UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(Mark One) |
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2002 |
or |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission | Registrant, State of Incorporation, | I.R.S. Employer | ||
1-11377 | CINERGY CORP. | 31-1385023 | ||
1-1232 | THE CINCINNATI GAS & ELECTRIC COMPANY | 31-0240030 | ||
1-3543 | PSI ENERGY, INC. | 35-0594457 | ||
2-7793 | THE UNION LIGHT, HEAT AND POWER COMPANY | 31-0473080 |
Each of the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission Registrant, Statefollowing classes or series of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
1-11377 CINERGY CORP. 31-1385023
(A Delaware Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 381-2000
1-1232 THE CINCINNATI GAS & ELECTRIC COMPANY 31-0240030
(An Ohio Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 381-2000
1-3543 PSI ENERGY, INC. 35-0594457
(An Indiana Corporation)
1000 East Main Street
Plainfield, Indiana 46168
(317) 839-9611
2-7793 THE UNION LIGHT, HEAT AND POWER COMPANY 31-0473080
(A Kentucky Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 381-2000
Securitiessecurities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Registrant Title of each classAct is registered on which registered
Cinergy Corp. Common Stockthe New York Stock Exchange
The Cincinnati Gas Cumulative Preferred Stock
& Electric Company 4% New York Stock Exchange
Junior Subordinated
Debentures 8.28% New York Stock Exchange
PSI Energy, Inc. Cumulative Preferred Stock
4.32%, 4.16%, 6 7/8% New York Stock Exchange
First Mortgage Bonds
Series S and Y New York Stock Exchange
The Union Light, None
Heat and Power
Company
Registrant | Title of each class | |||
Cinergy Corp. | Common Stock | |||
Income PRIDES | ||||
The Cincinnati Gas & Electric Company | Cumulative Preferred Stock | 4 | % | |
Junior Subordinated Debentures | 8.28 | % | ||
PSI Energy, Inc. | Cumulative Preferred Stock | 4.32 | % | |
Cumulative Preferred Stock | 4.16 | % | ||
Cumulative Preferred Stock | 6-7/8 | % | ||
The Union Light, Heat and Power Company | None | |||
Securities registered pursuant to Section 12(g) of the Act for Cinergy Corp.,
The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light,
Heat and Power Company:Act: None
Indicate by check mark whether each registrant (1) has 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 such registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes Xý No __
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants'registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )
Requirements pursuant to Item 405 of Regulation S-K are not applicable for The
Union Light, Heat and Power Company.
The Union Light, Heat and Power Company.
The Union Light, Heat and Power Company meets the conditions set forth in General Instruction I(1)I (1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2)I (2) of Form 10-K.
Indicate by check mark whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ý No o
As of February 28, 1998,January 31, 2003, the aggregate market value of the voting and nonvoting
common equity of Cinergy Corp. held by nonaffiliates (shareholders who are not directors or executive officers) was $5.4$5.3 billion. Cinergy Corp. is the sole ownerAll of the Common Stockcommon stock of each of PSI Energy, Inc.
and The Cincinnati Gas & Electric Company. The Union Light, Heat and Power
Company's Common Stock is wholly-owned by The Cincinnati Gas & Electric
Company.
As of February 28, 1998, shares of Common Stock outstanding for each registrant
were as listed:
Company Shares Cinergy Corp., par value $.01 per share 157,764,020
The Cincinnati Gas & Electric Company par value $8.50 per share 89,663,086
and PSI Energy, Inc. is owned by Cinergy Corp., without par value, stated value $.01 per share 53,913,701
and all of the common stock of The Union Light, Heat and Power Company par value $15.00 per share 585,333
is owned by The Cincinnati Gas & Electric Company. As of January 31, 2003, each registrant had the following shares of common stock outstanding:
Registrant | Description | Shares | |||
Cinergy Corp. | Par value $.01 per share | 168,979,381 | |||
The Cincinnati Gas & Electric Company | Par value $8.50 per share | 89,663,086 | |||
PSI Energy, Inc. | Without par value, stated value $.01 per share | 53,913,701 | |||
The Union Light, Heat and Power Company | Par value $15.00 per share | 585,333 |
2
DOCUMENTS INCORPORATED BY REFERENCE
The
Portions of the Proxy Statement of Cinergy Corp. dated March 16, 1998, and the Information Statement of PSI Energy, Inc. dated March 23, 1998, filed, or to be filed, with the Securities and Exchange Commission are incorporated by reference into Part III of this report.
This combined Form 10-K is separately filed by Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company.Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to theregistrants other registrants.
3
TABLE OF CONTENTS
Item Page
Number Number
PART I
1 Business
Organization . . . . . . . . . . . . . . . . . . . . . .
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . .
ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . .
PSI. . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments. . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . .
Customer, Sales, and Revenue Data. . . . . . . . . . . .
Financial Information by Business Segment. . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Matters . . . . . . . . . . . . . . . . . . .
Power Supply . . . . . . . . . . . . . . . . . . . . . .
Fuel Supply. . . . . . . . . . . . . . . . . . . . . . .
Gas Supply . . . . . . . . . . . . . . . . . . . . . . .
Competition. . . . . . . . . . . . . . . . . . . . . . .
Capital Requirements . . . . . . . . . . . . . . . . . .
Environmental Matters. . . . . . . . . . . . . . . . . .
Employees. . . . . . . . . . . . . . . . . . . . . . . .
2 Properties . . . . . . . . . . . . . . . . . . . . . . . .
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . .
PSI. . . . . . . . . . . . . . . . . . . . . . . . . . .
ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . .
Other Utility Subsidiaries . . . . . . . . . . . . . . .
3 Legal Proceedings
WVPA Settlement Agreement. . . . . . . . . . . . . . . .
Manufactured Gas Plant Claims. . . . . . . . . . . . . .
Skinner Landfill Remediation . . . . . . . . . . . . . .
United Scrap Lead Site . . . . . . . . . . . . . . . . .
Enertech Litigation. . . . . . . . . . . . . . . . . . .
4 Submission of Matters to a Vote of Security Holders. . . .
Executive Officers of the Registrant . . . . . . . . . . .
PART II
Exhibits, Financial Statement Schedules, and Reports on Form 8-K | |
Certifications | |
5 Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . .
6 Selected Financial Data. . . . . . . . . . . . . . . . . .
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . .
Index to Financial Statements and Financial Statement
Schedules. . . . . . . . . . . . . . . . . . . . . . . .
7A Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . . .
8 Financial Statements and Supplementary Data. . . . . . . .
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . .
PART III
10 Directors and Executive Officers of the Registrant . . . .
11 Executive Compensation . . . . . . . . . . . . . . . . . .
12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . .
13 Certain Relationships and Related Transactions . . . . . .
PART IV
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Financial Statements and Schedules . . . . . . . . . .
Reports on Form 8-K. . . . . . . . . . . . . . . . . .
Exhibits . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . .
PART I
ITEM 1. BUSINESS
CAUTIONARY STATEMENTS
In this report Cinergy CG&E, PSI, and ULH&P
Organization
(which includes Cinergy Corp., a Delaware corporation (Cinergy or Company), is a registered
holding company under the Public Utility Holding Company Act of 1935 (PUHCA).
Cinergy was created in the October 1994 merger of PSI Resources, Inc.
(Resources) and The Cincinnati Gas & Electric Company (CG&E). Following the
merger, Cinergy became the parent holding company of PSI Energy, Inc. (PSI),
previously Resources' utility subsidiary, CG&E, Cinergy Investments, Inc.
(Investments), and Cinergy Services, Inc. (Services).
Cinergy's two utility subsidiaries, CG&E and PSI, account for the majority of
Cinergy's revenues and total assets.
Cinergy, CG&E, and ULH&P
CG&E
CG&E, an Ohio corporation, is a combination electric and gas public utility
company with five wholly-owned utility subsidiaries, The Union Light, Heat and
Power Company (ULH&P), Miami Power Corporation, an Indiana corporation (Miami),
The West Harrison Gas and Electric Company (West Harrison), an Indiana
corporation, KO Transmission Company (KO Transmission), and Lawrenceburg Gas
Company (Lawrenceburg), an Indiana corporation. In addition, CG&E has one
wholly-owned non-utility subsidiary, Tri-State Improvement Company (Tri-State).
CG&E and its utility subsidiaries are engaged in the production, transmission,
distribution, and sale of electric energy and/or the sale and transportation of
natural gas in the southwestern portion of Ohio and adjacent areas in Kentucky
and Indiana. The area served with electricity, gas, or both covers approximately
3,000 square miles, has an estimated population of two million people, and
includes the cities of Cincinnati and Middletown in Ohio, Covington and Newport
in Kentucky, and Lawrenceburg in Indiana.
KO Transmission, a Kentucky corporation, acquired an interest in an interstate
natural gas pipeline in June 1996, to which CG&E was entitled as a result of a
settlement with the Columbia Gas Transmission Corp. KO Transmission is engaged
in the transportation of natural gas in interstate commerce between Kentucky and
Ohio.
Tri-State, an Ohio corporation, is devoted to acquiring and holding property in
Ohio, Kentucky, and Indiana for substations, electric and gas rights of way,
office space, and other uses in CG&E's and its subsidiaries' operations.
ULH&P
ULH&P, a Kentucky corporation, is engaged in the transmission, distribution, and
sale of electric energy and the sale and transportation of natural gas in
northern Kentucky. The area served with electricity, gas, or both covers
approximately 500 square miles, has an estimated population of 319 thousand
people, and includes the cities of Covington and Newport in Kentucky.
Cinergy and PSI
PSI
PSI, an Indiana corporation, is engaged in the production, transmission,
distribution, and sale of electric energy in north central, central, and
southern Indiana. It serves an estimated population of 2.1 million people
located in 69 of the state's 92 counties including the cities of Bloomington,
Columbus, Kokomo, Lafayette, New Albany, and Terre Haute.
PSI Energy Argentina, Inc. (PSI Energy Argentina), a wholly-owned subsidiary of
PSI and an Indiana corporation, was formed to invest in foreign utility
companies. PSI Energy Argentina is a member of a multinational consortium which
has controlling ownership of Edesur S.A. (Edesur). Edesur is an
electricity-distribution network serving the southern half of Buenos Aires,
Argentina. Edesur provides distribution services to 2.1 million customers. PSI
Energy Argentina owns a small equity interest in this project and provides
operating and consulting services.
South Construction Company, Inc. (South Construction), a wholly-owned subsidiary
of PSI and an Indiana corporation, has been used solely to hold legal title to
real estate and interests in real estate which are either not used and useful in
the conduct of PSI's business (such as undeveloped real estate of PSI abutting a
PSI office building) or which have some defect in title which is unacceptable to
PSI. Most of the real estate to which South Construction acquires title relates
to PSI's utility business.
Cinergy
Investments
Investments, a Delaware corporation, is a non-utility subholding company that
was formed to operate Cinergy's domestic non-utility and international
businesses and interests. Investments holds the following non-utility
subsidiaries and interests, which are more fully described below: Cinergy-
Cadence, Inc.; Cinergy Capital & Trading, Inc. (Capital & Trading); Cinergy
Communications, Inc. (Communications); Cinergy Engineering, Inc. (Engineering);
Cinergy Global Power, Inc. (Cinergy Global); Cinergy Resources, Inc. (CRI);
Cinergy Supply Network, Inc. (Supply); Cinergy Solutions, Inc. (Solutions);
Cinergy Technology, Inc. (Technology); Cinergy UK, Inc. (Cinergy UK); and
Enertech Associates, Inc. (Enertech).
Cinergy-Cadence, Inc., an Indiana corporation, is dedicated solely to holding
Investment's one-third ownership interest in Cadence Network LLC (Cadence).
Cadence was formed in the third quarter of 1997 as a joint venture with New
Century Energies, Inc. and Florida Progress Corporation to provide a single
source for both energy management services and products designed to lower energy
costs for national customers that operate in multiple locations across the
country. These services include consolidated billing, bill auditing, and usage
analysis. Cadence commenced operations in the third quarter of 1997.
Capital & Trading, an Indiana corporation, was formed to engage in the business
of marketing power, electricity futures, and trading related energy products and
services and to provide consulting services in the wholesale power-related
markets. In June 1997, Capital & Trading acquired the assets and personnel of
Greenwich Energy Partners, which specialized in energy risk management,
marketing, and proprietary arbitrage trading.
Communications, a Delaware corporation, is an exempt telecommunications company
engaged or planning to be engaged in a variety of telecommunications activities
including, but not limited to: right-of-way leasing, fiber installation, and
radio tower construction and leasing.
Engineering, an Ohio corporation, provides engineering designs and engineering
technical support in connection with various energy-related projects and
proposals.
Cinergy Global, a Delaware corporation, holds substantially all of the equity of
MPII (Zambia) B.V., a Netherlands company, which in turn, holds a 39% equity
interest in Copperbelt Energy Corporation PLC (CEC), a corporation organized
under the laws of the Republic of Zambia. CEC holds certain electric generation,
transmission, and distribution assets formerly held by the Republic of Zambia
through the Power Division of Zambia Consolidated Copper Mines Limited.
Cinergy Global also owns all of the equity of MPI International Limited (MPI
International), a United Kingdom (UK) company. During the third quarter of 1997,
MPI International assumed ownership of all of the projects in development and
all future projects of Midlands Power International, a subsidiary of Midlands
Electricity plc (Midlands) which is discussed below. Cinergy Global, through MPI
International, will acquire and/or develop energy projects throughout the world.
CRI, a Delaware corporation, was formed to hold CG&E's interest in U.S. Energy
Partners, a gas marketing partnership that was dissolved effective September 1,
1995. Upon dissolution, CRI took its portion of the partnership assets to
continue in the gas marketing business. CRI competes with traditional, regulated
local distribution companies by offering "merchant service" (i.e., acquiring
natural gas for resale to end-use customers) and brokers gas to industrial and
large commercial customers.
Recently, CRI expanded its business to include retail marketing of electricity.
CRI is participating in a pilot program in Pennsylvania under which electric
customers throughout the state will have the right to choose their electricity
supplier. CRI began delivering power to Pennsylvania customers in December 1997.
Solutions, a Delaware corporation, was formed to market an array of
energy-related products and services and develop, acquire, own, and operate
certain energy-related projects. Solutions holds a 50% interest in
Trigen-Cinergy Solutions LLC, a Delaware limited liability company
(Trigen-Cinergy). Trigen- Cinergy was formed to build, own, and operate
cogeneration and trigeneration facilities for industrial plants, office
buildings, shopping centers, hospitals, universities, and other major energy
users that can benefit from combined heat and power production economies.
Trigen-Cinergy will also provide energy and asset management services, including
fuel procurement, ancillary to its activities.
Solutions also holds a 51% interest in Trigen-Cinergy Solutions of Cincinnati
LLC, an Ohio limited liability company (Trigen-Cinergy Cincinnati), which was
formed in the third quarter of 1997. Effective August 1997, Cinergy Cooling
Corp. was merged with and into Trigen-Cinergy Cincinnati, with Trigen-Cinergy
Cincinnati being the surviving company jointly owned by Solutions (51%) and
Trigen Solutions, Inc. (49%). Trigen-Cinergy Cincinnati has an exclusive
franchise from the City of Cincinnati which permits it to maintain and operate a
chilled water system in the downtown business district of Cincinnati, Ohio.
Supply, a Delaware corporation, was formed in January 1998 to broker
transmission and distribution materials and services and to provide underground
utility facilities location services.
Technology, an Indiana corporation, was created to manage certain existing
technology-related investments of Cinergy, assess the market potential for
technology-related product and service development opportunities, and form key
alliances for technology-related product development.
Cinergy UK, a Delaware corporation, was formed to hold Cinergy's 50% interest in
Avon Energy Partners Holdings, a UK unlimited liability company, and its wholly
owned subsidiary, Avon Energy Partners PLC, a UK limited liability company
(collectively, Avon Energy). During 1996, Avon Energy acquired all of the
outstanding common stock of Midlands, a UK regional electric company. Midlands
primarily distributes and supplies electricity to over 2.2 million industrial,
commercial, and residential customers. In addition, Midlands, together with its
subsidiaries, generates power, supplies natural gas to retail customers, and
performs electrical contracting services. (See Note 1(e) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
Enertech was incorporated in Ohio in 1992 as a vehicle for CG&E to offer utility
management consulting services and to pursue investment opportunities in
energy-related areas, including demand-side management (DSM) services,
consulting, energy and fuel brokering, engineering services, construction and/or
operation of generation, cogeneration, independent power production facilities,
and project development. In July 1994, Enertech acquired Beheer-En
Belegginsmaatschappij Bruwabel B.V. (Bruwabel) and its subsidiaries for the
purpose of pursuing design, engineering, and development work involving energy
privatization projects, primarily in the Czech Republic. In June 1996,
Investments sold what remained of its investment in Bruwabel and its
subsidiaries and their assets, including the Vytopna Kromeriz Heating Plant
which was acquired by Power Development s.r.o. in 1995. (See Note 12(d) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
PSI Recycling, Inc. (Recycling) was an Indiana corporation which recycled metal
from CG&E and paper, metal, and other materials from PSI, its largest single
supplier, and other sources. Investments sold the assets of Recycling in August
1996. Recycling was dissolved effective December 31, 1997.
Power Equipment Supply Co. (PESCO) was incorporated in Indiana to sell equipment
and parts from a PSI generating plant which was canceled, the Marble Hill
Nuclear Project. PESCO also purchased equipment for resale, brokered equipment,
and sold equipment on consignment for others. PESCO discontinued operations in
early 1996 and was dissolved effective December 31, 1997.
CGE ECK, Inc., a Delaware corporation (CGE ECK), was created to hold CG&E's
one-third interest in a Czech electric utility company, ECK s.r.o. After the
Cinergy merger, CGE ECK reduced its ownership interest in ECK s.r.o. In mid-
1997, CGE ECK sold what remained of its interest in ECK s.r.o. and was dissolved
effective December 31, 1997.
Cinergy, CG&E, PSI, and ULH&P
Services
Services, a Delaware corporation, is the service company for the Cinergy system,
providing member companies with a variety of administrative, management, and
support services.
Cinergy, CG&E, PSI, and ULH&P
Customer, Sales, and Revenue Data
The number of customers served at year-end and the percent of operating revenues
derived from the sale of electricity and the sale and transportation of natural
gas for each registrant for 1997 are as follows:
Operating
Customers Revenues
Registrant Electric Gas Electric Gas
Cinergy and subsidiaries 1 412 552 456 651 88% 11%
CG&E and subsidiaries 737 502 456 651 79% 20%
PSI 675 052 N/A 98% N/A
ULH&P 117 835 77 944 70% 29%
Cinergy's utilities' service territory spans 86 counties in Ohio, Indiana, and
Kentucky and includes approximately 840 cities, towns, unincorporated
communities, and adjacent rural areas, including municipal utilities and rural
electric cooperatives.
The service territory of CG&E and its utility subsidiaries, including ULH&P, is
heavily populated and characterized by a stable residential customer base and a
diverse mix of industrial customers. CG&E's and its utility subsidiaries'
service territory spans 19 counties in Ohio, Indiana, and Kentucky (of which
ULH&P serves six counties in Kentucky) and includes approximately 130 (44 for
ULH&P) cities, towns, unincorporated communities, and adjacent rural areas,
including municipal utilities and rural electric cooperatives. The area served
by PSI is a residential, agricultural, and widely diversified industrial
territory. PSI's service territory includes approximately 710 cities, towns,
unincorporated communities, and adjacent rural areas, including municipal
utilities and rural electric cooperatives. No one customer accounts for more
than 6% of operating revenues for PSI, 5% of electric or gas operating revenues
for CG&E and its utility subsidiaries, or 10% of electric or gas operating
revenues for ULH&P. Sales of electricity and gas sales and transportation are
affected by seasonal weather patterns, and, therefore, operating revenues and
associated operating expenses are not distributed evenly during the year.
Cinergy, CG&E, and ULH&P
Financial Information by Business Segment
For financial information by business segment, see Note 15 of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary
Data." For a discussion of the potential divestiture of CG&E's, including
ULH&P's, gas operations, see Note 12(f) of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data."
Regulation
Cinergy, CG&E, PSI, and ULH&P
Cinergy, its utility subsidiaries, and certain of its non-utility subsidiaries
are subject to regulation by the Securities and Exchange Commission (SEC) under
the PUHCA with respect to, among other things, issuances and sales of
securities, acquisitions and sales of certain utility properties, acquisitions
and retentions of interests in non-utility businesses, intrasystem sales of
certain goods and services, the method of keeping accounts, and access to books
and records. In addition, the PUHCA generally limits registered holding
companies to a single "integrated" public utility system, which the SEC
traditionally has interpreted to prohibit a registered holding company, with
limited exceptions, from owning both gas and electric properties. (Refer to the
information appearing under the captions "Repeal of the PUHCA" in the
"Competitive Pressures" section and "Potential Divestiture of Gas Operations" in
the "Regulatory Matters" section in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and to Note 1(f) of
the "Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
CG&E, ULH&P, Miami, and PSI are each subject to regulation by the Federal Energy
Regulatory Commission (FERC) under the Federal Power Act with respect to the
classification of accounts, rates for wholesale sales of electricity,
interconnection agreements, and acquisitions and sales of certain utility
properties. In addition, services by KO Transmission are rendered in accordance
with terms and conditions and at rates contained in a gas tariff filed with the
FERC. Transportation of gas between CG&E and ULH&P by KO Transmission is subject
to regulation by the FERC under the Natural Gas Act.
Cinergy, CG&E, and ULH&P
CG&E, as a public utility under the laws of Ohio, is also subject to regulation
by the Public Utilities Commission of Ohio (PUCO) as to retail electric and gas
rates, services, accounts, depreciation, issuance of securities, acquisitions
and sales of certain utility properties, and in other respects as provided by
Ohio law. Rates within municipalities in Ohio are subject to original regulation
by the municipalities. The Ohio Power Siting Board has jurisdiction in Ohio over
the location, construction, and initial operation of new electric generating
facilities and certain electric and gas transmission lines presently used by
CG&E. As to retail rates and other matters, ULH&P is regulated by the Kentucky
Public Service Commission, and West Harrison and Lawrenceburg are regulated by
the Indiana Utility Regulatory Commission (IURC).
Cinergy and PSI
PSI, as a public utility under the laws of Indiana, is also regulated by the
IURC as to its retail rates, services, accounts, depreciation, issuance of
securities, acquisitions and sales of certain utility properties, and in other
respects as provided by Indiana law. Prior to the construction, purchase, or
lease of a facility used for the generation of electricity, a public utility in
Indiana must obtain from the IURC a certificate of public convenience and
necessity.
Cinergy, CG&E, PSI, and ULH&P
Regulatory Matters
Refer to the information appearing under the caption "Regulatory Matters" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Power Supply
Cinergy, CG&E, PSI, and ULH&P
Cinergy and other utilities in an eight-state region are participating in the
East Central Area Reliability Coordination Agreement for the purpose of
coordinating the planning and operation of generating and transmission
facilities to provide for maximum reliability of regional bulk power supply.
(Refer to the information appearing under the caption "Midwest ISO" in the
"Competitive Pressures" section of "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of Cinergy's
involvement in a coalition for operation of a regional transmission system.)
In addition to an intercompany tie between CG&E's and PSI's electric systems,
Cinergy's electric system, which is operated by Services, is interconnected with
the electric systems of Indiana Michigan Power Company, Columbus Southern Power
Company, Ohio Power Company (all doing business as American Electric Power
Company, Inc. (AEP)), Central Illinois Public Service Company, East Kentucky
Power Cooperative, Hoosier Energy Rural Electric Cooperative, Inc., Indianapolis
Power and Light Company, Kentucky Utilities Company, Louisville Gas & Electric
Company (LG&E), Northern Indiana Public Service Company, Southern Indiana Gas
and Electric Company, The Dayton Power and Light Company, and Ohio Valley
Electric Corporation.
Cinergy and PSI
PSI has a power supply relationship with Wabash Valley Power Association, Inc.
(WVPA) and Indiana Municipal Power Agency (IMPA) through power coordination
agreements. WVPA and IMPA are also parties with PSI to a joint transmission and
local facilities agreement.
Cinergy, CG&E, and ULH&P
ULH&P does not own or operate any electric generating facilities. Its
requirements for electric energy are purchased primarily from CG&E at rates
regulated by the FERC.
Fuel Supply
Cinergy
Cinergy purchases approximately 25 million tons of coal annually for use by CG&E
and PSI, which historically would rank Cinergy as the sixth largest utility coal
purchaser in the United States.
Cinergy, CG&E, and PSI
A major portion of the coal required by CG&E and PSI is obtained through both
long- and short-term coal supply agreements, with the remaining requirements
purchased on the spot market. The prices to be paid under most of these
contracts are subject to adjustment. In addition, some of these agreements
include extension options and termination provisions pertaining to coal quality.
The coal delivered under these contracts is primarily from mines located in
Indiana, Illinois, Pennsylvania, and West Virginia for PSI and West Virginia,
Ohio, Kentucky, and Pennsylvania for CG&E.
CG&E and PSI monitor alternative sources to assure a continuing availability of
economical fuel supplies. The companies intend to maintain the practice of
purchasing a portion of their coal requirements on the spot market and will
continue to investigate the least cost coal options in connection with their
compliance with the Clean Air Act Amendments of 1990. (See the information
appearing under the caption "Environmental Issues" in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
The companies believe they will be able to obtain sufficient coal to meet future
generating requirements. However, both CG&E and PSI are unable to predict the
extent to which coal availability and price may ultimately be affected by future
environmental requirements. Presently, CG&E and PSI expect the cost of coal to
rise in the long run as the supply of more accessible and higher-grade coal
diminishes and as mining, transportation, and other related costs continue an
upward trend.
Cinergy, CG&E, and ULH&P
Gas Supply
In 1997, CG&E and its utility subsidiaries, including ULH&P, purchased 44% of
their natural gas supply from firm supply agreements, with remaining volumes
purchased in the spot market. These firm contracts feature dual levels of gas
supply: base load for continuous supply for CG&E's and its utility subsidiaries'
core requirements, and "swing" load, which is gas available on a daily basis to
accommodate changes in demand. CG&E pays reservation charges for firm base and
swing supplies. These charges guarantee delivery from the supplier during
extreme weather and protect the supplier from fluctuations in daily prices
associated with swing supplies.
As the trend of customers purchasing gas directly from gas marketers (suppliers)
and using CG&E's facilities for transportation increases, CG&E and its
subsidiaries seek to minimize contract commitment costs to firm suppliers, and
reduce the amount of reservation charges paid to suppliers for firm supply.
Accordingly, CG&E and its subsidiaries anticipate purchasing approximately 50%
of their gas supply in the spot market and 50% from firm supply agreements in
1998.
Gas purchased by CG&E and its subsidiaries is transported on interstate
pipelines either directly to CG&E's and its subsidiaries' distribution systems,
or it is injected into pipeline storage facilities for withdrawal and delivery
in the future. Most of CG&E's and its utility subsidiaries' gas supplies
originate from the Gulf of Mexico coastal area of Texas and Louisiana. CG&E and
its subsidiaries have also obtained a limited supply originating from the
Appalachian region and the mid-continent (Arkansas - Oklahoma) basin, and from
methane gas recovered from an Ohio landfill. Over the long-term, natural gas is
expected to retain its price competitiveness with alternative fuels. However,
weather conditions, supply, demand, and storage inventories can cause
significant price fluctuations.
Cinergy, CG&E, PSI, and ULH&P
Competition
Refer to the information appearing under the caption "Competitive Pressures" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Cinergy, CG&E, PSI, and ULH&P
Capital Requirements
Refer to the information appearing under the caption "Capital Requirements" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Cinergy, CG&E, and PSI
Environmental Matters
Environmental compliance construction expenditures for 1998 for Cinergy and its
subsidiaries are forecasted to be as follows:
Registrant Expenditures
(in thousands)
CG&E and subsidiaries $3 742
PSI 3 387
Cinergy and subsidiaries $7 129
In addition, refer to the information appearing under the caption "Environmental
Issues" in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Employees
Cinergy
The number of employees of Cinergy and its subsidiaries at December 31, 1997,
was 7,609, of whom 4,312 belonged to bargaining units. These bargaining unit
employees were represented by labor agreements between CG&E and its
subsidiaries, including ULH&P, or PSI and the applicable union organization. Of
Cinergy's total employees, 2,825 employees were represented by the International
Brotherhood of Electrical Workers (IBEW), 407 were represented by the United
Steelworkers of America (USWA), and 1,080 were represented by the Independent
Utilities Union (IUU).
Employees assigned to Services at December 31, 1997, totaled 3,028, of whom 831
belonged to bargaining units. These bargaining unit employees were represented
by the labor agreements previously discussed. Of Services' total employees, 540
were represented by the IUU, 1 was represented by the USWA, and 290 were
represented by the IBEW (112 were represented by the agreement with PSI and 178
were represented by the agreement with CG&E).
Employees assigned to Cinergy Resources at December 31, 1997, totaled 13
non-union employees.
Cinergy and CG&E
The number of employees of CG&E and its subsidiaries at December 31, 1997, was
2,537, of whom CG&E employed 2,292, ULH&P employed 236, and Lawrenceburg
employed 9.
CG&E and its subsidiaries have collective bargaining agreements with several
union organizations. Of CG&E's and its subsidiaries' total employees, 540 were
represented by the IUU, 406 were represented by the USWA, and 1,177 were
represented by the IBEW. The current contract between CG&E and the IUU will
expire in April 2001. CG&E and its subsidiaries have a contract with the USWA
expiring May 15, 2002. The IBEW contract expires April 1, 2001.
Cinergy and PSI
The number of employees of PSI at December 31, 1997, was 2,030, of whom 1,358
were represented by the IBEW.
PSI's collective bargaining agreement with the IBEW will expire at the end of
April 1999.
Cinergy and ULH&P
The number of employees of ULH&P at December 31, 1997, was 236, of whom 209
belonged to bargaining units. These bargaining unit employees were represented
by the same labor agreements between CG&E and the applicable union organization.
Of ULH&P's total employees, 61 employees were represented by the IBEW, 91 were
represented by the USWA, and 57 were represented by the IUU.
The current contract between ULH&P and the IUU will expire in April 2001. ULH&P
has agreements with the USWA and IBEW that will expire May 15, 2002, and April
1, 2001, respectively.
ITEM 2. PROPERTIES
Cinergy, CG&E, PSI, and ULH&P
Substantially all utility plant is subject to the lien of each applicable
company's first mortgage bond indenture.
In addition to the information discussed herein, refer to Note 13 of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data."
Cinergy, CG&E, and PSI
At December 31, 1997, the Cinergy utility subsidiaries owned electric generating
plants, or portions thereof in the case of jointly owned plants, with net
capabilities (winter ratings) as shown in the following table:
Net
Percent Principal Capability
Plant Name Location Ownership Fuel Source megawatts (mw)
CG&E
Steam Electric Generating Plants:
Miami Fort Station (Units 5&6) North Bend, Ohio 100.00% Coal 243
Miami Fort Station (Units 7&8) North Bend, Ohio 64.00 Coal 640
W.C. Beckjord Station (Units 1-5) New Richmond, Ohio 100.00 Coal 704
W.C. Beckjord Station (Unit 6) New Richmond, Ohio 37.50 Coal 158
J.M. Stuart Station Aberdeen, Ohio 39.00* Coal 913
Killen Station Adams County, Ohio 33.00* Coal 198
Conesville Station Conesville, Ohio 40.00* Coal 312
William H. Zimmer Generating
Station Moscow, Ohio 46.50 Coal 605
East Bend Station Boone County, Kentucky 69.00 Coal 414
Combustion Turbines:
Dicks Creek Station Middletown, Ohio 100.00 Gas 172
Miami Fort Gas Turbine Station North Bend, Ohio 100.00 Oil 78
W.C. Beckjord Gas Turbine Station New Richmond, Ohio 100.00 Oil 245
Woodsdale Generating Station Butler County, Ohio 100.00 Gas 564
PSI
Steam Electric Generating Plants:
Gibson Generating Station:
(Units 1-4) Princeton, Indiana 100.00 Coal 2,532
(Unit 5) Princeton, Indiana 50.05 Coal 313
Wabash River Station Terre Haute, Indiana 100.00 Coal 668
Cayuga Station Cayuga, Indiana 100.00 Coal 1,005
R.A. Gallagher Station New Albany, Indiana 100.00 Coal 560
Edwardsport Station Edwardsport, Indiana 100.00 Coal 160
Noblesville Station Noblesville, Indiana 100.00 Coal 90
Combustion Turbines:
Cayuga Combustion Turbine Cayuga, Indiana 100.00 Gas 120
Wabash River Coal Gasification
Project Terre Haute, Indiana 100.00 Coal 262
Internal Combustion Units:
Connersville Peaking Station Connersville, Indiana 100.00 Oil 98
Miami-Wabash Peaking Station Wabash, Indiana 100.00 Oil 104
Cayuga Peaking Units Cayuga, Indiana 100.00 Oil 11
Wabash River Peaking Units Terre Haute, Indiana 100.00 Oil 8
Hydroelectric Generating Station:
Markland Generating Station Markland Dam, Ohio
River 100.00 Water 45
* Station is not operated by CG&E.
