $ | 16 |
|
Property, plant, and equipment-net |
| 25 |
|
|
| — |
| ||
Other assets(2) |
| 401 |
|
|
| 18 |
| ||
|
|
|
|
|
|
|
| ||
Total Assets |
| $ | 1,679 |
|
|
| $ | 34 |
|
|
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
|
|
| ||
Current liabilities |
| $ | 825 |
|
|
| $ | 6 |
|
Long-term debt |
| — |
|
|
| 18 |
| ||
Other |
| 278 |
|
|
| 5 |
| ||
|
|
|
|
|
|
|
| ||
Total Liabilities |
| $ | 1,103 |
|
|
| $ | 29 |
|
|
|
|
|
|
|
|
| ||
CG&E |
|
|
|
|
|
|
| ||
Assets |
|
|
|
|
|
|
| ||
Current assets |
| $ | 205 |
|
|
| $ | — |
|
Other assets |
| 90 |
|
|
| — |
| ||
|
|
|
|
|
|
|
| ||
Total Assets |
| $ | 295 |
|
|
| $ | — |
|
|
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
|
|
| ||
Current liabilities |
| $ | 187 |
|
|
| $ | — |
|
Other |
| 91 |
|
|
| — |
| ||
|
|
|
|
|
|
|
| ||
Total Liabilities |
| $ | 278 |
|
|
| $ | — |
|
(1)See Note 1(b) for additional information on Predecessor and Successor reporting.
(2)Balance includes $161 million of Goodwill resulting from the merger which has been allocated to Assets held for sale.
In conjunction with the merger with Duke Energy, effective April 3, 2006, Duke Energy and Cinergy have adopted new business segments that management believes properly align the various operations of the merged companies with how the chief operating decision maker will view the business. Accordingly, effective with the second quarter of 2006, the new reportable business segments pertinent to Cinergy are: U.S. Franchised Electric & Gas, Commercial Power, and International. All prior period amounts have been restated to reflect the current segment presentation. Cinergy’s, CG&E’s, and PSI’s chief operating decision makers regularly review financial information about each of these business units in deciding how to allocate resources and evaluate performance. All of the business units are considered reportable segments under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”
The remainders of Cinergy’s, CG&E’s,and PSI’s operations are presented as “Other.” While it is not considered a business segment, “Other” for Cinergy primarily includes Cinergy’s telecommunications, shared services, governance costs, and certain international investments. “Other” for CG&E and PSI includes shared services and governance costs.
U.S. Franchised Electric & Gas 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 and its regulated electric generation in Kentucky. U.S. Franchised Electric & Gas plans, constructs, operates and maintains Cinergy’s transmission and distribution systems and delivers gas and electric energy to consumers. U.S. Franchised Electric & Gas 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 Power primarily consists of CG&E’s non-regulated generation in Ohio and the recently acquired merchant generation assets discussed in Note 8 and manages energy marketing and trading activities. Commercial
Power also performs energy risk management activities and provides customized energy solutions. In June 2006, an agreement was reached to sell Commercial Power’s energy marketing and trading activities. These activities are included in the Commercial Power segment balance sheet presentation, however, they are not included in the revenue presentation since they are below the EBIT line on the income statement. See Note 10 for additional information.
International primarily directs and manages an international business holding which supplies and sells natural gas to international customers. International earns equity earnings from this unconsolidated company.
Cinergy’s reportable segments offer different products and services and are managed separately as business units. Management evaluates segment performance based on EBIT from continuing operations, after deducting minority interest expense related to those profits. Cash, cash equivalents, and short-term investments are managed centrally by Cinergy, so the associated realized and unrealized gains and losses from foreign currency transactions and interest and dividend income on those balances are excluded from the segments’ EBIT.
Transactions between reportable segments are accounted for on the same basis as unaffiliated revenues and expenses in the accompanying Consolidated Financial Statements.
Cinergy Business Segment Data(1)
| Unaffiliated |
| Intersegment |
| Total |
| Segment |
| |||||
|
|
|
| (in millions) |
|
|
| ||||||
Successor(2) |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Three Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. Franchised Electric & Gas |
| $ | 845 |
| $ | — |
| $ | 845 |
| $ | 91 |
|
Commercial Power |
| 440 |
| 10 |
| 450 |
| 22 |
| ||||
Total reportable segments |
| 1,285 |
| 10 |
| 1,295 |
| 113 |
| ||||
Other |
| 23 |
| — |
| 23 |
| (32 | ) | ||||
Eliminations |
| — |
| (10 | ) | (10 | ) | — |
| ||||
Interest expense |
| — |
| — |
| — |
| (82 | ) | ||||
Interest income and other(3) |
| — |
| — |
| — |
| 14 |
| ||||
Total consolidated |
| $ | 1,308 |
| $ | — |
| $ | 1,308 |
| $ | 13 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Predecessor(2) |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Three Months Ended March 31, 2006 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. Franchised Electric & Gas |
| $ | 1,025 |
| $ | — |
| $ | 1,025 |
| $ | 167 |
|
Commercial Power |
| 546 |
| 12 |
| 558 |
| 120 |
| ||||
International |
| — |
| — |
| — |
| 1 |
| ||||
Total reportable segments |
| 1,571 |
| 12 |
| 1,583 |
| 288 |
| ||||
Other |
| 5 |
| — |
| 5 |
| (128 | ) | ||||
Eliminations |
| — |
| (12 | ) | (12 | ) | — |
| ||||
Interest expense |
| — |
| — |
| — |
| (84 | ) | ||||
Interest income and other(3) |
| — |
| — |
| — |
| 19 |
| ||||
Total consolidated |
| $ | 1,576 |
| $ | — |
| $ | 1,576 |
| $ | 95 |
|
|
|
|
|
|
|
|
|
|
| ||||
Three Months Ended June 30, 2005 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. Franchised Electric & Gas |
| $ | 719 |
| $ | — |
| $ | 719 |
| $ | 144 |
|
Commercial Power |
| 328 |
| 63 |
| 391 |
| 42 |
| ||||
International |
| — |
| — |
| — |
| (1 | ) | ||||
Total reportable segments |
| 1,047 |
| 63 |
| 1,110 |
| 185 |
| ||||
Other |
| 4 |
| — |
| 4 |
| (43 | ) | ||||
Eliminations |
| — |
| (63 | ) | (63 | ) | — |
| ||||
Interest expense |
| — |
| — |
| — |
| (68 | ) | ||||
Interest income and other(3) |
| — |
| — |
| — |
| 10 |
| ||||
Total consolidated |
| $ | 1,051 |
| $ | — |
| $ | 1,051 |
| $ | 84 |
|
|
|
|
|
|
|
|
|
|
| ||||
Six Months Ended June 30, 2005 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. Franchised Electric & Gas |
| $ | 1,633 |
| $ | — |
| $ | 1,633 |
| $ | 331 |
|
Commercial Power |
| 660 |
| 108 |
| 768 |
| 91 |
| ||||
International |
| — |
| — |
| — |
| (1 | ) | ||||
Total reportable segments |
| 2,293 |
| 108 |
| 2,401 |
| 421 |
| ||||
Other |
| 8 |
| — |
| 8 |
| (97 | ) | ||||
Eliminations |
| — |
| (108 | ) | (108 | ) | — |
| ||||
Interest expense |
| — |
| — |
| — |
| (132 | ) | ||||
Interest income and other(3) |
| — |
| — |
| — |
| 21 |
| ||||
Total consolidated |
| $ | 2,301 |
| $ | — |
| $ | 2,301 |
| $ | 213 |
|
(1)Segment results exclude results of discontinued operations.
(2)See Note 1(b) for additional information on Predecessor and Successor reporting.
(3)Other includes foreign currency transaction gains and losses not allocated to the segment results.
CG&E Business Segment Data(1)
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| Segment |
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| EBIT/Consolidated |
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| Earnings from |
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| Continuing |
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| Unaffiliated |
| Intersegment |
| Total |
| Operations Before |
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| Revenues |
| Revenues |
| Revenues |
| Income Taxes |
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| (in millions) |
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Successor(2) |
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Three Months Ended June 30, 2006 |
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| �� |
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| ||||
U.S. Franchised Electric & Gas |
| $ | 297 |
| $ | — |
| $ | 297 |
| $ | 20 |
|
Commercial Power |
| 399 |
| 1 |
| 400 |
| 36 |
| ||||
Total reportable segments |
| 696 |
| 1 |
| 697 |
| 56 |
| ||||
Other |
| — |
| — |
| — |
| (13 | ) | ||||
Eliminations |
| — |
| (1 | ) | (1 | ) | — |
| ||||
Interest expense |
| — |
| — |
| — |
| (28 | ) | ||||
Interest income and other(3) |
| — |
| — |
| — |
| 5 |
| ||||
Total consolidated |
| $ | 696 |
| $ | — |
| $ | 696 |
| $ | 20 |
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Predecessor(2) |
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Three Months Ended March 31, 2006 |
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U.S. Franchised Electric & Gas |
| $ | 543 |
| $ | — |
| $ | 543 |
| $ | 80 |
|
Commercial Power |
| 420 |
| 1 |
| 421 |
| 166 |
| ||||
Total reportable segments |
| 963 |
| 1 |
| 964 |
| 246 |
| ||||
Other |
| — |
| (1 | ) | (1 | ) | (39 | ) | ||||
Interest expense |
| — |
| — |
| — |
| (30 | ) | ||||
Interest income and other(3) |
| — |
| — |
| — |
| 9 |
| ||||
Total consolidated |
| $ | 963 |
| $ | — |
| $ | 963 |
| $ | 186 |
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|
|
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|
| ||||
Three Months Ended June 30, 2005 |
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| ||||
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| ||||
U.S. Franchised Electric & Gas |
| $ | 283 |
| $ | — |
| $ | 283 |
| $ | 35 |
|
Commercial Power |
| 267 |
| 40 |
| 307 |
| 68 |
| ||||
Total reportable segments |
| 550 |
| 40 |
| 590 |
| 103 |
| ||||
Other |
| — |
| — |
| — |
| (26 | ) | ||||
Eliminations |
| — |
| (40 | ) | (40 | ) | — |
| ||||
Interest expense |
| — |
| — |
| — |
| (23 | ) | ||||
Interest income and other(3) |
| — |
| — |
| — |
| 3 |
| ||||
Total consolidated |
| $ | 550 |
| $ | — |
| $ | 550 |
| $ | 57 |
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|
| ||||
Six Months Ended June 30, 2005 |
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| ||||
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| ||||
U.S. Franchised Electric & Gas |
| $ | 780 |
| $ | — |
| $ | 780 |
| $ | 118 |
|
Commercial Power |
| 521 |
| 79 |
| 600 |
| 136 |
| ||||
Total reportable segments |
| 1,301 |
| 79 |
| 1,380 |
| 254 |
| ||||
Other |
| — |
| — |
| — |
| (45 | ) | ||||
Eliminations |
| — |
| (79 | ) | (79 | ) | — |
| ||||
Interest expense |
| — |
| — |
| — |
| (46 | ) | ||||
Interest income and other(3) |
| — |
| — |
| — |
| 8 |
| ||||
Total consolidated |
| $ | 1,301 |
| $ | — |
| $ | 1,301 |
| $ | 171 |
|
(1)Segment results exclude results of discontinued operations.
(2)See Note 1(b) for additional information on Predecessor and Successor reporting.
(3)Other includes foreign currency transaction gains and losses not allocated to the segment results.