Cinergy and CG&E
CG&E
CG&E's 1997 peak load (exclusive of off-system transactions), which occurred on
July 28, was 4,638 mw. For the period 1998 through 2007, peak load and
kilowatt-hour (kwh) sales are each forecasted to have annual growth rates of 2%.
These forecasts reflect CG&E's load growth, alternative fuel choices, population
growth, and housing starts. These forecasts exclude non-firm power transactions
and any potential off-system, long-term firm power sales.
As of December 31, 1997, CG&E's transmission system consisted of 388 circuit
miles of 345,000 volt line, 618 circuit miles of 138,000 volt line, 523 circuit
miles of 69,000 volt line, and 116 circuit miles of lesser volt line, all within
the states of Ohio and Kentucky. In addition, as of December 31, 1997, CG&E's
distribution system consisted of 14,736 circuit miles, all within the state of
Ohio. As of the same date, CG&E's transmission substations had a combined
capacity of 14,845,106 kilovolt-amperes, and the distribution substations had a
combined capacity of 5,951,348 kilovolt-amperes. A portion of CG&E's total
transmission system is jointly owned, primarily in connection with its jointly
owned electric generating units.
During 1997, almost all of the electricity generated by units owned by CG&E or
in which it has an ownership interest was produced by coal-fired generating
units. Those units generate most of the electric requirements of CG&E and its
utility subsidiaries.
CG&E owns two propane/air peakshaving plants. Associated with these plants are
two underground caverns, one with a seven million gallon capacity and one with
an eight million gallon capacity. Both plants and storage caverns are located in
Ohio and are used primarily to augment CG&E's supply of natural gas during
periods of peak demand and emergencies. CG&E also owns natural gas distribution
systems consisting of 5,718 miles of mains and service lines in southwestern
Ohio.
Cinergy and PSI
PSI
PSI's 1997 peak load (exclusive of off-system transactions), which occurred on
July 14, was 5,313 mw. For the period 1998 through 2007, peak load and kwh sales
are each forecast to have annual growth rates of 2%. These forecasts reflect
PSI's load growth, alternative fuel choices, population growth, and housing
starts. These forecasts exclude non-firm power transactions and any potential
off-system, long-term firm power sales.
As of December 31, 1997, PSI's transmission system consisted of 719 circuit
miles of 345,000 volt line, 656 circuit miles of 230,000 volt line, 1,595
circuit miles of 138,000 volt line, and 2,429 circuit miles of 69,000 volt line,
all within the state of Indiana. In addition, as of December 31, 1997, PSI's
distribution system consisted of 19,707 circuit miles, all within the state of
Indiana. As of the same date, PSI's transmission substations had a combined
capacity of 21,700,155 kilovolt-amperes, and the distribution substations had a
combined capacity of 6,322,409 kilovolt-amperes.
During 1997, almost all of PSI's kwh production was obtained from coal-fired and
hydroelectric generation.
Cinergy, CG&E, and ULH&P
ULH&P
As of December 31, 1997, ULH&P owned 105 circuit miles of 69,000 volt electric
transmission line, an electric distribution system consisting of 2,516 circuit
miles, and a gas distribution system consisting of 1,307 miles of mains and
service lines in northern Kentucky. ULH&P also owns a propane/air peakshaving
plant, a seven million gallon capacity underground cavern for the storage of
liquid propane, and related liquid propane feeder lines, located in northern
Kentucky and adjacent to one of the gas lines that transports natural gas to
CG&E. The propane/air plant and cavern are used primarily to augment CG&E's and
ULH&P's supply of natural gas during periods of peak demand and emergencies.
Cinergy and CG&E
Other Utility Subsidiaries
As of December 31, 1997, Lawrenceburg owned a gas distribution system consisting
of 172 miles of mains and service lines in Indiana adjacent to the western part
of CG&E's service area. Lawrenceburg is connected with and sells gas at
wholesale to the city of Aurora, Indiana, and is also connected within Indiana
with the lines of Texas Gas Transmission Corporation and Texas Eastern
Transmission Corporation.
As of December 31, 1997, West Harrison owned a small electric distribution
system consisting of 10 circuit miles in Indiana adjacent to CG&E's service
area. As of the same date, Miami owned 40 miles of 138,000 volt transmission
line connecting the lines of LG&E with those of CG&E.
As of December 31, 1997, KO Transmission owned a 32.67% interest in a 90-mile
interstate natural gas pipeline and a 100% interest in a 2 1/4 mile natural gas
pipeline. KO Transmission transports gas from southeast Kentucky northward to
the service territories of CG&E and ULH&P, their primary customers.
ITEM 3. LEGAL PROCEEDINGS
Cinergy and PSI
WVPA Settlement Agreement
See Note 12(e) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
Manufactured Gas Plant Claims
See Note 12(b)(ii) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
Cinergy and CG&E
Skinner Landfill Remediation
In the first quarter of 1998, CG&E was notified, by the Allocator in a
Court-mandated alternative dispute resolution (ADR) proceeding, that it had been
identified as a potentially responsible party (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) with respect to
the Skinner Landfill Superfund Site, which is located approximately 15 miles
north of Cincinnati, Ohio. In March 1997, the Plaintiffs from the underlying
CERCLA litigation brought suit in the United States District Court for the
Southern District of Ohio, Western Division (the Court), against over 80 PRPs.
In August 1997, the Court entered an order staying the litigation and requiring
all parties to engage in a non-binding, confidential ADR process. The Allocator,
which has been given authority by the Court to identify other parties that may
be responsible for response costs, has informed CG&E that it was identified by a
site owner, operator, or worker as one that had arranged for the disposal of
waste at the landfill and has concluded that a reasonable basis exists for
CG&E's participation in the ADR process. The plaintiffs claim to have expended
almost $2 million in initial response actions at the site and the Allocator has
indicated that the present value of the total site response costs is estimated
at approximately $14 million. CG&E is currently participating in the ADR
process. Based on information currently available, any potential liability
allocated to CG&E would not be material to its financial condition or results of
operations.
United Scrap Lead Site
See Note 12(c) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
Cinergy, CG&E, and PSI
Enertech Litigation
See Note 12(d) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
ULH&P
ULH&P has no material pending legal proceedings.
Cinergy, CG&E, PSI, and ULH&P
In addition to the above litigation, see "Regulatory Matters" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Notes 12(b), 12(c), and 12(f) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cinergy, CG&E, and PSI
None.
ULH&P
Omitted pursuant to instruction I(2)(c).
EXECUTIVE OFFICERS OF THE REGISTRANTS (at February 28, 1998)
Age at
Dec. 31,
Name 1997 Office & Date Elected or in Job
Cinergy, CG&E, and PSI
Jackson H. Randolph 67 Chairman of Cinergy, CG&E, and
PSI - 1995
Chairman and Chief Executive Officer
of Cinergy, CG&E, and PSI - 1994
Chairman, President, and Chief Executive
Officer of CG&E - 1993
James E. Rogers 50 Vice Chairman, President, and Chief
Executive Officer of Cinergy - 1995
Vice Chairman and Chief Executive
Officer of CG&E and PSI - 1995
Vice Chairman, President, and Chief
Operating Officer of Cinergy - 1994
Vice Chairman and Chief Operating
Officer of CG&E and PSI - 1994
Chairman and Chief Executive Officer
of Resources - 1993
Cheryl M. Foley 50 Vice President, General Counsel, and
Secretary of CG&E - 1995
Vice President, General Counsel, and
Secretary of Cinergy - 1994
Vice President, General Counsel, and
Secretary of PSI and Resources - 1991
Donald B. Ingle, Jr. 48 Vice President of Cinergy, CG&E, and PSI 1/
- 1997
President, Energy Services Business Unit
(ESBU) of Cinergy 1/ - 1997
Contract Consultant - Investments - 1995
President and Chief Executive Officer -
CornerStone Industries, Inc. 3/ - 1992
Elizabeth K. Lanier 2/ 46 Vice President and Chief of Staff of
Cinergy, CG&E, and PSI - 1996
Partner - Frost & Jacobs 3/ - 1984
J. Wayne Leonard 47 Vice President of Cinergy, CG&E, and PSI 4/
- 1997
President, Energy Commodities Business Unit
of Cinergy - 1996
Group Vice President and Chief
Financial Officer of CG&E and PSI - 1995
Group Vice President and Chief Financial
Officer of Cinergy - 1994
Senior Vice President and Chief Financial
Officer of PSI and Resources - 1992
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1997 Office & Date Elected or in Job
Madeleine W. Ludlow 43 Vice President and Chief Financial Officer
of Cinergy, CG&E, and PSI 4/ - 1997
Vice President - Enterprise Diversified
Holdings Incorporated (EDHI), a subsidiary
of Public Service Enterprise Group
Incorporated 3/ - 1996
Vice President and Treasurer - EDHI 3/ -
1992
William L. Sheafer 54 Vice President and Treasurer of Cinergy,
CG&E, and PSI - 1997
Treasurer of Cinergy and PSI - 1994
Treasurer of CG&E - 1987
John P. Steffen 45 Vice President and Comptroller of Cinergy,
CG&E, and PSI - 1998
Comptroller of Cinergy, CG&E, and PSI 5/ -
1997
Assistant Comptroller of CG&E - 1995
Assistant Comptroller of Cinergy and PSI -
1994
Assistant Controller of CG&E - 1991
Larry E. Thomas 52 Vice President of Cinergy, CG&E, and PSI -
1997
President, Energy Delivery Business Unit
of Cinergy - 1996
Group Vice President and Chief
Transformation Officer of Cinergy, CG&E,
and PSI - 1995
Group Vice President, Reengineering and
Operations Services of CG&E and
PSI - 1995
Group Vice President, Reengineering
and Operations Services of Cinergy - 1994
Senior Vice President and Chief Operations
Officer of PSI - 1992
Cinergy and CG&E
William J. Grealis 6/ 52 President, ESBU of Cinergy 1/ - 1996
Vice President of Cinergy - 1995
President of CG&E - 1995
President of Investments - 1995
President, Gas Business Unit of CG&E - 1995
Partner - Akin, Gump, Strauss, Hauer
& Feld 3/ - 1978
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1997 Office & Date Elected or in Job
Cinergy and PSI
John M. Mutz 7/ 62 Vice President of Cinergy - 1995
President of PSI - 1994
President of Resources - 1993
Cinergy
John Bryant 51 Vice President of Cinergy - 1998
Managing Director of MPI International
Limited, Cinergy's international project
development subsidiary - 1997
Executive Generation Director - Midlands -
1996
Generation Director - Midlands - 1992
J. Joseph Hale, Jr. 48 Vice President of Cinergy - 1996
General Manager, Marketing
Operations of CG&E - 1995
President of Cinergy Foundation, Inc. 8/ -
1992
M. Stephen Harkness 49 Vice President of Cinergy - 1996
Executive Vice President and Chief
Operating Officer of Trigen-Cinergy 9/ -
1996
General Manager, Corporate Development
and Financial Services of Cinergy - 1994
Jerry W. Liggett 56 Vice President of Cinergy - 1996
Senior Manager, Human Resources
Strategy of Cinergy - 1995
General Manager, Employee Relations,
Compensation & Benefits of Cinergy - 1995
Executive Director, Human Resources
of PSI and Resources - 1990
Michael M. Sample 45 Vice President of Cinergy - 1996
General Manager, International
Investments of Cinergy - 1994
Vice President, Government Affairs
of PSI and Resources - 1991
Charles J. Winger 52 Vice President of Cinergy - 1997
Vice President and Comptroller of Cinergy,
CG&E, and PSI 5/ - 1997 Comptroller of CG&E
- 1995 Comptroller of Cinergy - 1994
Comptroller of Resources - 1988
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
ULH&P
Omitted pursuant to instruction I(2)(c).
Cinergy, CG&E, and PSI
None of the officers are related in any manner. Executive officers of Cinergy
are elected to the offices set opposite their respective names until the next
annual meeting of the Board of Directors and until their successors shall have
been duly elected and shall have been qualified.
1/ Mr. Ingle named as Acting President of ESBU during May 1997, succeeding
Mr. Grealis; Mr. Ingle served in this capacity through September 1997, at
which time he was named President of ESBU and Vice President of each of
Cinergy, CG&E, and PSI, all effective October 1, 1997.
2/ Prior to becoming Vice President effective June 1, 1996, Ms. Lanier was a
partner in the law firm of Frost & Jacobs located in Cincinnati, Ohio.
3/ Non-affiliate of Cinergy.
4/ Effective April 22, 1997, Mr. Leonard relinquished additional title of
Chief Financial Officer and Ms. Ludlow appointed Vice President and Chief
Financial Officer.
5/ Effective August 11, 1997, Mr. Steffen was appointed Comptroller of
Cinergy, CG&E, and PSI, succeeding Mr. Winger, who retained office of Vice
President of Cinergy.
6/ Prior to becoming President of Investments, Mr. Grealis was a partner in
the Washington, D.C. law firm of Akin, Gump, Strauss, Hauer & Feld. In
addition, prior to the merger, Mr. Grealis was President of PSI
Investments, Inc. on an interim basis beginning in 1992.
7/ Prior to becoming President of Resources, Mr. Mutz was President of Lilly
Endowment, Inc., a private philanthropic foundation located in
Indianapolis, Indiana.
8/ An affiliated public benefit corporation organized and operating exclusively
for charitable purposes.
9/ Joint venture company formed by Cinergy and Trigen Energy Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Cinergy, CG&E, PSI, and ULH&P
Cinergy's common stock is listed on the New York Stock Exchange and has unlisted
trading privileges on the Boston, Chicago, Cincinnati, Pacific, and Philadelphia
exchanges. As of February 5, 1998, Cinergy's most recent dividend record date,
there were 73,018 common shareholders of record. The following table shows the
high and low sales prices per share, if applicable, and the dividends on common
stock declared by Cinergy, CG&E, PSI, and ULH&P for the past two years:
Market Price (a) Dividends Declared
High Low (per share) (in thousands)
1996
Cinergy
4th Quarter $34 1/4 $30 7/8 $.45
3rd Quarter 32 29 1/8 .43
2nd Quarter 32 27 1/2 .43
1st Quarter 32 1/8 28 1/4 .43
CG&E
4th Quarter $ 50 949 (b)
3rd Quarter 239 909 (b)
2nd Quarter 45 116 (b)
1st Quarter 41 995 (b)
PSI
4th Quarter 29 713 (b)
3rd Quarter 28 311 (b)
2nd Quarter 28 165 (b)
1st Quarter 25 887 (b)
ULH&P
4th Quarter 8.50 (b)
1997
Cinergy
4th Quarter 39 1/8 32 .45
3rd Quarter 35 1/4 32 5/16 .45
2nd Quarter 35 5/8 32 .45
1st Quarter 35 3/4 32 5/8 .45
CG&E
4th Quarter 42 600 (b)
3rd Quarter 42 600 (b)
2nd Quarter 42 600 (b)
1st Quarter 42 600 (b)
PSI
4th Quarter 28 400 (b)
3rd Quarter 28 400 (b)
2nd Quarter 28 400 (b)
1st Quarter 28 400 (b)
ULH&P
4th Quarter 17.00 (b)
(a) Market price for CG&E, PSI, and ULH&P is not applicable.
(b) All of CG&E's and PSI's dividends were paid to CinergyULH&P's
dividends were paidour regulated and non-regulated subsidiaries) is, at times, referred to CG&E.
See Note 2(b) ofin the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data" for a brief description of common dividend
restrictions.
All CG&E and PSI common stock is held by Cinergy and all ULH&P common stock is
held by CG&E; therefore, there is no public trading market for their common
stock.
ITEM 6. SELECTED FINANCIAL DATA
Cinergy
1997 1996 1995 1994 1993
(in millions, except per share amounts)
Operating revenues (1) $4 353 $3 243 $3 023 $2 888 $2 833
Net income before extraordinary
item (1) 363 335 347 191 63
Net income (2) 253 335 347 191 63
Common stock
Earnings per share (3)
Net income before extraordinary
item 2.30 2.00 2.22 1.30 .43
Net income 1.61 2.00 2.22 1.30 .43
EPS-assuming dilution (3)
Net income before extraordinary
item 2.28 1.99 2.20 1.29 .43
Net income 1.59 1.99 2.20 1.29 .43
Dividends declared per share 1.80 1.74 1.72 1.50 1.46
Total assets (4) 8 858 8 725 8 103 8 037 7 696
Cumulative preferred stock of
subsidiaries subject to mandatory
redemption (5) - - 160 210 210
Long-term debt (6) 2 151 2 326 2 347 2 615 2 545
Long-term debt due within
one year (6) 85 140 202 60 -
CG&E
1997 1996 1995 1994 1993
(in millions)
Operating revenues (1) $2 452 $1 976 $1 848 $1 788 $1 752
Net income (loss) (1) 239 227 236 158 (9)
Total assets (4) 4 914 4 844 5 081 5 069 5 036
Cumulative preferred stock subject
to mandatory redemption (5) - - 160 210 210
Long-term debt (6) 1 324 1 381 1 518 1 738 1 729
Long-term debt due within
one year (6) - 130 152 - -
PSI
1997 1996 1995 1994 1993
(in millions)
Operating revenues (1) $1 958 $1 332 $1 248 $1 114 $1 092
Net income (1) 132 126 146 82 125
Total assets (4) 3 406 3 295 3 076 2 945 2 645
Long-term debt (6) 826 945 828 878 816
Long-term debt due within
one year (6) 85 10 50 60 -
Cinergy, CG&E, and PSI
(1) See Notes 1 and 15 of the "Notes to Financial Statements" in
"Item 8. Financial Statements and Supplementary Data."
(2) See Notes 1 and 17 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
(3) See Note 16 of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
(4) See Notes 1(f) and 6 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
(5) See Note 3 of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
(6) See Note 4 and 8(b) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
In addition, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 12 of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data" for
discussions of material uncertainties for Cinergy, CG&E, and PSI.
ULH&P
Omitted pursuant to Instruction I(2)(a)first person as “we”, “our”, or “us”.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cinergy, CG&E, PSI, and ULH&P
This document includes forward-looking statements within the meaning of Financial Condition and
Results of Operations" reflect and elucidate the Companies' corporate visionSection 27A of the futureSecurities Act of 1933 and as a partSection 21E of that, outline goals and aspirations, as well as
specific projections. These goals and projections are considered forward-lookingthe Securities Exchange Act of 1934. Forward-looking statements and are based on management'smanagement’s beliefs and assumptions. These forward-looking statements are identified by terms and phrases such as well as certain assumptions
made by management. In addition“anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similar expressions.
Forward-looking statements involve risks and uncertainties that may cause actual results to any assumptions and other factors that are
referred to specifically in connection with these statements, other factorsbe materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statementsstatement include, among others:
*but are not limited to:
• Factors affecting utility operations, such asas:
(1) unusual weather conditions;
(2) catastrophic weather-related damage;
(3) unscheduled generation outages;
(4) unusual maintenance or repairs;
(5) unanticipated changes toin fossil fuel costs, gas supply costs, or
availability constraints due to higher demand,
shortages, transportation problems or other developments;constraints;
(6) environmental incidents; orincidents, including costs of compliance with existing and future environmental requirements; and
(7) electric transmission or gas pipeline system constraints.
* Increased
• State, federal, and local legislative and regulatory initiatives.
• The timing and extent of the entry of additional competition in electric or gas markets and the electriceffects of continued industry consolidation through the pursuit of mergers, acquisitions, and gas utility industries, including
effects of: industry restructuring; transmission system operation and/or
administration; customer choice; and cogeneration.
*strategic alliances.
• Regulatory factors such as unanticipated changes in rate-settingthe policies or procedures; recovery ofprocedures that set rates; changes in our ability to recover expenditures for environmental compliance, purchased power costs and investments made under traditional regulation through rates; and changes to the frequency and timing of rate increases.
*
• Financial or regulatory accounting principles or policies imposed by governing bodies.
• Political, legal, and economic conditions and developments in the Financial Accounting Standards Board,United States (U.S.) and the Securities and Exchange
Commission (SEC), the Federal Energy Regulatory Commission (FERC), state
public utility commissions, state entitiesforeign countries in which regulate natural gas
transmission, gathering and processing and similar entities with regulatory
oversight.
* Economic conditions, includingwe have a presence. These would include inflation rates and monetary fluctuations.
*
6
• Changing market conditions and a variety of other factors associated withrelated to physical energy and financial trading activities including, but not limited
to,activities. These would include price, basis, credit, liquidity, volatility, capacity, transmission, currency exchange rates, interest rate,rates, and warranty risks.
*
• 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, resulting from changes in: Cinergy and its
subsidiaries, interest rates, and securities ratings or market perceptions
of the utility industry and energy-related industries.
*capital.
• Employee workforce factors, including changes in key executives, collective bargaining agreements with union employees, orand work stoppages.
*
• Legal and regulatory delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures.
*
• Costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters, including, but not
limited to, those describedclaims. Examples can be found in Note 1211 of the "Notes“Notes to Financial Statements"Statements” in "Item“Item 8. Financial Statements and Supplementary Data."
*Data”.
• Changes in international, Federal,federal, state, or local legislative requirements, such as changes in tax laws, or rates;tax rates, and environmental laws and regulations.
Cinergy Corp. (Cinergy or Company)
Unless we otherwise have a duty to do so, the Securities and its subsidiaries undertake no obligation
to publicly update or revise anyExchange Commission’s (SEC) rules do not require forward-looking statements whetherto be revised or updated (whether as a result of changes in actual results, changes in assumptions, or other factors affecting the statements). Our forward-looking statements reflect our best beliefs as of the time they are made and may not be updated for subsequent developments.
7
BUSINESS
ITEM 1. BUSINESS
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 available free of charge on or through our internet website, www.cinergy.com, as soon as reasonably practicable after we electronically file such statements.
material with, or furnish it to, the SEC.
Cinergy CG&E, PSI, and ULH&P
THE COMPANIES
Cinergy,Corp., a Delaware corporation iscreated in October 1994, owns all outstanding common stock of The Cincinnati Gas & Electric Company (CG&E) and PSI Energy, Inc. (PSI), both of which are public utility subsidiaries. As a registeredresult of this ownership, we are considered a utility holding company. Because we are a holding company with material utility subsidiaries operating in multiple states, we are registered with and are subject to regulation by the SEC under the Public Utility Holding Company Act of 1935, (PUHCA).as amended. Our other principal subsidiaries are:
• Cinergy was created in the
October 1994 merger of PSI Resources,Services, Inc. and The Cincinnati Gas & Electric
Company (CG&E). Cinergy is the parent holding company of PSI Energy, Inc. (PSI),
CG&E,(Services);
• Cinergy Investments, Inc. (Investments);
• Cinergy Global Resources, Inc. (Global Resources); and
• Cinergy Wholesale Energy, Inc. (Wholesale Energy).
CG&E, and Cinergy Services, Inc.
(Services). CG&Ean Ohio corporation, is an operating utility primarily engaged in providinga combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through its subsidiaries, in nearby areas of Kentucky and Indiana. CG&E’sprincipal subsidiary, The Union Light, Heat and Power Company (ULH&P)(ULH&P), is a Kentucky corporation that provides electric and gas service in adjacent areasnorthern Kentucky. CG&E’s other subsidiaries are insignificant to its results of operations.
In 2001, CG&E began a transition to electric deregulation and customer choice. Currently, the competitive retail electric market in Kentucky. PSIOhio is in the development stage. CG&E is recovering its Public Utilities Commission of Ohio (PUCO) approved costs and retail electric rates are frozen during this market development period. See the “Retail Market Developments” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of key elements of Ohio deregulation.
PSI, an operatingIndiana corporation, is a vertically integrated and regulated electric utility primarily engaged in providing electricthat provides service in north central, central, and southern Indiana.
8
The following table presents further information related to the operations of our domestic utility companies (our operating companies):
Principal | Major Cities Served | Approximate | |||||
CG&E and subsidiaries | • Generation, transmission, distribution, and sale of electricity • Sale and/or transportation of natural gas | Cincinnati, OH | 2,053,000 | ||||
PSI | • Generation, transmission, distribution, and sale of electricity | Bloomington, IN | 2,230,000 | ||||
ULH&P | • Transmission, distribution, and sale of electricity • Sale and transportation of natural gas | Covington, KY | 342,000 | ||||
Services is a service company that provides our subsidiaries with a variety of centralized administrative, management, financial, administrative, engineering, legal, and othersupport services. Investments holds most of our domestic non-regulated, energy-related businesses and investments, including gas marketing and trading operations. Global Resources holds most of our international businesses and investments.
Wholesale Energy, through a wholly-owned subsidiary, Cinergy Power Generation Services, LLC (Generation Services), provides electric production-related construction, operation, and maintenance services to Cinergy, certain affiliates and non-affiliated third parties.
9
We have collective bargaining agreements with the International Brotherhood of Electrical Workers (IBEW), the United Steelworkers of America (USWA), the Utility Workers Union of America (UWUA), formerly the Independent Utilities Union, and various international union organizations.
The following table indicates the number of employees by classification at December 31, 2002:
|
| Regulated |
| Non-Regulated |
|
|
| ||||||||||
Classification |
| CG&E(4) |
| PSI |
| ULH&P |
| Total |
| Domestic(5)(6) |
| International |
| Total Non- |
| Cinergy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IBEW(1) |
| 509 |
| 1,267 |
| 55 |
| 1,831 |
| 903 |
| — |
| 903 |
| 2,734 |
|
USWA(2) |
| 277 |
| — |
| 85 |
| 362 |
| 13 |
| — |
| 13 |
| 375 |
|
UWUA(3) |
| 371 |
| — |
| 53 |
| 424 |
| 373 |
| — |
| 373 |
| 797 |
|
Various Union Organizations |
| — |
| — |
| — |
| — |
| 57 |
| 219 |
| 276 |
| 276 |
|
Non-Bargaining |
| 208 |
| 370 |
| 20 |
| 598 |
| 2,851 |
| 192 |
| 3,043 |
| 3,641 |
|
|
| 1,365 |
| 1,637 |
| 213 |
| 3,215 |
| 4,197 |
| 411 |
| 4,608 |
| 7,823 |
|
(1) IBEW #1347 contract will expire on April 1, 2006, IBEW #1393 contract will expire on May 1, 2005, and IBEW #352 contract will expire on February 5, 2005.
(2) USWA #12049 and #5541-06 contracts will expire on May 15, 2007.
(3) Contract will expire on March 31, 2005.
(4)CG&E PSI, and Investments. Cinergy conducts its internationalsubsidiaries excluding ULH&P.
(5) Includes 2,485 Services’ employees, who provide services to both regulated and non-regulated businessesoperations.
(6) Includes 1,353 Generation Services’ employees who provide services to certain affiliates and non-affiliated third parties.
Collective Bargaining Agreements
The collective bargaining agreements of the UWUA and the IBEW #1393 expired on April 1, 2002 and April 30, 2002, respectively. With regards to the contracts, the parties have negotiated new three-year agreements that will run through InvestmentsMarch 31, 2005 and May 1, 2005 for the UWUA and IBEW #1393, respectively.
For many years our industry has been relatively stable and dominated by vertically integrated companies. However, in recent years a number of federal and state developments, aimed at promoting competition, initiated a de-integration of the traditional value chain and triggered industry restructuring.
New business models emerged as market participants sought to exploit opportunities along the de-integrated value chain. The marketplace became characterized by independent power producers, energy marketers and traders, energy merchants, transmission and distribution providers and retail energy suppliers. New market entrants and activity among the traditional participants, such as mergers, acquisitions, asset sales and spin-offs of lines of business, reshaped the industry. Power generators attempted to differentiate themselves to attract a new customer base; large wholesalers expanded through acquisitions of regional businesses; transmission
10
systems are being operated by Regional Transmission Operators; and the sale of retail energy is no longer the exclusive business of the traditional integrated utility. Recent events have led to the challenge of certain business models and are significantly altering the industry landscape.
In late 2000 and early 2001, California experienced unprecedented high prices, extreme price volatility, a lack of market liquidity and inadequate generation supply, leading to customer blackouts. Ultimately, California’s two largest utilities accumulated significant unpaid obligations, which resulted in one of the utilities declaring bankruptcy during 2001. By the end of 2001, several states, which had previously adopted deregulation plans had decided to delay or suspend their activities. In December 2001, Enron Corp. (Enron), a dominant energy trader and former seventh largest company of the Fortune 500 in terms of revenue, filed for bankruptcy protection after disclosing substantial third quarter losses and a restatement of prior period results, which contributed to a significant downgrade in its subsidiaries.
FINANCIAL CONDITION
COMPETITIVE PRESSURES
ELECTRIC UTILITY INDUSTRY
Cinergy, credit ratings. The SEC, the Federal Energy Regulatory Commission (FERC), the U.S. Department of Justice and numerous Congressional committees initiated investigations of Enron’s collapse.
The events and circumstances with California, Enron and others, are significantly influencing the industry landscape. In 2002, wholesale electric markets were characterized by lower prices, decreased liquidity, and the near evaporation of mid- to long-term markets. Developers cancelled turbine orders and abandoned existing power projects. Several trading operations announced plans to curtail or exit their wholesale trading activities. Credit rating agencies downgraded many industry participants. In this period of unprecedented change and uncertainty, energy industry participants are likely to reconsider their strategies and business models.
The highly publicized accounting restatements of Enron in 2001 and others in 2002 also led to a crisis of investor confidence regarding the reliability of financial statements, as reflected in the Dow Jones Utility Index, which receded to less than half its value during the highs of 2000-2001 and hit a five-year low. As a result, new legislation, regulations, and additional accounting guidance were developed and enacted, with more on the horizon.
We conduct operations through our subsidiaries and manage through the following three business units:
• Energy Merchant Business Unit (Energy Merchant);
• Regulated Businesses Business Unit (Regulated Businesses); and
• Power Technology and Infrastructure Services Business Unit (Power Technology).
The following section describes the activities of our business units as of December 31, 2002.
See Note 16 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for financial information by business segment.
Energy Merchant
Energy Merchant manages wholesale generation and energy marketing and trading of energy commodities. Energy Merchant operates and maintains our regulated and non-regulated electric
11
generating plants, including some of our jointly-owned plants. Energy Merchant is also responsible for our international operations. As of December 31, 2002, the total winter electric capability (including our portion of the total capacity for the jointly-owned plants) of our domestic generating plants was 13,112 megawatts (MW). Approximately 75 percent of this generation portfolio is coal-fired. See “Item 2. Properties” for a further discussion of the generating facilities.
Energy Merchant also performs the following activities:
• energy risk management;
• proprietary arbitrage activities; and
• customized energy solutions.
See the “Market Risk Sensitive Instruments and Positions” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on risks associated with these activities.