PSI Business Segment Data
| Unaffiliated |
| Total |
| Segment |
| ||||
|
| (in millions) |
| |||||||
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|
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|
| |||
Three Months Ended June 30, 2006 |
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|
|
|
|
| |||
|
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|
|
|
|
|
| |||
U.S. Franchised Electric & Gas |
| $ | 550 |
| $ | 550 |
| $ | 65 |
|
Total reportable segments |
| 550 |
| 550 |
| 65 |
| |||
Other |
| — |
| — |
| (24 | ) | |||
Interest expense |
| — |
| — |
| (30 | ) | |||
Interest income and other |
| — |
| — |
| 8 |
| |||
Total consolidated |
| $ | 550 |
| $ | 550 |
| $ | 19 |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Three Months Ended June 30, 2005 |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
U.S. Franchised Electric & Gas |
| $ | 428 |
| $ | 428 |
| $ | 111 |
|
Total reportable segments |
| 428 |
| 428 |
| 111 |
| |||
Other |
| — |
| — |
| (13 | ) | |||
Interest expense |
| — |
| — |
| (27 | ) | |||
Interest income and other |
| — |
| — |
| 4 |
| |||
Total consolidated |
| $ | 428 |
| $ | 428 |
| $ | 75 |
|
| Unaffiliated |
| Total |
| Segment |
| ||||
|
| (in millions) |
| |||||||
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|
|
|
|
| |||
Six Months Ended June 30, 2006 |
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|
|
| |||
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|
|
| |||
U.S. Franchised Electric & Gas |
| $ | 1,036 |
| $ | 1,036 |
| $ | 151 |
|
Total reportable segments |
| 1,036 |
| 1,036 |
| 151 |
| |||
Other |
| — |
| — |
| (50 | ) | |||
Interest expense |
| — |
| — |
| (65 | ) | |||
Interest income and other |
| — |
| — |
| 14 |
| |||
Total consolidated |
| $ | 1,036 |
| $ | 1,036 |
| $ | 50 |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Six Months Ended June 30, 2005 |
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|
| |||
|
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|
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|
| |||
U.S. Franchised Electric & Gas |
| $ | 854 |
| $ | 854 |
| $ | 216 |
|
Total reportable segments |
| 854 |
| 854 |
| 216 |
| |||
Other |
| — |
| — |
| (26 | ) | |||
Interest expense |
| — |
| — |
| (52 | ) | |||
Interest income and other |
| — |
| — |
| 6 |
| |||
Total consolidated |
| $ | 854 |
| $ | 854 |
| $ | 144 |
|
Segment assets in the following table are net of intercompany advances, intercompany notes receivable, intercompany current assets, intercompany derivative assets, and investments in subsidiaries.
Total segment assets at June 30, 2006 and December 31, 2005 are as indicated below:
| Successor(1) |
|
|
| Predecessor(1) |
| |||
|
| June 30, |
|
|
| December 31, |
| ||
|
| 2006 |
|
|
| 2005 |
| ||
|
| (in millions) |
| ||||||
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| ||
Cinergy Segment Assets |
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|
|
|
|
|
| ||
U.S. Franchised Electric & Gas |
| $ | 10,322 |
|
|
| $ | 9,601 |
|
Commercial Power |
| 8,192 | (3) |
|
| 6,757 |
| ||
International |
| 79 |
|
|
| 94 |
| ||
Total reportable segments |
| 18,593 |
|
|
| 16,452 |
| ||
Unallocated goodwill |
| 4,128 | (4) |
|
|
|
| ||
Other |
| 450 |
|
|
| 437 |
| ||
Eliminations and reclassifications(2) |
| 113 |
|
|
| 265 |
| ||
Total consolidated assets |
| $ | 23,284 |
|
|
| $ | 17,154 |
|
|
|
|
|
|
|
|
| ||
CG&E Segment Assets |
|
|
|
|
|
|
| ||
U.S. Franchised Electric & Gas |
| $ | 3,957 |
|
|
| $ | 3,523 |
|
Commercial Power |
| 5,656 |
|
|
| 3,496 |
| ||
Total reportable segments |
| 9,613 |
|
|
| 7,019 |
| ||
Unallocated goodwill |
| 2,173 | (4) |
|
| — |
| ||
Eliminations and reclassifications(2) |
| 110 |
|
|
| 215 |
| ||
Total consolidated assets |
| $ | 11,896 |
|
|
| $ | 7,234 |
|
(1)See Note 1(b) for additional information on Predecessor and Successor reporting.
(2)Eliminations and reclassifications include accounts and notes receivable from affiliates and short- and long-term intercompany energy risk management assets.
(3)Includes $161 million of Goodwill related to Marketing & Trading and Cinergy Canada, Inc. See Note 10 for additional information.
(4)Includes $4,128 million of Goodwill for Cinergy and $2,173 million of Goodwill for CG&E which has not been allocated to the segments.
| June 30, |
| December 31, |
| |||
|
| 2006 |
| 2005 |
| ||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
PSI Segment Assets |
|
|
|
|
| ||
U.S. Franchised Electric & Gas |
| $ | 6,121 |
| $ | 6,078 |
|
Total reportable segments |
| 6,121 |
| 6,078 |
| ||
Eliminations and reclassifications(1) |
| 50 |
| 164 |
| ||
Total consolidated assets |
| $ | 6,171 |
| $ | 6,242 |
|
(1)Eliminations and reclassifications includes accounts and notes receivable from affiliates and short- and long-term intercompany energy risk management assets.
12. Risk Management Instruments
(a) Energy Trading Credit Risk
Cinergy’s extension of credit for energy marketing and trading is governed by Duke Energy’s Corporate Credit Policy. Written guidelines approved by Duke Energy’s Chief Risk Officer documents various required credit activities including credit limit delegation and approval limits, underwriting rating criteria, and certain other credit management standards. Exposures to credit risks are monitored daily by the Corporate Credit Risk function, which is independent of all trading operations. As of June 30, 2006, 87 percent of Cinergy’s credit exposure and 92 percent of CG&E’s credit exposure, net of credit collateral, related to energy trading and marketing activity was with counterparties rated investment grade or the counterparties’ obligations were guaranteed or secured by an investment grade entity. The majority of these investment grade counterparties are externally rated. If a counterparty has an external rating, the lower of Standard & Poor’s Ratings Services or Moody’s Investors Service
is used; otherwise, Duke Energy’s internal rating of the counterparty is used. Cinergy’s remaining 13 percent represents credit exposure of $126 million and CG&E’s remaining eight percent represents credit exposure of $15 million with counterparties rated non-investment grade.
As of June 30, 2006, CG&E had a concentration of trading credit exposure of $26 million with one counterparty accounting for greater than 10 percent of its total trading credit exposure. This counterparty is rated investment grade.
Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity. Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.
Cinergy also includecontinually reviews and monitors its credit exposure to all counterparties and secondary counterparties. If appropriate, Cinergy and CG&E may adjust the 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.
(b) Derivatives
(i) Hedges of Natural Gas Held in Storage
Cinergy designates derivatives as fair value hedges for certain volumes of its natural gas held in storage. Hedging instruments for gas held in storage are designated entirely for Marketing & Trading operations. Thus, all amounts are included in discontinued operations in Cinergy’s Consolidated Statement of Operations. See Note 10 for additional information. Cinergy assesses 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 three months ended June 30, 2006, March 31, 2006, and June 30, 2005, and the six months ended June 30, 2005 were as follows:
|
| Successor(1) |
|
|
| Predecessor(1) |
| ||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| ||||
|
| Ended |
|
|
| Ended |
| Ended |
| Ended |
| ||||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
| ||||
|
|
|
|
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Portion of loss on hedging instruments determined to be ineffective |
| $ | (1 | ) |
|
| $ | (5 | ) | $ | (4 | ) | $ | — |
|
Portion of (loss) gain on hedging instruments related to changes in time value excluded from assessment of ineffectiveness |
| (3 | ) |
|
| 36 |
| — |
| (4 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total ineffectiveness |
| $ | (4 | ) |
|
| $ | 31 |
| $ | (4 | ) | $ | (4 | ) |
(1) See Note 1(b) for additional information on Predecessor and Successor reporting.
(ii) Generation Portfolio Optimization
CG&E optimizes the value of its non-regulated portfolio. The portfolio includes generation assets (power and capacity), fuel, and emission allowances. Modeled forecasts of future generation output, fuel requirements, and emission allowance requirements are 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 SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS No. 149), most forward power transactions and certain coal transactions from management of the portfolio are accounted for at fair value. The other component pieces of the portfolio are typically not subject to SFAS No. 149 and are accounted for using the accrual method, where changes in fair value are not recognized. As a result, these forward sales and purchases are subject to earnings volatility via mark-to-market gains or losses from changes in the value of the contracts accounted for using fair value. In addition, the generation portfolio not utilized to serve native load or committed load is subject to commodity price fluctuations. This is primarily related to non-registrants.the Midwestern generation assets retained from DENA. A spark spread sensitivity on these megawatt hour (MWh) was immaterial at June 30, 2006.
(iii) Forward Starting Interest Rate Swaps
In June 2005, PSI executed two forward starting swaps with a combined notional amount of $325 million. The forward starting swaps effectively fixed 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 were designated as cash flow hedges under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As the terms of these swap agreements mirrored the terms of the forecasted debt issuance, PSI anticipated that they would be highly effective hedges. In June 2006, PSI terminated these swaps at a value of approximately $25 million, when it issued $325 million 6.05% senior unsecured notes at PSI. The $25 million gain on the hedge will be recognized as reclassifications from Accumulated Other Comprehensive Income (AOCI) to interest expense over the life of the related bond. At Cinergy, this amount is classified as a regulatory liability and will be amortized as an offset to Interest Expense over the life of the bond.
(iv) Trading & Marketing
Cinergy and CG&E measure the market risk inherent in the trading portfolio employing value at risk (VaR) analysis, as discussed in the 2005 10-K. The change in VaR from the 2005 10-K was not material to Cinergy’s and CG&E’s financial position or results of operations.
(v) Generation Related Cash Flow Hedges
In connection with Duke Energy’s contribution of its unregulated generating assets to CG&E, CG&E assumed approximately $63 million of pre-tax deferred losses associated with contracts formerly designated as cash flow hedges of forecasted power sales and gas purchases from Duke Energy’s Midwestern generation fleet. See Note 8 for additional information. These contracts were sold by Duke Energy in 2005 and the deferred losses remain on the Consolidated Balance Sheet in AOCI until the related hedged transactions (gas purchases and power sales) occur. As of June 30, 2006, $21 million of the pre-tax deferred net losses on derivative instruments related to commodity cash flow hedges were accumulated on the Consolidated Balance Sheet in AOCI, and are expected to be recognized in earnings during the next 12 months as the hedged transactions occur.
(a) Regulatory Merger Approvals
As discussed in Note 2, on April 3, 2006, the merger between Duke Energy and Cinergy was consummated to create a newly formed company, Duke Energy HC. 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 shared with customers in Ohio and Kentucky, respectively. Each of the commissions also required Duke Energy HC, Cinergy, CG&E, and/or ULH&P to meet additional conditions. While the merger itself was not subject to approval by the Indiana Utility Regulatory Commission (IURC), the IURC approved certain affiliate agreements in connection with the merger subject to similar conditions. Key elements of these conditions include:
· The PUCO’s conditions include a requirement that CG&E provide (i) a rate credit of approximately $15 million for one year to facilitate economic development in a time of increasing rates and (ii) 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 approval for a full evidentiary hearing. The OCC alleged that the PUCO committed reversible error on both procedural and substantive grounds by, among other things, failing to set the matter for a full evidentiary hearing, failing to consider evidence regarding the transfer of certain 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 in May 2006, the OCC filed a motion to dismiss. In June 2006, the Court granted the motion to dismiss. As of June 30, 2006, CG&E has returned $7 million and $9 million, respectively, on each of these rate credits.
· The IURC’s conditions include a requirement that PSI provide a rate credit of $40 million to PSI customers over a one year period and $5 million over a five year period for low-income energy assistance and clean coal technology. In April 2006, Citizens Action Coalition of Indiana, Inc., an intervenor in the merger proceeding, 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 terms of the North Carolina Utility Commission’s order approving the merger. In May 2006, the IURC denied the petition for rehearing and reconsideration. As of June 30, 2006, PSI has returned $3 million to customers on this rate credit.
· The KPSC’s conditions include a requirement that ULH&P 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. As of June 30, 2006, ULH&P has returned $1 million to customers on this rate credit.
In addition, the FERC approved the merger without conditions. On January 19, 2006, Public Citizen’s Energy Program, Citizens Action Coalition of Indiana, Inc., 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. A decision by the FERC is expected in the thirdquarter of 2006.
(b) PSI Environmental Compliance Case
In November 2004,PSI applied to the IURC for approval of its plan for complying with sulfur dioxide (SO2), nitrogen oxides (NOX), and mercury emission reduction requirements discussed in Note 14(a)(i). PSI also requested approval of cost recovery for certain proposed compliance projects. An evidentiary hearing was held in May 2005. In December 2005, PSI, the Indiana Office of Utility Consumer Counselor (OUCC), 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. In May 2006, the IURC approved the Settlement Agreement in its entirety. The approved Settlement Agreement provides for: (1) the construction of Phase 1 Clean Air Interstate Rule (CAIR) and Clean Air Mercury Rule (CAMR) projects with estimated expenditures of approximately $1.08 billion, (2) timely recovery of financing, construction, operation and maintenance cost, and depreciation associated with the Phase 1 CAIR and CAMR plan, (3) recovery of emission allowances in connection with SO2, NOX, and mercury, (4) accelerated 20 year depreciation rate, (5) timely recovery of Phase 1 plan development and presentation costs and Phase 2 costs, and (6) authority to defer post-in-service allowance for funds used during construction (AFUDC), depreciation costs and operation and maintenance cost until applicable costs are reflected in rates.
(c) Integrated Gasification Combined Cycle (IGCC)
PSI filed an application with the IURC for approval of study and preconstruction costs related to the joint development of an IGCC project with Southern Indiana Gas and Electric Company d/b/a Vectren Energy Delivery of Indiana, Inc. (Vectren). PSI and Vectren reached a Settlement Agreement with the OUCC providing for the recovery of such costs if the IGCC project is approved and constructed and for the partial recovery of such costs if the IGCC project does not go forward. The IURC issued an order in July 2006, approving the Settlement Agreement in its entirety.
(d) Fuel Adjustment Clause
PSI recovers its actual fuel costs quarterly through a rate adjustment mechanism. In two recent fuel clause proceedings, certain industrial customers and the Citizens Action Coalition of Indiana, Inc. have intervened and sub-dockets have been established to address issues raised by the OUCC and the intervenors concerning the allocation of fuel costs between native load customers and non-native load sales, the reasonableness of various Midwest Independent System Operator, Inc. (Midwest ISO) costs for which PSI has sought recovery and PSI’s recovery of costs associated with certain power hedging activities. PSI is defending its practices, its costs, and the allocation of such costs, and discovery is underway in these cases. PSI has been authorized to collect through rates its costs for which it sought recovery in the two sub-docket proceedings, subject to refund pending the outcome of these
proceedings. Cinergy and PSI cannot predict the outcome of these proceedings but does not expect the outcome to be material to PSI.
(e) CG&E Electric Rate Filings
CG&E operates under a MBSSO which was approved by the PUCO in November 2004. In March 2005, the OCC appealed the Commission’s approval of the MBSSO to the Supreme Court of Ohio. The Supreme Court of Ohio recently ruled on the MBSSO’s for two other Ohio utilities and in each of those rulings upheld the market prices charged by the utility to its consumers as approved by the Commission but overturned the competitive bid process approved by the Commission on the basis that the Commission rejected the bid price on behalf of consumers and the applicable statute requires customer involvement. CG&E’s MBSSO does not contain a competitive bid process pursuant to a statutory exception. CG&E does not expect a significant, if any, change to its MBSSO as a result of this case but cannot predict the outcome of its case. Cinergy and CG&E expect the Court to decide the case in 2006. On August 2, 2006, CG&E filed an application with the PUCO to extend CG&E’s MBSSO. The proposal provides for continued electric system reliability, a simplified rate structure, and clear price signals for customers, while helping maintain a stable revenue stream for Cinergy and CG&E. The application also proposes that the PUCO review and approve the application by the end of 2006.
CG&E’s MBSSO includes a fuel clause recovery component, which is audited annually by the PUCO. In January 2006, CG&E entered into a settlement resolving all open issues identified in the 2005 audit. The PUCO approved the settlement in February 2006. Cinergy and CG&E do not expect the agreement to have a material impact on their consolidated results of operations.
CG&E 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 MBSSO. The parties to the proceeding agreed upon and filed a settlement setting the recommended annual revenue increase at approximately $50 million. In December 2005, the PUCO issued an order approving the settlement agreement.
(f) ULH&P Gas Rate Case
In 2002, the KPSC approved ULH&P’s gas base rate case which included, among other things, recovery of costs associated with an accelerated gas main replacement program. The approval authorized a tracking mechanism to recover such costs including depreciation and a rate of return on the program’s capital expenditure. The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism. In 2005, both ULH&P and the KPSC requested that the Court dismiss the case. At the present time, Cinergy and 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 and 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 gas main replacement program in base rates. The KPSC did not rule on the base rate case request or the request to continue the tracking mechanism by October 1, 2005; consequently, the initial tracking mechanism 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. In December 2005, the KPSC approved an annual rate increase of $8.1 million and approved the tracking mechanism through 2011. Pursuant to the KPSC’s order, ULH&P filed a refund plan in January 2006 for the excess revenues collected since October 1, 2005. In February 2006, the KPSC issued an additional order responding to a rehearing request made by the Attorney General. Its rehearing order re-approved ULH&P’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 order improperly allows ULH&P to increase its rates for gas main replacement costs in between general rate cases, and also claiming that the order 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, Cinergy and ULH&P cannot predict the outcome of this proceeding.
(g) ULH&P Electric Rate Case
In May 2006, ULH&P filed an application for an increase in its base electric rates. The application, which seeks an increase of approximately $65 million in revenue, or approximately 28 percent, to be effective in January 2007, was filed pursuant to the KPSC’s 2003 Order approving the transfer of 1,100 MW of generating assets from CG&E to ULH&P. ULH&P is also seeking reinstitution of its fuel cost recovery mechanism which has been frozen since 2001, and has proposed to refresh the pricing for the back-up power supply contract, to reflect current market pricing. At this time, ULH&P cannot predict the outcome of this proceeding.
(h) PUCO Gas Pipeline System Investigation
In April 2005, the PUCO issued an 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.
(i) Midwest ISO Revenue Sufficiency Guarantee (RSG)
On April 25, 2006, the FERC issued an order on the Midwest ISO’s revisions to its Transmission and Energy Markets Tariffs regarding its RSG. The FERC found that the Midwest ISO violated the tariffs when it did not charge RSG costs to virtual supply offers. The FERC, among other things, ordered the Midwest ISO to recalculate the rate and make refunds to customers, with interest, to reflect the correct allocation of RSG costs. DESS, on behalf of PSI, CG&E, and ULH&P, has filed a Request for Rehearing, and the matter is currently pending before the FERC. At this time, Cinergy, CG&E and PSI cannot predict the outcome of this matter and whether it will have a material effect on their financial position or results of operations.
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7.14. 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 (NONOX) 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. As of March 31,June 30, 2006, we haveCinergy has incurred approximately $823 million in capital costs to comply with this program and dodoes not anticipate significant additional costs.
In March 2005, theThe 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.finalized its CAIR in May 2005. The rule established a two-phase, regional cap and trade program for sulfur dioxide (limits total annual SO2) and NOX, affecting 28 states, including Ohio, Indiana, emissions and Kentucky,summer NOX emissions from electric generating facilities across the Eastern United States through a two-phased cap-and-trade program. Phase 1 begins in 2009 for NOX and in 2010 for SO2. Phase 2 begins in 2015 for both NOX and SO2. The rule requires SO2 and NOX emissions to be cut by 70 percent and 65 percent, respectively, by 2015. SIPs must comply withThe rule gives states the prescribed reduction levels under CAIR; however,option of participating in the states havenational trading program. If a state chooses not to participate, then the ability to introduce more stringent requirements if desired. Under CAIR, companies have flexible compliance options including installation of pollution controlsrule sets a fixed limit on large plants where such controls are particularly efficient and utilization of emission allowances for smaller plants where controls are not cost effective.that state’s annual emissions.
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, theThe 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 pendingits CAMR 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 outcome of these matters.
Also in March 2005, the EPA issued the Clean Air Mercury Rule (CAMR) which requires national reductions inMay2005. The rule limits total annual mercury emissions from coal-fired power plants beginningacross the United States through a two-phased cap-and-trade program. Phase 1 begins in 2010. Accompanying2010 and Phase 2 begins in 2018. The rule gives states the CAMR publicationoption of participating in the Federal Register wasnational trading program. If a state chooses not to participate, then the EPA’s determinationrule sets a fixed limit on 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 CAMR; however, the states have the ability to introduce more stringent requirements if desired. Under 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.
state’s annual emissions.
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. On October 21, 2005, the EPA agreed to reconsider certain aspects of the CAMR as well as the determination not to regulate mercury under Section 112 of the CAA.Clean Air Act (CAA). On June 9, 2006, the EPA took final action on the issues being reconsidered and determined that its original decisions were reasonable and should not be changed. At this time, weCinergy cannot predict the outcome of these matters.
OverCinergy has spent $0.45 billion through 2005 to comply with Phase 1 of the 2006-2010CAIR and CAMR rules and currently estimates that it will spend an additional $1.23 billion over the 2006-2011 time period, we expect to spend approximately $1.5 billion to reduce mercury, SO2, and NOX emissions. Thesefor a total of $1.68 billion. The projected expenditures include estimated costs to comply at plants that we ownCinergy owns but dodoes 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 ourCinergy’s plans will be adjusted accordingly. Approximately 55 percentThe IURC recently issued an order granting PSI approximately $1.08 billion in rate recovery, which represents PSI’s share of theseCinergy’s estimated $1.68 billion total projected environmental compliance 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.Phase 1 of CAIR and CAMR. See (b)(i)Note 13(b) for more details. CG&E receives partial recovery of depreciation and financing costs related to environmental compliance projects for 2005-2008 through its rate stabilization plan (RSP).MBSSO. See (b)(ii)Note 13(e) 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 operateCinergy operates 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 StatesU.S. 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 consolidated financial position or results of operations.
In July 2005, the EPA issued its final regional haze rules and implementingimplemented 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 ourCinergy’s, CG&E’s, and PSI’s financial positionpositions 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,Federal Implementation Plan (FIP), that would address the air quality concerns from neighboring states. In MarchOn April 28, 2006, the EPA denied North Carolina’s petition based upon the final CAIR FIP described above. It is unclear at this time whether North Carolina will pursuehas filed a legal action onchallenge to the EPA’s denial.
(iii) Clean Water Act Rulemaking
The EPA’s final Clean Water Act Section 316(b) rule became effective July 9, 2004. The rule establishes aquatic protection requirements for existing facilities that withdraw 50 million gallons or more of water per day from rivers, streams, lakes, reservoirs, estuaries, oceans, or other U.S. waters for cooling purposes. Six of 11 coal-fueled generating facilities in which Cinergy is either a whole or partial owner are affected sources under the rule. The rule requires a Comprehensive Demonstration Study (CDS) for each affected facility to provide information needed to determine necessary facility-specific modifications and cost estimates for implementation. These studies will be completed over the next three to five years. Once compliance measures are determined and approved by regulators, a facility will typically have five or more years to implement the measures. Due to the wide range of measures potentially applicable to a given facility, and since the final selection of compliance measures will be at least partially dependent upon the CDS information, Cinergy is not able to estimate its cost for complying with the rule at this time.