Energy Merchant competes for wholesale contracts for the purchase and sale of electricity and natural gas. Energy Merchant’s main competitors include public utilities, power and natural gas marketers and traders, and independent power producers.
Fuel Supply
Each year, through CG&E PSI, and ULH&P
Introduction
The electric utility industry is transitioningPSI, we purchase approximately 28 million tons of coal to generate electricity. We purchase approximately 80 percent of our coal supply through long-term coal supply agreements and approximately 20 percent through the spot market or through short-term supply agreements. We receive our coal supply primarily from mines located in Indiana, West Virginia, Ohio, Kentucky, Pennsylvania, and Illinois. In early 2001, the market price for coal increased due to the buildup of inventories at various generators and the low production levels of coal mines. In 2002, coal prices decreased as normal production levels returned the market to a monopoly cost-of-service
regulated environmentbalanced state. We expect this to an industry in which companies will ultimately competecontinue and anticipate market prices for coal to be relatively level through 2003.
Cinergy has a fleet of natural gas-fired peaking plants that have a capacity of 2,719 MW. The fuel for these units is obtained through the customers' energy provider. This transitionnatural gas open market. For further information on the risk of purchasing natural gas see the “Market Risk Sensitive Instruments and Positions” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Energy Merchant monitors alternative sources of coal and gas to assure a continuing availability of economical fuel supplies. As such, it will maintain its practice of purchasing a portion of coal and gas requirements on the open market and will continue to investigate least-cost coal options to comply with new and existing environmental requirements. Cinergy, CG&E, and PSI believe that they can continue to obtain enough coal and gas to meet future needs. However, future environmental requirements may significantly impact the availability and price of these fuels.
12
Cogeneration
Energy Merchant is an on-site energy solutions provider, including cogeneration and operation and maintenance services for large industrial customers. Cogeneration is the simultaneous production of two or more forms of useable energy from a single fuel source.
Purchased Power
At times, we purchase power to meet the energy needs of our wholesale customers and to meet the requirements of our retail native load customers (end-use customers within our operating companies’ franchise territory). Factors that could cause Cinergy to purchase power for retail native load customers include generating plant outages, extreme weather conditions, growth, and other factors associated with supplying full requirements electricity. We believe we can obtain enough purchased power to meet future needs. However, during periods of excessive demand, the price and availability of these purchases may be significantly impacted. See the “Significant Rate Developments” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on PSI’s Purchased Power Tracker.
Trading Operations and Risk Management
The energy marketing and trading activities of Energy Merchant principally consists of Cinergy Marketing & Trading, LP’s (Marketing & Trading) natural gas marketing and trading operations, structure,Cinergy Global Trading Limited’s (Global Trading) European natural gas and profitabilitypower trading operations, and CG&E’s and PSI’s power marketing and trading operations. In April 2002, CG&E and PSI executed a new joint operating agreement whereby new power marketing and trading contracts since April 2002 are originated on behalf of Cinergy. The effectsCG&E. See the “Termination of competition are already being feltOperating Agreement” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Our domestic operations market and trade over-the-counter (an informal market where the buying/selling of commodities occurs) contracts for the purchase and sale of electricity (primarily in the wholesale power markets, where the
increased numbers of power marketers and brokers are reducing the margins
previously experienced.
Energy companies are positioning themselves for full competition through mergers
and acquisitions, strategic alliances with other energy companies and
energy-related businesses, and through the development of new products and
services. Just as critical to Cinergy will be the regulatory outcomeMidwest region of the deregulation processU.S.), natural gas, and other energy-related products. In addition, our domestic operations also market and trade natural gas and other energy-related products on the New York Mercantile Exchange. Global Trading’s operations trade over-the-counter contracts for the purchase and sale of natural gas and electricity (both primarily in eachthe United Kingdom). Global Trading also trades natural gas on the International Petroleum Exchange. See the “Market Risk Sensitive Instruments and Positions” section of its three franchise states,“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on risks associated with these activities.
International
As of December 31, 2002, we had ownership interests in energy-related assets located in six different countries. These assets serve retail and wholesale customers by providing utility services including generation of electricity and heat as well as the outcomedistribution of gas and electric commodities.
13
Revenue Data and Customer Base
Energy Merchant’s operating revenue is derived primarily by providing and trading electricity in the Midwest region of the U.S. In addition, Energy Merchant provides and trades natural gas primarily to wholesale customers across the U.S. The majority of Energy Merchant’s customers are public utilities, power and natural gas marketers and traders, and independent power producers.
Regulated Businesses
Regulated Businesses consists of PSI’s regulated, integrated utility operations, and Cinergy’sother states where Cinergyregulated electric and gas transmission and distribution systems. Regulated Businesses plans, constructs, operates, and maintains Cinergy’s transmission and distribution systems and delivers gas and electric energy to compete.
Deregulation Processconsumers. Regulated Businesses also earns revenues from wholesale customers primarily by transmitting electric power through Cinergy’s transmission system. Regulated Businesses operated approximately 46,500 circuit miles (the total length in miles of separate circuits) of electric lines to provide regulated transmission and distribution service to 1.5 million customers as of December 31, 2002.
Regulated Businesses operated approximately 8,500 miles of gas mains (gas distribution lines that serve as a common source of supply for more than one service line) and service lines to provide domestic regulated transmission and distribution services to approximately 500,000 customers as of December 31, 2002. See “Item 2. Properties” for a further discussion of the transmission and distribution systems owned by our operating companies.
Electric Operations
Regulated Businesses (through our operating companies) and other non-affiliated utilities in a nine-state region are parties to the East Central Area Reliability Council Agreement (ECAR Agreement). The FERC opened upECAR Agreement coordinates the wholesale electric markets to competition in 1996 with
Orders 888planning and 889. The final rules providedoperation of generation and transmission facilities, which provides for mandatory filingmaximum reliability of open
access/comparability transmission tariffs, provided for functional unbundling of
all services, required utilities to use the filed tariffs for their ownregional bulk power transactions,supply.
14
Transmission System Interconnections
The following map illustrates the interconnections between our electric systems and other electric systems.
15
Midwest Independent Transmission System Operator, Inc. (Midwest ISO)
As part of the effort to create a competitive wholesale power marketplace, the FERC approved the formation of the Midwest ISO during 1998. In that same year, Cinergy agreed to join the Midwest ISO in preparation for meeting anticipated changes in the FERC regulations and future deregulation requirements. The Midwest ISO was established an electronic bulletin board for transmission
availability and pricing information, and established a contract-based approach
to recover any potential "stranded" investments (explained below) as a resultnon-profit organization to maintain functional control over the combined transmission systems of customer choiceits members. For further information on the Midwest ISO, see the “Midwest ISO” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Electricity Supply
A new joint operating agreement, effective in April 2002, allows Cinergy to jointly dispatch the regulated generating assets of PSI in conjunction with the deregulated generating assets of CG&E. Under this agreement, transfers of power between PSI and CG&E are generally priced at market rates. See the wholesale level.
Customer choice“Termination of Operating Agreement” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. With the implementation of electric deregulation in Ohio, effective January 1, 2001, Regulated Businesses continues, through a market development period, to acquire its electricity requirements through Energy Merchant for those retail customers who do not switch suppliers.
ULH&P purchases energy from CG&E pursuant to a new contract effective January 1, 2002, which was approved by the FERC and the Kentucky Public Service Commission (KPSC). This five-year agreement is a negotiated fixed-rate contract with CG&E and replaces the previous cost of service based contract, which expired on December 31, 2001.
For further details on electricity supply of CG&E, PSI, and ULH&P, refer to the “Retail Market Developments” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Gas Supply
Regulated Businesses is responsible for the purchase and the subsequent delivery of natural gas to native load customers. Regulated Businesses’ natural gas procurement strategy is to buy firm gas supplies (gas intended to be available at all times) and firm interstate pipeline capacity during the end-user (i.e., retail) level currently remainswinter season (November through March) and buy spot supply and capacity during the non-heating season (April through October). This strategy allows Regulated Businesses to assure reliable gas supply for its high priority (non-curtailable) customers during peak winter conditions and provides Regulated Businesses the flexibility to reduce its contract commitments if firm customers choose alternate gas suppliers under the jurisdictionRegulated Businesses’ customer choice/gas transportation programs. In 2002, firm supply purchase commitment agreements provided approximately 49 percent of individual states (see State Developments)the natural gas supply, with the remaining gas purchased on the spot market. These firm supply agreements feature two levels of gas supply, specifically (1) base load, which is a continuous supply to meet normal demand requirements, and (2) swing load, which is gas available on a daily basis to accommodate changes in demand due primarily to
16
changing weather conditions. Regulated Businesses pays reservation charges for base and swing load.
Regulated Businesses manages gas procurement-hedging programs for CG&E and ULH&P. These programs include the use of fixed purchase prices as well as variable price arrangements (collars), which have a minimum (floor) and maximum (cap) established on the price to be paid. ULH&P has received approval from the KPSC for its hedging program. In accordance with a PUCO ruling, CG&E may apply for approval of its hedging program on an after-the-fact basis. As of December 31, 2002, CG&E and ULH&P, combined, had hedged approximately 30 percent of their winter 2002/2003 base load requirements. See the “Gas Industry” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.
Interstate pipelines either (1) transport gas purchased directly to the distribution systems or (2) inject gas purchased into pipeline storage facilities for future withdrawal and delivery. The deregulation
process has varied greatlymajority of the gas supply comes from statethe Gulf of Mexico coastal areas of Texas and Louisiana. In addition, a limited supply comes from the mid-continent (Arkansas-Oklahoma) basin. Also, industrial transportation customers behind Cinergy’s city gate (point where the distribution system connects to state. Several states have enacted
customer choice legislation, while many statesan interstate gas pipeline) are obtaining methane gas recovered locally from an Ohio landfill.
Regulated Businesses expects the natural gas market will remain competitive in future years. While natural gas prices remained moderate for most of the year 2002, prices began to escalate in the early stagesfourth quarter of studying the issues. Duringyear. We expect the prices to continue to rise throughout the 2002/2003 winter season. Price movement will be driven by the effects of weather conditions, availability of supply, and changes in demand and storage inventories. Currently, neither CG&E nor ULH&P profit from changes in the cost of gas. Natural gas purchase costs are passed directly to the customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.
In November 2002, CG&E’s and ULH&P’s agreement with Mirant Americas Energy Marketing, LP (Mirant) to manage theirinterstate pipeline transportation and storage capacity and gas supply contracts was assigned to Marketing & Trading, a non-regulated affiliate of CG&E and ULH&P, for the remaining term of the contract. Under the terms of this agreement, which expires in October 2003, Marketing & Trading is obligated to deliver gas to meet CG&E’s and ULH&P’s firm requirements. ULH&P is in the process of developingseeking approval of this affiliate contract from the KPSC. No other regulatory approvals are required.
17
Revenue Data and Customer Base
The percent of retail operating revenues derived from full service electricity and gas sales and transportation for each of the three years ended December 31 were as follows:
|
| Retail Operating Revenues |
| ||||||||||
Registrant |
| 2002 |
| 2001 |
| 2000 |
| ||||||
|
| Electric % |
| Gas % |
| Electric % |
| Gas % |
| Electric % |
| Gas % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinergy |
| 85 |
| 15 |
| 81 |
| 19 |
| 84 |
| 16 |
|
CG&E and subsidiaries |
| 77 |
| 23 |
| 71 |
| 29 |
| 75 |
| 25 |
|
PSI |
| 100 |
| — |
| 100 |
| — |
| 100 |
| — |
|
ULH&P |
| 73 |
| 27 |
| 68 |
| 32 |
| 71 |
| 29 |
|
Electric and gas sales are seasonal. Electricity usage in our service territory peaks during the summer and gas usage peaks during the winter. Air conditioning increases electricity demand and heating increases electricity and gas demand.
The service territory of CG&E and its utility subsidiaries, including ULH&P, is heavily populated and is characterized by a stable residential customer base and a diverse mix of industrial customers. The territory served by PSI is composed of residential, agricultural, and widely diversified industrial customers. No single customer provides more than 10 percent of total operating revenues (electric or gas) for any of our operating companies.
Under the Ohio customer choice legislation, utilitiesprogram, CG&E’s retail customers may choose their electric supplier. As of December 31, 2002, the number of customers switching to other electric suppliers by customer class was as follows:
Revenue Class |
| Number of |
| Switching |
|
|
|
|
|
|
|
Residential |
| 18,792 |
| 3.8 | % |
Commercial |
| 2,178 |
| 21.5 | % |
Industrial |
| 169 |
| 24.6 | % |
Other Public Authorities |
| 410 |
| 21.5 | % |
Total |
| 21,549 |
|
|
|
(1) The residential switching percentage is based on annual energy consumption and the non-residential switching percentages are based on average monthly peak demand.
Customer switching reduces retail revenues by the generation component of rates and shopping incentives. CG&E still collects transmission and distribution revenues from the delivery of electricity to switched customers. During the market development period, the reduction in revenues due to customer switching is generally offset by wholesale power sales from the freed-up generation capacity and recoveries of lost revenues and shopping incentives through the Regulatory Transition Charge (RTC). The RTC is a mechanism through which CG&E recovers its previous generation related regulatory assets and other transition costs. For further discussion
18
on Ohio deregulation see “Ohio” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Power Technology
Power Technology primarily manages the development, marketing, and sales of our non-regulated retail energy and energy-related businesses. This is accomplished through various subsidiaries and joint ventures. Power Technology also manages Cinergy Ventures, LLC (Ventures), Cinergy’s venture capital subsidiary. Ventures invests in emerging energy technologies that can benefit future Cinergy business development activities.
During 2002, Cinergy sold or initiated plans to dispose of generation and electric and gas distribution operations in the Czech Republic, Estonia, and South Africa. These investments have been required to consider issues suchclassified as the
recovery of any stranded investment, ability to compete for incumbent customers,
and the potential forced divestiture of generating assets. Cinergy continues to
be an advocate of competition in the electric utility industry and continues to
pursue customer choice legislation at both the state and Federal levels.
As the deregulation process has progressed, it has become clear that both scale
and diversity of business are critical factors for success. Scale is critical
for several reasons. A critical mass of customers allows the development of new
products and back-office capabilities in a cost-effective manner. A larger
balance sheet scale and diversity of commodities (i.e., gas and electric) allow
the trading business to market risk intermediation products without taking
excessive financial risks and to recover back-office costs in a low margin
business. Merger and acquisition activity in the energy industry appears to be
accelerating as companies attempt to create the desired scale.
Recent Developments
Stranded Investments Due to excess capacity in the industry and the declining
cost of new technology, electricity prices in a competitive market may not fully
cover the costs of past commitments made by utilities while under a cost-
of-service regulated environment. Fixed costs which cannot be recovered through
electricity sales at market prices are referred to as stranded investments.
While the recovery of prudent past investments and commitments has been
supported by FERC in Order 888 and at least partially in the states in which
competition-related legislation has been passed, there is no guarantee that
Cinergy or any other utility will receive full recovery of potential stranded
investments. In addition, in those states which have legislated open
competition, many have required the divestiture of generating assets in order to
qualify and obtain recovery of stranded investments.
Midwest ISO During 1997, Cinergy collaborated with other Midwestern utility
companies on a plan to join the transmission systemsdiscontinued operations. For further information see Note 15 of the participating
companies into a single regional system. The plan was filed“Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”.
On December 21, 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the FERC early
in 1998 for approval. If approved, the new system would be managed independently
by an Independent System Operator (ISO). The formation of a Midwest ISO, as it
has become known, would ensure non-discriminatory open transmission access and
system reliability, as well as the development of a regional transmission
tariff, which would help eliminate the "pancaking" of transmission rates in a
region.
Currently, there are eight utilities participating in the filing along with
Cinergy. The proposed ISO consists of 32,000 miles of transmission lines and
covers portions of eight Midwestern states, forming one of the largest ISOs in
the country. FERC's approval of the plan is anticipated to come within a year.
Repeal of the PUHCA Currently, PUHCA creates a number of restrictions that make
preparing for deregulation more difficult. PUHCA restricts the amount which can
be invested outside the regulated utility, including foreign investments and
investments in power plants. It also restricts potential merger partners to
those that meet certain integration requirements.
In 1995, the SEC endorsed recommendations for reform of PUHCA. The
recommendations called for repeal and, pending repeal, significant
administrative reform of the 62-year-old statute. Since the release of the SEC's
report, numerous bills have been introduced in both houses of the United States, (US) Congress providingthree northeast states, and two environmental groups for a negotiated resolution of Clean Air Act (CAA) Amendments claims and other related matters brought against coal-fired power plants owned and operated by Cinergy’s operating companies. The estimated cost for capital expenditures associated with this proposed settlement is expected to be approximately $700 million. These capital expenditures are in addition to ongoing efforts to maintain and enhance emissions control equipment at our power plants, including our previously announced commitment to install Nitrogen Oxide (NOX) controls at various power plants. In 2002, we spent $259 million for NOX and other environmental compliance projects. Forecasted expenditures for NOX and other environmental compliance projects (in nominal dollars) are approximately $200 million for 2003 and $440 million for the repeal or significant amendment2003-2007 period. See Note 11(f) of PUHCA. During
1997,the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for a bill repealing PUHCA was introduceddiscussion of the Environmental Protection Agency (EPA) agreement in principle and other related environmental issues.
See the information appearing under the same caption in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the following discussions:
• Wholesale Market Developments;
• Retail Market Developments;
• Midwest ISO;
• Significant Rate Developments; and
• Gas Industry.
19
PROPERTIES
ITEM 2. PROPERTIES
Our operating companies’ total winter electric capabilities, reflected in MW, as of December 31, 2002, are shown in the US Senate but was never
brought to a vote. Legislation repealing PUHCA is anticipated to be reintroducedtable that follows. Our electric generating plants, which are managed by our Energy Merchant business unit, are located in the US Congress in 1998. Cinergy supports the repeal of this act either as
part of comprehensive reformOhio, Kentucky, and Indiana and are wholly-owned or jointly-owned facilities.
Registrant(1) |
| Stations |
| Coal |
| Natural |
| Oil |
| Hydro |
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CG&E |
| 9 |
| 4,186 |
| 736 |
| 323 |
| — |
| 5,245 |
|
PSI |
| 9 |
| 5,578 |
| 120 |
| 261 |
| 45 |
| 6,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| 18 |
| 9,764 |
| 856 |
| 584 |
| 45 |
| 11,249 |
|
(1) This table includes only our portion of the total capacity for the jointly-owned plants. Refer to Note 12 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for a discussion of the jointly-owned plants.
During 2002, electric industry orgenerating plants, including those that we own but do not operate, performed reliably, as separate
legislation.
Franchise Rights During 1997, several states enacted transition plansevidenced by our annual capacity factor of 70 percent (excluding natural gas and fuel oil peaking stations), a utilization factor of 84 percent and anequivalent availability factor of 84 percent. A capacity factor is a percentage that includedindicates how much of a varietypower plant’s capacity is used over time. A utilization factor is a percentage that indicates how much of measures designeda power plant’s capacity is used while being available. An equivalent availability factor is a percentage that indicates how much a unit is available to create a "level playing field"generate compared to its potential maximum generation.
In July 2002, we experienced record peak loads of 11,133 MW, 5,265 MW,and 6,088 MW for
new competitors. In some cases, there has been a mandatory "divestiture" of
existing customers. In others, the plans provide incentives which may encourage
customers to switch suppliers by providing "above market" credits to those who
switch from the incumbent utility. Also, some states have put varying
restrictions on the incumbent utility's ability to compete for these customers. Cinergy, CG&E PSI, and ULH&P
State Developments
As previously mentioned, certain states have enacted legislation which will lead
to complete retail competition within the next several years. These states
generally have required up-front rate reductions and the opportunity for all
customer classes to choose an electricity provider. A few states have phased in
customer choice, but still provided for immediate rate reductions.
All states passing legislation have included some mechanism for recovery of
stranded investment. However, states have varied on the methodology to be
applied in determining the level of stranded investment, and divestiture of
generation assets has been required in a few states.
As discussed below, the three states in which Cinergy operates public utility
companies have all had legislation introduced which would provide for full
retail customer choice. None of these states has yet passed legislation, but
policymakers and stakeholders continue to work to resolve issues with an eye
toward passage.
Cinergy and PSI
Indiana A customer choice bill (SB427) was introduced during the 1997 Indiana
legislative session, with support from a coalition made up of Cinergy, the
Indiana Manufacturers Association, the Indiana Industrial Energy Consumers,
Inc., and onePSI, respectively. Cinergy and CG&E subsequently set new record peak loads of 11,305 MW and 5,311 MW, respectively, in August 2002. At times, we purchase power to meet the energy needs of our wholesale customers and to meet the requirements of our retail native load customers. Factors that could cause Cinergy to purchase power for retail native load customers include outages, extreme weather conditions, growth, economics, and other Indiana investor-owned electric utility. After amendments
were made, essentially strippingfactors associated with supplying full requirements electricity. We believe we can obtain enough purchased power to meet future needs.
In December 2002, the bill of most of its provisions and turning
it into a bill calling for the study of deregulation by a legislative committee
known as the Regulatory Flexibility Committee (Study Committee), SB427 passed
the legislature and was signed by the governor.
The Indiana Utility Regulatory Commission (IURC) approved PSI’s request to acquire the Butler County, Ohio and the Henry County, Indiana peaking plants under the terms and conditions contained in a settlement agreement with PSI, the IURC Testimonial Staff and the Indiana Office of the Utility Consumer Counselor. On February 4, 2003, the FERC issued an order approving the transfer. This action was the final regulatory approval needed for the transfer, which occurred on February 5, 2003. See “Transfer of Generating Assets to PSI” in
20
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
Ohio Deregulation
In its transition plan, CG&E proposed to transfer its generating stations and their related assets and obligations to an Exempt Wholesale Generator (EWG) affiliate, subject to receipt of FERC, SEC, and applicable third-party approvals and consents. To facilitate this transfer, the generation assets of CG&E, as of August 2000, were released from the first mortgage indenture lien allowing them to be moved unencumbered to the EWG affiliate. Generation assets added after August 2000 remain subject to the lien of CG&E’s first mortgage bond indenture and would require release at some future date prior to being transferred. A FERC order, that was effective April 2002, allowed Cinergy to jointly dispatch the regulated generating assets of PSI in conjunction with the deregulated generating assets of CG&E. Transfers of power between PSI and CG&E are generally priced at market rates, see the “Termination of Operating Agreement” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. FERC has also authorized the transfer of CG&E’s generating assets to a non-regulated affiliate. However, Cinergy has determined that it can realize the benefits of the new joint dispatch agreement without transferring CG&E’s generation assets to an EWG affiliate, and therefore Cinergy does not plan to transfer CG&E’s generation assets to a non-regulated affiliate in the foreseeable future. For further discussion of Ohio deregulation, see the “Retail Market Developments” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Merchant Plants
Domestic
At December 31, 2002, our domestic merchant plant capacity consisted of four gas-fired peaking plants with a total capacity of 1,863 MW. A merchant plant only sells electricity on the wholesale market without the benefit of long-term contracts that cover 100 percent of the plant capacity. The following is the breakdown of capacity for each generating facility:
Plant | MW Capacity | ||
Brownsville | 480 | ||
Caledonia | 550 | ||
Butler County(1) | 704 | ||
Henry County(1) | 129 |
(1) Transferred to PSI in February 2003.
International
As of December 31, 2002, we had ownership interests in six countries. We had ownership interests in generation assets located in three countries. We also have ownership interests in
21
approximately 2,000 miles of gas and electric transmission and distribution systems through jointly-owned investments in three countries. We serve approximately 22,000 transmission and distribution customers.
Cogeneration
As of December 31, 2002, Cinergy had ownership interests in and/or operated eighteen domestic cogeneration facilities capable of producing 559 MW of electricity. Cogeneration is the simultaneous production of two or more forms of useable energy from a single fuel source. During 2003-2004, Cinergy anticipates completion of an additional 761 MW of electric capacity.
Other
In the third quarter of 2002, Cinergy Capital & Trading, Inc. completed an acquisition of a coal-based synthetic fuel production facility, which converts coal feedstock into synthetic fuel for sale to a third party. The synthetic fuel replaces coal in the generation of electricity. This facility can be disassembled and transported to an alternate location at a minimal expense if needed. See the “Results of Operations - Future” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding this new business initiative.
Electric
Metrics for our operating companies’ electric transmission and distribution systems located in Ohio, Kentucky, and Indiana (excluding our proportionate share of jointly-owned facilities) are as follows:
Registrant |
| Electric |
| Electric |
| Substation |
|
|
| (circuit miles) |
| (circuit miles) |
| (kilovolt-amperes)(1) |
|
|
|
|
|
|
|
|
|
CG&E |
| 1,658 |
| 15,714 |
| 20,980,288 |
|
ULH&P |
| 106 |
| 2,750 |
| 1,334,998 |
|
Other subsidiaries |
| 40 |
| — |
| — |
|
CG&E and subsidiaries |
| 1,804 |
| 18,464 |
| 22,315,286 |
|
PSI |
| 5,361 |
| 20,907 |
| 29,762,209 |
|
|
|
|
|
|
|
|
|
Total |
| 7,165 |
| 39,371 |
| 52,077,495 |
|
(1) Kilovolt-amperes (1,000 volt-amperes) are a broad measure of our substation transformer capacity.
At the end of 2002, our operating companies’ electric systems were interconnected with fifteen other utilities.
22
Our electric transmission and distribution systems are designed and constructed to further the goal of providing reliable service to our customers. Every effort is made to ensure that sufficient facilities are in service to meet this goal without installing facilities beyond what is required to operate reliably and within the design or designed parameters. Through our ongoing review of these systems, enhancements are developed and constructed to meet our planning, loading, and reliability guidelines. This process allows us to prudently invest in capacity additions only when and where they are required.
On February 1, 2002, the Midwest ISO assumed functional control of Regulated Businesses’ transmission systems. Although the Midwest ISO continues to develop, modify, and change its various operating practices, it does handle all transmission tariff administration.
Gas
As of December 31, 2002, the natural gas transmission and distribution systems of CG&E and its subsidiaries had approximately 8,500 miles of mains and service lines located in southwestern Ohio, southeastern Indiana, and northern Kentucky. CG&E and its subsidiaries also jointly own three underground caverns with a total storage capacity of approximately 23 million gallons of liquid propane (of which 7 million gallons belonged to ULH&P). As of December 31, 2002, CG&E had 20 million gallons of liquid propane in storage (of which 7 million gallons belonged to ULH&P). This liquid propane is used in the three propane/air peak shaving plants located in Ohio and Kentucky. Propane/air peak shaving plants store propane and, when needed, vaporize the propane and mix with natural gas to supplement the natural gas supply during peak demand periods and emergencies. During 2002, CG&E and its subsidiaries’ natural gas transmission and distribution systems operated reliably.
In November 2002, CG&E’s and ULH&P’s agreement with Mirant to manage theirinterstate pipeline transportation and storage capacity and gas supply contracts was assigned to Marketing & Trading, a non-regulated affiliate of CG&E and ULH&P, for the remaining term of the contract. Under the terms of this agreement, which expires in October 2003, Marketing & Trading is obligated to deliver gas to meet CG&E’s and ULH&P’s firm requirements. ULH&P is in the process of seeking approval of this affiliate contract from the KPSC. No other regulatory approvals are required.
23
LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
NEW SOURCE REVIEW (NSR) AND NOTICES OF VIOLATION (NOV)
The CAA’s NSR provisions require that a company obtain a pre-construction permit if it plans to build a new stationary source of pollution or make a major modification to an existing facility, unless the changes are exempt.
On November 3, 1999, the United States sued a number of holding companies and electric utilities, including Cinergy, CG&E, and PSI, in various U.S. District Courts (District Court). The Cinergy, CG&E, and PSI suit alleged violations of the CAA at two of our generating stations relating to NSR and New Source Performance Standards requirements. The suit sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at CG&E’s W.C. Beckjord Generating Station and at PSI’s Cayuga Generating Station, and (2) civil penalties in amounts of up to $27,500 per day for each violation. Since that time, two amendments to the complaint have been filed by the United States, alleging additional violations of the CAA, including allegations involving different generating units. In addition, three northeast states and two environmental groups have intervened in the case.
On December 21, 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the parties in the litigation for a negotiated resolution of the CAA claims in the litigation. See Note 11(f) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for a discussion of the tentative EPA Agreement.
On October 4, 2002, the Indiana District Court issued a report titled "Energy
Report: Public Policy Considerations" (Report)Revised Case Management Plan in Cinergy’s case that sets forth the dates by which various events in the litigation, such as discovery and the filing of dispositive motions, must be completed. Consistent with the plan, on October 9, 2002, the Indiana District Court set the case for trial by jury commencing on October 4, 2004.
At this time, it is not possible to predict whether a final agreement implementing the agreement in principle can be reached. The parties continue to negotiate. If the settlement is not completed, we intend to defend against the allegations vigorously in court. In such an event, it is not possible to determine the likelihood that the plaintiffs would prevail upon their claims or whether resolution of these matters would have a material effect on our financial position or results of operations.
MANUFACTURED GAS PLANT SITES (MGP)
Prior to the Study Committee1950s, gas was produced at MGP sites through a process that involved the heating of coal and/or oil. The gas produced from this process was sold for residential, commercial, and industrial uses.
24
Coal tar residues, related hydrocarbons, and various metals associated with MGP sites have been found at former MGP sites in November 1997. The scope and purposeIndiana, including at least 21 sites which PSI or its predecessors previously owned. PSI acquired four of the Report was to provide informationsites from NIPSCO in 1931. At the same time, PSI sold NIPSCO the sites located in Goshen and Warsaw, Indiana. In 1945, PSI sold 19 of these sites (including the four sites it acquired from NIPSCO) to the Study Committee which would enable thempredecessor of the Indiana Gas Company, Inc. (IGC). IGC later sold the site located in Rochester, Indiana to answerNIPSCO.
IGC and NIPSCO have both made claims against PSI, alleging that PSI is a Potentially Responsible Party with respect to the question of whether
retail customer choice21 MGP sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The claims further asserted that PSI was in the best interest of Indiana. Public policy issues
listed by the Reportlegally responsible for the Study Committeecosts of investigating and remediating the sites. In August 1997, NIPSCO filed suit against PSI in federal court, claiming recovery (pursuant to consider were: jurisdiction over
retail transmission; recoveryCERCLA) of stranded investments; estimation methodologyNIPSCO’s past and future costs of any stranded investments allowed to be recovered; methodinvestigating and remediating MGP-related contamination at the Goshen, Indiana MGP site.
In November 1998, NIPSCO, IGC, and PSI entered into a Site Participation and Cost Sharing Agreement (Agreement). This Agreement allocated CERCLA liability for recovery of
stranded investments; low-incomepast and environmental programs; and impact of
deregulation on state and local taxes. The Report's conclusion was: "Infuture costs at seven MGP sites in Indiana among the long
run, competition in the electricity market could be in the best interest of
Indiana. Experience in other states has shown that the best outcomes and
smoothest process to bring about customer choice in the electric industry have
resulted from a cooperative effort led by the governor, the legislature and the
state commission working together with all stakeholders. Indiana should be
prepared to respond to competition created by other states, especially those
surrounding Indiana, and to any Federal legislation that requires nationwide
competition in the electricity market."three companies. As a result of the IURC reportAgreement, NIPSCO’s lawsuit against PSI was dismissed. Similar agreements were reached between IGC and other
testimonyPSI that allocate CERCLA liability at 14 MGP sites with which NIPSCO was not involved. These agreements concluded all CERCLA and similar claims between the three companies related to MGP sites. The parties continue to investigate and remediate the sites, as appropriate, under the agreements and applicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of the sites.
PSI notified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and IDEM. In April 1998, PSI filed suit in Hendricks County Circuit Court 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, or (2) pay PSI’s costs of defense and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. The lawsuit was moved to the Study Committee, the Study Committee recommended that they
continue to study changesHendricks County Superior Court (Superior Court) in the electric industry.