(iv) Clean Air Act LawsuitLawsuits
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 weCinergy, CG&E, and PSI 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 ourCinergy’s, CG&E’s, and PSI’s owned and co-owned generating stations. Additionally, the suit claims that weCinergy, CG&E, and PSI 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 northeastNortheast 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, CG&E, and PSI at the trial of the case. Contrary to Cinergy’s, CG&E’s, and PSI’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 accepted the appeal and set oralappeal. Oral arguments forwere held before the Seventh Circuit Court of Appeals in 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 Court of Appeals rules. Notwithstanding the appeal, there are a number of other legal issues currently before the district court 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 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 in front of the same judge who has the CSP case.
WeAt this time, Cinergy, CG&E, and PSI are unable to predict whether resolution of these matters would have a material effect on ourtheir financial position or results of operations.We Cinergy, CG&E, and PSIintend to vigorously defend against these allegations.
(iv)(v) 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. Oral argument was held before the Second Circuit Court of Appeals and oral argument is scheduled forin June 2006. We areCinergy is not able to predict whether resolution of these matters would have a material effect on ourits financial position or results of operations.
(v)(vi) Zimmer Generating Station (Zimmer Station) Lawsuit
In November 2004, a citizen of the Village of Moscow, Ohio, the town adjacent to CG&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, weCG&E cannot predict whether the outcome of this matter will have a material impact on ourits financial position or results of operations. We intendCG&E intends to defend this lawsuit vigorously in court.
(vi)(vii) Manufactured Gas Plant (MGP) Sites
Coal tar residues, related hydrocarbons, and various metals have been found in at least 2223 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 2223 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 betweenamong 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 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 carrier, a jury returned a verdict against PSI in February 2005. PSI has appealed this decision. At the presentthis 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. WePSI will continue to investigate and remediate the sites as outlined in the voluntary remediation plan. As additional facts become known and investigation is completed, wePSI will assess whether the likelihood of incurring additional costs becomes probable. Until all investigation and remediation is complete, we arePSI is unable to determine the overall impact on ourits financial position or results of operations.
CG&E has performed site assessments on certain of theirits sites where we believe MGP activities are believed to have occurred at some point in the past and have found no imminent risk to the environment. At the presentthis time, CG&E cannot predict whether investigation and/or remediation will be required in the future at any of these sites.
(vii)(viii) Asbestos Claims Litigation
PSI and CG&E, 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 (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 as outside contractors in the construction and maintenance of CG&EPSI andPSI CG&E generating stations. The plaintiffs further claim that as the property owner of the generating stations, CG&E PSI and PSICG&E should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure. The impact on CG&E’sPSI’s and PSI’sCG&E’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 on a negligence claim and a verdict for PSI on punitive damages. PSI appealed this decision up to the Indiana Supreme Court. In October 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 over 150 other claims for amounts which neither individually nor in the aggregate are material to PSI’s financial position or results of operations. Based 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 made in Indiana and more case law is established.
CG&E has been named in fewer than 10 cases and as a result has virtually no settlement history for asbestos cases. Thus, CG&E is not able to reasonably estimate the range of potential loss from current or future lawsuits. However, potential judgments or settlements of existing or future claims could be material to CG&E.
(viii)(ix) 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.
(ix)(x) Ontario, Canada Lawsuit
WeCinergy, CG&E, and PSI understand that a class action lawsuit was filed in Superior Court in Ontario, Canada against usCinergy, CG&E, and PSI 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. WeCinergy, CG&E, and PSI understand that the lawsuit also claims entitlement to punitive and exemplary damages in the amount of $1 billion. WeCinergy, CG&E, and PSI have not yet been served in this lawsuit,lawsuit; however, if served, weCinergy, CG&E, and PSI intend to defend this lawsuit vigorously in court. WeAt this time, Cinergy, CG&E, and PSI are not able to predict whether resolution of this matter would have a material effect on ourCinergy’s, CG&E’s, and PSI’s financial position or results of operations.
(xi) 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,others’, greenhouse gas emissions contributed to the frequency and intensity of storms such as Hurricane Katrina. Cinergy has not been served with this lawsuit.lawsuit; however, if served Cinergy intends to defend this lawsuit vigorously in court. At this time, we areCinergy is 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, CinergyCinergy’s 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 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 first half of 2006.
(ii) CG&E Electric Rate Filings
CG&E operates under an RSP which was approved by the PUCO in November 2004, and which expires December 31, 2008.
One of the components of CG&E’s RSP is a fuel clause recovery mechanism, which was recently audited by the PUCO’s auditor. The auditor recommended alternate methodologies for administration of the fuel clause recovery mechanism that varies from CG&E’s current practice. A hearing before PUCO 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. In January 2006, CG&E signed 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’s or Cinergy’s results of operations.
In March 2005, the Ohio Consumers’ Counsel appealed the Commission’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 its consumers as approved by the 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.
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 approximately $51 million. In December 2005, the PUCO issued an order approving the settlement agreement.
(iii) 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 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 assets. As of March 31, 2006, we have capitalized $64.5 million in costs associated with the accelerated gas main replacement program through this tracking mechanism, of which ULH&P has recovered $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 the base rate case request or the request to continue the tracking mechanism by October 1, 2005; consequently the initial tracking mechanism 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. In December 2005, the KPSC approved an annual rate increase of $8.1 million and reapproved the tracking mechanism through 2011. Pursuant to the KPSC’s order, ULH&P filed a refund plan in January 2006 for the excess revenues collected since October 1, 2005. In February 2006, the KPSC issued an additional order responding to a rehearing request made by the Attorney 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 order improperly allows ULH&P to increase its rates for gas main replacement costs in between general rate cases, and also claiming that the order 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 this litigation.
(iv) Gas Distribution Plant
In June 2003, the PUCO approved an amended settlement agreement between CG&E and the PUCO staff in a gas distribution safety case arising out of a gas leak at a service head-adapter (SHA) style riser on CG&E’s distribution system. The amended settlement agreement required CG&E to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, and to file a comprehensive plan addressing all SHA risers on its distribution system. 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) Synthetic Fuel Production
Cinergy produces synthetic fuel from two facilities that qualify for tax credits (through 2007) in accordance with Section 29/45K of the Internal Revenue Code if certain requirements are satisfied. These credits reduceCinergy’sCinergy’s income tax liability and thereforeCinergy’sCinergy’s effective tax rate. Cinergy’sCinergy’s sale of synthetic fuel has generated $339$343 million in tax credits through December 31, 2005 and an additional $18 million, after2005. After reducing for phase-out,the possibility of phase-outs in 2006, the amount of additional credits generated through March 31, 2006.June 30, 2006 is immaterial. 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 believeCinergy believes that for 2006 and 2007 the amount of the tax credits will be reduced, perhaps significantly. If oilOil prices are high enough, we may idlecurrently at a level where Cinergy has idled the plants, as the value of the credits wouldmay 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 would indemnifyCinergyCinergy in the event that tax credits are insufficient to support operating expenses. This agreement did not continue in the second quarter. Cinergy’s net book value of the plants at June 30, 2006 was approximately $24 million. Based upon the increase in crude oil prices subsequent to June 30, 2006, it is possible that Cinergy’sCinergy may incur a future impairment of its net investment in the plants at March 31, 2006 was approximately $37 million.synthetic fuel plants.
The Internal Revenue Service (IRS) is currently auditinghas completed the audit of CinergyCinergy for the 2002, 2003, and 2004 tax years. We expectyears including the IRS will evaluate the various key requirements for claiming our Section 29/45K credits related to synthetic fuel. If the IRS challenges our Section 29/45Ksynfuel facility owned during that period. That facility represents $222 million of tax credits relatedgenerated during that audit period. The IRS has not proposed any adjustment that would disallow the credits claimed during that period. Subsequent periods are still subject to synthetic fuel, and such challenges are successful, this could result in the disallowance of up to all $357 million in previously claimed credits for synthetic fuel produced by the applicableaudit. CinergyCinergy facilities and a loss of our ability to claim future credits for synthetic fuel produced by such facilities. We believe believes that we operateit operates in conformity with all the necessary requirements to be allowed such tax credits under Section 29/45K.
(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. On April 28, 2006, the court granted Cinergy’s motion for summary judgment, thus ruling that Cinergy is not obligated to pay the $15 million sought by FirstEnergy. FirstEnergy has appealed this decision. At this time, weCinergy cannot predict the outcome of this matter.
(iii) GuaranteesOther Litigation and Legal Proceedings
As part of their normal business, Cinergy, CG&E, and PSI are party to various financial guarantees, performance guarantees, and other contractual commitments to extend guarantees of credit and other assistance to various subsidiaries, investees, and other third parties. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on the Consolidated Balance Sheets. The possibility of Cinergy, CG&E, and PSI having to honor their contingencies is largely dependent upon future operations of various subsidiaries, investees, and other third parties, or the occurrence of certain future events. For further information, see Note 15.
In addition, Cinergy, CG&E, and PSI enter into various fixed-price, non-cancelable commitments to purchase or sell power (tolling arrangements or power purchase contracts), take-or-pay arrangements, transportation or throughput agreements, and other contracts that may or may not be recognized on the Consolidated Balance Sheets. Some of these arrangements may be recognized at market value on the Consolidated Balance Sheets as trading contracts or qualifying hedge positions included in unrealized gains or losses on MTM and hedging transactions.
15. Guarantees and Indemnifications
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 calculateCinergy calculates the maximum potential amount by considering the terms of the guaranteed transactions, to the extent such amount is estimable.
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$113 million under these guarantees as of March 31,June 30, 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 be $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 2006 to 2010.
We believeCinergy believes the likelihood that itCinergy 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.
8. Discontinued Operations16. Related Party Transactions
In December 2005, Cinergy completed the sale of a wholly-owned subsidiary, CG&E, and PSI engage in the Czech Republic that was engaged in the generationrelated party transactions. These transactions are generally performed at cost 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 heldthe applicable state and federal commission regulations. The Consolidated Balance Sheets of Cinergy, CG&E,and PSI reflect amounts payable to and/or receivables from related parties as Accounts payable and Receivables, respectively. The amounts for sale. In AprilCinergy and CG&E, at June 30, 2006, were as follows:
| June 30, 2006 |
| ||
|
| (in millions) |
| |
|
|
|
| |
Cinergy |
|
|
| |
Accounts payable |
| $ | 94 |
|
Receivables |
| — |
| |
CG&E |
|
|
| |
Accounts payable |
| $ | 143 |
|
Receivables |
| 33 |
| |
PSI |
|
|
| |
Accounts payable |
| $ | 26 |
|
Receivables |
| 3 |
|
Cinergy completed the sale, CG&E, and PSI are allocated their proportionate share 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)corporate governance and other costs by a consolidated affiliate of Duke Energy. CG&E, PSI, and Duke Energy and its subsidiaries are allocated their proportionate share of corporate governance costs from a consolidated affiliate of Cinergy.
These consolidated entities have been presented as Discontinued operations, net of tax inThe revenues and expenses associated with corporate governance and other service costs for Cinergy’sCinergy Condensed Consolidated Statements of Income and as Assets/Liabilities of Discontinued Operations in Cinergy’sCG&E 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 quartersthree months ended June 30, 2006, March 31, 2006 and 2005.June 30, 2005 and the six months ended June 30, 2005 were as follows:
| 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 |
|
| Successor(1) |
|
|
| Predecessor(1) |
| |||||||||
|
| Three Months |
|
|
| Three Months |
| Three Months |
| Six Months |
| ||||
|
| Ended |
|
|
| Ended |
| Ended |
| Ended |
| ||||
|
| June 30, 2006 |
|
|
| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
| ||||
|
|
|
|
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate governance and other service revenues |
| $ | 27 |
|
|
| $ | — |
| $ | — |
| $ | — |
|
Corporate governance and other service expenses |
| 48 |
|
|
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
CG&E |
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate governance and other service expenses |
| $ | 98 |
|
|
| $ | 99 |
| $ | 82 |
| $ | 152 |
|
(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 2005 10-K, we conduct operations through our subsidiaries and manage our businesses through the following three reportable segments:
· Regulated Business Unit (Regulated);
· 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 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-year amounts have been reclassified to conform to the current presentation.
40
Financial results by business unit for the quarters ended March 31, 2006, and March 31, 2005, are as indicated below.
|
| 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 margins are calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Consolidated Statements of Income.
(3)Gas gross margins are calculated as Gas operating revenues less Gas purchased expense from the Condensed Consolidated Statements of Income.
(4)See Note 81(b) for additional information.information on Predecessor and Successor reporting.
(5)See Note 1(e)(i) for additional information.
Total segment assets at March 31, 2006 and December 31, 2005, are as indicated below:
|
| 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 decrease in Commercial’s assets was primarily due to decreases in energy risk management assets and decreases in trade receivables.
42
10. Earnings Per Common Share (EPS)
A reconciliation of EPS — basic to EPS — diluted from continuing operations is presented below for the quarters ended March 31, 2006 and 2005:
|
| 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 1.3 million and 1.5 million were excluded from the EPS — diluted calculation for the quarters ended March 31, 2006 and 2005, respectively.
11. Acquisition and Transfer of Generating Assets
(a) Transfer of Duke Generating Assets to CG&E — Subsequent Event
In April 2006, Duke contributed to CG&E its ownership interest in five 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 April 2006 and was accounted for at Duke’s net book value for 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 connectionThe expenses associated with the contribution of these assets, CG&E assumed certain related liabilities. In particular, CG&E assumed from Duke all payment, performance,corporate governance and other service costs for PSI for the three and six months ended June 30, 2006 and 2005 were as follows:
| Three Months |
| Three Months |
| Six Months |
| Six Months |
| |||||
|
| Ended |
| Ended |
| Ended |
| Ended |
| ||||
|
| June 30, 2006 |
| June 30, 2005 |
| June 30, 2006 |
| June 30, 2005 |
| ||||
|
| (in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
PSI |
|
|
|
|
|
|
|
|
| ||||
Corporate governance and other service expenses |
| $ | 92 |
| $ | 64 |
| $ | 147 |
| $ | 121 |
|
The following new accounting standards were adopted by Cinergy and its subsidiaries subsequent to June 30, 2005, and the impacts of such adoptions, if applicable, have been presented in the accompanying Consolidated Financial Statements:
SFAS No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29” (SFAS No. 153). In December 2004, the FASB issued SFAS No. 153 which amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” by eliminating the exception to the fair-value principle for exchanges of similar productive assets, which were accounted for under APB Opinion No. 29 based on the book value of the asset surrendered with no gain or loss recognition. SFAS No. 153 also eliminates APB Opinion No. 29’s concept of culmination of an earnings process. The amendment requires that an exchange of nonmonetary assets be accounted for at fair value if the exchange has commercial substance and fair value is determinable within reasonable limits. Commercial substance is assessed by comparing the entity’s expected cash flows immediately before and after the exchange. If the difference is significant, the transaction is considered to have commercial substance and should be recognized at fair value. SFAS No. 153 was effective for nonmonetary transactions occurring on or after July 1, 2005. The adoption of SFAS No. 153 did not have a material impact on Cinergy’s consolidated results of operations, cash flows, or financial position.
FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations” (FIN 47). In March 2005, the FASB issued FIN 47, which clarifies the accounting for conditional asset retirement obligations as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” (SFAS No. 143). A conditional asset retirement obligation is an unconditional legal obligation to perform an asset retirement activity in which the timing and/or method of Duke,settlement are conditional on a future event that may or may not be within the control of the entity. Therefore, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation under SFAS No. 143 if the fair value of the liability can be reasonably estimated. The provisions of FIN 47 were effective for Cinergy and its subsidiaries as of December 31, 2005. In the first quarter of 2006, Cinergy and CG&E recognized a loss of approximately $3 million (net of tax) for the cumulative effect of this change in accounting principle. The effect of adoption for Cinergy, CG&E, and PSI included balance sheet reclassifications of approximately $35 million, $27 million, and $8 million, respectively, from Regulatory liabilities. The increases in asset retirement obligations from adopting FIN 47 were $51 million, $39 million, and $12 million for Cinergy, CG&E, and PSI, respectively.
SFAS No. 123(R), “Share-Based Payment.” In December of 2004, the FASB issued SFAS No. 123(R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. For Cinergy, timing for implementation of SFAS No. 123(R) was January 1, 2006. Cinergy is required to determine an appropriate expense for stock options and record compensation expense in the Consolidated Statements of Operations for stock options. Cinergy implemented SFAS No. 123(R) using the modified prospective transition method. In 2003, Cinergy prospectively adopted accounting for its stock-based compensation plans using the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” for all employee awards granted or with respect to certain deferred tax liabilitiesterms modified on or after January 1, 2003. Therefore, the impact of implementation of SFAS No. 123(R) on stock options and remaining awards was not material. See additional detail regarding Cinergy’s stock-based compensation plans in Note 3.
Cinergy currently also has retirement eligible employees with outstanding share-based payment awards (unvested stock awards, stock based performance awards, and phantom stock awards). Compensation cost related to those awards was previously expensed over the assets.stated vesting period or until actual retirement occurred. Effective January 1, 2006, Cinergy is required to recognize compensation cost for new awards granted to employees over the requisite service period, which generally begins on the date the award is granted through the earlier of the date the award vests or the date the employee becomes retirement eligible. Awards, including stock options, granted to employees that are already retirement eligible will be deemed to have vested immediately upon issuance, and therefore, compensation cost for those awards will be recognized on the date such awards are granted.
Most options granted prior to May 8, 2005 were immediately vested upon consummation of the April 3, 2006 merger with Duke Energy and resulted in additional purchase accounting adjustments of $59 million (See Note 2). Options granted after May 8, 2005 will continue to be expensed over the remaining portion of the three-year vesting period, unless granted to retirement eligible employees. The following table summarizes this transactionremaining options to be expensed under SFAS No. 123(R) are not anticipated to have a material impact on Cinergy’s consolidated results of operations, cash flows, or financial position. However, the impact to Cinergy in periods subsequent to adoption of SFAS No. 123(R) will be largely dependent upon the nature of any new share-based compensation awards issued to employees (See Note 3).
Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment” (SAB 107). On March 29, 2005, the SEC staff issued SAB 107 to express the views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and to provide the staff’s views regarding the valuation of share-based payment arrangements for public companies. Cinergy adopted SFAS No. 123(R) and SAB 107 effective January 1, 2006.
FASB Staff Position (FSP) Nos. Financial Accounting Standards (FAS) 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”(FSP Nos. FAS 115-1 and 124-1). The FASB issued FSP Nos. FAS 115-1 and 124-1 in November 2005, which was effective for CG&ECinergy:
| (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 |
|
and its subsidiaries beginning January 1, 2006. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The adoption of FSP Nos. FAS 115-1 and 124-1 did not have a material impact on Cinergy’s consolidated results of operations, cash flows, or financial position.
AsFSP No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event,” (FSP No. FAS 123(R)-4). In February 2006, the FASB staff issued FSP No. FAS 123(R)-4 to address the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event. The guidance amends SFAS No. 123(R). FSP No. FAS 123(R)-4 provides that cash settlement features that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not require classifying the option or similar instrument as a liability until it becomes probable that the event will occur. FSP No. FAS 123(R)-4 applies only to options or similar instruments issued as part of this transaction, Duke Capital LLC, a subsidiaryemployee compensation arrangements. The guidance in FSP No. FAS 123(R)-4 was effective for Cinergy as of Duke, agreed to reimburseApril 1, 2006. CG&ECinergy through April 2016 in the event of certain cash shortfalls that may result from CG&E’s ownership of the five stations.
(b) Transfer of Generating Assets from CG&E to ULH&P
In January 2006, CG&E contributed 100 percent of its ownership interest in one generating unit and one peaking plant with a combined 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 effectiveadopted SFAS No. 123(R) as of January 1, 2006 (see Note 3(b)). The adoption of FSP No. FAS 123(R)-4 did not have a material impact on Cinergy’s consolidated results of operations, cash flows, or financial position.
The following new accounting standards have been issued but have not yet been adopted by Cinergy and its subsidiaries as of June 30, 2006:
SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB SFASNo. 133 and 140” (SFAS No. 155). In February 2006, the FASB issued SFAS No. 155, which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” (SFAS No. 140). SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for at fair value at acquisition, at issuance, or when a net book value of approximately $140 million.previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-
instrument basis, in cases in which a derivative would otherwise have to be bifurcated. This Statement is effective for Cinergy for all financial instruments acquired, issued, or subject to remeasurement after January 1, 2007, and for certain hybrid financial instruments that have been bifurcated prior to the effective date, for which the effect is to be reported as a cumulative-effect adjustment to beginning retained earnings. Cinergy does not anticipate the adoption of SFAS No. 155 will have any material impact on its consolidated results of operations, cash flows, or financial position.
SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB SFASNo. 140” (SFAS No. 156).In this report,March 2006, the FASB issued SFAS No. 156, which amends SFAS No. 140. SFAS No. 156 requires recognition of a servicing asset or liability when an entity enters into arrangements to service financial instruments in certain situations. Such servicing assets or servicing liabilities are required to be initially measured at fair value, if practicable. SFAS No. 156 also allows an entity to subsequently measure its servicing assets or servicing liabilities using either an amortization method or a fair value method. This Statement is effective for Cinergy (which includes Cinergy Corp. and allits subsidiaries as of our regulatedJanuary 1, 2007, and non-regulated subsidiaries)must be applied prospectively, except that where an entity elects to remeasure separately recognized existing arrangements and reclassify certain available-for-sale securities to trading securities, any effects must be reported as a cumulative-effect adjustment to retained earnings. CG&E retains servicing responsibilities for its role as collection agent for receivables sold to Cinergy Receivables Company, LLC. Cinergy is at times, referredcurrently evaluating the impact of adopting SFAS No. 156 on its accounts receivable sales program. Currently, Cinergy is unable to predict whether the implementation of this accounting standard will have a material impact on its consolidated results of operations, cash flows, or financial position.
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48) On July 13, 2006, the FASB issued FIN 48, which interprets SFAS No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance for the recognition, measurement, classification, and disclosure of the financial statement effects of a position taken or expected to be taken in a tax return (“tax position”). The financial statement effects of a tax position must be recognized when there is a likelihood of more than 50 percent that, based on technical merits, the position will be sustained upon examination and resolution of the related appeals or litigation processes, if any. A tax position that meets the recognition threshold must be measured initially and subsequently as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority. The Interpretation is effective for fiscal years beginning after December 15, 2006. Cinergy is currently evaluating the impact of adopting FIN 48, and cannot currently estimate the impact of FIN 48 on its consolidated results of operations, cash flows, or financial position.
FSP No. FIN 46 (R)-6, “Determining the Variability to Be Considered In Applying Interpretation No. 46(R) (FSP No.-FIN 46(R)-6).” In April 2006, the FASB staff issued FSP No. 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 first person as “we,” “our,” or “us.”