Another customer choice bill (SB 431), sponsored by, among others, those who
supported the customer choice bill during 1997, was introduced in the Indiana
Senate in JanuaryJuly 1998. In the House of Representatives, House Bill 1190 (HB
1190) was introduced. This bill calls for a study by the IURC of the effects
deregulation would have on Indiana. Although the legislature is much more
knowledgeable on the customer choice issues as a result of the Study Committee's
report and debating the 1997 customer choice bill, neither SB 431 or HB 1190 was
passed during the 1998 legislative session.
Cinergy and CG&E
Ohio Although the Ohio legislature did not pass customer choice legislation
during 1997, it did create the Joint Select Committee on Electric Industry
Deregulation (Committee) to examine competition and restructuring issues. The Committee heard testimony fromtrial court issued a variety of stakeholders on various customer
choice issues throughoutrulings with respect to the spring of 1997. In December 1997, the Committee's
chairpersons unveiled the outline of a plan designed to bring competition into
Ohio's retail electric industryclaims and defenses in the year 2000.litigation. PSI has appealed certain adverse rulings to the Indiana Court of Appeals. At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeals to the Indiana Court of Appeals.
PSI has accrued costs for the sites related to investigation, remediation, and groundwater monitoring. However, PSI currently cannot determine the total costs that may be incurred in conection with remediation of all sites, to the extent that remediation is required. Until investigation and remediation activities have been completed on these sites, and the extent of insurance coverage for these costs, if any, is determined, we are unable to reasonably estimate the total costs and impact on our financial position or results of operations.
25
In January 2000, Investments sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing business as The chairpersons' plan is
based on five basic policies: allEnergy Cooperative (Energy Cooperative). In February 2001, Cinergy, CG&E, and Resources were named as defendants in three class action lawsuits brought by customers including residential, can
participaterelating to Energy Cooperative’s removal from the outset;Ohio Gas Customer Choice program and the costfailure to deliver gas to customers.
Subsequently, these class action suits were amended and consolidated into one suit. CG&E has been dismissed as a defendant in the consolidated suit. In March 2001, Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and Resources. This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of electricity will decrease fromResources. This lawsuit is pending in the outsetLicking County Common Pleas Court. Trial is anticipated to occur in late 2003 or early 2004. In October 2001, Cinergy, CG&E, and continue to decrease at an accelerating rate for all customers duringInvestments initiated litigation against the transition period; current low-income assistance programs will be continued;
current reliability and quality of service will be maintained; and open free
markets will be established with lower prices driven by competition. The plan
would provide for competition among utilities to begin January 1, 2000, with a
five-year transition period.
Furthermore, the plan addresses the tax consequences of a deregulated
environment through the creation of a revenue-neutral system. The current tax
structure of Ohio subjects Ohio electric utility companies to certain state
taxes which would not be paid by out-of-state competitors selling power in Ohio
retail markets. The new system attempts to remedy this disadvantage while not
diminishing the amount of tax revenues currently being collected by state and
local governments.
The chairpersons were not able to get their plan adoptedEnergy Cooperative, requesting indemnification by the full committee.
SomeEnergy Cooperative for the claims asserted by former customers in the class action litigation. This customer litigation is pending in the Hamilton County Common Pleas Court. A trial date has not been set. We intend to vigorously defend these lawsuits. At the present time, we cannot predict the outcome of the primary concerns that have been expressed are that the plan does not
adequately address utilities' stranded investment concerns, and that the
proposalthese suits.
26
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to create retail marketing areas, or "buying pools," throughout the
state during the transition period would be unduly disruptive in that customers
who did not affirmatively elect to remain with their incumbent utility would be
assigned to the buying pool under a Public Utility Commissionvote of Ohio (PUCO)
designed and administered bidding process. The chairpersons have announced
intentions to introduce a bill in 1998.
Also in Ohio, a bill was introduced in November 1997 (HB 625) authorizing the
issuancesecurity holders of electric utility rate reduction bonds that would permit utilities to
securitize certain assets. The bill itself does not provide for retail
competition but, rather, specifies financing issues a utility may engage in to
prepare for competition. It is uncertain whether this bill or any bill providing
for retail competition will be passed in Ohio in 1998.
Cinergy, CG&E, or PSI during the fourth quarter of 2002.
27
MARKET FOR REGISTRANT’S COMMON EQUITY
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Cinergy Corp.’s common stock is listed on the New York Stock Exchange. The high and low stock prices for each quarter for the past two years are indicated below:
|
| High |
| Low |
| ||
2002 |
|
|
|
|
| ||
First Quarter |
| $ | 35.75 |
| $ | 31.00 |
|
Second Quarter |
| 37.19 |
| 34.25 |
| ||
Third Quarter |
| 36.21 |
| 25.40 |
| ||
Fourth Quarter |
| 34.19 |
| 28.25 |
| ||
|
|
|
|
|
| ||
2001 |
|
|
|
|
| ||
First Quarter |
| $ | 35.15 |
| $ | 28.81 |
|
Second Quarter |
| 35.60 |
| 32.20 |
| ||
Third Quarter |
| 35.00 |
| 28.00 |
| ||
Fourth Quarter |
| 33.85 |
| 28.16 |
| ||
Cinergy Corp. holds all outstanding CG&E and PSI common stock, and CG&E holds all ULH&P
Kentucky In common stock. Therefore, no public trading market exists for the common stock of CG&E, PSI, and ULH&P.
As of January 1998,31, 2003, Cinergy Corp. had 55,637 shareholders of record.
Cinergy Corp. declared dividends on its common stock of $.45 per share for each quarter of 2002 and 2001. The quarterly dividends paid to Cinergy Corp. by CG&E and PSI, and to CG&E by ULH&P for the House Chairmanpast two years were as follows:
Registrant |
| Quarter |
| 2002 |
| 2001 |
| ||
|
|
|
| (in thousands) |
| ||||
CG&E |
| First |
| $ | 44,787 |
| $ | 71,535 |
|
|
| Second |
| 46,866 |
| 71,551 |
| ||
|
| Third |
| 47,059 |
| 71,588 |
| ||
|
| Fourth |
| 47,197 |
| 71,595 |
| ||
|
|
|
|
|
|
|
| ||
PSI |
| First |
| $ | 26,944 |
| $ | — |
|
|
| Second |
| 28,194 |
| — |
| ||
|
| Third |
| 28,310 |
| — |
| ||
|
| Fourth |
| 28,394 |
| — |
| ||
|
|
|
|
|
|
|
| ||
ULH&P |
| First |
| $ | — |
| $ | — |
|
|
| Second |
| 2,675 |
| 4,829 |
| ||
|
| Third |
| — |
| — |
| ||
|
| Fourth |
| 6,995 |
| 6,878 |
| ||
28
On January 14, 2003, the board of directors of Cinergy Corp. declared dividends on its common stock of $.46 per share, payable February 15, 2003, to shareholders of record at the close of business on January 24, 2003.
See Note 2(b) of the Tourism, Development and
Energy Committee introduced a customer choice bill (HB 443). The bill would
allow persons and businesses in participating service areas to choose their
supplier of electricity beginning January 1, 2000. It would also ensure a rate
cap to prevent any increase in generation energy prices for six years, with
certain exceptions. Because of its low electric rates, Kentucky has not to date
been moving aggressively toward retail customer choice. It is uncertain whether
HB 443 will be passed in Kentucky in 1998.
Cinergy
United Kingdom
Transition to full competition in the United Kingdom's (UK) electric utility
industry began with the industry's privatization in 1991. When the industry was
privatized, the generation, transmission, and regional distribution businesses
were, in effect, unbundled into separate companies. The regional distribution
companies, including Midlands Electricity plc (Midlands) (Cinergy, through a
joint venture owns a 50% interest in Midlands, see Note 1(e) of the "Notes“Notes to Financial Statements"Statements” in "Item“Item 8. Financial Statements and Supplementary Data")Data” for a brief description of the registrants’ common stock dividend restrictions.
29
SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
|
| 2002 |
| 2001 |
| 2000 |
| 1999 |
| 1998 |
| |||||
|
| (in millions, except per share amounts) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy(1) |
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues(2) |
| $ | 11,960 |
| $ | 12,997 |
| $ | 8,397 |
| $ | 5,953 |
| $ | 5,778 |
|
Income before discontinued operations and cumulative effect of a change in accounting principle |
| 397 |
| 459 |
| 400 |
| 402 |
| 261 |
| |||||
Discontinued operations, net of tax(3) |
| (25 | ) | (17 | ) | (1 | ) | 2 |
| — |
| |||||
Cumulative effect of a change in accounting principle, net of tax(4) |
| (11 | ) | — |
| — |
| — |
| — |
| |||||
Net income |
| 361 |
| 442 |
| 399 |
| 404 |
| 261 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings per common share (EPS) |
|
|
|
|
|
|
|
|
|
|
| |||||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| 2.37 |
| 2.88 |
| 2.52 |
| 2.53 |
| 1.65 |
| |||||
Discontinued operations, net of tax(3) |
| (0.15 | ) | (0.10 | ) | (0.01 | ) | .01 |
| — |
| |||||
Cumulative effect of a change in accounting principle, net of tax(4) |
| (0.06 | ) | — |
| — |
| — |
| — |
| |||||
Net income |
| 2.16 |
| 2.78 |
| 2.51 |
| 2.54 |
| 1.65 |
| |||||
EPS - assuming dilution |
|
|
|
|
|
|
|
|
|
|
| |||||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| 2.34 |
| 2.85 |
| 2.51 |
| 2.52 |
| 1.65 |
| |||||
Discontinued operations, net of tax(3) |
| (0.15 | ) | (0.10 | ) | (0.01 | ) | .01 |
| — |
| |||||
Cumulative effect of a change in accounting principle, net of tax(4) |
| (0.06 | ) | — |
| — |
| — |
| — |
| |||||
Net income |
| 2.13 |
| 2.75 |
| 2.50 |
| 2.53 |
| 1.65 |
| |||||
Dividends declared per share |
| 1.80 |
| 1.80 |
| 1.80 |
| 1.80 |
| 1.80 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance Sheet Data (at end of period): |
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
| 13,307 |
| 12,300 |
| 12,330 |
| 9,617 |
| 9,687 |
| |||||
Long-term debt (including amounts due in one year) |
| 4,272 |
| 3,745 |
| 2,917 |
| 3,020 |
| 2,740 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E |
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues(2) |
| $ | 4,951 |
| $ | 4,752 |
| $ | 3,237 |
| $ | 2,578 |
| $ | 2,784 |
|
Net income |
| 264 |
| 327 |
| 267 |
| 234 |
| 216 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance Sheet Data (at end of period): |
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
| 5,542 |
| 5,360 |
| 5,987 |
| 4,917 |
| 5,154 |
| |||||
Long-term debt (including amounts due in one year) |
| 1,690 |
| 1,205 |
| 1,206 |
| 1,206 |
| 1,350 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI |
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating revenues(2) |
| $ | 2,359 |
| $ | 4,108 |
| $ | 2,691 |
| $ | 2,163 |
| $ | 2,342 |
|
Net income |
| 214 |
| 162 |
| 135 |
| 117 |
| 52 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance Sheet Data (at end of period): |
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
| 4,223 |
| 4,571 |
| 4,630 |
| 3,835 |
| 3,584 |
| |||||
Long-term debt (including amounts due in one year) |
| 1,372 |
| 1,348 |
| 1,113 |
| 1,243 |
| 1,032 |
| |||||
(1) The results of Cinergy also include amounts related to non-registrants.
(2) Emerging Issues Task Force Issue 02-3, Accounting for Contracts Involved in Energy Trading and Risk Management Activities will require that all gains and losses on energy trading derivatives be presented on a net basis beginning January 1, 2003. This will result in substantial reductions in reported Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense. However, Operating Income and Net Income will not be affected by this change. For further information see Note 1(q)(i) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”.
(3) See Note 15 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further explanation.
(4) In 2002, Cinergy recognized a cumulative effect of a change in accounting principle of $11 million (net of tax as a result of an impairment charge for goodwill related to certain of our international assets. See Note 14 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”.
30
MD&A - - LIQUIDITY AND CAPITAL RESOURCES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this report Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we”, own no transmission“our”, or “us”.
The following discussion should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report. The results discussed below are not necessarily indicative of the results to be expected in any future periods.
In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we explain our general operating environment, as well as our liquidity, capital resources, and results of operations. Specifically, we discuss the following:
• factors affecting current and future operations;
• what our expenditures for construction and other commitments were during 2002, and what we expect them to be in 2003-2007;
• potential sources of cash for future capital expenditures;
• why revenues and expenses changed from period to period; and
• how the above items affect our overall financial condition.
LIQUIDITY AND CAPITAL RESOURCES
COMPARATIVE CASH FLOW ANALYSIS
Cinergy
At December 31, 2002, Cinergy’s consolidated cash and cash equivalents totaled $221.1 million compared to $111.1 million at December 31, 2001. This increase was primarily attributable to increases in cash from operating activities and to the proceeds received from the monetization of certain non-core investments. These increases were partially offset by additional construction expenditures, including our operating companies’ environmental compliance programs, and by additional investments.
The Cincinnati Gas & Electric Company (CG&E)
At December 31, 2002, CG&E’s consolidated cash and cash equivalents totaled $45.3 million compared to $9.1 million at December 31, 2001. Increased cash from operating activities was largely offset by the payment of common stock dividends, repayments of debt, and additional construction expenditures.
31
PSI Energy, Inc. (PSI)
At December 31, 2002, PSI’s consolidated cash and cash equivalents totaled $2 million as compared to $1.6 million at December 31, 2001. Increased cash from operating activities was offset by additional construction expenditures.
The Union Light, Heat and Power Company (ULH&P)
At December 31, 2002, ULH&P’s cash and cash equivalents totaled $3.9 million as compared to $4.1 million at December 31, 2001. Increased cash from operating activities was offset by construction expenditures and the repayment of short-term debt.
Operating Activities
For each of the years ended December 31, 2002, 2001, and 2000, our cash flows from operating activities were as follows:
Net Cash Provided by (Used in) Operating Activities
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Cinergy(1) |
| $ | 996,199 |
| $ | 717,849 |
| $ | 632,045 |
|
CG&E and subsidiaries |
| 653,029 |
| 343,118 |
| 470,170 |
| |||
PSI |
| 499,047 |
| 401,911 |
| 343,038 |
| |||
ULH&P |
| 60,707 |
| 47,766 |
| 49,559 |
| |||
(1) The results of Cinergy also include amounts related to non-registrants.
The tariff-based gross margins of our operating companies continue to be the principal source of cash from operating activities. The diversified retail customer mix of residential, commercial, and industrial classes and a commodity mix of gas and electric services provide a reasonably predictable gross cash flow.
For the year ended December 31, 2002, Cinergy’s, CG&E’s, PSI’s, and ULH&P’s net cash provided by operating activities increased, as compared to 2001, primarily due to increases in income after adjusting for increases in non-cash items such as depreciation, favorable working capital fluctuations, and deferred income taxes. The increase in deferred income taxes, in part, reflects a change in accounting methodology for tax purposes related to capitalized costs, which increased current tax deductions. Current tax obligations were also reduced by increases in tax credits associated with the production and sale of synthetic fuel.
Cinergy’s net cash provided by operating activities increased for 2001, as compared to 2000, primarily as a result of increased income and a net cash inflow from working capital fluctuations. CG&E’s net cash provided by operating activities decreased primarily due to working capital fluctuations, offset in part by increased income. PSI’s cash from operating activities increased primarily due to increased income.
32
Financing Activities
For each of the years ended December 31, 2002, 2001, and 2000, our cash flows from financing activities were as follows:
Net Cash Provided by (Used in) Financing Activities
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Cinergy(1) |
| $ | 3,225 |
| $ | 867,263 |
| $ | 161,430 |
|
CG&E and subsidiaries |
| (293,445 | ) | 16,841 |
| (192,665 | ) | |||
PSI |
| (43,817 | ) | 34,723 |
| (77,955 | ) | |||
ULH&P |
| (22,026 | ) | (14,678 | ) | (18,006 | ) | |||
(1) The results of Cinergy also include amounts related to non-registrants.
For the year ended December 31, 2002, Cinergy’s net cash provided by financing activities decreased, as compared to 2001. This decrease was primarily due to the net proceeds received in 2001 from the issuance of Preferred trust securities and from new debt issuances, which were used to fund the purchase of new peaking generation facilities and are limitedenvironmental compliance expenditures. The payment of common stock dividends and the repayment of both long- and short-term debt reduced cash proceeds recognized in 2002 from the issuances of common stock and new long-term debt.
CG&E’s, PSI’s,and ULH&P’s net cash used in financing activities increased during 2002, as compared to 2001. CG&E’s increase reflects a net reduction in debt financing, partially offset by a decrease in dividends paid on common stock. PSI’s increase primarily reflects the payment of approximately $112 million in common stock dividends in 2002, as compared to 2001, when no common dividends were paid. ULH&P’s increase primarily reflects the repayment of short-term debt in 2002.
For the year ended December 31, 2001, Cinergy’s, CG&E’s, and PSI’s cash provided by financing activities increased, as compared to 2000. Cinergy’s increase was primarily due to the amountnet proceeds from the issuance of Preferred trust securities and proceeds from debt issuances to fund the purchase of new generating facilities and environmental compliance expenditures. CG&E’s increase was primarily a result of increased short-term borrowings offset by an increase in dividends paid on common stock. PSI’s increase was primarily the result of no dividends paid on common stock in 2001 and the retirement of preferred stock in 2000.
33
Investing Activities
For each of the years ended December 31, 2002, 2001, and 2000, our cash flows used in investing activities were as follows:
Net Cash Provided by (Used in) Investing Activities
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Cinergy(1) |
| $ | (889,408 | ) | $ | (1,567,099 | ) | $ | (782,340 | ) |
CG&E and subsidiaries |
| (323,322 | ) | (371,522 | ) | (266,422 | ) | |||
PSI |
| (454,810 | ) | (436,358 | ) | (272,614 | ) | |||
ULH&P |
| (38,854 | ) | (35,449 | ) | (28,734 | ) | |||
(1) The results of Cinergy also include amounts related to non-registrants.
For the year ended December 31, 2002, Cinergy’s net cash used in investing activities decreased, as compared to 2001. This decrease was primarily the result of Cinergy’s 2001 acquisition of peaking generation they may own. Third-party accessfacilities, increased capital expenditures related to environmental compliance programs, and other non-core investments. Proceeds from the sale of certain non-core investments in 2002, were offset by expenditures for our operating companies’ capital programs, including ongoing environmental compliance, additional investments in cogeneration projects, and capital expenditures related to the transmissionpurchase of a synthetic fuel production facility.
CG&E’s, PSI’s, and local distribution
systemsULH&P’s net cash used in investing activities was comparable to 2001, reflecting ongoing construction expenditures.
Cinergy’s, CG&E’s, PSI’s, and ULH&P’s net cash used in investing activities increased in 2001, as compared to 2000, as a result of an increase in capital expenditures related to environmental compliance projects. Cinergy’s increase also putreflects the acquisition of additional peaking generation facilities.
34
Capital Requirements
Actual construction and other committed expenditures (including capitalized financing costs) for 2002 and forecasted construction and other committed expenditures for the year 2003 and for the five-year period 2003-2007 (in nominal dollars) are presented in place, enabling licensed suppliersthe table below:
Capital and Investment Expenditures
|
| Actual |
| Forecasted |
| |||||
|
|
| 2003 |
| 2003-2007 |
| ||||
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
| |||
Cinergy(1) |
| $ | 988 |
| $ | 759 |
| $ | 3,102 |
|
CG&E and subsidiaries |
| 324 |
| 326 |
| 1,477 |
| |||
PSI(2) |
| 467 |
| 367 |
| 1,369 |
| |||
ULH&P |
| 40 |
| 43 |
| 242 |
| |||
(1) The results of Cinergy also include amounts related to non-registrants.
(2) Excludes intercompany purchase of peaking plants from non-regulated affiliates.
This forecast includes an estimate of expenditures in accordance with the companies’ plans regarding Nitrogen Oxide (NOX) emission control standards and other environmental compliance (excluding implementation of the tentative United States (U.S.) Environmental Protection Agency (EPA) Agreement), as discussed in Note 11(f) of “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”. In 2002, we spent $259 million for NOX and other environmental compliance projects. Forecasted expenditures for NOX and other environmental compliance projects (in nominal dollars) are approximately $200 million for 2003 and $440 million for the 2003-2007 period. All forecasted amounts and the underlying assumptions are subject to risks and uncertainties as disclosed in “Cautionary Statements Regarding Forward-Looking Information”.
Environmental Commitment and Contingency Issues
EPA Agreement
On December 21, 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the United States, three northeast states, and two environmental groups for a negotiated resolution of Clean Air Act (CAA) Amendments claims and other related matters brought against coal-fired power plants owned and operated by Cinergy’s operating companies. The estimated cost for capital expenditures associated with this settlement is expected to be approximately $700 million. These capital expenditures are in addition to ongoing efforts to maintain and enhance emissions control equipment at our power plants. See Note 11(f) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for a discussion of the agreement in principle and related environmental issues.
35
Manufactured Gas Plant (MGP) Sites
In November 1998, PSI entered into a Site Participation and Cost Sharing Agreement with Northern Indiana Public Service Company and Indiana Gas Company, Inc. related to contamination at MGP sites, which PSI or its predecessors previously owned. Until investigation and remediation activities have been completed on the sites, we are unable to reasonably estimate the total cost and impact on our financial position or results of operations. In relation to the MGP claims, PSI also filed suit against its general liability insurance carriers. Subsequently, PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI, or (2) pay PSI’s costs of defense and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. At the present time, PSI cannot predict the outcome of this litigation. See Note 11(g) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further information on MGP Sites.
Ambient Air Standards
In 1997, the EPA revised the National Ambient Air Quality Standards (NAAQS) for ozone and fine particulate matter. State ozone non-attainment area designations are due to the EPA in April 2003. Fine particulate non-attainment designations are expected in the 2004-2006 timeframe. Fine particulate matter refers to very small solid or liquid particles in the air. Following identification of non-attainment areas, each individual state will identify the sources of emissions and develop emission reduction plans. These plans may be state-specific or regional in scope. Under the CAA, individual states have up to 12 years from the date of designation to secure emissions reductions from sources contributing to the problem.
Cinergy may face further reductions of NOX, sulfur dioxide (SO2), and particulate emissions due to the implementation of the fine particulate matter and 8-hour ozone NAAQS as required by the EPA. However, we cannot predict the exact amount and timing of these reductions at this time. Nonetheless, Cinergy expects that compliance costs with these new standards will be significant.
Regional Haze
The EPA published the final regional haze rule on July 1, 1999. This rule established planning and emission reduction timelines for states to use to improve visibility in national parks throughout the U.S. The ultimate effect of the new regional haze rule could be requirements for (1) newer and cleaner technologies and additional controls on particulates emissions, and (2) reductions in SO2 and NOX emissions from utility sources. If more utility emissions reductions are required, the compliance cost could be significant. In August 1999, several industry groups (some of which we are a member) filed a challenge to the regional haze rules with the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals). On May 24, 2002, the Court of Appeals set aside a portion of the EPA’s rule, holding that the rule improperly forced states to require emissions controls without adequate consideration of an individual source’s impact on visibility impairment. We currently cannot predict the timing or outcome of the EPA’s response to the Court of Appeals’ ruling.
36
In July 2001, the EPA proposed guidance to implement portions of the regional haze rule. This guidance recommends that states require widespread installation of scrubbers to reduce SO2 emissions. We currently cannot determine whether or how the EPA will modify the scope of this guidance, or whether the states in which we operate will adopt the EPA’s proposed guidance.
Global Climate Change
In December 1997, delegates to the United Nations’ climate summit in Japan adopted an agreement, the Kyoto Protocol (Protocol), to address global warming. The Protocol establishes legally binding greenhouse gas emission (man-made pollutants thought to be artificially warming the earth’s atmosphere) targets for developed nations. On November 12, 1998, the U.S. signed the Protocol; however, it will not be effective in the U.S. until it is approved by a two-thirds vote of the U.S. Senate, which we currently believe is unlikely, as the current Administration is opposed to the Protocol and has not submitted it to the Senate for ratification.
A total of 108 nations, including the European Union, Japan, and Canada have ratified the Protocol. If the Protocol goes into effect, Cinergy does not anticipate that its operations will be impacted so long as the U.S. remains outside the Protocol agreement. In addition, there are still major uncertainties concerning the Protocol including how the Protocol will be implemented, the level and timing of greenhouse gas emissions reductions, the extent to which greenhouse gas trading would be allowed, and whether companies would be allowed to comply with emission reduction requirements through agricultural, geologic, or oceanic sequestration, or through projects in the U.S. and abroad to reduce other greenhouse gas emissions (such as methane). Because of these networks.uncertainties, Cinergy cannot, at this time, identify specific impacts of the Protocol on its operations, even if the U.S. should change its course and ratify the Protocol.
In February 2002, the Bush Administration announced a voluntary global climate change initiative that calls for industries to undertake voluntary activities to reduce the intensity of greenhouse gas emissions. The Bush Administration initiative also called for increased funding of scientific research and for increased research and development. In response to President Bush’s call for industries to take voluntary actions, Cinergy signed a commitment with the EPA to participate in its Climate Leaders program. As a participant, Cinergy is committed to conducting an annual inventory of its corporate greenhouse gas emissions, to developing a greenhouse gas emission reduction goal, and to reporting annually on its corporate-wide greenhouse gas emissions and its progress toward achieving its greenhouse gas reduction goal.
Our plan for managing the potential risk and uncertainty of regulations relating to climate change includes the following:
• implementing cost-effective greenhouse gas emission reduction and offsetting activities;
• funding research of more efficient and alternative electric generating technologies;
• funding research to better understand the causes and consequences of climate change;
• encouraging a global discussion of the issues and how best to manage them; and
• advocating comprehensive legislation for fossil-fired power plants.
37
Air Toxics Regulation
On December 14, 2000, the EPA made a determination that additional regulation of mercury emissions from coal-fired power plants was appropriate. It is currently developing a Maximum Achievable Control Technology (MACT) standard for mercury. Although the issue is highly uncertain, there is some possibility that the EPA may also seek to establish MACT standards for other pollutants such as acid gases, metals, and organics. The EPA is expected to issue draft regulations in December 2003, and final rules by December 2004, with reductions required as soon as December 2007. We currently cannot predict the outcome or costs relating to the EPA’s determination and subsequent regulation.
At this time, Cinergy cannot predict the exact mercury target that the EPA will finalize nor the specific compliance timing. In addition, the form of the standard and the availability of flexibility mechanisms is also not yet known. Nonetheless, Cinergy has analyzed various mercury MACT regulatory scenarios and has initially estimated total capital compliance costs of between $500 million and $700 million for mercury emissions control equipment. This range corresponds to an emissions reduction target between 50 percent and 90 percent per power plant.
Asbestos Claims Litigation
CG&E and PSI have been named in lawsuits related to Asbestos at their electric generating stations. In these lawsuits, plaintiffs claim to have been exposed to Asbestos containing products in the course of their work at the CG&E and PSI generating stations. The plaintiffs further claim that, as the property owner of the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any Asbestos exposure. A majority of the lawsuits to date have been brought against PSI. The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material. See Note 11(h) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for a discussion of Asbestos claims and related cases.
Pensions
Cinergy maintains qualified defined benefit pension plans covering substantially all U.S. employees meeting certain minimum age and service requirements. Plan assets consist of investments in equity and fixed income securities. Funding for the qualified defined benefit pension plans is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. Due to the decline in market value of the investment portfolio over the last few years, assets held in trust to satisfy plan obligations have decreased. Additionally, recent decreases in long-term interest rates have the effect of increasing the measured liability for funding purposes. As a result of these events, future funding obligations could increase substantially. Based on preliminary estimates, we expect to fund approximately $33 million for the transition plan, larger userscalendar year 2003. Contributions for the calendar year 2002 were $4 million.
38
Other Investing Activities
Our ability to invest in growth initiatives is limited by certain legal and regulatory requirements, including the Public Utility Holding Company Act of electricity1935, as amended (PUHCA). The PUHCA limits the types of non-utility businesses in which Cinergy and other registered holding companies under PUHCA can invest as well as the amount of capital that can be invested in permissible non-utility businesses. Also, the timing and amount of investments in the non-utility businesses is dependent on the development and favorable evaluations of opportunities. Under the PUHCA restrictions, we are allowed to invest or commit to invest in certain non-utility businesses, including:
1. Exempt Wholesale Generators (EWG) and Foreign Utility Companies (FUCO)
An EWG is an entity, certified by the Federal Energy Regulatory Commission (FERC), devoted exclusively to owning and/or operating, and selling power from one or more electric generating facilities. An EWG whose generating facilities are located in the U.S. is limited to making only wholesale sales of electricity.
A FUCO is a company all of whose utility assets and operations are located outside the U.S. and which are used for the generation, transmission, or distribution of electric energy for sale at retail or wholesale, or the distribution of gas at retail. A FUCO may not derive any income, directly or indirectly, from the generation, transmission or distribution of electric energy for sale or the distribution of gas at retail within the U.S. An entity claiming status as a FUCO must provide notification thereof to the Securities and Exchange Commission (SEC) under PUHCA.
In May 2001, the SEC issued an order under PUHCA authorizing Cinergy to invest (including by way of guarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) our average consolidated retained earnings from time to time plus (2) $2 billion. As of December 31, 2002, we had invested or committed to invest $1.2 billion in EWGs and FUCOs, leaving available investment capacity under the May 2001 order of $2.1 billion.
2. Qualifying Facilities and Energy-Related Non-utility Entities
SEC regulations under the PUHCA permit Cinergy and other registered holding companies to invest and/or guarantee an amount equal to 15 percent of consolidated capitalization (consolidated capitalization is the sum of Notes payable and other short-term obligations, Long-term debt (including amounts due within one year), Preferred Trust Securities, Cumulative Preferred Stock of Subsidiaries, and total Common Stock Equity) in domestic qualifying cogeneration and small power production plants (qualifying facilities) and certain other domestic energy-related non-utility entities. At December 31, 2002, we had invested and/or guaranteed approximately $0.7 billion of the $1.3 billion available.
39
Contractual Cash Obligations
The following table presents Cinergy’s, CG&E’s, PSI’s, and ULH&P’s significant contractual cash obligations:
|
| Payments Due |
| |||||||||||||||||||
Contractual Cash Obligations |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| There- |
| Total |
| |||||||
|
| (in millions) |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Cinergy(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Notes payable and other short-term obligations |
| $ | 521 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 147 | (2) | $ | 668 |
|
Lease obligations |
| 47 |
| 37 |
| 30 |
| 26 |
| 23 |
| 74 |
| 237 |
| |||||||
Long-term debt (including amounts due within one year) |
| 191 |
| 815 |
| 204 | (3)(4) | 335 |
| 374 |
| 2,351 |
| 4,270 |
| |||||||
Preferred trust securities |
| 7 |
| 8 |
| 2 |
| — |
| 316 |
| — |
| 333 |
| |||||||
Fuel purchase contracts |
| 562 |
| 510 |
| 455 |
| 502 |
| 293 |
| 1,523 |
| 3,845 |
| |||||||
Power purchase contracts(5) |
| 2,313 |
| 577 |
| 254 |
| 148 |
| 88 |
| 246 |
| 3,626 |
| |||||||
Total Cinergy |
| $ | 3,641 |
| $ | 1,947 |
| $ | 945 |
| $ | 1,011 |
| $ | 1,094 |
| $ | 4,341 |
| $ | 12,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
CG&E and subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Notes payable and other short-term obligations(6) |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 112 | (2) | $ | 112 |
|
Lease obligations |
| 11 |
| 9 |
| 9 |
| 9 |
| 8 |
| 25 |
| 71 |
| |||||||
Long-term debt (including amounts due within one year) |
| 120 |
| 110 |
| 150 | (4) | — |
| 100 |
| 1,212 |
| 1,692 |
| |||||||
Fuel purchase contracts |
| 208 |
| 175 |
| 135 |
| 191 |
| — |
| — |
| 709 |
| |||||||
Power purchase contracts(5) |
| 2,059 |
| 374 |
| 134 |
| 62 |
| 27 |
| 21 |
| 2,677 |
| |||||||
Total CG&E and subsidiaries |
| $ | 2,398 |
| $ | 668 |
| $ | 428 |
| $ | 262 |
| $ | 135 |
| $ | 1,370 |
| $ | 5,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
PSI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Notes payable and other short-term obligations(6) |
| $ | 138 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 35 | (2) | $ | 173 |
|
Lease obligations |
| 11 |
| 10 |
| 9 |
| 9 |
| 8 |
| 28 |
| 75 |
| |||||||
Long-term debt (including amounts due within one year) |
| 56 |
| 2 |
| 51 | (3) | 328 |
| 267 |
| 676 |
| 1,380 |
| |||||||
Fuel purchase contracts |
| 354 |
| 335 |
| 320 |
| 311 |
| 293 |
| 1,523 |
| 3,136 |
| |||||||
Power purchase contracts(5) |
| 215 |
| 163 |
| 79 |
| 47 |
| 20 |
| 21 |
| 545 |
| |||||||
Total PSI |
| $ | 774 |
| $ | 510 |
| $ | 459 |
| $ | 695 |
| $ | 588 |
| $ | 2,283 |
| $ | 5,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
ULH&P |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Notes payable and other short-term obligations(6) |
| $ | 14 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 14 |
|
Lease obligations |
| — |
| — |
| 1 |
| 1 |
| 1 |
| 3 |
| 6 |
| |||||||
Long-term debt (including due within one year) |
| 20 |
| — |
| — |
| — |
| — |
| 55 |
| 75 |
| |||||||
Total ULH&P |
| $ | 34 |
| $ | — |
| $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 58 |
| $ | 95 |
|
(1) Includes amounts for non-registrants.
(2) Includes Variable Rate Pollution Control Notes depicted according to scheduled maturities, which the holders have been freethe right to choose their supplier since 1994 or earlier. Full competition for all
customers was scheduled to be phased in beginning in April 1998. However, due to
delayshave redeemed on any business day, with the designremainder being redeemable annually. See Variable Rate Pollution Control Notes below.
(3) Includes 6.50% Debentures due August 1, 2026, reflected as maturing in 2005, as the interest rate resets on August 1, 2005.
(4) Includes 6.90% Debentures due June 1, 2025, reflected as maturing in 2005, as the debentures are putable to CG&E at the optionof the holders on June 1, 2005.
(5) Firm commitments are disclosed on a gross basis and testingare not netted against firm sales with like counterparties for purposes of this disclosure.
(6) Includes net Money Pool borrowings.
40
Guarantees
We are subject to an SEC order under the PUHCA, which limits the amounts Cinergy Corp. can have outstanding under guarantees at any one time to $2 billion. As of December 31, 2002, we had $526 million outstanding under the guarantees issued, of which approximately 88 percent represents guarantees of obligations reflected on Cinergy’s Consolidated Balance Sheets. The amount outstanding represents Cinergy Corp.’s guarantees of liabilities and commitments of its consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures. See Note 11(b) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for a discussion of guarantees in accordance with Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires disclosure of maximum potential liabilities for guarantees issued on behalf of unconsolidated subsidiaries and joint ventures and under indemnification clauses in various contracts. The FIN 45 disclosure is different from the PUHCA restrictions in that it requires a calculation of maximum potential liability, rather than actual amounts outstanding; it excludes guarantees issued by consolidated subsidiaries; and it includes potential liabilities under indemnification clauses.
Collateral Requirements
Cinergy has certain contracts in place, primarily with trading counterparties, that require the issuance of collateral in the event our debt ratings are downgraded below investment grade. Based upon our December 31, 2002 trading portfolio, if such an event were to occur, Cinergy would be required to issue up to approximately $69 million in collateral related to its gas and power trading operations.
Capital Resources
Cinergy meets current and future capital requirements through:
• internally generated funds;
• cash and cash equivalents on hand ($221 million as of December 31, 2002);
• issuance of debt and equity securities;
• bank financing under new and existing facilities; and
• monetization of assets.
Cinergy believes that it has adequate financial resources to meet its future needs.
41
Notes Payable and Other Short-term Obligations
We are required to secure authority to issue short-term debt from the SEC under the PUHCA and the state utility commission of Ohio. The SEC under the PUHCA regulates the issuance of short-term debt by Cinergy Corp., PSI, and ULH&P. The Public Utilities Commission of Ohio (PUCO) has regulatory jurisdiction over the issuance of short-term debt by CG&E.
|
| Short-term Regulatory Authority |
| ||||
|
| (millions) |
| ||||
|
|
|
|
|
| ||
|
| Authority |
| Outstanding |
| ||
Cinergy Corp. |
| $ | 5,000 | (1) | $ | 498 |
|
CG&E and subsidiaries |
| 671 |
| 9 |
| ||
PSI |
| 600 |
| 138 |
| ||
ULH&P |
| 65 |
| 14 |
| ||
(1)Cinergy Corp., under the PUHCA, was granted approval to increase total capitalization (which excludes retained earnings and accumulated other comprehensive income (loss)) by $5 billion. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.
For the purposes of quantifying regulatory authority, short-term debt includes revolving credit borrowings, uncommitted credit line borrowings, inter-company money pool obligations, and commercial paper.
42
Cinergy Corp.’s short-term borrowing consists primarily of unsecured revolving lines of credit and the sale of commercial paper. Cinergy Corp.’s $1 billion credit facilities and $800 million commercial paper program also support the short-term borrowing needs of CG&E and PSI. In addition, Cinergy, 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. A summary of outstanding short-term borrowings for Cinergy, CG&E, PSI, and ULH&P, including variable rate pollution control bonds is as follows:
|
| Short-term Borrowings |
| |||||||||||||
|
| Established |
| Outstanding |
| Unused |
| Standby |
| Available |
| |||||
|
| (millions) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy Corp. |
|
|
|
|
|
|
|
|
|
|
| |||||
Revolving lines |
| $ | 1,000 |
| $ | 25 |
| $ | 975 |
| $ | 481 |
| $ | 494 |
|
Uncommitted lines(1) |
| 65 |
| — |
| 65 |
|
|
|
|
| |||||
Commercial paper(2) |
| 800 |
| 473 |
| 327 |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating companies |
|
|
|
|
|
|
|
|
|
|
| |||||
Uncommitted lines(1) |
| 75 |
| — |
| 75 |
|
|
|
|
| |||||
Pollution control notes |
|
|
| 147 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-regulated subsidiaries |
|
|
|
|
|
|
|
|
|
|
| |||||
Revolving lines |
| 7 |
| 1 |
| 6 |
|
|
| 6 |
| |||||
Short-term debt |
| 22 |
| 22 |
| — |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy Total |
|
|
| $ | 668 |
|
|
|
|
| $ | 500 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E and subsidiaries |
|
|
|
|
|
|
|
|
|
|
| |||||
Uncommitted lines(1) |
| $ | 15 |
| $ | — |
| $ | 15 |
|
|
|
|
| ||
Pollution control notes |
|
|
| 112 |
|
|
|
|
|
|
| |||||
Money pool |
|
|
| 9 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E Total |
|
|
| $ | 121 |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI |
|
|
|
|
|
|
|
|
|
|
| |||||
Uncommitted lines(1) |
| $ | 60 |
| $ | — |
| $ | 60 |
|
|
|
|
| ||
Pollution control notes |
|
|
| 35 |
|
|
|
|
|
|
| |||||
Money pool |
|
|
| 138 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI Total |
|
|
| $ | 173 |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
ULH&P |
|
|
|
|
|
|
|
|
|
|
| |||||
Money pool |
|
|
| $ | 14 |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
ULH&P Total |
|
|
| $ | 14 |
|
|
|
|
|
|
| ||||
(1) Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.
(2) The commercial paper program is supported by Cinergy Corp.’s revolving lines.
(3) Standby liquidity is reserved against the revolvers to support the commercial paper program and outstanding letters of credit (currently $473 million and $8 million, respectively).
43
At December 31, 2002, Cinergy Corp. had $494 million remaining unused and available capacity relating to its $1 billion revolving credit facilities. These revolving credit facilities include the following:
Credit Facility |
| Expiration |
| Established |
| Outstanding |
| Unused and |
| |||
|
|
|
|
|
| (in millions) |
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
364-day senior revolving(1) |
| April 2003 |
|
|
|
|
|
|
| |||
Direct borrowing |
|
|
| $ |
|
| $ | — |
| $ |
|
|
Commercial paper support |
|
|
|
|
| 473 |
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Total 364-day facility |
|
|
| 600 |
| 473 |
| 127 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Three-year senior revolving |
| May 2004 |
|
|
|
|
|
|
| |||
Direct borrowing |
|
|
|
|
| 25 |
|
|
| |||
Commercial paper support |
|
|
|
|
| — |
|
|
| |||
Letter of Credit support |
|
|
|
|
| 8 |
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Total three-year facility |
|
|
| 400 |
| 33 |
| 367 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Total credit facilities |
|
|
| $ | 1,000 |
| $ | 506 |
| $ | 494 |
|
(1)Cinergy Corp. has historically followed the practice of renewing its 364-day facility upon expiration.
In our credit facilities, Cinergy Corp. has covenanted to maintain:
• a consolidated net worth of $2 billion; and
• a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
A breach of these covenants could result in the termination of the credit facilities and the acceleration of the related indebtedness. In addition to breaches of covenants, certain other events that could result in the termination of available credit and acceleration of the related indebtedness include:
• bankruptcy;
• defaults in the payment of other indebtedness; and
• judgments against the company that are not paid or insured.
The latter two events, however, are subject to dollar-based materiality thresholds.
Variable Rate Pollution Control Notes
CG&E and PSI have issued certain variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes). Because the holders of these notes have the right to have their notes redeemed on a daily, monthly, or annual basis, they are reflected in Notes payable and other short-term obligations on the Balance Sheets
44
for Cinergy, CG&E, and PSI. In October 2002, CG&E and PSI redeemed $84 million and $47.6 million, respectively, of variable rate pollution control notes. At December 31, 2002, CG&E had $112 million and PSI had $35 million outstanding in variable rate pollution control notes, classified as short-term debt. Any short-term pollution control note borrowings outstanding do not reduce the unused and available short-term debt regulatory authority of CG&E, PSI, and ULH&P. See Notes 4 and 5 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information systems,regarding pollution control notes.
Money Pool
Cinergy Corp., Cinergy Services, Inc. (Services), and our operating companies participate in a money pool arrangement to better manage cash and working capital requirements. Under this arrangement, those companies with surplus short-term funds provide short-term loans to affiliates (other than Cinergy Corp.) participating under this arrangement. This surplus cash may be from internal or external sources. The amounts outstanding under this money pool arrangement are shown as a component of Notes receivable from affiliated companies and/or Notes payable to affiliated companies on the phase-inBalance Sheets of CG&E, PSI, and ULH&P. Any money pool borrowings outstanding reduce the unused and available short-term debt regulatory authority of CG&E, PSI, and ULH&P.
Operating Leases
We have entered into operating lease agreements for various facilities and properties such as computer, communication and transportation equipment, and office space. See Note 7(a) of the “Notes to full
competition has been delayedFinancial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information regarding operating leases.
Capital Leases
Our operating companies are able to September 1998. Midlands' service territory is
now scheduled to begin open competition in October 1998.
To date, new entrantsenter into capital leases subject to the industry have been limitedauthorization limitations of the applicable state utility commissions. New financing authority is subject to the approval of the respective commissions. In May 2002, ULH&P received approval from the Kentucky Public Service Commission (KPSC) to enter into an additional $25 million of capital lease obligations for the period ending December 31, 2004. In June 2002, PSI received approval from the Indiana Utility Regulatory Commission (IURC) to enter into an additional $100 million of capital lease obligations for the period ending December 31, 2003. In December 2002, CG&E received approval from the PUCO to enter into an additional $74 million of capital lease obligations for the period ending December 31, 2003. See Note 7(b) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information regarding capital leases.
45
Long-term Debt
A summary of our long-term debt authorizations at December 31, 2002, is as follows:
|
| Authorized |
| Used |
| Available |
| |||
|
|
|
| (in millions) |
|
|
| |||
|
|
|
|
|
|
|
| |||
Cinergy Corp. |
|
|
|
|
|
|
| |||
PUHCA total capitalization(1) |
| $ | 5,000 |
| $ | 1,750 |
| $ | 3,250 |
|
|
|
|
|
|
|
|
| |||
CG&E |
|
|
|
|
|
|
| |||
State Public Utility Commission |
| 500 |
| 500 |
| — |
| |||
|
|
|
|
|
|
|
| |||
PSI |
|
|
|
|
|
|
| |||
State Public Utility Commission |
| 500 |
| 48 |
| 452 |
| |||
|
|
|
|
|
|
|
| |||
ULH&P |
|
|
|
|
|
|
| |||
State Public Utility Commission |
| 75 |
| — |
| 75 |
| |||
(1)Cinergy Corp., under PUHCA, was granted approval to increase total capitalization (which excludes retained earnings and accumulated other comprehensive income (loss)) by $5 billion. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.
We are required to secure authority to issue long-term debt from the SEC under the PUHCA and the state utility commissions of Ohio, Kentucky, and Indiana. The SEC under the PUHCA regulates the issuance of long-term debt by Cinergy Corp. The respective state utility commissions regulate the issuance of long-term debt by our operating companies. In June 2000, the SEC issued an order under the PUHCA authorizing Cinergy Corp., over a five-year period expiring in June 2005, to increase its total capitalization based on a balance at December 31, 1999 (excluding retained earnings and accumulated other comprehensive income (loss)) by an additional $5 billion, through the issuance of any combination of equity and debt securities. This increased authorization is subject to certain conditions, including, among others, that common equity comprises at least 30 percent of Cinergy Corp.’s consolidated capital structure and that Cinergy Corp., under certain circumstances, maintains an investment grade rating on its senior debt obligations.
In July 2002, CG&E filed a shelf registration statement with the SEC for the issuance of up to $700 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock. This shelf registration statement became effective in September 2002, and CG&E subsequently sold $500 million of senior unsecured debentures thereby reducing the standby capacity of its shelf registration statement with the SEC to $200 million. PSI maintains shelf registration statements with the SEC with authority remaining to issue $400 million in unsecured debentures, $205 million first in mortgage bonds, and $40 million in preferred stock. ULH&P may issue up to $30 million in secured or unsecured debt securities and up to $20 million in first mortgage bonds.
On January 15, 2003, Cinergy Corp. filed a shelf registration statement with the SEC with respect to the issuance of common stock, preferred stock, and other securities including senior
46
unsecured debt securities in an aggregate offering amount of $750 million. This registration statement became effective in January 2003, and on February 5, 2003, Cinergy sold $175 million of Cinergy Corp. common stock.
In February 2003, both CG&E and PSI filed shelf registration statements with the SEC for the issuance of unsecured debt securities, first mortgage bonds, or preferred stock. These filings will increase the available amounts for these securities under the SEC shelf registration statements by $300 million and $55 million for CG&E and PSI, respectively.
CG&E, PSI, and ULH&P are also subject to the various state public utility commissions for authority to issue securities. In December 2002, CG&E filed an application with the PUCO seeking authorization to issue secured and unsecured debt securities in any combination up to an aggregate amount of $500 million for the period ending December 31, 2003. In January 2003, the PUCO granted this request.
In October 2002, PSI filed a petition with the IURC for the purpose of securing authorization and approval to issue promissory notes to Cinergy Corp. for the acquisition of the Butler County, Ohio and Henry County, Indiana peaking plants. On January 22, 2003, the IURC granted this request, and on February 5, 2003, PSI issued the notes.
Off-Balance Sheet Financing
Cinergy uses special-purpose entities (SPE) from time to time to facilitate financing of various projects. SPEs are entities often created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, and reinsurance, or other transactions or arrangements. Due to our lack of control of these entities, a substantive investment by unrelated parties, and various other criteria, Cinergy does not consolidate these SPEs. The Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation 46) in January 2003. This interpretation will significantly change the consolidation requirements for SPEs and may impact certain of our SPEs. Refer to “Accounting Changes” in “Results of Operations - Future” for further information.
The following describes our major off-balance sheet financings excluding the investments Cinergy holds in various unconsolidated subsidiaries which are accounted for under the equity method (see Note 1(b) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”). Cinergy Corp. has guaranteed approximately $8 million of the debt of these entities.
(i) Power Sales
Cinergy Capital & Trading, Inc. (Capital & Trading) is a 10 percent owner of two SPEs that were created to facilitate power sales to Central Maine Power (Central Maine). The SPEs raised capital to purchase Central Maine’s existing power supply contracts from two independent power producers, who competeproducers. The SPEs restructured the terms of the agreements, resulting in power sales contracts for approximately 45 MW, ending in 2009, and 35 MW, ending in 2016. Since the SPEs have no generation sources, power purchase agreements were entered into with Capital & Trading with near equivalent terms. The total debt outstanding at December 31, 2002, within these two SPEs is approximately $233 million. This debt is non-recourse to Cinergy and Capital & Trading in the event of non-performance by Central Maine. A portion of the cash flows received by the SPEs from Central Maine is reserved to pay the interest and principal on the debt.
47
Capital & Trading provides various services, including certain credit support facilities. The maximum exposure under the capped credit facilities is approximately $25 million. There is a non-capped facility, but it can only be called upon in the event the SPE breaches representations, violates covenants, or other unlikely events.
Capital & Tradingaccounts for its 10 percent interest in both SPEs under the equity method of accounting.
(ii) Leasing
Cinergy had an arrangement with an SPE that had contracted to buy several combustion turbines from an unrelated party. Cinergy entered this arrangement with the formerly state-run generators by using new,
efficient technology. There have been no major new entrants intointention of leasing these turbines after construction. In the supply
business from outsidesecond quarter of 2002, Cinergy exercised its option to purchase the industry. However, new entrants are expectedcontractual rights to emerge
as full competition opens.
A substantial portion of Midlands' operating profit is related to the
distribution business, which will remain a regulated monopoly. Midlands intends
to market both gas and electric service in the supply business, as all customers
gain the ability to choose suppliers.
Cinergy, CG&E, and ULH&P
Gas Utility Industry
Customer Choice The PUCO approved CG&E's gas customer choice program during
1997. The plan, which made customer choice available to all residential and
small commercial customers, went into effect in November 1997. As of January 30,
1998, approximately 7,300 customers have opted to participate in this program.
Large industrial, commercial, and educational institution customers already had
the ability to select their own gas supplier. In 1997, the PUCO approved two
other gas customer choice programs in the state. Cinergy Resources, Inc. (CRI),
Cinergy's gas retail marketing subsidiary, is one of many entities competing for
customer gas supply business in these programs.
CG&E continues to provide the gas transportation service for all customers on
its system without regard to the supplier of the gas commodity. CG&E receivesturbines and subsequently sold those rights to third parties. Cinergy recognized a transportation charge from customers which is based on its current regulated
rates.
Cinergy and CG&E
Lossloss of Transportation Customer Late in 1997, AK Steel, Cinergy's largest
natural gas transportation customer, informed CG&E that it plans to build its
own pipeline to connect directly to an interstate natural gas pipeline. The
interruptible contract with CG&E, which represents approximately $7 million on this sale. The rights to the remaining turbines remained with the SPE.
In the fourth quarter of annual revenues, will expire at the end of 1998. Under that contract, AK Steel
purchases gas directly from other suppliers but uses CG&E's pipelines to deliver
the gas. AK Steel is able2002, Cinergy decided not to pursue this alternative becausethe leasing arrangement with the SPE. We incurred a charge of its close
proximityapproximately $14 million for the cancellation of the leasing arrangement.
(iii) Sales of Accounts Receivable
In February 2002, CG&E, PSI, and ULH&P replaced their existing agreement to an existing interstate pipeline. With few customers being similarly
situated, sell certain of their accounts receivable and related collections. Cinergy Corp. formed Cinergy Receivables Company, LLC (Cinergy Receivables) to purchase, on a revolving basis, nearly all of the retail accounts receivable and related collections of CG&E do, PSI, and ULH&P. Cinergy Corp. does not currently anticipate others proceeding in a
similar manner.consolidate Cinergy CG&E, PSI, and ULH&P
Cinergy's ResponseReceivables since it meets the requirements to the Changing Competitive Environment
Cinergy believes competition will benefit electric customers individually and
the economybe accounted for as a whole. Cinergy has taken steps to prepare not onlyqualifying SPE. The sales of receivables are accounted for the
changing environment, but to assure fairness and consistency in the setting of
rules and regulations in the various markets in which Cinergy competes.
Cinergy's basic approach to the deregulation environment is to have set a goal
to be a top five utility in five measures of scale and productivity within five
years. Examples of steps taken to achieve this goal include the following:
Cinergy reorganized its operations into four strategic business units. This
functional unbundling separated Cinergy's business into Energy Services, Energy
Delivery, Energy Commodities, and International business units. Each business
unit is responsible for business expansion in its own markets.
Cinergy enhanced its international presence in 1996 by acquiring its
interest in Midlands, an electricity distribution company located in the UK. In
1997, Cinergy furthered its international development plans by acquiring the
development team and all rights to future projects of Midlands Power
International, a power development subsidiary of Midlands.
Cinergy formed a joint venture with Trigen Energy Corporation (Trigen) to
develop and operate cogeneration and trigeneration facilities throughout the US
and Canada which enables Cinergy to compete for customers outside its own
franchise territory prior to and following the arrival of retail competition.
Cinergy has partnered with two other energy companies to form Cadence
Network LLC which will provide a variety of innovative products and services to
multi-site national accounts customers. These services include consolidated
billing, bill auditing, and rate and usage analysis.
Cinergy has become a major participant in the marketing of power, resulting
in megawatt (mw) sales volume increases of 600% and 80% in 1997 and 1996,
respectively.
In 1997, Cinergy acquired Greenwich Energy Partners (Greenwich). Greenwich
is a small proprietary trader of energy commodities. Through its acquisition of
Greenwich, Cinergy became the first utility company to hold a seat on the New
York Mercantile Exchange (NYMEX). The NYMEX is the world's largest physical
commodity futures exchange and preeminent trading forum for energy and precious
metals.
In 1996, the NYMEX began trading electricity futures and options contracts
with contract delivery points in the western US. During the first half of 1998,
the NYMEX will begin trading contracts with delivery points located in the
Midwest, Mid-Atlantic, and Southern regions of the country. Cinergy's
transmission system was selected as the delivery point for the Midwest region.
Cinergy's acquisition of the NYMEX seat and its selection as a delivery point
for electricity futures trading demonstrates Cinergy's participation as a leader
in the evolving power markets.
Cinergy, CG&E, PSI, and ULH&P
Substantial Accounting Implications
Historically, regulated utilities have applied the provisions ofunder Statement of Financial Accounting Standards No. 71, 140, Accounting for the EffectsTransfers and Servicing of Certain
TypesFinancial Assets and Extinguishments of RegulationLiabilities (Statement 71)140). The accounting afforded regulated utilities
in Statement 71 is based on the fundamental premise that rates authorized by
regulators allow recoveryFor a more detailed discussion of a utility's costs in its generation, transmission,
and distribution operations. These principles have allowed the deferralour sales of costs
(i.e., regulatory assets) based on assurances of a regulator as to the future
recoverabilityaccounts receivable, see Note 6 of the costs“Notes to Financial Statements” in rates charged to customers. Certain criteria must
be met for the continued application“Item 8. Financial Statements and Supplementary Data”.
48
Securities Ratings
As of the provisions of Statement 71,
including regulated rates designed to recover the specific utility's costs.
Failure to satisfy the criteria in Statement 71 would eliminate the basis for
recognition of regulatory assets.
Based on Cinergy's current regulatory orders and the regulatory environment in
which it currently operates, the recognition of its regulatory assets as of
DecemberJanuary 31, 1997, is fully supported. However, in light of recent trends in
customer choice legislation, the potential for future losses resulting from
discontinuance of Statement 71 does exist. Such potential losses, if any, cannot
be determined until such time as a legislated plan has been approved by each
state in which Cinergy operates a franchise territory. Cinergy intends to
continue its pursuit of competitive strategies which mitigate the potential
impact of these issues on the financial condition of the Company.
Cinergy, CG&E, PSI, and ULH&P
SECURITIES RATINGS
The current ratings provided by2003, the major credit rating agencies; Duff & Phelps
Credit Rating Co. (D&P),ratings agencies rated our securities as follows:
Fitch(1) | Moody’s(2) | S&P(3) | |||||
Cinergy Corp. | |||||||
Corporate Credit | BBB+ | Baa2 | BBB+ | ||||
Senior Unsecured Debt | BBB+ | Baa2 | BBB | ||||
Commercial Paper | F-2 | P-2 | A-2 | ||||
Preferred Trust Securities | BBB+ | Baa2 | BBB | ||||
CG&E | |||||||
Senior Secured Debt | A- | A3 | A- | ||||
Senior Unsecured Debt | BBB+ | Baa1 | BBB | ||||
Junior Unsecured Debt | BBB | Baa2 | BBB- | ||||
Preferred Stock | BBB | Baa3 | BBB- | ||||
Commercial Paper | F-2 | P-2 | Not Rated | ||||
PSI | |||||||
Senior Secured Debt | A- | A3 | A- | ||||
Senior Unsecured Debt | BBB+ | Baa1 | BBB | ||||
Junior Unsecured Debt | BBB | Baa2 | BBB- | ||||
Preferred Stock | BBB | Baa3 | BBB- | ||||
Commercial Paper | F-2 | P-2 | Not Rated | ||||
ULH&P | |||||||
Senior Unsecured Debt | Not Rated | Baa1 | BBB |
(1) Fitch IBCA (Fitch)
(2) Moody’s Investors Service LP (Fitch)(Moody’s)
(3) Standard & Poor’s Ratings Services (S&P)
The lowest investment grade credit rating for Fitch is BBB-, Moody's Investors
Service (Moody's),Moody’s is Baa3, and Standard and Poor's (S&P), are included in the following
table:
D&P Fitch Moody's S&P is BBB-.
In April 2002, Moody’s affirmed the credit ratings of Cinergy Corporate Credit BBB+ BBB+ Baa2 BBB+
Commercial Paper D-2 F-2 P-2 A-2
Corp. and its operating subsidiaries, CG&E
Secured Debt A- A- A3 A-
Senior Unsecured Debt BBB+ Not rated Baa1 BBB+
Junior Unsecured Debt BBB Not rated Baa2 BBB+
Preferred Stock BBB BBB+ baa1 BBB+
Commercial Paper D-1- F-2 P-2 Not rated
and PSI
Secured Debt A- A A3 A-
Senior Unsecured Debt BBB+ A- Baa1 BBB+
Junior Unsecured Debt BBB BBB+ Baa2 BBB+
Preferred Stock BBB BBB+ baa1 BBB+
Commercial Paper D-1- F-2 P-2 Not rated
ULH. Moody’s also removed Cinergy Corp. from review for possible downgrade, and assigned stable outlooks to the debt and preferred stock of Cinergy Corp. and all of its operating subsidiaries.
In June 2002, S&P Secured Debt A- Not rated A3 A-
Unsecured Debt Not rated Not rated Baa1 BBB+
affirmed Cinergy Corp.’s corporate credit rating, the rating of the company’s commercial paper program, and the secured debt ratings of CG&E and PSI, while lowering the credit ratings on other issuances. S&P removed all of the Cinergy Corp., CG&E,and PSI ratings from CreditWatch with negative implications and assigned a stable outlook.
Also in June 2002, Fitch affirmed the credit ratings of Cinergy Corp. Fitch also changed the rating outlook on these securities from negative to stable and affirmed the ratings of CG&E and PSI.
These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.
REGULATORY MATTERS
49
Equity Securities
Under the SEC’s June 2000 Order, Cinergy Corp. is permitted to increase its total capitalization by $5 billion (as previously discussed). The proceeds from any new issuances will be used for general corporate purposes.
In November 2001, Cinergy Corp. chose to reinstitute the practice of issuing new Cinergy Corp. common shares to meet its obligations under the various employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. This replaces the previous practice of purchasing open market shares to fulfill plan obligations. See Note 2(a) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information on issued shares.
In December 2001, under an existing registration statement, Cinergy Corp. issued approximately $316 million notional amount of combined securities (Income PRIDES), a component of which is stock purchase contracts. These contracts obligate the holder to purchase common shares of Cinergy Corp. in, and/or before, February 2005. See Note 2(e) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information regarding the stock purchase contracts.
In February 2002, Cinergy Corp. issued 6.5 million shares of common stock with net proceeds of approximately $200 million.
In July 2002, Cinergy implemented a policy that prohibits executive officers and directors from selling shares of Cinergy Corp. common stock acquired through the exercise of stock options (except to the extent necessary to pay the exercise price and/or any accompanying tax obligation) until 90 days after they leave the company or board.
On January 15, 2003, Cinergy Corp. filed a registration statement with the SEC with respect to the issuance of common stock, preferred stock, and other securities in an aggregate offering amount of $750 million. On February 5, 2003, Cinergy sold 5.7 million shares of common stock of Cinergy Corp. with net proceeds of approximately $175 million under this registration statement.
Dividend Restrictions
Cinergy Corp.’s ability to pay dividends to holders of its common stock is principally dependent on the ability of CG&E and PSI to pay Cinergy Corp. common dividends. Cinergy Corp., CG&E, and PSI cannot pay dividends on their common stock if their respective preferred stock dividends or preferred trust dividends are in arrears. The amount of common stock dividends that each company can pay is also limited by certain capitalization and earnings requirements under CG&E’s and PSI’s credit instruments. Currently, these requirements do not impact the ability of either company to pay dividends on its common stock.
50
Other
Where subject to rate regulations, our operating companies have the ability to timely recover certain cash outlays through regulatory mechanisms such as fuel adjustment clause, purchased power tracker (Tracker), gas cost recovery, and construction work in progress (CWIP) ratemaking. For further discussion see “Electric Industry” and “Gas Industry”.
As opportunities arise, we will continue to monetize certain non-core investments, which would include our international and renewable assets operated by Cinergy Global Resources, Inc. (Global Resources) and other technology investments.
51
The Results of Operations discussions for Cinergy, CG&E, and PSI are combined within this section.
2002 RESULTS OF OPERATIONS - HISTORICAL
Summary of Results
Electric and gas gross margins and net income for Cinergy, CG&E, and PSI for the years ended December 31, 2002 and 2001 were as follows:
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| ||||||||||||
|
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric gross margin |
| $ | 2,400,458 |
| $ | 2,250,044 |
| $ | 1,228,005 |
| $ | 1,215,385 |
| $ | 1,083,218 |
| $ | 942,530 |
|
Gas gross margin |
| 247,978 |
| 231,017 |
| 204,534 |
| 199,665 |
| — |
| — |
| ||||||
Net income |
| 360,576 |
| 442,279 |
| 263,696 |
| 326,654 |
| 214,249 |
| 162,333 |
| ||||||
(1) The results of Cinergy also include amounts related to non-registrants.
Net income for the year ended December 31, 2002, was $361 million ($2.13 per share on a diluted basis) as compared to $442 million ($2.75 per share on a diluted basis) for the same period last year. Income before taxes for the period was $558 million compared to $718 million for the prior year. Increased gross margins were offset by the recognition of costs associated with employee severance programs, charges related to the write-off of certain investments, and higher operating costs. Increased gross margins were also offset by a cumulative effect of a change in accounting principle related to the implementation of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement 142).
The explanations below follow the line items on the Statements of Income for Cinergy, CG&E, and PSI. However, only the line items that varied significantly from prior periods are discussed.