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This document includes forward-looking statements withinentity, and which party, if any, is the meaning of Section 27Aprimary beneficiary of the Securities ActVIE. The variability affects the calculation of 1933expected losses and Section 21Eexpected residual returns. This guidance will be applied prospectively to all entities with which Cinergy first becomes involved or existing entities for which a reconsideration event occurs after July 1, 2006. Given the prospective nature of this guidance, Cinergy does not anticipate the Securities Exchange Actadoption of 1934. Forward-looking statements are basedFSP No. FIN 46 (R)-6 will have any material impact on management’s beliefsits consolidated results of operations, cash flows, or financial position. However, Cinergy continues to evaluate the ramifications to potential new arrangements along with any possible reconsideration events for existing arrangements. In particular, the guidance is not clear how certain types of power purchase or sale arrangements should be handled and assumptions. These forward-looking statements are identifiedwhether such arrangements create variability, absorb variability, or neutralize variability.
Emerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (Issue No. 06-3).” In June 2006, the EITF reached a consensus on Issue No. 06-3 to address any tax assessed by termsa governmental authority that is directly imposed on a revenue-producing transaction between a seller and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”,a customer 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:to, sales, use, value added, and some excise taxes. For taxes within the Issue’s scope, the consensus requires that entities present such taxes on either a gross (i.e., include in revenues and costs) or net (i.e., exclude from revenues) basis according to their accounting policies, which should be disclosed. If such taxes are reported gross and are significant, entities should disclose the amounts of those taxes. Disclosures may be made on an aggregate basis. The consensus is effective for Cinergy beginning January 1, 2007; however, Cinergy
·and its subsidiaries have disclosed the impacts of certain excise taxes on their revenues. (See Note 1(f)) Factors affectingCinergy does not anticipate the adoption of EITF Issue 06-3 will have any material impact on its consolidated results of operations.
As of June 30, 2006, Cinergy had total provisions of approximately $58 million for uncertain tax positions, as compared to approximately $56 million as of December 31, 2005, including interest. Management is not aware of any issues for open tax years that upon final resolution are expected to have a material adverse effect on Cinergy’s consolidated results of operations, such as:cash flows, or financial position.
The effective tax rates for Cinergy and CG&E for the three months ended June 30, 2006, March 31, 2006 and June 30, 2005, and six months ended June 30, 2005 and the effective tax rates for PSI for three and six months ended June 30, 2006 and 2005 are summarized in the following tables:
| Successor(1) |
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| Predecessor(1) |
| |||||
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| Three Months |
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| Three Months |
| Three Months |
| Six Months |
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| Ended |
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| Ended |
| Ended |
| Ended |
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| June30, 2006 |
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| March 31, 2006 |
| June 30, 2005 |
| June 30, 2005 |
|
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Cinergy |
| 46.7 | % |
|
| 17.8 | % | 25.1 | % | 21.5 | % |
CG&E |
| 37.5 |
|
|
| 36.5 |
| 21.8 |
| 34.6 |
|
(1) unanticipated weather conditions; See Note 1(b) for additional information on Predecessor and Successor reporting.
| Three Months |
| Three Months |
| Six Months |
| Six Months |
| |
|
| Ended |
| Ended |
| Ended |
| Ended |
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| June 30, 2006 |
| June 30, 2005 |
| June 30, 2006 |
| June 30, 2005 |
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PSI |
| 33.7 | % | 43.3 | % | 37.9 | % | 41.0 | % |
(2)The 2006 effective tax rate for Cinergy is expected to be approximately 40 percent. Cinergy’s higher effective tax rate for the three months ended June 30, 2006 is caused by a deferred tax reconciliation adjustment recognized in the quarter which, when compared to full-year (instead of quarter-only) income, will have an immaterial impact on Cinergy’s effective tax rate. unscheduled generation outages;
(3) unusual maintenanceAs a result of the Duke Energy/Cinergy merger consummation, Cinergy and its subsidiaries entered into a new tax sharing agreement with Duke Energy, where the separate return method is used to allocate benefits to the subsidiaries whose investments or repairs;results of operations provide these tax benefits. This new agreement with Duke Energy supersedes the previous agreement between Cinergy and its subsidiaries.
(i) Merger-Related Obligations
(4)Several of Cinergy’s, CG&E’s, and PSI’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 Energy as discussed in Note 2. 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. unanticipated
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. Payments totaling $70 million were made in December pursuant to these agreements. The agreements amended 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, Cinergy prepaid performance shares under the LTIP and severance payments for certain individuals. In the event an employee who received such amounts voluntarily terminated his or her 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, Cinergy mitigated taxes and related expenses that it would otherwise have incurred if it had waited until after 2005 to make these payments.
The majority of these payments were recorded as prepaid compensation in Current Assets - 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 Energy. The remainder, representing the half that executives must repay if the merger was never consummated, remained in Current Assets - 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 Cinergy’s, CG&E’s, and PSI’s current best estimates, Cinergy’s, CG&E’s, and PSI’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”, were approximately $90 million ($42 million of which is related to severance), and these amounts were accounted for in April 2006 when the merger closed. The payments will be paid in 2006 and, under certain circumstances, in subsequent years. These payments only included amounts payable pursuant to existing benefit arrangements, employment contracts, and 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.
Below is a table showing the reconciliation of changes in costs;the severance provision from April 1, 2006 to June 30, 2006:
| Balance at |
| Cash |
| Balance at |
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| (in millions) |
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Cinergy(1) |
| $ | 42 |
| $ | (17 | ) | $ | 25 |
|
CG&E |
| — |
| — |
| — |
| |||
PSI |
| 1 |
| — |
| 1 |
| |||
(1) | Of the $42 million recorded to severance during the second quarter of 2006, $38 million was recorded in goodwill, $3 million was charged to operating expenses, and $1 million was recorded in regulatory assets. |
(5)20. Subsequent Events environmental incidents; and
(6) electric transmission or gas pipeline system constraints.
· Legislative and regulatory initiatives and legal 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.
· Changing market conditions and other factorsFor information on subsequent events related to physical energydebt and financial trading activities.credit facilities, see Note 6 and for regulatory matters, see Notes 13(c) and 13(e).
· 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.
· Business uncertainties, contractual restrictions, and the potential inability to attract and retain key personnel.
We undertake no obligation to update the information contained herein.
4568
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In this report, Cinergy (which includes Cinergy Corp. and all of its regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we”, “our”, or “us”.
The following discussion should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report and the combined Form 10-K for the year ended December 31, 2005 (2005 10-K). WeCinergy, The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI) have reclassified certain prior-year amounts in the financial statements of Cinergy, The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI) to conform to current presentation.presentation (See Note 1(c) of the “Notes to Consolidated Financial Statements” in “Item 1. Financial Statements” for further details). The following discussions of results are not necessarily indicative of the results to be expected in any future period.
In MarchOn April 3, 2006, in accordance with their previously announced merger agreement, Duke EnergyCorporation (Old Duke Energy) and Cinergy Corp. andmerged into wholly owned subsidiaries of Duke a North Carolina corporation, received final approvalsEnergy Holding Corp. (Duke Energy HC), resulting in Duke Energy HC becoming the parent entity. 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. consummatedclosing of the merger with Duke. Undertransactions, Duke Energy HC changed its name to Duke Energy Corporation (“New Duke Energy” or “Duke Energy”) and Old Duke Energy converted into a limited liability company named Duke Power Company LLC. As a result of the merger agreement,transactions, each outstanding share of Cinergy common stock was converted into 1.56 shares of the newly formed company, Duke Energy Holding Corp., a Delaware Corporation (Duke Energy Holding) (subsequently renamedcommon stock, and each share of common stock of Old Duke Energy Corporation).was converted into one share of Duke Energy common stock, which resulted in the issuance of approximately 1.2 billion shares of Duke Energy common stock. Both Old Duke Energy and New Duke Energy are referred to as Duke Energy herein.
The merger has been accounted for under the purchase method of accounting with Duke Energy treated as the acquirer for accounting purposes. As a result, the assets and liabilities of Cinergy were recorded at their respective fair values as of April 3, 2006. Except for an adjustment related to pension and other postretirement benefit obligations, as mandated by Statement of Financial Accounting Standards (SFAS) No. 87, “Employers’ Accounting for Pension” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” the accompanying consolidated financial statements do not reflect any pro forma adjustments related to Cinergy’s, CG&E’s, and CinergyPSI’s believeregulated operations that are accounted for pursuant to SFAS No. 71, “Accounting for the combination willEffects of Certain Types of Regulation, (SFAS No. 71)” which are comprised of CG&E’s regulated transmission and distribution, PSI and ULH&P. Under the rate setting and recovery provisions currently in place for these regulated operations which provide substantialrevenues derived from cost, the fair values of the individual tangible and intangible assets and liabilities are considered to approximate their carrying values.
The fair values of the assets acquired and liabilities assumed are preliminary and are subject to change as valuation analyses are finalized and remaining information on the fair values is received. However, Cinergy does not currently anticipate any such changes to have a material impact on their consolidated results of operations, cash flows, or financial position.
In connection with the merger, Duke Energy issued 1.56 shares of Duke Energy common stock for each outstanding share of Cinergy common stock, which resulted in the issuance of approximately 313 million shares of Duke Energy common stock. Based on the market price of Duke Energy common stock during the period, including the two trading days before, through the two trading days after, May 9, 2005, the date Duke Energy and Cinergy announced the merger, the transaction is valued at approximately $9.1 billion and has resulted in preliminary goodwill for Cinergy and CG&E of approximately $4.3 billion and $2.2 billion, respectively. The amount of goodwill results from significant strategic and financial benefits expected to their shareholders, employeesbe realized by Cinergy and customers,CG&E 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;Midwestern United States (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 customersdiscussed 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 approval 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 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 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)(iii1(b) ) of the “Notes to CondensedConsolidated Financial Statements” in “Item 1. Financial Information” for additional information on these payments.
Purchase price allocationStatements”, purchase accounting impacts, including goodwill recognition, have been “pushed down” to Cinergy and goodwill
Duke has been determined to beCG&E, resulting in the acquirerassets and liabilities of Cinergy the acquiree under generally accepted accounting principles. The merger isand CG&E being recorded using the purchase methodat their respective fair values as of accounting whereby the total purchase price of approximately $9 billion is being allocated to Cinergy’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 3, 2006.
The allocation of the purchase price to the net assets of Cinergy and the resulting goodwill determination are not yet complete. However, preliminary indications are that the acquisition will result in approximately $4 billion of goodwill.
Based on management’s review and analysis of relevant Securities and Exchange Commission (SEC) regulations, 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 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.
The Results of Operations discussion for Cinergy is presented in a reduced disclosure format in accordance with General Instruction H(2)(a) of Form 10-Q.
Given the dynamics
Electric and gas gross margins and net income for Cinergy June 30 (in millions)for the quarters ended March 31, 2006 and 2005 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 | ) | |||
| Three Months Ended |
| ||||||||||
|
| June 30, |
| |||||||||
|
| Successor(1) |
|
|
| Predecessor(1) |
| Increase |
| |||
|
| 2006 |
|
|
| 2005 |
| (Decrease) |
| |||
Operating revenues |
| $ | 1,308 |
|
|
| $ | 1,051 |
| $ | 257 |
|
Operating expenses |
| 1,237 |
|
|
| 966 |
| 271 |
| |||
(Losses) Gains on Sales of Other Assets and Other, net |
| (5 | ) |
|
| 40 |
| (45 | ) | |||
Operating income |
| 66 |
|
|
| 125 |
| (59 | ) | |||
Equity in earnings of unconsolidated affiliates |
| 6 |
|
|
| 13 |
| (7 | ) | |||
Other income and expenses, net |
| 23 |
|
|
| 14 |
| 9 |
| |||
Interest expense |
| 82 |
|
|
| 68 |
| 14 |
| |||
Income tax expense from continuing operations |
| 6 |
|
|
| 21 |
| (15 | ) | |||
(Loss) income from discontinued operations, net of tax |
| (6 | ) |
|
| (12 | ) | 6 |
| |||
Net income |
| $ | 1 |
|
|
| $ | 51 |
| $ | (50 | ) |
(1) Electric gross marginSee Note 1(b) of the “Notes to Consolidated Financial Statements” in “Item 1. Financial Statements” for additional information on Predecessor and Successor reporting.