Electric Operating Revenues
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| ||||||||||||||||||
|
| 2002 |
| 2001 |
| % Change |
| 2002 |
| 2001 |
| % Change |
| 2002 |
| 2001 |
| % Change |
| ||||||
|
| (in millions) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Retail |
| $ | 2,771 |
| $ | 2,691 |
| 3 |
| $ | 1,412 |
| $ | 1,444 |
| (2 | ) | $ | 1,360 |
| $ | 1,247 |
| 9 |
|
Wholesale |
| 3,970 |
| 5,482 |
| (28 | ) | 2,964 |
| 2,645 |
| 12 |
| 959 |
| 2,835 |
| (66 | ) | ||||||
Transportation |
| 13 |
| 3 |
| — |
| 13 |
| 3 |
| — |
| — |
| — |
| — |
| ||||||
Other |
| 158 |
| 80 |
| 98 |
| 125 |
| 64 |
| 95 |
| 40 |
| 26 |
| 54 |
| ||||||
Total |
| $ | 6,912 |
| $ | 8,256 |
| (16 | ) | $ | 4,514 |
| $ | 4,156 |
| 9 |
| $ | 2,359 |
| $ | 4,108 |
| (43 | ) |
(1) The results of Cinergy also include amounts related to non-registrants.
Electric operating revenues decreased for Cinergy and PSI Indiana
IURC Ordersand increased for CG&E for the year ended December 31, 2002, as compared to 2001. Increases in retail sales, including transportation, were offset by an overall reduction in wholesale sales.
52
Cinergy’s wholesale sales decrease primarily reflects a reduction in the average price per megawatt hour (MWh) realized on non-firm wholesale transactions related to CG&E’s and PSI’s energy marketing and trading activities. Non-firm power is power without a guaranteed commitment for physical delivery. Additionally, CG&E’s increase and PSI’s decrease in wholesale revenues reflect the implementation of the new joint operating agreement effective April 2002 (see “Termination of Operating Agreement” in “Results of Operations - PSI's Future”). In connection with implementation of the new operating agreement, new wholesale sales transactions entered into since April 2002 were originated on behalf of CG&E.
Retail revenues increased for Cinergy and PSI due to increased MWh sales, attributable to weather and increased customer usage. Also contributing to this increase were changes in rate tariff adjustments associated with demand-side management, Tracker, CWIP, and fuel cost recovery programs. The cost of fuel for PSI’s retail customers is passed on dollar-for-dollar under the state mandated fuel cost recovery mechanism. CG&E’s retail revenues were relatively flat for the year ended December 31, 2002, as compared to 2001. Increased residential sales, primarily attributable to weather, were offset by decreases in revenue from commercial and industrial customers. This decrease reflects a sluggish economy and the migration of such customers to a transportation-only tariff, in connection with the Ohio electric customer choice program.
Other Electric operating revenues for Cinergy, CG&E, and PSI increased for the year ended December 31, 2002, as compared to 2001. Cinergy’s and CG&E’s increase is due primarily to third party coal sales. Cinergy’s, CG&E’s, and PSI’s increase also reflects transmission revenues associated with the Midwest Independent Transmission System Operator, Inc. (Midwest ISO) which began operations in early 2002.
Gas Operating Revenues
|
| Cinergy(1) |
| CG&E and subsidiaries |
| ||||||||||||
|
| 2002 |
| 2001 |
| % Change |
| 2002 |
| 2001 |
| % Change |
| ||||
|
| (in millions) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Retail |
| $ | 386 |
| $ | 547 |
| (29 | ) | $ | 386 |
| $ | 547 |
| (29 | ) |
Wholesale |
| 4,481 |
| 4,068 |
| 10 |
| — |
| — |
| — |
| ||||
Transportation |
| 47 |
| 40 |
| 18 |
| 47 |
| 40 |
| 18 |
| ||||
Other |
| 3 |
| 8 |
| (63 | ) | 4 |
| 9 |
| (56 | ) | ||||
Total |
| $ | 4,917 |
| $ | 4,663 |
| 5 |
| $ | 437 |
| $ | 596 |
| (27 | ) |
(1) The results of Cinergy also include amounts related to non-registrants.
Gas operating revenues for Cinergy increased for the year ended December 31, 2002, as compared to 2001. Cinergy’s increase was primarily the result of increased volumes sold by Cinergy Marketing & Trading, LP (Marketing & Trading), slightly offset by a lower price received per thousand cubic feet (mcf). Wholesale natural gas commodity spot prices were 16 percent lower on average than the year ended December 31, 2001.
CG&E’s retail gas revenues decreased primarily due to a lower price received per mcf delivered. The lower price reflects a substantial decrease in the wholesale gas commodity cost, which is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism
53
that is mandated by state law. Partially offsetting this decrease in retail gas revenues was an increase in CG&E’s base rates approved by the PUCO in May 2002 (See “CG&E Gas Rate ProceedingCase” in “Results of Operations - Future”).
Other Revenues
Other revenues for Cinergy increased for the year ended December 31, 2002, as compared to 2001. This increase is primarily due to the sale of synthetic fuel, which began in July 2002.
Operating Expenses
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| ||||||||||||||||||
|
| 2002 |
| 2001 |
| % Change |
| 2002 |
| 2001 |
| % Change |
| 2002 |
| 2001 |
| % Change |
| ||||||
|
| (in millions) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fuel |
| $ | 865 |
| $ | 779 |
| 11 |
| $ | 410 |
| $ | 332 |
| 23 |
| $ | 455 |
| $ | 453 |
| — |
|
Purchased and exchanged power |
| 3,647 |
| 5,227 |
| (30 | ) | 2,876 |
| 2,609 |
| 10 |
| 821 |
| 2,713 |
| (70 | ) | ||||||
Gas purchased |
| 4,669 |
| 4,432 |
| 5 |
| 233 |
| 397 |
| (41 | ) | — |
| — |
| — |
| ||||||
Operation and maintenance |
| 1,298 |
| 1,013 |
| 28 |
| 533 |
| 442 |
| 21 |
| 489 |
| 413 |
| 18 |
| ||||||
Depreciation |
| 414 |
| 374 |
| 11 |
| 196 |
| 187 |
| 5 |
| 156 |
| 149 |
| 5 |
| ||||||
Taxes other than income taxes |
| 263 |
| 228 |
| 15 |
| 198 |
| 174 |
| 14 |
| 57 |
| 50 |
| 14 |
| ||||||
Total |
| $ | 11,156 |
| $ | 12,053 |
| (7 | ) | $ | 4,446 |
| $ | 4,141 |
| 7 |
| $ | 1,978 |
| $ | 3,778 |
| (48 | ) |
(1) The results of Cinergy also include amounts related to non-registrants.
Fuel
Fuel represents the cost of coal, natural gas, and Demand-Side Management (DSM)
Proceeding oil that is used to generate electricity. The following table details the changes to fuel expense from the year ended December 31, 2001, to the year ended December 31, 2002:
|
| Cinergy(1) |
| CG&E |
| PSI |
| |||
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
| |||
2001 fuel expense |
| $ | 779 |
| $ | 332 |
| $ | 453 |
|
|
|
|
|
|
|
|
| |||
Increase (Decrease) due to changes in: |
|
|
|
|
|
|
| |||
Price of fuel |
| (8 | ) | (22 | ) | 14 |
| |||
Deferred fuel cost |
| (5 | ) | — |
| (5 | ) | |||
MWh generation |
| 23 |
| 30 |
| (7 | ) | |||
Other(2) |
| 76 |
| 70 |
| — |
| |||
|
|
|
|
|
|
|
| |||
2002 fuel expense |
| $ | 865 |
| $ | 410 |
| $ | 455 |
|
(1) The results of Cinergy also include amounts related to non-registrants.
(2) Includes costs of third party coal sales through our marketing and trading activities.
54
Purchased and Exchanged Power
Purchased and exchanged power expense decreasedfor Cinergy and PSI and increased for CG&E for the year ended December 31, 2002, as compared to 2001. Cinergy’s decrease primarily reflects a reduction in the average price paid per MWh as wholesale electric on-peak commodity prices were approximately 23 percent lower on average as compared to 2001. CG&E’s and PSI’s purchased and exchanged power expense also reflects the implementation of the new joint operating agreement beginning in April 2002.
Gas Purchased
Gas purchased expense increased for Cinergy for the year ended December 31, 2002, as compared to 2001. Cinergy’s increase primarily reflects higher gas volumes purchased by Marketing & Trading. Increased volumes purchased were partially offset by decreases in the average cost of mcf purchased. Wholesale natural gas commodity spot prices were 16 percent lower on average for the year ended December 31, 2002, as compared to 2001. CG&E’sgas purchased expense decreased primarily due to a decrease in the average cost purchased per mcf. CG&E’s wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated by state law.
Operation and Maintenance
Operation and maintenance expense increased for Cinergy, CG&E, and PSI for the year ended December 31, 2002, as compared to 2001. Cinergy’s, CG&E’s, and PSI’s increase reflects the recognition of costs associated with employee severance programs, which began in the second quarter of 2002. Also contributing to this increase were higher transmission costs, increased costs of employee compensation and benefit programs, and expenditures related to process improvement and performance measurement initiatives. Cinergy’s and PSI’s increase also reflects increased amortization of demand-side management expenditures. Additionally, Cinergy’s increase includes costs associated with the production of synthetic fuel, beginning in July 2002 and increased operating costs for certain of our non-regulated investments.
Depreciation
Depreciation expense increased for Cinergy, CG&E, and PSI for the year ended December 31, 2002, as compared to 2001. This increase was primarily attributable to the addition of depreciable plant, including Cinergy’s acquisitions of non-regulated peaking generation in 2001 and a synthetic fuel project in 2002.
Taxes Other Than Income Taxes
Taxes other than income taxes expense increased for Cinergy, CG&E, and PSI for the year ended December 31, 2002, as compared to 2001. This increase is primarily attributable to increased property taxes. Cinergy’s and CG&E’s increase also reflects other tax changes associated with deregulation in Ohio.
55
Equity in Earnings (Losses) of Unconsolidated Subsidiaries
Equity in earnings (losses)of unconsolidated subsidiaries increased for the year ended December 31, 2002, as compared to 2001, primarily due to changes in the market valuation of certain investments and the dissolution and write-off of subsidiaries in 2001.
Miscellaneous - Net
Miscellaneous - net decreased for Cinergy for the year ended December 31, 2002, as compared to 2001, primarily reflecting the write-off of technology investments and costs accrued related to the termination of a contract for the construction of combustion turbines. Partially offsetting this decrease were net gains realized from the sale of equity investments in certain renewable energy projects.
Interest
Interest expense decreased for Cinergy, CG&E, and PSI for the year ended December 31, 2002, as compared to 2001, primarily as a result of lower interest rates.
Preferred Dividend Requirement of Subsidiary Trust
Preferred dividend requirement of subsidiary trust relates to quarterly payments to be made to holders of Cinergy’s preferred trust securities, which were issued in December 2001.
Income Taxes
Income taxes expense decreased for Cinergy and CG&E for the year ended December 31, 2002, as compared to 2001. This decrease was primarily due to the decrease in taxable income. Also contributing to Cinergy’s decrease were tax credits associated with the production and sale of synthetic fuel beginning July 2002. PSI’s income tax expense increased for the year ended December 31, 2002, as compared to 2001, mainly due to the increase in taxable income.
Discontinued Operations
In 2002, Cinergy sold and/or classified as held for sale, several non-core investments. Pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-lived Assets (Statement 144), these investments have been classified as discontinued operations in our financial statements. See Note 15 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further information.
Cumulative Effect of a Change in Accounting Principle
Cinergy recognized a Cumulative effect of a change in accounting principle of approximately $11 million (net of tax) as a result of an impairment charge for goodwill related to the implementation of Statement 142. See Note 14 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further information.
56
ULH&P
The Results of Operations discussion for ULH&P is presented only for the year ended December 31, 2002, in accordance with General Instruction I(2)(a).
Electric and gas margins and net income for ULH&P for the year ended December 31, 2002 and 2001, were as follows:
|
| ULH&P |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (in thousands) |
| ||||
|
|
|
|
|
| ||
Electric gross margin |
| $ | 67,122 |
| $ | 79,398 |
|
Gas gross margin |
| 34,820 |
| 36,740 |
| ||
Net income |
| 12,150 |
| 35,924 |
| ||
Electric Gross Margins
Electric operating revenues decreased for the year ended December 31, 2002, as compared to 2001, primarily due to the recognition of revenues in 2001 which were previously deferred subject to refund in connection with a 2000 retail rate filing with the KPSC. A settlement was reached in May 2001, allowing ULH&P to retain these revenues. Partially offsetting this decrease in revenues was an increase in sales attributable to warmer than normal weather.
Electricity purchased from parent company for resale increased for the year ended December 31, 2002, as compared to 2001, due primarily to a new wholesale power contract with CG&E that became effective in January 2002. This five-year agreement is a negotiated fixed-rate contract that replaced the previous cost of service based contract that expired on December 31, 2001.
Gas Gross Margins
Gas operating revenues decreased for the year ended December 31, 2002, as compared to 2001. This decrease is primarily due to lower price received per mcf. The lower price reflects a substantial decrease in the wholesale gas commodity cost. Partially offsetting the decrease in gas revenues was an increase in ULH&P’s base rates approved by the KPSC in January 2002 (see “ULH&P Gas Rate Case” in “Results of Operations - Future”).
Gas purchased expenses decreased for the year ended December 31, 2002, as compared to 2001, due to lower prices paid per mcf. The wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.
Operation and Maintenance
Operation and maintenance expense increased for the year ended December 31, 2002, as compared to 2001, due primarily to higher transmission costs associated with the new wholesale power contract with CG&E that became effective in January 2002.
57
2001 RESULTS OF OPERATIONS - HISTORICAL
Summary of Results
Electric and gas gross margins and net income for Cinergy, CG&E, and PSI for the years ended December 31, 2001 and 2000 were as follows:
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| ||||||||||||
|
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Electric gross margin |
| $ | 2,250,044 |
| $ | 2,220,084 |
| $ | 1,215,385 |
| $ | 1,183,816 |
| $ | 942,530 |
| $ | 959,541 |
|
Gas gross margin |
| 231,017 |
| 267,304 |
| 199,665 |
| 224,633 |
| — |
| — |
| ||||||
Net income |
| 442,279 |
| 399,466 |
| 326,654 |
| 266,820 |
| 162,333 |
| 135,398 |
| ||||||
(1)The results of Cinergy also include amounts related to non-registrants.
Diluted earnings per share for the year ended December 31, 2001, was $2.75 as compared to $2.50 for the year ended December 31, 2000. Included in 2000 results were previously reported one-time charges totaling $.11 per share related to a tentative agreement reached with the EPA and a limited early retirement program (LERP) offered to employees during 2000.
The increase in 2001 earnings was primarily attributable to increased electric gross margins within Energy Merchant Business Unit’s (Energy Merchant) origination, marketing and trading segment, and reduced operating expenditures. Partially offsetting this increase were lower electric gross margins within our regulated operations, mainly driven by mild weather and a slowed economy, and increased depreciation and interest expenses associated with new investments. Gas gross margins decreased for the year ended December 31, 2001, as compared to 2000, primarily as a result of mild weather.
The explanations below follow the line items on the Statements of Income for Cinergy, CG&E, and PSI. However, only the line items that varied significantly from prior periods are discussed.
Electric Operating Revenues
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| ||||||||||||||||||
|
| 2001 |
| 2000 |
| % Change |
| 2001 |
| 2000 |
| % Change |
| 2001 |
| 2000 |
| % Change |
| ||||||
|
| (in millions) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Retail |
| $ | 2,691 |
| $ | 2,692 |
| — |
| $ | 1,444 |
| $ | 1,482 |
| (3 | ) | $ | 1,247 |
| $ | 1,210 |
| 3 |
|
Wholesale |
| 5,482 |
| 2,615 |
| — |
| 2,645 |
| 1,233 |
| — |
| 2,835 |
| 1,450 |
| 96 |
| ||||||
Transportation |
| 3 |
| — |
| — |
| 3 |
| — |
| — |
| — |
| — |
| — |
| ||||||
Other |
| 80 |
| 52 |
| 54 |
| 64 |
| 31 |
| — |
| 26 |
| 31 |
| (16 | ) | ||||||
Total |
| $ | 8,256 |
| $ | 5,359 |
| 54 |
| $ | 4,156 |
| $ | 2,746 |
| 51 |
| $ | 4,108 |
| $ | 2,691 |
| 53 |
|
(1) The results of Cinergy also include amounts related to non-registrants.
Electric operating revenues for Cinergy, CG&E, and PSI increased for the year ended December 31, 2001, as compared to 2000, mainly due to an increase in volumes and average
58
price per MWh realized on non-firm wholesale transactions related to energy marketing and trading activities. Non-firm power is power without a guaranteed commitment for physical delivery.
Gas Operating Revenues
|
| Cinergy(1) |
| CG&E and subsidiaries |
| ||||||||||||
|
| 2001 |
| 2000 |
| % Change |
| 2001 |
| 2000 |
| %Change |
| ||||
|
| (in millions) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Retail |
| $ | 547 |
| $ | 429 |
| 28 |
| $ | 547 |
| $ | 429 |
| 28 |
|
Wholesale |
| 4,068 |
| 2,454 |
| 66 |
| — |
| — |
| — |
| ||||
Transportation |
| 40 |
| 56 |
| (29 | ) | 40 |
| 56 |
| (29 | ) | ||||
Other |
| 8 |
| 3 |
| — |
| 9 |
| 6 |
| 50 |
| ||||
Total |
| $ | 4,663 |
| $ | 2,942 |
| 58 |
| $ | 596 |
| $ | 491 |
| 21 |
|
(1) The results of Cinergy also include amounts related to non-registrants.
Gas operating revenues for Cinergy increased for the year ended December 31, 2001, as compared to 2000. Cinergy’s increase was primarily the result of increased volumes sold by Marketing & Trading.
CG&E’s retail gas revenues increased primarily due to a higher price received per mcf sold. This increase was partially offset by a decrease in retail gas sales resulting from warmer weather during the fourth quarter of 2001. The higher price reflects a substantial increase in the wholesale gas commodity cost during the first six months, which is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated by state law. Retail sales also increased and transportation sales decreased due to transportation customers (customers who purchase gas directly from other suppliers) returning to full gas service (customers who purchase gas and utilize the transportation services of CG&E).
Operating Expenses
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| ||||||||||||||||||
|
| 2001 |
| 2000 |
| % Change |
| 2001 |
| 2000 |
| % Change |
| 2001 |
| 2000 |
| % Change |
| ||||||
|
| (in millions) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fuel |
| $ | 779 |
| $ | 760 |
| 3 |
| $ | 332 |
| $ | 344 |
| (3 | ) | $ | 453 |
| $ | 407 |
| 11 |
|
Purchased and exchanged power |
| 5,227 |
| 2,379 |
| — |
| 2,609 |
| 1,218 |
| — |
| 2,713 |
| 1,325 |
| — |
| ||||||
Gas purchased |
| 4,432 |
| 2,675 |
| 66 |
| 397 |
| 266 |
| 49 |
| — |
| — |
| — |
| ||||||
Operation and maintenance |
| 1,013 |
| 1,112 |
| (9 | ) | 442 |
| 492 |
| (10 | ) | 413 |
| 464 |
| (11 | ) | ||||||
Depreciation |
| 374 |
| 342 |
| 9 |
| 187 |
| 181 |
| 3 |
| 149 |
| 141 |
| 6 |
| ||||||
Taxes other than income taxes |
| 228 |
| 268 |
| (15 | ) | 174 |
| 208 |
| (16 | ) | 50 |
| 57 |
| (12 | ) | ||||||
Total |
| $ | 12,053 |
| $ | 7,536 |
| 60 |
| $ | 4,141 |
| $ | 2,709 |
| 53 |
| $ | 3,778 |
| $ | 2,394 |
| 58 |
|
(1) The results of Cinergy also include amounts related to non-registrants.
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Fuel
Fuel represents the cost of coal, natural gas, and oil that is used to generate electricity. The following table details the changes to fuel expense from the year ended December 31, 2000, to the year ended December 31, 2001:
|
| Cinergy(1) |
| CG&E |
| PSI |
| |||
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
| |||
2000 fuel expense |
| $ | 760 |
| $ | 344 |
| $ | 407 |
|
|
|
|
|
|
|
|
| |||
Increase (Decrease) due to changes in: |
|
|
|
|
|
|
| |||
Price of fuel |
| 47 |
| 22 |
| 25 |
| |||
Deferred fuel cost |
| 45 |
| 2 |
| 43 |
| |||
MWh generation |
| (58 | ) | (36 | ) | (22 | ) | |||
Other |
| (15 | ) | — |
| — |
| |||
|
|
|
|
|
|
|
| |||
2001 fuel expense |
| $ | 779 |
| $ | 332 |
| $ | 453 |
|
(1) The results of Cinergy also include amounts related to non-registrants.
Purchased and Exchanged Power
Purchased and exchanged power expense for Cinergy, CG&E, and PSI increased for the year ended December 31, 2001, as compared to 2000, primarily due to an increase in purchases of non-firm wholesale power, reflecting higher sales volumes and higher prices paid per MWh.
Gas Purchased
Gas purchased expense for Cinergy increased for the year ended December 31, 2001, as compared to 2000, primarily due to an increase in gas commodity trading volumes. CG&E’sgas purchased expense increased primarily due to higher prices paid per mcf during the first six months of 2001. CG&E’s wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism that is mandated by state law.
Operation and Maintenance
Operation and maintenance expense for Cinergy, CG&E, and PSI decreased for the year ended December 31, 2001, as compared to 2000, due in part to one-time charges related to a tentative agreement reached with the EPA in late 2000 and the LERP offered during 2000, as part of a corporate restructuring initiative. Cinergy’s and CG&E’s decrease is also attributable to a sale of emission allowances, due to decreased electric generation, and Cinergy’s and PSI’s decrease reflects the reduction in amortization of demand-side management costs, resulting from the expiration of the agreement in May 2000.
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Depreciation
Depreciation expense for Cinergy increased for the year ended December 31, 2001, as compared to 2000. This increase was primarily attributable to the acquisition of additional depreciable plant, including investments in peaking generation.
Taxes Other Than Income Taxes
Taxes other than income taxes expense for Cinergy, CG&E, and PSI decreased for the year ended December 31, 2001, as compared to 2000, primarily due to reduced property tax expense and other tax changes associated with deregulation in Ohio.
Miscellaneous – Net
Miscellaneous - net increased for Cinergy, CG&E,and PSI for the year ended December 31, 2001, as compared to 2000, due in part to gains associated with the demutualization of one of our medical insurance carriers. Cinergy’s and PSI’s increase also reflects income associated with capitalized financing costs of PSI’s pollution control projects.
Interest
Interest expense for Cinergy increased for the year ended December 31, 2001, as compared to 2000, mainly due to debt issuances principally associated with the acquisition of additional peaking generation. Partially offsetting this increase was a decrease in short-term interest rates.
Income Taxes
Income taxes expense for Cinergy, CG&E, and PSI increased for the year ended December 31, 2001, as compared to 2000, primarily due to an increase in taxable income.
Discontinued Operations
In 2002, Cinergy sold and/or classified as held for sale, several non-core investments resulting in a reclassification of those investments as discontinued operations. See Note 15 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further information.
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MD&A - - RESULTS OF OPERATIONS - FUTURE
FUTURE EXPECTATIONS/TRENDS
In the “Future Expectations/Trends” section, we discuss electric and gas industry developments, market risk sensitive instruments and positions, inflation, and accounting matters. Each of these discussions will address the current status and potential future impact on our results of operations and financial condition.
ELECTRIC INDUSTRY
The utility industry has traditionally operated as a regulated monopoly but is transitioning to an environment of increased wholesale and retail competition. Regulatory and legislative decisions being made at the federal and state levels are aimed at promoting customer choice and are shaping this transition. Customer choice provides the customer with the ability to select an energy supplier (the company that generates or supplies the commodity) in an open and competitive marketplace. In particular, the FERC issued a Notice of Proposed Rulemaking (NOPR) proposing significant changes to enhance wholesale competition and create more customer options, among other initiatives.
The events and circumstances with California, Enron Corp. (Enron), and others, are significantly influencing the transition to increased wholesale and retail competition. In 2002, wholesale electric markets were characterized by lower prices, decreased liquidity, and the near evaporation of mid- to long-term markets. Developers cancelled turbine orders and abandoned existing power projects. Several trading operations announced plans to curtail or exit their wholesale trading activities. Credit rating agencies downgraded many industry participants. In this period of unprecedented change and uncertainty, energy industry participants are re-evaluating their strategies and business models.
Wholesale Market Developments
FERC NOPR on “Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design”
In July 2002, the FERC issued a NOPR on “Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design” that proposed significant changes, intended by FERC, to enhance wholesale competition, enable efficient transmission system development, provide correct pricing signals for investment in transmission and generation facilities, and create more customer options. Market monitoring and market power mitigation proposals are also critical parts of the proposals for standardized power market rules. As part of this process, the FERC proposes to amend its regulations under the Federal Power Act, to modify the pro-forma open access transmission tariff established under the FERC’s Order No. 888. FERC proposes to require all public utilities with open access transmission tariffs to file modifications to their tariffs to implement its proposed standardized transmission services and standardized wholesale electric market design. On November 15, 2002, Cinergy submitted initial NOPR comments to the FERC as part of this proceeding, generally supporting the FERC’s pro-competitive goals but suggesting modifications and sensitivity to some regional differences. Pursuant to FERC’s procedural directives, Cinergy anticipates filing additional comments on this NOPR with the FERC in the first quarter of 2003.
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The FERC issued a news release on January 13, 2003, stating its intention to issue an additional document on this NOPR in April 2003. The FERC also indicated that it would seek comments on the new document from interested parties. As a result, it is likely that the original timeline included in the NOPR will be delayed. Cinergy continues to evaluate this NOPR, but at this time, cannot determine the impact to either its financial position or results of operations.
FERC NOPR on New Standards of Conduct Regulations
In September 1996,2001, the FERC issued a NOPR proposing to promulgate new standards of conduct regulations that would apply, uniformly, to natural gas pipelines and transmitting public utilities. The FERC is proposing to adopt one set of standards of conduct to govern the relationships between regulated transmission providers and all their energy affiliates, broadening the definition of an affiliate covered by the standards of conduct from the more narrow definition in the existing regulations. At this time, we are unable to predict either the outcome of this proceeding or its effect on Cinergy.
Supply-side Actions
In December 2001, the IURC approved PSI’s plan for converting its Noblesville generating station from coal to natural gas, which will increase the electric generating capacity at the plant from approximately 100 megawatts (MW) to 300 MW. The conversion is expected to be completed in June 2003. In addition to increasing capacity, upon completion of the project, overall emissions to the environment will be reduced. Also, in December 2001, PSI filed a petition with the IURC to acquire the Butler County, Ohio and Henry County, Indiana peaking plants from subsidiaries of Capital & Trading. In December 2002, the IURC approved PSI’s purchase of the two plants, and on February 4, 2003, the FERC issued an order (September 1996 Order)
approving the transfer. See “Transfer of Generating Assets to PSI” for additional information.
Demand-side Actions
Pursuant to Ohio’s customer choice legislation enacted in 2001, four percent of CG&E’s residential customers and 23 percent of CG&E’s non-residential retail customers, in terms of annual energy consumption, had switched electric suppliers as of December 31, 2002. CG&E currently has no plans to replace these customers by acquiring new retail customers, although CG&E reserves the flexibility to replace load in the wholesale market, to the extent it chooses. For a further discussion on Ohio deregulation, see “Retail Market Developments” in this section.
In July 2002, we experienced record peak loads of 11,133 MW, 5,265 MW,and 6,088 MW for Cinergy, CG&E, and PSI, respectively. Cinergy and CG&E subsequently set new record peak loads of 11,305 MW and 5,311 MW, respectively, in August 2002. We met customer demands with our own supply and planned purchases from other regional electric suppliers.
Retail Market Developments
Currently, regulatory and legislative initiatives shaping the transition to a competitive retail market are the responsibilities of the individual states. Many states, including Ohio, have enacted electric utility deregulation legislation. In general, these initiatives have sought to separate the electric utility service into its basic components (generation, transmission, and distribution) and offer each component separately for sale. This separation is referred to as
63
unbundling of the integrated services. Under the customer choice initiatives in Ohio, we continue to transmit and distribute electricity; however, the customer can purchase electricity from any available supplier, and we are compensated through a transportation charge. The following sections further discuss the current status of federal and state energy policies and deregulation legislation in the states of Ohio, Indiana, and Kentucky, each of which includes a portion of our service territory.
Federal Update
Energy Bill
President Bush, in conjunction with the work of an inter-agency energy task force headed by Vice President Richard Cheney, developed a number of recommendations to address the energy security needs of America. The U.S. House of Representatives passed its version of energy security legislation (H.R. 4) in 2001, and the U.S. Senate passed its version (S. 517) on April 25, 2002. After significant debate, the bill died in a conference committee because differences could not be resolved. While the Bush Administration has urged Congress to take up similar legislation during 2003, it is unclear how quickly Congress will move to enact a bill. Last year’s versions of the energy bill included a provision to repeal the PUHCA, which Cinergy supported. It is likely that early versions of the energy bill will include PUHCA repeal, but it is too early to determine if an energy bill with electricity provisions will pass Congress this year.
Clear Skies Legislation
At the end of the 107th Congress, President Bush requested the introduction of legislation that would create a clear roadmap for environmental laws, allowing the nation to meet air goals but providing certainty for electric utilities with coal-fired power. That legislation is expected to be re-introduced in this session of Congress, and President Bush, in his 2003 State of the Union address, expressed that passage of his Clear Skies legislation was a top priority. Cinergy has been a promoter of this legislation, as it will create a clear roadmap of its environmental requirements while providing the time necessary to make required environmental improvements.
The importance of Clear Skies legislation is that it would replace unpredictable environmental regulations with set targets and timetables, allowing the industry adequate time to access needed capital and build environmental improvement projects. Clear Skies legislation would seek an overall average70 percent improvement in emissions from power plants over a phased-in reduction schedule beginning in 2010 and stretching to 2018. The leaders of the U.S. Senate Environmental Committee have promised to consider the legislation early in 2003; however, timing for consideration is less certain with the U.S. House of Representatives. Therefore, the prospects for passage of the Clear Skies legislation are unclear.
Ohio
In July 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill), beginning the transition to electric deregulation and customer choice for the state of Ohio. The Electric Restructuring Bill created a competitive electric retail service market effective January 1, 2001. The legislation provides for a market development period that began January 1, 2001 and ends no later than December 31, 2005.
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In May 2000, CG&E reached a stipulated agreement with the PUCO staff and various other interested parties with respect to its proposal to implement electric customer choice in Ohio effective January 1, 2001. In August 2000, the PUCO approved CG&E’s stipulation agreement. Subsequently, two parties filed applications for rehearing with the PUCO. In October 2000, the PUCO denied these applications. One of the parties appealed to the Ohio Supreme Court in the fourth quarter of 2000, and CG&E subsequently intervened in that case. In April 2002, the Ohio Supreme Court affirmed the PUCO’s stipulated agreement with CG&E with respect to implementing electric customer choice. The Ohio Supreme Court ruling leaves CG&E’s transition plan entirely intact.
Under CG&E’s transition plan, retail customers continue to receive transportation services from CG&E but may purchase electricity from another supplier. Retail customers that purchase electricity from another supplier receive shopping credits from CG&E. The shopping credits generally reflect the costs of electric generation included in CG&E’s frozen rates. However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers, are higher than CG&E’s electric generation costs in order to stimulate the development of the competitive retail electric service market.
CG&E recovers its regulatory assets and other transition costs through a Regulatory Transition Charge (RTC) paid by all retail customers. As the RTC is collected from customers, CG&E amortizes the deferred balance of regulatory assets and other transition costs. A portion of the RTC collected from customers is recognized currently as a return on the deferred balance of regulatory assets and other transition costs and as reimbursement for the difference in the shopping credits provided to customers and the wholesale revenues from switched generation. The ability of CG&E to recover its regulatory assets and other transition costs is dependent on several factors, including, but not limited to, the level of CG&E’s electric sales, prices in the wholesale power markets, and the amount of customer switching to other electric suppliers.
On January 10, 2003, CG&E filed an application with the PUCO for approval of a methodology to establish how market-based rates for non-residential customers will be determined when the market development period ends. In the filing, CG&E seeks to establish a market-based standard service offer rate increase for PSInon-residential customers that do not switch suppliers, and a process for establishing the competitively-bid generation service option required by the Electric Restructuring Bill. As of 7.6% ($75.7 million
annually)December 31, 2002, more than 20 percent of the load in each of CG&E’s non-residential customer classes has switched to other electric suppliers. Under its transition plan, CG&E may end the market development period for those classes of customers once 20 percent switching has been achieved; however, PUCO approval of the standard service offer rate and competitive bidding process is required before the market development period can be ended. CG&E is not requesting to end the market development period for non-residential customers at this time. CG&E is unable to predict the outcome of this proceeding.
A FERC order, that was effective April 2002, allowed Cinergy to jointly dispatch the regulated generating assets of PSI in conjunction with the deregulated generating assets of CG&E. AmongThe order also authorizes the transfer of the CG&E generating assets to a non-regulated affiliate. However, Cinergy has determined that it can realize the benefits of the new joint dispatch agreement without transferring CG&E’s generation assets, and therefore Cinergy does not plan
65
to transfer CG&E’s generating assets to a non-regulated affiliate in the foreseeable future. For further discussion of the joint dispatch agreement, see “Termination of Operating Agreement”.
Indiana
In 2002, Indiana lawmakers anticipated the creation of an Energy Policy Commission to assist in the creation of a comprehensive energy plan. However, no such commission was formed and, as a result, there are no current plans for electric deregulation in Indiana.
Kentucky
Throughout 1999, a special Kentucky Electricity Restructuring Task Force (Task Force), convened by the Kentucky legislature, studied the issues of electric deregulation. In January 2000, the Task Force issued a final report to Kentucky Governor Paul Patton recommending that lawmakers wait until the 2002 General Assembly before considering any deregulation that would open the state’s electric industry to competition. The state legislature did not take any action in 2002 to move Kentucky towards electric deregulation.
Other States
At the end of 2000, approximately one half of the states and the District of Columbia had adopted deregulation plans. However, recent events are significantly influencing political and legislative activity. At the end of 2001, eight of the states decided to delay or suspend their deregulation activities. No additional states adopted deregulation plans during 2002.
Other
Under generally accepted accounting principles (GAAP), CG&E, PSI, and ULH&P apply the provisions of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (Statement 71) to the applicable rate-regulated portions of their businesses. The provisions of Statement 71 allow CG&E, PSI, and ULH&P to capitalize (record as a deferred asset) costs that would normally be charged to expense. These costs are classified as regulatory assets in the accompanying financial statements, and the majority have been approved by regulators for future recovery from customers through our rates. As of December 31, 2002, our operating companies have approximately $1 billion of net regulatory assets, of which more than 90 percent has been approved for recovery.
Except with respect to the generation assets of CG&E, as of December 31, 2002, our operating companies continue to meet each of the criteria required for the application of Statement 71. However, to the extent other things,states implement deregulation legislation, the IURC authorizedapplication of Statement 71 will need to be reviewed. Based on our operating companies’ current regulatory orders and the inclusionregulatory environment in which they currently operate, management believes the future recovery of regulatory assets recognized in the accompanying Balance Sheets, as of December 31, 2002, is probable. See Note 1(c) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for a further discussion of our regulatory assets.
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Midwest ISO
Historical
As part of the effort to create a competitive wholesale power marketplace, the FERC approved the formation of the Midwest ISO during 1998. In that same year, Cinergy agreed to join the Midwest ISO in preparation for meeting anticipated changes in the FERC regulations and future deregulation requirements. The Midwest ISO was established as a non-profit organization to maintain functional control over the combined transmission systems of its members.
On December 15, 2001, the Midwest ISO initiated startup of its operations with the provision of a variety of support or stand alone services to its transmission owning members. The Midwest ISO achieved full startup, including implementation of tariff administration, on February 1, 2002. Although the Midwest ISO continues to develop, modify, and enhance its various operating practices, it has assumed functional control of the transmission systems of its member companies, including the Cinergy utilities. This transfer of control was implemented without significant impact on the operations of Cinergy’s transmission systems.
FERC Orders
In December 2001, the FERC approved the proposal of the Midwest ISO to become the first FERC-approved Regional Transmission Organization (RTO) and denied a similar proposal from the Alliance Regional Transmission Organization (Alliance RTO) on the basis that the proposal lacked sufficient scope. The FERC encouraged the former Alliance RTO companies to explore joining the Midwest ISO. Certain former Alliance RTO companies have joined or announced intent to join the Midwest ISO. The remaining former Alliance RTO companies have announced that they will join the PJM Interconnection, LLC (PJM).
In its July 17, 2002 open meeting and subsequent orders, the FERC reaffirmed its expectation that the Midwest ISO and PJM implement a common wholesale market between them by October 1, 2004. FERC also imposed more immediate deadlines upon the Midwest ISO, PJM, and various other parties to establish certain protocols, including the elimination of pancaked transmission rates between the Midwest ISO and PJM, necessary to establish a “virtual” single regional transmission organization among the Midwest ISO and PJM companies. Pancaked transmission rates are multiple transmission charges imposed for a single transaction crossing between multiple transmission providers. As part of the FERC orders, the FERC has opened an investigation, under Section 206 of the Federal Power Act (Section 206), into the justness and reasonableness of the “through and out” transmission rates of the costsMidwest ISO and PJM. Cinergy is participating in the Section 206 hearing, along with the other transmission owners who are members, or potential members, of the Midwest ISO or PJM. Pursuant to an order issued in July 2002, the FERC indicated that it plans to issue a 262-mw clean coal power generating facility located at Wabash River
Generating Station (Clean Coal Project)decision by July 31, 2003. As part of this proceeding, Cinergy is advocating the removal of pancaked transmission rates between the Midwest ISO and PJM, including all of the former Alliance RTO companies, as well as lost revenue recovery for transmission owners who are affected by the removal of the pancaked transmission rates. At this time, Cinergy cannot determine the impact of either the FERC orders or the related Section 206 investigation upon either our financial position or results of operations.
In related activity, the FERC issued an order in December 2001, in response to protests of the Midwest ISO’s proposed methodology related to the calculation of its administrative adder fees
67
for the services it provides. Cinergy and a number of other parties filed protests to the proposed methodology, suggesting, among other things, that the methodology was inconsistent with the transmission owners’ prior agreement with the Midwest ISO and selectively allowed only independent transmission companies to choose which unbundled administrative adder services they wished to purchase from the Midwest ISO. A partial settlement was reached in the FERC proceeding, resolving the issues addressed by Cinergy’s protest in a manner favorable to Cinergy. Most active parties in the FERC proceeding filed comments in support of the settlement. The only contested issue under the settlement involved an agreed upon deferred accounting and regulatory asset mechanism to be established as a backstop to guard against any under-recovery of assessed administrative fees in retail ratemaking proceedings. The settlement agreement was neither approved nor denied approval by the FERC by December 31, 2002. Cinergy anticipates that the settlement will need to be renegotiated in early 2003 and resubmitted to the FERC for approval. Cinergy also anticipates that the Midwest ISO transmission members will reach a similar settlement with the Midwest ISO, and that such agreement will be approved by the FERC without material change.
In late 2001 and early 2002, the FERC issued its Opinion No. 453 and 453-A ordering, among other things, that transmission service for bundled retail customers (i.e., customers who cannot select an alternative energy provider) shall be provided under the Midwest ISO’s open access transmission tariff, and that the Midwest ISO’s charges for its administrative services shall apply to bundled retail customers. PSI and other parties have appealed these orders to the U.S. Court of Appeals for the District of Columbia Circuit, challenging the application of the Midwest ISO’s tariff, and the costs of a scrubber at Gibson
Generating Station. The order also reflects a return on common equity of 11.0%,
beforeMidwest ISO’s charges for its administrative services to bundled retail customers. PSI cannot predict either when the 100 basis points additional common equity return allowed as a merger
savings sharing mechanismcourt will issue its opinion in the IURC's February 1995appeal or the outcome of the appeal.
On November 22, 2002, the FERC issued an order (February 1995
Order) discussedconditionally approving the Midwest ISO’s recovery of costs associated with the establishment of financial transmission rights, and the development of energy markets within the Midwest ISO’s operating area. The FERC’s order suspended the proposed rates and made them effective November 25, 2002, subject to refund, and set for a hearing the issues identified below. The FERC’s order expressed the expectation that the Midwest ISO’s board of directors will guard against any unreasonable costs being incurred by the Midwest ISO. The Midwest ISO had proposed to assess a withdrawal/exit fee on any transmission owner member who withdraws from the Midwest ISO for its proportionate share of any unrecovered deferred costs. The Midwest ISO transmission owners, including Cinergy, filed a protest with the FERC, challenging the cost allocation and the implementation of an exit fee within the Midwest ISO proposal. The FERC subsequently set these issues for a hearing.
In July 2002, the FERC issued a NOPR that proposed significant changes to the electricity wholesale market. At this time, we are unable to determine the impact of the NOPR on the Midwest ISO and Cinergy. See “FERC NOPR on ‘Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design’” for further herein, with an 8.21% overall ratediscussion.
68
State Regulatory Agencies Filings
This past summer, PSI and the other investor-owned transmission companies in Indiana who are members of returnthe Midwest ISO, requested approval from the IURC to defer, for subsequent recovery from their respective Indiana retail electric customers, the applicable costs incurred by the companies for administrative services provided by the Midwest ISO.
The actual costs for 2002 were approximately $6 million and $3 million for PSI and CG&E, respectively, and are deferred on net
original cost rate base.
In October 1996, Thetheir respective Balance Sheets as of December 31, 2002. A settlement was reached between the Indiana Office of the Utility Consumer Counselor, (UCC)PSI, and the Citizens Action Coalitionother parties to the IURC proceeding providing for the requested rate and deferred accounting treatment. The settlement was approved by the IURC on December 11, 2002. PSI anticipates that its recovery of Indiana, Inc. (CAC)these deferred amounts will commence with the IURC’s order in PSI’s upcoming retail electric rate case. For the market development period, CG&E is authorized to recover these costs in Ohio through its regulatory transition plan.
Significant Rate Developments
PSI Retail Rate Case
In December 2002, PSI filed a Joint Petition for
Reconsideration and Rehearing of the September 1996 Orderpetition with the IURC. AIURC seeking approval of a base retail electric rate increase. PSI’s proposed increase reflects an average increase of approximately 16 to 19 percent over PSI’s current retail electric rates. If approved by regulators, PSI estimates the rate request will become effective in early 2004. PSI plans to file initial testimony in this case in March 2003. An IURC decision is expected in the first quarter of 2004.
Transfer of Generating Assets to PSI
In December 2001, PSI filed a petition with the IURC requesting approval, under Indiana’s Power Plant Construction Act, to acquire the Butler County, Ohio and Henry County, Indiana peaking plants from their current owners, subsidiaries of Capital & Trading, to address its need for increased generating capacity. In September 2002, PSI reached a settlement agreement with various parties, authorizing PSI to purchase the UCCtwo peaking plants. In December 2002, the IURC issued an order approving the settlement agreement and CACproviding state authorization to transfer the plants.
In September 2002, PSI and the applicable Capital & Trading subsidiaries filed applications with the SEC under the PUHCA and the FERC, under the Federal Power Act, requesting authorization for the transfer. However, in October 2002, the SEC notified PSI that the transaction is exempt from the SEC’s jurisdiction under the PUHCA, and accordingly, PSI and the Capital & Trading subsidiaries withdrew the SEC application. In October 2002, several parties intervened and filed protests in the proceeding before the FERC, opposing the transfer. Cinergy timely filed an answer to these protests.
On February 4, 2003, the FERC issued an order, under Section 203 of the Federal Power Act, authorizing PSI’s proposed acquisition of the Henry County, Indiana and Butler County, Ohio gas-fired peaking power plants. This action was approvedthe final regulatory approval needed for the transfer, which occurred on February 5, 2003.
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On January 8, 2003, the IURC issued an order authorizing PSI to defer post-in-service depreciation and carrying costs associated with these peaking plants and PSI’s Noblesville generating station until the costs are reflected in its entirety byPSI’s base rates after a rate case. Pursuant to Statement of Financial Accounting Standards No. 92, Regulated Enterprises-Accounting for Phase-in Plans (Statement 92), the equity component of allowance for funds used during construction (AFUDC) will not be deferred for financial reporting. Also, PSI is allowed to retain off-system sales profits associated with the three plants but will be required to credit such off-system sales profits (other than 50 MWs of Henry County capacity committed to wholesale) to customers from January 1, 2004 until the effective date of PSI’s next retail base rate change. See “Supply-side Actions” for additional detail.
Purchased Power Tracker
In May 1999, PSI filed a petition with the IURC seeking approval of a Tracker. This request was designed to provide for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not recovered through the existing fuel adjustment clause.
A hearing was held before the IURC in August 1997. This settlement agreement reducedFebruary 2001, to determine whether it was appropriate for PSI to continue the original rate
increase by $2.1 million (.2%). Major provisionsTracker for future periods. In April 2001, a favorable order was received extending the Tracker for two years, through the summer of 2002. PSI is authorized to seek recovery of 90 percent of its purchased power expenses through the Tracker (net of the settlement agreement
include: a) a $4.1 million increase indisplaced energy portion recovered through the annual amortizationfuel recovery process and net of certain
regulatory assets; b) a retail rate reduction of $1 million annually; c) a $.9
million reduction in retail rates to reflect an August 31, 1995, cut-off date
for costs to achieve merger savings instead of an October 31, 1996, cut-off
date; and d) authorization to deferthe mitigation credit portion), with the remaining 10 percent deferred for subsequent recovery costsin PSI’s next general rate case. In March 2002, PSI filed a petition with the IURC seeking approval to achieve
merger savings incurred between September 1, 1995, and October 31, 1996.extend the Tracker process beyond the summer of 2002. A hearing was held on January 16, 2003. We cannot predict the outcome of this proceeding at this time.
In June 2002, PSI also filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2002 purchased power costs. A hearing on this matter is scheduled for the first quarter of 2003.
2002 Purchased Power Costs
In May 2002, the IURC approved a settlement agreement between PSI, the IURC staff, and the Indiana Office of the Utility Consumer Counselor pertaining to PSI’s 2002 purchased power arrangements. This agreement allowed PSI to purchase the output of the Henry County, Indiana and Butler County, Ohio peaking plants through December 31, 2002. The parties also agreed to not challenge the recovery of costs for the purchase of power from these plants, as well as the costs of additional summer 2002 purchases needed for reliability purposes, through PSI’s Tracker and fuel recovery mechanism. Before PSI can begin recovering its summer 2002 purchased power costs through its Tracker, however, it must obtain an order authorizing such from the IURC in PSI’s summer 2002 Tracker case. The hearing relating to PSI’s summer 2002 Tracker case is scheduled for the first quarter of 2003. If approved, recovery of PSI’s summer 2002 purchased power costs via the Tracker will likely begin in the second quarter of 2003 and extend over a 12 month period.
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We have $27 million of 2002 purchased power costs deferred for recovery at December 31, 2002. Of the $27 million, $24 million has been requested through the Tracker, and the recovery of the remaining $3 million will be requested in PSI’s next retail rate case.
The transfer of the Henry County, Indiana and Butler County, Ohio peaking plants to PSI will decrease PSI’s need for purchased power by a like amount. However, PSI will continue to have purchased power requirements and will continue to seek IURC approval to utilize its Tracker to recover the costs of such purchases.
Termination of Operating Agreement
Upon consummation of the merger between CG&E and PSI Resources, Inc. in 1994, an operating agreement entered into between CG&E, PSI, and Services was filed with and approved by the FERC. This agreement was established to provide for the coordinated planning and operation of the two regulated entities’ generation and transmission systems.
In October 2000, CG&E, PSI, and Services filed a notice of termination of the operating agreement with the FERC. The reason for the termination filing was that, with the introduction of deregulation in the State of Ohio, the companies no longer share the common characteristics that formed the basis for the operating agreement. In December 2000, the FERC ruled that the companies have the contractual right to terminate the operating agreement. Additionally, the FERC established a termination effective date of May 22, 2001, and set a May 1, 2001, hearing date on the issue of the reasonableness of termination.
Certain parties appealed the FERC’s December 2000 decision. In March 2001, the IURC initiated an investigation proceeding into the termination of the operating agreement. In May 2001, the parties to the FERC proceeding reached a settlement resolving termination issues and certain intervenors,compensation and damage issues. The settlement agreement was approved by the FERC in June 2001 and delayed the termination of the existing operating agreement until a new successor agreement has been approved by the FERC.
In August 2001, the parties to both the IURC investigation proceeding established to review PSI's current and the previous FERC proceeding entered into two complementary settlement agreements. Both agreements addressed, among other things, the terms and conditions of a proposed DSM programs,new joint generation operating agreement and a proposed new joint transmission operating agreement. The IURC settlement agreement was approved by the IURC in December 1996 (December 1996 DSM Order). BeginningSeptember 2001. Both the IURC and the FERC settlement agreements were conditioned upon FERC acceptance of the proposed successor agreements. Cinergy filed the successor agreements with the FERC in October 2001 and in March 2002, the FERC approved the successor agreements. The successor agreements allow Cinergy to jointly dispatch the regulated generating assets of PSI in conjunction with the deregulated generating assets of CG&E. Under these agreements, transfers of power between PSI and CG&E are generally priced at market rates. The successor agreements were implemented effective in April 2002.
PSI Fuel Adjustment Charge
PSI defers fuel costs that are recoverable in future periods subject to IURC approval under a fuel recovery mechanism. In June 2001, the IURC issued an order in a PSI fuel recovery proceeding,
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disallowing approximately $14 million of deferred costs. On June 26, 2001, PSI formally requested that the IURC reconsider its disallowance decision. In August 2001, the IURC indicated that it would reconsider its decision. In August 2002, the IURC issued its final ruling allowing PSI to fully recover the $14 million.
In June 2001, PSI filed a petition with the IURC requesting authority to recover $16 million in under billed deferred fuel costs incurred from March 2001 through May 2001. The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket. The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed deferred fuel costs. A hearing was held in July 2002, and we anticipate a decision in the first quarter of 2003.
CWIP Ratemaking Treatment for NOX Equipment
During the third quarter of 2001, PSI filed an application with the IURC requesting CWIP ratemaking treatment for costs related to NOX equipment currently being installed at certain PSI generation facilities. CWIP ratemaking treatment allows for the recovery of carrying costs on the equipment during the construction period. PSI filed its case-in-chief testimony in January 1, 1997,
and continuing2002. In July 2002, the IURC approved the application allowing PSI to commence CWIP ratemaking treatment for its NOX equipment investments made through December 31, 2000, the settlement agreement allows PSI to
recover $35 million per year through2001. Initially this rate adjustment will result in approximately a non-bypassable charge in PSI's retail
rates. The $35 million is designed to recover all previously incurred, but as
yet unrecovered, DSM costs and all costs related to satisfying remaining
commitments associated with a previous DSM settlement agreement. The $35 million
also includes recovery of carrying costs. Further, the agreement authorizes PSI
to spend up to $8 million annually on ongoing DSM programs through the year 1999
and to collect such amounts currently in retail rates.
February 1995 Order - Retail Rate Proceeding and Merger Savings Allocation Plan
The IURC's February 1995 Order approved a settlement among PSI and certain
intervenors authorizing PSI toone percent increase retail rates $33.6 million before
credits to base rates of $4.4 million in 1995 and an additional $2.2 million and
$2.4 million in 1996 and 1997, respectively, to reflect the sharing with
customers of non-fuel operation and maintenance expense merger savings (Non-
fuel Merger Savings).
Additionally, the February 1995 Order provided PSI an opportunity to earn up to
an additional 100 basis points above the common equity return authorized in the
September 1996 Order until December 31, 1997. To be eligible for such additional
earnings, PSI had to meet certain performance-related standards. PSI met those
standards, which were measured in conjunction with quarterly fuel adjustment
clause filings. Beginning January 1, 1998, the 100 basis point increment to the
authorized common equity return will be phased out over a twelve-month period.
Effective with this order, PSI began recovering carrying costs on certain
environmental-related projects under construction. This recovery continues until
the date of an approved rate order reflecting such projects in rates. Through
this mechanism, revenues were increased by $9 million, $18 million, and $2
million on an annual basis in February 1995, March 1995, and January 1996,
respectively.
Coal Contract Buyout Costs In August 1996, PSI entered into a coal supply
agreement with Eagle Coal Company (Eagle) for the supply of approximately three
million tons of coal per year. The agreement, which terminates December 31,
2000, provides for a buyout fee of $179 million (including interest) to be
included in the price of coal to PSI over the term of the contract. This fee
represents the costs to Eagle of the buyout of the coal supply agreement between
PSI and Exxon Coal and Minerals Company. The retail jurisdictional portion of
the buyout charge, excluding the portion applicable to joint owners, is being
recovered through the quarterly fuel adjustment clause, with carrying costs on
unrecovered amounts, through December 2002. PSI has also filed a petition at the
FERC for recovery of the wholesale jurisdictional portion of the buyout costs
through the wholesale fuel adjustment clause. Generally, the FERC will allow
recovery if the utility can demonstrate there will be net benefits to customers
during the buyout cost recovery period. The FERC is expected to issue an order
on PSI's petition early in 1998. (See Note 1(i) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")
Cinergy and CG&E
Ohio
PUCO Order - CG&E's Gas Rate Proceeding In December 1996, the PUCO issued an
order (December 1996 Order) approving an overall average increase in gas
revenues for CG&E of 2.5% ($9.3 million annually). The PUCO established an
overall rate of return of 9.7%, including a return on common equity of 12.0%. In
developing this return on common equity, the PUCO considered, among other
things, CG&E's efforts to reduce costs and increase operating efficiency and its
proposals to allow residential customers to choose their natural gas supplier.
The PUCO disallowed certain of CG&E's requests, including the requested working
capital allowance, recovery of certain capitalized information systems
development costs, and certain merger-related costs. These disallowances
resulted in a pretax charge to earnings during the fourth quarter of 1996 of $20
million ($15 million net of taxes or $.10 per share basic, $.09 per share
diluted). CG&E's request for a rehearing on the disallowed information systems
costs and other aspects of the order was denied.
In April 1997, CG&E filed a notice of appeal with the Supreme Court of Ohio
challenging the disallowance of information systems costs and the imputation of
certain revenues. Cinergy and CG&E cannot predict what action the Supreme Court
of Ohio may take with respect to this appeal.
Other In April 1994, the PUCO issued an order approving a settlement agreement
among CG&E and certain intervenors which, among other things, resolved
outstanding issues related to the merger. As part of this settlement, CG&E
agreed to a moratorium on increases in base electric rates until January 1, 1999
(except under certain circumstances). In return, CG&E is allowed to retain all
PUCO electric jurisdictional Non-fuel Merger Savings until 1999.
Consistent with the provisions of the settlement agreement and the December 1996
Order, CG&E expensed merger transaction costs and costs to achieve merger
savings (Merger Costs) applicable to its PUCO jurisdiction of $5 million and $41
million (including $6 million as a result of the December 1996 Order) in 1995
and 1996, respectively. CG&E and its utility subsidiaries have deferred a
portion of the Merger Costs incurred through December 31, 1996, for future
recovery in customer rates. Additionally, in December 1996,Under the PUCO issued anIURC’s CWIP rules, PSI may update its CWIP tracker at six-month intervals. The IURC’s July order applicablealso authorized PSI to CG&E's
DSM programs.defer, for subsequent recovery, post-in-service depreciation and to continue the accrual for AFUDC. Pursuant to Statement 92, the equity component of AFUDC will not be deferred for financial reporting.
In October 2002, PSI filed its first six-month CWIP tracker update with the IURC requesting approximately $11 million of additional revenue associated with investments made January 1, 2002, through June 30, 2002, for NOX emission reduction equipment. The order requires CG&E to spend up to one-half of the annual $5
million currently included in retail rates on PUCO-sanctioned low-income
residential programs. The remaining portion of the $5 million is to be applied
toIURC authorized the recovery of DSM cost deferrals. CG&E's participationthese incremental expenditures in the low-income
programs willan order issued on January 29, 2003. The cumulative annual revenue to be a factor considered by the PUCO in setting future rates of
return and approving competitive transition plans.
Cinergy, CG&E, and recovered under this tracker is $28 million.
GAS INDUSTRY
ULH&P Kentucky Gas Rate Case
In exchangethe second quarter of 2001, ULH&P filed a retail gas rate case with the KPSC seeking to increase base rates for the Kentucky Public Service Commission's (KPSC) supportnatural gas distribution services and requesting recovery through a tracking mechanism of the merger,costs of an accelerated gas main replacement program with an estimated capital cost of $112 million over the next 10 years. A hearing on this matter was held in May 1994, ULH&P acceptedNovember 2001 and an order was issued in January 2002. In the KPSC's request for an electricorder, the KPSC authorized a base rate moratorium commencing after ULH&P's next retail rate case (which has not
yet been filed) and extendingincrease of $2.7 million, or 2.8 percent overall, to be effective on January 1, 2000.31, 2002. In addition, the KPSC authorized ULH&P to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program for an initial period of three years, with the possibility of renewal for the full 10 years. Per the terms of the order, the tracking mechanism will be set annually. The first filing was made in March 2002 and was approved by the KPSC in an order issued in August 2002. ULH&P filed an application for a certificate for public convenience and necessity with the KPSC in November 2002, to do cast iron and bare steel main replacement
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work in 2003 at an estimated cost of $14.1 million. The Kentucky Attorney General (Attorney General) has authorized concurrent recoveryappealed the KPSC’s approval of costs relatedthe tracking mechanism to various DSM programsthe Franklin Circuit Court (Court) and has also appealed the KPSC’s August 2002 order approving the new tracking mechanism rates. The KPSC’s August 2002 order requires ULH&P to maintain records of ULH&P.
the revenues collected under the tracking mechanism to enable ULH&P has deferred its portion of Merger Costs incurred through December 31,
1996, to refund such revenues, in case the Attorney General’s appeal is upheld and the KPSC orders a refund. Amounts collected to date under this tracking mechanism are not material. ULH&P filed an application for future recoveryrehearing with the KPSC in customer rates.September 2002, in which ULH&P requested that the KPSC Ordereliminate this requirement. In July 1996,October 2002, the KPSC issued an order authorizinggranting ULH&P’s application for rehearing in part. The KPSC’s order clarified that ULH&P must maintain its records of the revenues collected under the tracking mechanism in case a decreaserefund is ordered at a later date; however, the KPSC’s order stated that it will not address the issue of whether to order a refund unless the Court rules that the KPSC lacked the requisite authority to approve the tracking mechanism. As a result, ULH&P will not record these revenues as subject to refund unless the Court so rules. At the present time, ULH&P cannot predict the outcome of this litigation.
CG&E Gas Rate Case
In the third quarter of 2001, CG&E filed a retail gas rate case with the PUCO seeking to increase base rates for natural gas distribution service and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $716 million over the next 10 years. CG&E entered into a settlement agreement with most of the parties and a hearing on this matter was held in ULH&P's electric ratesApril 2002. An order was issued in May 2002, in which the PUCO approved the settlement agreement and authorized a base rate increase of approximately $1.8$15 million, or 3.3 percent overall, to be effective on May 30, 2002. In addition, the PUCO authorized CG&E to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program, subject to certain rate caps that increase in amount annually through May 2007, through the effective date of new rates in CG&E’s next retail gas rate case. The PUCO’s order was not appealed. In the fourth quarter of 2002, CG&E filed an application to reflect a
reductionincrease its rates under the tracking mechanism by approximately $8 million or 2.4 percent. The PUCO is investigating the application and CG&E expects that the increase will become effective in May 2003.
Gas Prices
While natural gas prices remained moderate for most of 2002, prices began to escalate during the fourth quarter. We expectprices to continue to rise throughout the 2002/2003 winter season. Price movement will be driven by the effects of weather conditions, availability of supply, and changes in demand and storage inventories.Currently, neither CG&E nor ULH&P profit from changes in the cost of electricity purchased from CG&E.
Cinergy, CG&E, and ULH&P
Potential Divestiture of Gas Operations Undergas. Natural gas purchase costs are passed directly to the PUHCA, the divestiture of
CG&E's gas operations may be required. The key questioncustomer dollar-for-dollar under the relevant PUHCA
standardsgas cost recovery mechanism that is the amount of increased operating costs, if any, that would result
from the gas operations being divested and operated on a stand-alone basis.
mandated under state law.
In its order approving the merger, the SEC reserved judgment over Cinergy's
ownership of CG&E's gas operations for three years, at the end of which period
Cinergy would be required to address the matter. In February 1998, Cinergy made
a filingMarch 2002, ULH&P filed an application with the SEC setting forthKPSC requesting approval of a gas procurement-hedging program designed to mitigate the effects of gas price volatility on customers. In June 2002, the KPSC approved the pilot program for the 2002/2003 heating season, subject to certain restrictions. The approved hedging program allows the pre-arranging of between 0-65 percent of winter heating season base load gas requirements. ULH&P made
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advance arrangements for approximately 23 percent of its rationale for retention of the gas
operations. The filing includes, among other things, a study showing that, if
divested and operated on a stand-alone basis, the gas operations would bear
significant increased operating costs, greater than those cited by the SEC in
two 1997 cases permitting electric registered holding companies to acquire and
retain gas properties. For these and other reasons stated in Cinergy's filing,
Cinergy believes its retention of CG&E's gas properties meets all relevant
standardswinter 2002/2003 base load requirements under the PUHCA.
ENVIRONMENTAL ISSUES
Cinergy, program.
In July 2001, CG&E and PSI
Clean Air Act Amendments of 1990 (CAAA) The 1990 revisions to the Clean Air Act
require reductions in both sulfur dioxide (SO2) and nitrogen oxide (NOx)
emissions from utility sources. Reductions of these emissions are to be
accomplished in two phases. Compliance under Phase I was required by January 1,
1995, and Phase II compliance is required by January 1, 2000. To achieve the SO2
reduction objectives of the CAAA, emission allowances have been allocated by the
US Environmental Protection Agency (EPA) to affected sources (e.g., Cinergy's
electric generating units). Each allowance permits one ton of SO2 emissions. The
CAAA allows compliance to be achieved on a national level, which provides
companies the option to achieve this compliance by reducing emissions and/or
purchasing emission allowances.
Cinergy's operating strategy for Phase I was based upon the compliance plans
developed by PSI and CG&E and approved by the IURC and filed an application with the PUCO respectively.
All required modifications to Cinergy's generating units to implement the
compliance plans were completed prior to January 1, 1995.
To comply with Phase II SO2 emission requirements, Cinergy's current strategy
includes a combinationrequesting approval of switching to lower-sulfur coal blends and utilizing an
emission allowance banking strategy.its gas procurement-hedging program. This cost-effective strategy will allow
Cinergy to meet Phase II SO2 reduction requirements while maintaining optimal
flexibility to meet changesrequest was subsequently denied. However, in output due to increased customer choice, as well
as potentially significant future environmental requirements. Cinergy intends to
utilize an emission allowance banking strategy to the extent a viable emission
allowance market exists. However, the availability and economic value of
emission allowances over the long-term is still uncertain. In the event the
market pricedenying CG&E’s request for emission allowances or lower-sulfur coal increases
substantially from the current forecast, Cinergy could be forced to consider
high capital cost options.
To meet NOx reductions required by Phase II, Cinergy may install additional low
NOx burners on certain affected units in addition to the usepre-approval of a system-wide
NOx emission averaginghedging program, the PUCO order provided clarification that prudently incurred hedging costs are a valid component of CG&E’s gas purchasing strategy. Cinergy is forecasting CAAA compliance capital expendituresAs a result, CG&E has hedged approximately 30 percent of $19 million
duringits winter 2002/2003 base load requirements. CG&E will seek PUCO approval for its hedging program on an after the 1998 through 2002 period. Of these forecasted expenditures, $9
million relates to CG&E and $10 million relates to PSI. These expenditures are
included in the amounts provided in the "Capital Requirements" section herein.