The 98 percent decrease in Cinergy’s net income was primarily due to the following factors:
Increased operating revenues were primarily due to the following factors:
· Increased retail operating revenues from CG&E’s Market-Based Standard Service Offer (MBSSO), primarily due to its implementation for residential customers in Ohio beginning in January 2006 and increased revenues from non-residential customers related to the timing of collection of fuel and other costs;
· An increase in fuel revenues at PSI driven by new rates implemented in second quarter 2006 to begin making up for the under-collection of fuel costs from customers in 2005 and first quarter of 2006;
· An increase in CG&E’s retail distribution base rate implemented in January 2006;
· The contribution by Duke Energy of its five Midwest generating plants to CG&E in the second quarter of 2006; and
· Mark-to-market (MTM) gains on CG&E generation power hedges.
Partially offsetting these increases were the following factors:
· A decline in sales of synthetic fuel due to the facilities being idle for most of the second quarter of 2006;
· Milder weather in 2006 as compared to 2005; and
· Temporary rate reductions associated with regulatory approvals of the Duke Energy merger.
Increased operating expenses were primarily due to the following factors:
· Increased fuel costs associated with the increases in CG&E retail revenues discussed above;
· An increase in fuel costs at PSI driven by the under-collection of fuel costs from customers in 2005 and first quarter of 2006;
· Purchase accounting adjustments and related amortization recorded in the second quarter of 2006;
· Operating expenses related to the contribution by Duke Energy of its five Midwest generating plants to CG&E in the second quarter of 2006; and
· MTM losses on CG&E generation fuel hedges.
Partially offsetting these increases was a decrease in costs of fuel resold due to the synthetic fuel facilities being idle for most of the second quarter of 2006.
The decrease in (Losses) Gains on Sales of Other Assets and Other, net is calculated as Electric operating revenues less Fuel,due to the impacts of purchase accounting resulting in emission allowances and purchased powerbeing reflected on the balance sheet at their estimated fair values as of April 1, 2006. Prior to the impacts of purchase accounting, these emission allowances had a lower carrying value, resulting in larger gains on sales.
The increase in Cinergy’s effective tax rate is primarily due to lower synthetic fuel tax credits expected to be realized in 2006 as compared to 2005 due to the Condensed Statementshigh price of Income.
(2)oil. Gas gross margin is calculated as Gas operating revenues less Gas purchased expense from the Condensed Statements of Income.
Gross MarginsDiscontinued Operations, net of tax
The 16(Loss) Income from Discontinued Operations, net of tax, for 2006 and 2005 is primarily related to the marketing and trading operations, which were classified as discontinued operations in connection with the June 2006 announcement to sell Cinergy Marketing & Trading, LP (Marketing & Trading), and Cinergy Canada, Inc., as well as associated contracts, to Fortis.
| Three Months Ended |
| ||||||||
|
| Predecessor |
| |||||||
|
|
|
|
|
| Increase |
| |||
|
| 2006 |
| 2005 |
| (Decrease) |
| |||
|
|
|
|
|
|
|
| |||
Operating revenues |
| $ | 1,576 |
| $ | 1,249 |
| $ | 327 |
|
Operating expenses |
| 1,443 |
| 1,094 |
| 349 |
| |||
Gains on Sales of Other Assets and Other, net |
| 26 |
| 31 |
| (5 | ) | |||
Operating income |
| 159 |
| 186 |
| (27 | ) | |||
Equity in earnings of unconsolidated affiliates |
| 4 |
| 5 |
| (1 | ) | |||
Other income and expenses, net |
| 16 |
| 3 |
| 13 |
| |||
Interest expense |
| 84 |
| 64 |
| 20 |
| |||
Preferred dividend requirement of subsidiaries |
| — |
| (1 | ) | 1 |
| |||
Income tax expense from continuing operations |
| 17 |
| 25 |
| (8 | ) | |||
(Loss) income from discontinued operations, net of tax |
| 4 |
| 13 |
| (9 | ) | |||
Cumulative effect of a change in accounting principle, net of tax |
| (3 | ) | — |
| (3 | ) | |||
Net income |
| $ | 79 |
| $ | 117 |
| $ | (38 | ) |
The 32 percent increasedecrease in electric gross marginsnet income was primarily due to the following factors:
Increased operating revenues were primarily due to the following factors:
· An increase in retail marginsoperating revenues from CG&E’s rate stabilization plan (RSP),MBSSO, primarily due to its implementation for residential customers in Ohio beginning in January 2006 and increased margins2006;
· Increased revenues 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 ourMTM gains on CG&E generation portfolio, some of which are accounted for on a mark-to-market basis and some on an accrual basis; andpower hedges;
· 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&E’s retail distribution base rate increase implemented in January 2006.2006;
· Increased revenues at the synthetic fuel facilities, primarily related to a new facility purchased in the second quarter of 2005; and
· The timing of gas cost recovery.
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 onwas a fuel-related matter; and
· A declinedecrease 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).
The 32 percent decrease in net income wasIncreased operating expenses were primarily due to the following factors:
· An increase in Operation and maintenance expense resultingcosts of fuel sold at the synthetic fuel facilities, primarily from:related to a new facility purchased in the second quarter of 2005;
· Significant merger related costsCosts incurred in the first quarter of 2006 see Note 2(b)(iii)as a result of the “Notes to Condensed Financial Statements” in “Item 1. Financial Information” for further information;
· An increase in health care costs and incentive compensation;merger with Duke Energy; and
· Increased costs at our syntheticMTM losses on CG&E generation fuel facilities primarily related to production costs at a facility purchased in the second quarter of 2005.hedges.
· An increase in
The increase in Interest Expense is primarily due to an increase in interest expense related toon a tax contingency and an increase in average long-term debt outstanding.
Partially offsetting these increased expensesDiscontinued Operations, net of tax
The (Loss) Income from Discontinued Operations, net of tax, for 2006 and 2005 is primarily related to the marketing and trading operations, which were increasesclassified as discontinued operations in electricconnection with the June 2006 announcement to sell Marketing & Trading, and gas gross marginsCinergy Canada, Inc., as previously discussed and an increase in Miscellaneous Income — Net primarily duewell as associated contracts, to impairment and disposal charges recognized in 2005 on certain investments.Fortis.
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.
| CG&E |
| ||||||||||
|
| 2006 |
| 2005 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Electric gross margin(1) |
| $ | 432 |
| $ | 319 |
| $ | 113 |
| 35 | % |
Gas gross margin(2) |
| 90 |
| 99 |
| (9 | ) | (9 | ) | |||
Net income |
| 116 |
| 85 |
| 31 |
| 36 |
| |||
| Three Months Ended |
| ||||||||||
|
| June 30, |
| |||||||||
|
| Successor(1) |
|
|
| Predecessor(1) |
| Increase |
| |||
|
| 2006 |
|
|
| 2005 |
| (Decrease) |
| |||
Operating revenues |
| $ | 696 |
|
|
| $ | 550 |
| $ | 146 |
|
Operating expenses |
| 650 |
|
|
| 513 |
| 137 |
| |||
(Losses) Gains on Sales of Other Assets and Other, net |
| (5 | ) |
|
| 39 |
| (44 | ) | |||
Operating income |
| 41 |
|
|
| 76 |
| (35 | ) | |||
Other income and expenses, net |
| 7 |
|
|
| 4 |
| 3 |
| |||
Interest expense |
| 28 |
|
|
| 23 |
| 5 |
| |||
Income tax expense from continuing operations |
| 7 |
|
|
| 12 |
| (5 | ) | |||
(Loss) income from discontinued operations, net of tax |
| (20 | ) |
|
| 9 |
| (29 | ) | |||
Net income (loss) |
| $ | (7 | ) |
|
| $ | 54 |
| $ | (61 | ) |
(1) Electric gross margin is calculated as See Note 1(b) of the “Notes to Consolidated Financial Statements” in “Item 1. Financial Statements” for additional information on Predecessor and Successor reporting.
The 113 percent decrease in CG&E’s net income was primarily due to the following factors:
Increased operating revenues were primarily due to the following factors:
· Increased retail operating revenues from the MBSSO, primarily due to its implementation for residential customers in Ohio beginning in January 2006 and increased revenues from non-residential customers related to the timing of collection of fuel and other costs;
· An increase in the retail distribution base rate implemented in January 2006;
· The contribution by Duke Energy of its five Midwest generating plants in the second quarter of 2006; and
· MTM gains on generation power hedges.
These increases were slightly offset by temporary rate reductions due to regulatory approvals of the Duke Energy merger.
Increased operating expenses were primarily due to the following factors:
· Increased fuel costs associated with the increases in retail revenues discussed above;
· Purchase accounting adjustments and related amortization recorded in the second quarter of 2006;
· Operating expenses related to the contribution by Duke Energy of its five Midwest generating plants in the second quarter of 2006; and
· MTM losses on generation fuel hedges.
The decrease in (Losses) Gains on Sales of Other Assets and Other, net is due to the impacts of purchase accounting resulting in emission allowances and purchased power expense frombeing reflected on the Condensed Statementsbalance sheet at their estimated fair values as of Income.
(2)Gas gross margin is calculated as Gas operating revenues less Gas purchased expense fromApril 1, 2006. Prior to the Condensed Statementsimpacts of Income.purchase accounting, these emission allowances had a lower carrying value, resulting in larger gains on sales.
The (Loss) Income from Discontinued Operations, net of tax, for 2006 and 2005 is primarily related to the marketing and trading operations, which were classified as discontinued operations in connection with the June 2006 announcement to sell certain of CG&E’s trading contracts, and its associated contracts, to Fortis.
| Three Months Ended |
| ||||||||
|
| March 31, |
| |||||||
|
| Predecessor |
| |||||||
|
|
|
|
|
| Increase |
| |||
|
| 2006 |
| 2005 |
| (Decrease) |
| |||
Operating revenues |
| $ | 963 |
| $ | 751 |
| $ | 212 |
|
Operating expenses |
| 781 |
| 649 |
| 132 |
| |||
Gains (Losses) on Sales of Other Assets and Other, net |
| 26 |
| 31 |
| (5 | ) | |||
Operating income |
| 208 |
| 133 |
| 75 |
| |||
Other income and expenses, net |
| 8 |
| 4 |
| 4 |
| |||
Interest expense |
| 30 |
| 23 |
| 7 |
| |||
Income tax expense from continuing operations |
| 68 |
| 47 |
| 21 |
| |||
(Loss) Income from discontinued operations, net of tax |
| (2 | ) | 18 |
| (20 | ) | |||
Net income |
| $ | 116 |
| $ | 85 |
| $ | 31 |
|
The 3536 percent increase in electric gross marginsnet income was primarily due to the following factors:
Increased operating revenues were primarily due to the following factors:
· An increase in retail marginsoperating revenues from the RSP,MBSSO, primarily due to its implementation for residential customers in Ohio beginning in January 2006 and increased margins2006;
· Increased revenues 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 ourMTM gains on generation portfolio, some of which are accounted for on a mark-to-market basis and some on an accrual basis; andpower hedges;
· An increase in the average price received per MWh,megawatt hour (MWh), primarily due to the return of certain retail customers to full electric serviceservice; and a
· An increase in the 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 declinewas a decrease due to milder weather in the first quarter of 2006, as compared to 2005.
The nine percent decrease in gas gross margins was primarily due to milder weather in the first quarter of 2006, as compared to 2005, and a decline in non-weather related demand. Partially offsetting these declines was a ULH&P base rate increase implemented in October 2005.
The 36 percent increase in net income wasIncreased operating expenses were primarily due to the following factors:
· MTM losses on generation fuel hedges; and
· An increase in electric gross margins, as previously discussed.
Partially offsetting the increased margins was an increase in Operation, maintenance, and maintenanceother expenses associated with various increases in operating expenses, including significant merger related costs in the first quarter of 2006.
The (Loss) Income from Discontinued Operations, net of tax, for 2006 see Note 2(b)(iii)and 2005 is primarily related to the marketing and trading operations, which were classified as discontinued operations in connection with the June 2006 announcement to sell certain of the “NotesCG&E’s trading contracts, and its associated contracts, to Condensed Financial Statements” in “Item 1. Financial Information” for further information.Fortis.
The Results of Operations discussion for PSI is presented in a reduced disclosure format in accordance with General Instruction H(2)(a) of Form 10-Q.
| PSI |
| ||||||||||
|
| 2006 |
| 2005 |
| Change |
| % Change |
| |||
|
| (in millions) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Electric gross margin(1) |
| $ | 285 |
| $ | 293 |
| $ | (8 | ) | (3 | )% |
Net income |
| 19 |
| 42 |
| (23 | ) | (55 | ) | |||
| Six Months Ended |
| ||||||||
|
| June 30, |
| |||||||
|
|
|
|
|
| Increase |
| |||
|
| 2006 |
| 2005 |
| (Decrease) |
| |||
Operating revenues |
| $ | 1,036 |
| $ | 854 |
| $ | 182 |
|
Operating expenses |
| 943 |
| 668 |
| 275 |
| |||
Operating income |
| 93 |
| 186 |
| (93 | ) | |||
Other income and expenses, net |
| 22 |
| 10 |
| 12 |
| |||
Interest expense |
| 65 |
| 52 |
| 13 |
| |||
Income tax expense from continuing operations |
| 19 |
| 59 |
| (40 | ) | |||
Net income |
| $ | 31 |
| $ | 85 |
| $ | (54 | ) |
(1)Electric gross margin is calculated as Electric operating revenues less Fuel, emission allowances, and purchased power expense from the Condensed Statements of Income.
Gross Margins
The three64 percent decrease in electric gross marginsPSI’s net income was primarily due to the following factors:
· A decline in 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.
Partially offsetting these declines was growth in non-weather related demand.
The 55 percent decrease in net income wasIncreased operating revenues were primarily due to the following factors:
· An increase in fuel revenues driven by new rates implemented in second quarter 2006 to begin making up for the under-collection of fuel costs from customers in 2005 and first quarter of 2006.
These increases were partially offset by the following:
· A decline in retail revenues due to milder weather in 2006 as compared to 2005; and
· Temporary rate reductions associated with regulatory approvals of the Duke Energy merger.
Increased operating expenses were primarily due to the following factors:
· An increase in fuel costs driven by as the under-collection of fuel costs from customers in 2005 and first quarter of 2006;
· An increase in operation, maintenance expense and other primarily due to the following factors:
· Scheduled maintenance at certain facilities was accelerated in part to significant merger related costs2006 as a result of the milder weather; and
· Costs incurred in the first quarter of 2006 see Note 2(b)(iii)as a result of the “Notes to Condensed Financial Statements” in “Item 1. Financial Information” for further information.merger with Duke Energy.
·The decrease in electric gross margins, as previously discussed; and
· An increase in Interest Expense,income tax expense was primarily due to an increasea decrease in average long-term debt outstanding and an increase in interest expense related to a tax contingency.Income from Continuing Operations Before Income Taxes.
Partially offsetting these increased expenses and decreased margins was an increase in Miscellaneous Income — Net.78
Disclosure controls and procedures are our controls and other procedures that are designed to provide reasonable assuranceensure that information required to be disclosed by usCinergy, The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI) in the reports that wethey 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 usCinergy, CG&E, and PSI in the reports that wethey file or submit under the Exchange Act is accumulated and communicated to our management, including ourthe 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 ourthe chief executive officer and chief financial officer, weCinergy, CG&E, and PSI have evaluated the effectiveness of ourtheir disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31,June 30, 2006, and, based upon this evaluation, ourthe 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 ourthe chief executive officer and chief financial officer, weCinergy, CG&E, and PSI 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) that occurred during the fiscal quarter ended March 31,June 30, 2006 and, other than the Duke Energy and Cinergy merger discussed below, found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
52
On April 3, 2006, the previously announced merger between Duke Energy and Cinergy was consummated. Duke Energy is currently in the process of integrating Cinergy’s operations and will be conducting control reviews pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. See Notes 1, 2, and 13 of the “Notes to Consolidated Financial Statements” in “Item 1. Financial Statements” for additional information relating to the merger.
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 weCinergy, CG&E, and PSI 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 ourCinergy’s, CG&E’s, and PSI’s owned and co-owned generating stations. Additionally, the suit claims that weCinergy, CG&E, and PSI 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 northeastNortheast 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, CG&E, and PSI at the trial of the case. Contrary to Cinergy’s, CG&E’s, and PSI’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 accepted the appeal and set oralappeal. Oral arguments forwere held before the Seventh Circuit Court of Appeals in 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 Court of Appeals rules. Notwithstanding the appeal, there are a number of other legal issues currently before the district court 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 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 in front of the same judge who has the CSP case.
WeAt this time, Cinergy, CG&E, and PSI are unable to predict whether resolution of these matters would have a material effect on ourtheir financial position or results of operations. operations.WeCinergy, CG&E, and PSI 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 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. Oral argument was held before the Second Circuit Court of Appeals and oral argument is scheduled forin June 2006. We areCinergy is not able to predict whether resolution of these matters would have a material effect on ourits financial position or results of operations.
In November 2004, a citizen of the Village of Moscow, Ohio, the town adjacent to CG&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, weCG&E cannot predict whether the outcome of this matter will have a material impact on ourits financial position or results of operations. We intendCG&E intends to defend this lawsuit vigorously in court.
Coal tar residues, related hydrocarbons, and various metals have been found in at least 2223 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 2223 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 betweenamong 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 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 carrier, a jury returned a verdict against PSI in February 2005. PSI has appealed this decision. At the presentthis 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. WePSI will continue to investigate and remediate the sites as outlined in the voluntary remediation plan. As additional facts become known and investigation is completed, wePSI will assess whether the likelihood of incurring additional costs becomes probable. Until all investigation and remediation is complete, we arePSI is unable to determine the overall impact on ourits financial position or results of operations.
CG&E has performed site assessments on certain of theirits sites where we believe MGP activities are believed to have occurred at some point in the past and have found no imminent risk to the environment. At the presentthis time, CG&E cannot predict whether investigation and/or remediation will be required in the future at any of these sites.
PSI and CG&E, 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 (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 as outside contractors in the construction and maintenance of CG&EPSI andPSI CG&E generating stations. The plaintiffs further claim that as the property owner of the generating stations, CG&E PSI and PSICG&E should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure. The impact on CG&E’sPSI’s and PSI’sCG&E’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 on a negligence claim and a verdict for PSI on punitive damages. PSI appealed this decision up to the Indiana Supreme Court. In October 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 over 150 other claims for amounts which neither individually nor in the aggregate are material to PSI’s financial position or results of operations. Based 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 made in Indiana and more case law is established.
CG&E has been named in fewer than 10 cases and as a result has virtually no settlement history for asbestos cases. Thus, CG&E is not able to reasonably estimate the range of potential loss from current or future lawsuits. However, potential judgments or settlements of existing or future claims could be material to CG&E.
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.
WeCinergy, CG&E, and PSI understand that a class action lawsuit was filed in Superior Court in Ontario, Canada against usCinergy, CG&E, and PSI 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. WeCinergy, CG&E, and PSI understand that the lawsuit also claims entitlement to punitive and exemplary damages in the amount of $1 billion. WeCinergy, CG&E, and PSI have not yet been served in this lawsuit,lawsuit; however, if served, weCinergy, CG&E, and PSI intend to defend this lawsuit vigorously in court. WeAt this time, Cinergy, CG&E, and PSI are not able to predict whether resolution of this matter would have a material effect on ourCinergy’s, CG&E’s, and PSI’s 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,others’, greenhouse gas emissions contributed to the frequency and intensity of storms such as Hurricane Katrina. Cinergy has not been served with this lawsuit.lawsuit; however, if served Cinergy intends to defend this lawsuit vigorously in court. At this time, we areCinergy is not able to predict whether resolution of this matter would have a material effect on ourCinergy’s financial position or results of operations.
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 ourCinergy’s, CG&E’s, and PSI’s Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business,Cinergy’s, CG&E’s, and PSI’s, financial condition or future results. The risks described in ourCinergy’s, CG&E’s, and PSI’s Annual Report on Form 10-K are not the only risks facing our Company.Cinergy, CG&E, and PSI. Additional risks and uncertainties not currently known to usCinergy, CG&E, and PSI or that weCinergy, CG&E, and PSI currently deem to be immaterial also may materially adversely affect our business,Cinergy’s, CG&E’s, and PSI’s financial condition and/or operating results.
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The documents listed below are being filed, or have previously been filed, on behalf of Cinergy Corp., The Cincinnati Gas & Electric Company (CG&E), and PSI Energy, Inc. (PSI) and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith:
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10.1 |
| Cinergy Corp. | Consulting Agreement, dated March 31, 2006, between Michael J. Cyrus and Cinergy Corp. | Cinergy Corp.Form 8-K, filed | |||
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10.2 |
| Cinergy Corp. |
| Summary of Amendment to Employment Agreement of James E. Rogers, Michael J. Cyrus, Marc E. Manly, Lynn J. Good and James L. Turner. | Cinergy Corp.Form 8-K, filed | ||
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10.3 |
| Cinergy Corp. | Agreement, dated March 31, 2006, between James E. Rogers and Cinergy Corp. | Cinergy Corp.Form 8-K, filed | |||
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10.4 |
| Cinergy Corp. | Purchase and Sale Agreement by and among Cinergy Capital & Trading, Inc., as Seller, and Fortis Bank, S.A./N.V., as Buyer, dated as of June 26, 2006. | Cinergy Corp. Form 8-K, filed June 30, 2006 | |||
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| Cinergy Corp. CG&E | Amended and Restated Credit Agreement, dated as of June 29, 2006, among Cinergy Corp., CG&E, PSI, ULH&P, The Banks Listed Herein, Barclays Bank PLC, as Administrative Agent, and JP Morgan Chase Bank, N.A., as Syndication Agent. | |||||
10.6 |
| CG&E | Keepwell Agreement, dated April 10, 2006, between Duke Capital LLC and CG&E. | CG&EForm 8-K, filed | |||
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10.7 | PSI | Tenth Supplemental Indenture, dated as of June 9, 2006, between PSI, and the Bank of New York Trust Company, N.A. (successor trustee to Fifth Third Bank), as Trustee. | PSI Form 8-K, filed June 15, 2006 | ||||
18.1 | PSI | Letter regarding change in accounting principles. | |||||
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| Certification by David L. Hauser 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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| Cinergy Corp. |
| Certification by Steven K. Young 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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| 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. | |||
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| 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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| Cinergy Corp. |
| Certification by David L. Hauser 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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| Certification by Steven K. Young 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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| 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. | |||
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| 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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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company, and PSI Energy, Inc. each Securities Exchange Act of 1934, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CINERGY CORP. | ||||
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Date: |
| /s/ | David L. Hauser |
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| /s/ | Steven K. Young |
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THE CINCINNATI GAS & ELECTRIC COMPANY | |||||
PSI ENERGY, INC. |
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| /s/ | Myron L. Caldwell |
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| /s/ | Dwight L. Jacobs |
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| chief accounting officer) |
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