In addition, operating costs may increase due to higher fuel costs (e.g.,
higher-quality, lower-sulfur coal; increased use of natural gas) and maintenance
expenses.
Ambient Air Standards The EPA recently revised the National Ambient Air Quality
Standards for ozone and fine particulate matter. These new rules increase the
pressure for additional emissions reductions. On September 23, 1997, Cinergy
announced a proposal to reduce its NOx emissions rate by two-thirds to 0.25
pounds of NOx per one million British thermal units (MMBtu).fact basis. At thatthis time, Cinergy's preliminary cost estimate for the two-thirds reduction was between $74
million and $204 million (stated in 1997 dollars). Subsequent to Cinergy's
announcement, the EPA announced on October 10, 1997, its proposed call for
revisions to State Implementation Plans (SIPs) for statewide reductions in NOx
emissions, proposing utility NOx emissions at a rate of 0.15 pounds per MMBtu.
The EPA's schedule calls for all reductions to be in place as early as 2002.
These initiatives will force significant reductions in NOx emissions from many
sources. The EPA has stated that electric utility generating facilities
specifically are targeted. The final total level of NOx reductions will depend
upon the outcome of the SIP revision process. Cinergy estimates that the capital
costs for additional NOx controls at its facilities at the 0.15 pounds of Nox
per MMBtu rate proposed by the EPA could exceed $524 million (stated in 1997
dollars) over the next five years depending upon the final level of reductions,
details of a NOx trading program, and the time frame for implementation.
In February 1998, Cinergy joined with various utilities, labor groups, and other
organizations from several Midwest, Great Lakes, Mid-Atlantic, and Southeast
states in forming the Alliance for Constructive Air Policy (ACAP). This
coalition is committed to working with policymakers to find cost-effective,
equitable approaches for reducing ozone pollution in key regions of the country.
The ACAP is developing an alternative to the EPA's proposed call for SIPs
revisions to reduce NOx emissions (see discussion above). The ACAP's proposal is
a two-step process to achieve reductions in NOx emissions. The first step
involves NOx emission reductions of 55 percent from 1990 levels, or a reduction
in the NOx emission rate to 0.35 pounds of NOx per MMBtu, whichever is less
stringent, by 2004. The second step involves the development of enhanced
subregional air quality modeling that would be used to determine if any
additional reductions are necessary to reach local attainment. These additional
reductions, if needed, would be implemented by 2007. The ACAP is also promoting
the establishment of a subregional trading market for NOx emissions. This system
would allow for a market-based approach to limiting emissions and would produce
cost savings and incentives for the development of new technologies to improve
air quality. Capital costs required for Cinergy to be in compliance under the
ACAP's proposals would be significantly less than those under the current EPA
proposal. But as stated above, final costs of compliance depend on the final
level of reductions required, details of a NOx trading program, and the time
frame for implementation and compliance.
The impact of the particulate standards cannot be determined at this time. The
EPA estimates it will take up to five years to collect sufficient ambient air
monitoring data. The states will then determine the sources of these
particulates and determine a reduction strategy. The ultimate effect of the new
standard could be requirements for newer and cleaner technologies and additional
controls on conventional particulates and/or reductions in SO2 and NOx emissions
from utility sources. Since these studies and determinations have not been made,
Cinergywe cannot predict the outcome or effect of the new particulate standards.
Global Climate Change On December 11, 1997, delegates to the United Nations'
climate summit in Japan adopted a landmark environmental treaty (Kyoto Protocol)
to deal with global warming. The Kyoto Protocol establishes legally binding
greenhouse gas emission targets for developed nations. The Kyoto Protocol
framework lacks details related to definitions, implementation, and enforcement
plans. For the Kyoto Protocol to enter into force within the US it will have to
be ratified by a two-thirds vote of the US Senate. In July 1997, the US Senate
passed a resolution advising the Clinton Administration that they would not
favorably consider a protocol which did not include commitments for all nations
of the world, or that would cause harm to the US economy. The Kyoto Protocol, in
its present form, is unlikely to be ratified by the US Senate since it does not
meet the requirements of this resolution.
Significant uncertainty exists concerning the science of climate change,request.
CG&E and ULH&P use primarily fixed price forward contracts and the
Clinton Administration's environmentalcontracts with a ceiling and energy policies and how it intends to
reduce greenhouse gas emissions. Cinergy's plan for managing the potential risk
and uncertainty of climate change includes: (1) implementing cost-effective
greenhouse gas emission reduction and offsetting activities; (2) encouraging the
use of alternative fuels for transportation vehicles (a major source of
greenhouse gases); (3) funding research of more efficient and alternative
electric generating technologies; (4) funding research to better understand the
causes and consequences of climate change; and (5) encouraging a global
discussion of the issues and how best to manage them. Cinergy believes that
voluntary programs, such as the US Department of Energy Climate Challenge
Program, which Cinergy joined in 1995, are the most cost-effective means to
limit greenhouse gas emissions.
Air Toxics The air toxics provisions of the CAAA exempted fossil-fueled steam
utility plants from mandatory reduction of air toxics until the EPA completed a
study. The final report issued in February 1998, confirmed utility air toxic
emissions pose little risk to public health. It stated mercury is the pollutant
with the greatest potential threat, while others require further study. A
Mercury Study Report issued in December 1997, stated that mercury is not a risk
to the average American and expressed uncertainty whether reductions in current
domestic sources would reduce human mercury exposure. US utilities are a large
domestic source, but they are negligible compared to global mercury emissions.
The EPA was unable to show a feasible mercury control technology for coal-fired
utilities. The EPA must determine the need for regulation by April 15, 1998. If
more air toxics regulations are issued, the compliance cost could be
significant. Cinergy cannot predict the outcome or effects of the EPA's
determination.
Cinergy, CG&E, PSI, and ULH&P
Other As more fully discussed in Note 12(b)(ii) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data", PSI has
received claims from Indiana Gas Company, Inc. (IGC) and Northern Indiana Public
Service Company (NIPSCO) that PSI is a Potentially Responsible Party under the
Comprehensive Environmental Response, Compensation and Liability Act with
respect to certain manufactured gas plant (MGP) sites, and therefore responsible
for the costs of investigating and remediating these sites.
In August 1997, NIPSCO filed suit against PSI seeking recovery from PSI of
NIPSCO's past and future costs of investigating and remediating MGP related
contamination at the Goshen, Indiana, MGP site. NIPSCO alleged that it has
already incurred about $400,000 in response costs at the site and that
remediation of the site will cost about $2.7 million. PSI denied liability in
its answer to the complaint. The parties are currently engaged in the discovery
process and the case has not yet been scheduled for trial.
Also, in August 1997, PSI reached an agreement with IGC settling IGC's claims
that PSI should contribute to IGC's response costs related to 13 of the 19 MGP
sites conveyed by PSI to IGC in 1945. This agreement requires PSI and IGC to
share past and future response costs equally (50%/50%) at the 13 sites. Further,
the parties must jointly approve future management of the sites and the decision
to spend additional funds. The settlement does not address five sites PSI
acquired from NIPSCO and subsequently sold to IGC.
It is premature, at this time, to predict the nature, extent, and ultimate costs
of, or PSI's responsibility for, environmental investigations and remediations
at MGP sites owned or previously owned by PSI or its predecessors. PSI continues
to gather information pertaining to each of these MGP sites, including the 13
sites which are the subject of the agreement with IGC and the Goshen site which
is the subject of NIPSCO's complaint. Reserves recorded, based on information
currently available, are not material to Cinergy's financial condition or
results of operations. However, as further investigation and remediation
activities are undertaken at these sites, the potential liability for MGP sites
could be material to Cinergy's financial condition or results of operations.
Refer to Note 12(b) and (c) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data" for a more detailed discussion of
the status of certain environmental issues.
CAPITAL REQUIREMENTS
CONSTRUCTION AND OTHER INVESTING ACTIVITIES
Cinergy, CG&E, PSI, and ULH&P
Construction expenditures for the Cinergy system are forecasted to be
approximately $375 million for 1998, and over the next five years (1998 - 2002),
are forecasted to aggregate approximately $1.7 billion. Of these projected
expenditures, approximately $191 million and $866 million relate to CG&E
(including $37 million and $137 million for ULH&P) and $180 million and $858
million relate to PSI, for 1998, and over the next five years, respectively.
Substantially all of these expenditures are for capital improvements to and
expansion of Cinergy's operating facilities.
Cinergy is forecasting no investments in new generating facilities under the
belief that excess supply in the market will continue in the near term. If
deregulation of the generation component of the electric utility industry does
not occur in the manner or in the time frame anticipated, and depending on
capacity constraints, franchise demand requirements, and the regulatory
requirements dictated for Integrated Resource Planning, Cinergy could be forced
to make capital investments in new generating facilities in lieu of relying upon
the existing market for its energy needs. (All forecasted amounts are in nominal
dollars, exclude capital costs for additional NOx controls at Cinergy's
facilities (see "Ambient Air Standards" in the "Environmental Issues" section
herein), and reflect assumptions as to the economy, capital markets,
construction programs, legislative and regulatory actions, frequency and timing
of rate increases, and other related factors, all or any of which may change
significantly.)
Cinergy
As discussed in the "Competitive Pressures" section, during 1996, Cinergy
acquired a 50% interest in Midlands. Cinergy and GPU, Inc. (GPU) formed Avon
Energy Partners Holdings (Avon Energy), a 50%/50% joint venture, and acquired
the outstanding common stock of Midlands through Avon Energy's wholly-owned
subsidiary for approximately $2.6 billion. Cinergy and GPU have each invested
approximately $500 million in Avon Energy. Cinergy funded its investment through
its credit facility. Avon Energy funded the remainder of the purchase price
through the issuance of non-recourse debt (see Note 1(e) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data").
During 1996, Cinergy and Trigen formed a joint venture, Trigen-Cinergy Solutions
LLC (Trigen-Cinergy). Cinergy may invest up to $100 million and provide
guaranties of debt and other obligations in an aggregate amount not to exceed
$250 million at any one time with respect to energy-related products and
services, including those undertaken by Trigen-Cinergy. (See the "Competitive
Pressures" section herein.)
With respect to international development, subject to identifying projects which
meet Cinergy's investment objectives, Cinergy may invest or commit up to $100
million during 1998. Funding of these investments or commitments will be
provided through additional debt borrowings. (See the "Competitive Pressures"
section herein.)
Cinergy
Cinergy's net cash used in investing activities was $377 million in 1997,
compared to $871 million and $363 million in 1996 and 1995, respectively. The
decrease in 1997 was primarily attributable to the effect of Cinergy's
investment in Midlands during 1996.
CG&E and ULH&P
CG&E and its subsidiaries' net cash used in investing activities was $166
million in 1997 (including $23 million for ULH&P), compared to $156 million and
$147 million in 1996 and 1995 (including $19 million and $19 million for ULH&P),
respectively. The increase in 1997 was primarily attributable to an increase in
the amount of construction expenditures.
PSI
PSI's net cash used in investing activities was $152 million in 1997, compared
to $198 million and $230 million and 1996 and 1995, respectively. The decrease
in 1997 was primarily attributable to a decrease in the amount of construction
expenditures for PSI.
OTHER COMMITMENTS
Cinergy, CG&E, PSI, and ULH&P
Securities Redemptions Mandatory redemptions of long-term debt total $501
million ($341 million for CG&E and its subsidiaries, including $20 million for
ULH&P, and $160 million for PSI) during the period 1998 through 2002. On January
29, 1998, PSI gave notice of its intention to redeem on March 1, 1998, all
outstanding shares of its 7.44% Series Cumulative Preferred Stock at a
redemption price of $25 per share. On February 27, 1998, CG&E announced its
intention to redeem on March 29, 1998, $41 million principal amount of its 7
3/8% Series First Mortgage Bonds (due November 1, 2001) at a redemption price of
100.30% and to redeem on March 30, 1998, the entire $100 million principal
amount of its 8 1/2% Series First Mortgage Bonds (due September 1, 2022) at a
redemption price of 100%, both through the maintenance and replacement fund (M&R
Fund) provision of CG&E's first mortgage bond indenture. Additionally,floor on the same date, CG&E announced its intention to redeem on March 30, 1998,price. These contracts employ the remaining $19 million principal amount of its 7 3/8% Series First Mortgage Bonds
(due November 1, 2001) at a redemption price of 100.87%. On March 24, 1998,
ULH&P announced its intention to redeem on April 23, 1998, $6.3 million
principal amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at
a redemption price of 100.85% through the M&R Fund provision of ULH&P's first
mortgage bond indenture. Additionally, on the same date, ULH&P announced its
intention to redeem on April 24, 1998, the remaining $3.7 million principal
amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at a
redemption price of 101.73%. Cinergy will continue to evaluate opportunities for
the refinancing of outstanding securities beyond mandatory redemption
requirements.
M&R Fund provisions contained in CG&E's, PSI's,normal purchases and ULH&P's first mortgage bond
indentures require cash payments, bond retirements, or pledges of unfunded
property additions each year based on an amount related to the net revenues of
the respective company.
Cinergy
Windfall Profits Tax During the third quarter of 1997, a windfall profits tax
was levied against Midlands. Cinergy's share of the tax to be paid by Midlands
in two equal installments, due December 1, 1997,sales exemption, and 1998, is approximately 67
million pounds sterling ($109 million or $.69 per share, basic and diluted).
Midlands borrowed the funds to finance the first installment. Cinergy expects
Midlands will borrow funds as necessary to pay the final installment. As
Cinergy's management believes this charge to be unusual in nature, and doesdo not expect such a charge to recur, the tax was recorded as an extraordinary item in
Cinergy's Consolidatedinvolve Statement of Income during the third quarter of 1997. No
related tax benefit was recordedFinancial Accounting Standards No. 133, Accounting for the charge as the windfall profits tax is
not deductible for corporate income tax purposes in the UK,Derivative Instruments and Cinergy expects
that benefits, if any, derived for US Federal income taxes will not be
significant.
Cinergy, CG&E, PSI, and ULH&P
Year 2000 Costs Cinergy, like most owners of information systems, will be
required to modify significant portions of its systems to accommodate
requirements brought about by the turn of the century. During 1997, Cinergy
incurred costs of approximately $5 million to modify existing computer systems
and applications. Preliminary estimates of the remaining total costs to be
incurred prior to 2000 are approximately $8 million. Maintenance or modification
costs will be expensed as incurred, while the costs of new software will be
capitalized and amortized over the software's useful life.
CAPITAL RESOURCES
Cinergy, CG&E, PSI, and ULH&P
Cinergy, CG&E and its subsidiaries (including ULH&P)Hedging Activity (Statement 133), and PSI forecast that
their need for external funds during the 1998 through 2002 period will primarily
be for the refinancing of existing securities. (This forecast reflects nominal
dollars and assumptions as to the economy, capital markets, construction
programs, legislative and regulatory actions, frequency and timing of rate
increases, and other related factors, all or any of which may change
significantly.)
INTERNAL FUNDS
Cinergy, CG&E, PSI, and ULH&P
General Currently, the majority of Cinergy's revenues and corresponding cash
flows are derived from cost-of-service regulated operations. Cinergy believes it
is likely that the generation component of the electric utility industry will
ultimately be deregulated. However, the timing and nature of the deregulation
and restructuring of the industry is uncertain. In the interim, revenues
provided by cost-of-service regulated operations are anticipated to continue as
the primary source of funds for Cinergy. As a result of its low-cost position
and market strategy, over the long term, Cinergy believes it will be successful
in a more competitive environment. However, as the industry becomes more
competitive, future cash flows from Cinergy's operations could be subject to a
higher degree of volatility than under the present regulatory structure.
Cinergy
For the year ended December 31, 1997, Cinergy's cash provided from operating
activities was $753 million compared to $855 million and $736 million in 1996
and 1995, respectively. The decrease in 1997 was primarily due to CG&E's and
ULH&P's sales of accounts receivable during 1996. The decrease was offset, in
part, by PSI's payment in 1996 of $80 million in accordance with a 1989
settlement agreement between PSI and Wabash Valley Power Association, Inc.
(WVPA). (See Notes 6 and 12(e) of the "Notes to Financial Statements" in "Item
8. Financial Statements and Supplementary Data.")
CG&E and ULH&P
For the year ended December 31, 1997, CG&E and its subsidiaries' cash provided
from operating activities was $439 million (including $40 million for ULH&P)
compared to $680 million in 1996 (including $42 million for ULH&P) and $446
million in 1995 (including $37 million for ULH&P). The decrease in 1997 was
primarily due to CG&E's and ULH&P's sales of accounts receivable during 1996.
PSI
For the year ended December 31, 1997, PSI's cash provided from operating
activities was $332 million compared to $262 million in 1996 and $284 million in
1995. The increase in 1997 was primarily due to the reflection in 1996 of PSI's
payment of $80 million in accordance with a 1989 settlement agreement between
PSI and WVPA. (See Note 12(e) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data.")
Cinergy, CG&E, PSI, and ULH&P
Merger Savings As previously discussed in the "Regulatory Matters" section, CG&E
currently has a regulatory order in effect which provides a mechanism for the
retention of a portion of net Non-fuel Merger Savings.
COMMON STOCK
Cinergy
During 1997, 1996, and 1995, Cinergy issued 66 thousand, 15 thousand, and 2.6
million new shares, respectively, of common stock pursuant to its dividend
reinvestment and stock purchase plan and various stock-based employee plans. In
addition, Cinergy purchased 1.7 million and 1.2 million shares on the open
market to satisfy substantially all of its 1997 and 1996 obligations,
respectively, under these plans. Cinergy plans to continue using market
purchases of common stock to satisfy all or at least a portion of its
obligations under these plans.
LONG-TERM DEBT
Cinergy, CG&E, PSI, and ULH&P
As of December 31, 1997, CG&E, PSI, and ULH&P had state regulatory authority for
long-term debt issuances of $300 million, $300 million, and $50 million,
respectively. Regulatory approval to issue additional amounts of securities will
be requested as needed. On March 19, 1998, PSI issued $100 million principal
amount of its 7.25% JUnior Maturing Principal Securities (JUMPS). The JUMPS will
mature on March 15, 2028. Proceeds from the sale were used to repay short-term
indebtedness incurred in connection with the redemption on March 1, 1998, of all
outstanding shares of PSI's 7.44% Series Cumulative Preferred Stock at a
redemption price of $25 per share.
SHORT-TERM DEBT
Cinergy, CG&E, PSI, and ULH&P
Cinergy's utility subsidiaries had regulatory authority to borrow up to $853
million ($453 million for CG&E and its subsidiaries, including $50 million for
ULH&P, and $400 million for PSI) as of December 31, 1997. In connection with
this authority, committed lines have been established which permit borrowings of
up to $270 million ($85 million for CG&E and $185 million for PSI), of which
$140 million ($20 million for CG&E and $120 million for PSI) remained unused and
available at December 31, 1997. Also, pursuant to this authority, uncommitted
lines (short-term borrowings with various banks on an "as offered" basis) have
been established. Under these arrangements, $154 million ($100 million for CG&E
and $54 million for PSI) was unused and available at December 31, 1997. CG&E and
PSI also have the capability to issue commercial paper which must be supported
by committed lines (unsecured lines of credit) of the respective company.
Neither CG&E nor PSI issued commercial paper in 1997 or 1996.
To better manage cash and working capital requirements, Cinergy's utility
subsidiaries, including CG&E, PSI, and ULH&P, participate in a money pooling
arrangement. Under this arrangement, Cinergy system companies with surplus
short-term funds, whether from internal or external sources, provide short-term
loans to other system companies at rates that reflect (1) the actual costs of
the external borrowing and/or (2) the costs of the internal funds which are set
at the 30-day Federal Reserve "AA" industrial commercial paper rate. The SEC's
approval of the money pool, pursuant to the PUHCA, extends through December 31,
2002. For amounts outstanding under this money pool arrangement at December 31,
1997, and December 31, 1996, see "Notes payable to affiliated companies" on the
Consolidated Balance Sheets of CG&E and PSI and the Balance Sheets of ULH&P.
Cinergy
In 1997, Cinergy amended its existing credit facility. At year-end, Cinergy had
two separate credit facilities, a $350 million acquisition commitment and a $400
million revolving credit facility, which provides credit support for Cinergy's
newly instituted commercial paper program (see below). As of December 31, 1997,
approximately $111 million of the $400 million revolving facility, excluding the
amount reserved for commercial paper support, remained unused and available.
Cinergy's newly instituted commercial paper program is limited to a maximum
outstanding principal amount of $200 million. As of December 31, 1997,
approximately $161 million of commercial paper was outstanding under this
program. The majority of the proceeds were used to reduce the acquisition
commitment to the year-end level of $350 million. The entire $350 million was
utilized to fund the acquisition of Midlands through Avon Energy and its
wholly-owned subsidiary.
In addition, Cinergy UK, Inc., a subsidiary of Investments, which holds
Cinergy's 50% investment in Avon Energy, entered into a $40 million non-recourse
credit agreement in 1996, which was terminated in October of 1997. This
agreement was replaced by a one year $115 million non-recourse revolving credit
agreement, which had $81 million unused as of December 31, 1997.
On January 20, 1998, the SEC issued an order under the PUHCA permitting Cinergy
to issue and sell from time to time through December 31, 2002: 1) short-term
notes and commercial paper in an aggregate principal amount not to exceed $2
billion outstanding at any time; and 2) up to approximately 30 million
additional shares of Cinergy common stock. Cinergy intends to use the net
proceeds from the issuance and sale of the above mentioned securities for
general corporate purposes.
Net cash used in financing activities totaled $343 million in 1997, as compared
to $110 thousand and $410 million in 1996 and 1995, respectively. The change in
cash flow from financing activities for 1997 primarily resulted from Cinergy
borrowing under its credit facility in 1996 to fund the acquisition of Midlands.
CG&E and ULH&P
CG&E and its subsidiaries' net cash used in financing activities totaled $275
million (including $17 million for ULH&P) for 1997, as compared to $521 million
(including $23 million for ULH&P) for 1995 and $339 million (including $17
million for ULH&P) for 1994. The change in cash flow from financing activities
for 1997 was primarily attributable to CG&E's payments of common stock dividends
to Cinergy during 1996.
PSI
PSI's net cash used in financing activities totaled $165 million for 1997, as
compared to $77 million for 1996 and $45 million for 1995. The change in cash
flow from financing activities for 1997 was primarily attributable to PSI's
issuance of long-term debt in 1996.
SALE OF ACCOUNTS RECEIVABLE
Cinergy, CG&E, PSI, and ULH&P
In January 1996, CG&E, PSI, and ULH&P entered into an agreement to sell, on a
revolving basis, undivided percentage interests in certain of their accounts
receivable up to an aggregate maximum of $350 million, of which $252 million
($167 million by CG&E and its subsidiaries, including $29 million by ULH&P, and
$85 million by PSI), net of reserves, has been sold as of December 31, 1997. The
Consolidated Balance Sheets of Cinergy, CG&E, and PSI and the Balance Sheets of
ULH&P are net of the amounts sold at December 31, 1997 and 1996.
hedges.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Cinergy, CG&E, PSI, and ULH&P
The following discussions about Cinergy's market risk sensitive instruments and
positions and risk management activities include forward-looking information and
statements that involve risks and uncertainties. The forward-looking information
and statements presented are only estimates of what may occur in the future,
assuming certain adverse market conditions, due to their dependence on model
characteristics and assumptions. As a result, actual future results may differ
materially from those presented. These disclosures are not precise indicators of
expected future losses, rather they merely present indications of reasonably
possible losses.
Energy Commodities Sensitivity
Cinergy, CG&E, and PSI
During 1996 Cinergy functionally reorganized its operations into four strategic
business units, including an energy commodities business unit. The energy
commodities business unit includes Cinergy's power marketing and trading
function, which was formally established in 1995 and was the natural successor
of CG&E's and PSI's existing bulk power operations.
At present, the competitive electric power market is dominated by a small number
of large participants (primarily utilities and a few power marketers), trading
liquidity is limited, and pricing is not transparent. However, similar to the
development of natural gas markets, the market for trading electricity is
expected to develop rapidly and Cinergy plans to be a major participant.
The transactions associated with Cinergy's powerEnergy Merchant’s energy marketing and trading functionactivities give rise to various risks, including market risk. Market risk represents the potential risk of loss from changes in the market value of a particular
commitment arising from adverse changes in market rates and prices. Cinergy's
power marketing and trading operations are actively conducted in all regionsprice of the US. These operations subject Cinergy to the risks and volatilities
associated with theelectricity or other energy commodities (e.g., primarily electricity) which it
markets and trades. The wholesale power marketing and trading business continues
to be very competitive and, as a result, margins have declined throughout the
year.commodities. As CinergyEnergy Merchant continues to develop and expand its powerenergy marketing and trading business (and due to its substantial investment in generatinggeneration assets), its exposure to movements in the price of electricity and other energy commodities willmay become greater. As a result, Cinergywe may be subject to increased future earnings volatility.
Cinergy's
The energy marketing and trading activities of Energy Merchant principally consist of Marketing & Trading’s natural gas marketing and trading operations, Cinergy Global Trading Limited’s (Global Trading) European natural gas and power trading operations, and CG&E’s and PSI’s power marketing and trading activities principally consist ofoperations. In April 2002, CG&E and PSI executed a new joint operating agreement whereby new power marketing and trading contracts of the participants since April 2002 are originated on behalf of CG&E. See the “Termination of Operating Agreement” section for additional information.
Our domestic operations market and trade over-the-counter (an informal market where the buying/selling of commodities occurs) contracts for the purchase and sale of electricity (primarily in the Midwest region of the U.S.), natural gas, and other energy-related products. In addition, our domestic operations also market and trade natural gas and other energy-related products on the New York Mercantile Exchange. Global Trading’s operations trade over-the-counter contracts for the purchase and sale of electricity. The majoritynatural gas and electricity (both primarily in the United Kingdom). Global Trading also trades natural gas on the International Petroleum Exchange.
Many of thesethe contracts in both the accrual and trading portfolios commit Cinergyus to purchase or sell electricity, natural gas, and other energy-related products at fixed prices in the futurefuture. The majority of the contracts in the natural gas and other energy-related product portfolios are
74
financially settled contracts (i.e., fixed-price forward purchase
and sales contracts)there is no physical delivery related with these items). CinergyIn addition, Energy Merchant also markets and trades over-the-counter option contracts. The majority of these forward and option contracts require settlement
by physical delivery of electricity or are netted out in accordance with
industry trading standards. The use of these types of physical commodity instruments is designed to allow Cinergy toEnergy Merchant to:
• manage and economically hedge its contractual commitments,commitments;
• reduce its exposure relative to the volatility of cash market prices, andprices;
• take advantage of selected arbitrage opportunities. The use of
derivative commodity instruments intended to be settled in cash was not
significant during 1997.
Cinergy values its portfolio of over-the-counter forwardopportunities; and option contracts
using the aggregate lower of cost or market method. To the extent there are
estimated net aggregate losses in the portfolio, Cinergy reserves for such
losses. As these contracts are settled, actual gains
• originate customized transactions with municipalities and losses may differ from
the estimated gains and losses utilized in calculating the aggregate lower of
cost or market reserve due to changing market conditions.
Cinergyend-use customers.
Energy Merchant structures and modifies its net position to capture the following:
•expected changes in future demand,demand;
• seasonal market pricing characteristics,characteristics;
• overall market sentiment,sentiment; and
• price relationships between different time periods and trading regions. Therefore, at
At times, Cinergy creates a net open position is created or allows a
net open positionis allowed to continue when itEnergy Merchant believes future changes in prices and market conditions will make the positions profitable.may possibly result in profitable positions. Position imbalances maycan also occur because ofdue to the basic lack of liquidity in the wholesale power market
itself. To the extentmarket. The existence of net open positions exist, Cinergy is exposed to the risk
that fluctuating market prices of electric power maycan potentially result in an adverse impact itson our financial condition or results of operations adverselyoperations. This potential adverse impact could be realized if prices dothe market price of electric power does not movereact in the manner or direction expected. Cinergy’s Risk Management Control Policy contains limits associated with the overall size of net open positions for each trading operation and for Cinergy in total.
Value at Risk (VaR)
Energy Merchant measures the market risk inherent in itsthe trading portfolio utilizing value-at-riskemploying VaR analysis and other methodologies, which simulateutilize forward price curves in electric power and natural gas markets to quantify estimates of the magnitude and probability of potential future lossesvalue changes related to open contract positions. Cinergy's
value-at-risk expressesVaR is a statistical measure used to quantify the potential losschange in fair value of its forward contract
and option positionthe trading portfolio over a particular period of time, with a specified likelihood of occurrence, due to an adverse market movement. Cinergy reports
value-at-risk as a percentageEnergy Merchant, through some of its earnings,our non-regulated subsidiaries, markets physical natural gas and electricity and trades derivative commodity instruments which are usually settled in cash including: forwards, futures, swaps, and options. Any transaction, whether settled physically or financially, that is included in our fair value power and gas accounting results is included in the VaR calculation.
Our VaR is reported based on a 95%95 percent confidence interval, utilizing onea one-day holding period. This means that on a given day (one-day holding periods. Onperiod) there is a one day basis as of December
31, 1997, Cinergy's value-at-risk for its power marketing and95 percent chance (confidence level) that our trading activities
was lessportfolio will not change more than 2% of Cinergy's "Income Before Interest and Other Charges". The
value-at-riskthe stated amount. Our VaR model uses the variance-covariance statistical modeling technique and historical volatilities and correlations over the past 20021-trading day period. During 2002, Cinergy revised the sample horizon used for calculating historical volatility and correlation for power prices from 200 trading days to 21 trading days. This revision was made to be consistent with the calculation methodology used for natural gas and to comply with the common practice in the industry of using a 21-trading day sample period for power. The estimated2001 VaR information included in the chart below has not been restated to reflect this change. The average VaR for 2001 was
75
calculated using a simple quarterly average. The 2002 average VaR was calculated using an average of trading days over the entire year. The high and low VaR for 2001 were based on quarterly VaR calculations. The high and low VaR for 2002 were based on an entire year of trading day calculations. The market prices used to value these transactions for value-at-risk
purposes reflect the use of established pricing models and various factors
including quotationscalculate VaR are obtained from exchanges and over-the-counter markets pricewhen available, established pricing models and other factors including market volatility, factors, the time value of money, and location differentials. The VaR for Cinergy’s trading portfolio is presented in the table below:
VaR Associated with Energy Trading Contracts
|
| 2002 |
| 2001 |
| ||||
|
| (dollars in millions) |
| ||||||
|
| Trading VaR |
| Percentage of |
| Trading VaR |
| Percentage of |
|
|
|
|
|
|
|
|
|
|
|
95% confidence level, one-day holding period, one-tailed |
| $1.6 |
| 0.2% |
| $ 6.0 |
| 0.6% |
|
Average for the twelve months ended December 31 |
| 2.1 |
| 0.3 |
| 7.8 |
| 0.8 |
|
High for the twelve months ended December 31 |
| 3.7 |
| 0.5 |
| 11.9 |
| 1.3 |
|
Low for the twelve months ended December 31 |
| 0.5 |
| 0.1 |
| 4.9 |
| 0.5 |
|
76
Changes in Fair Value
The changes in fair value of the energy risk management assets and liabilities for Cinergy, CG&E, and PSI for the years ended December 31, 2002 and 2001 are presented in the table below:
|
| Change in Fair Value |
| ||||||||||||||||
|
| 2002 |
| 2001 |
| ||||||||||||||
|
| Cinergy(1) |
| CG&E |
| PSI |
| Cinergy(1) |
| CG&E |
| PSI |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fair value of contracts outstanding at the beginning of period: |
| $ | 18 |
| $ | 28 |
| $ | (7 | ) | $ | (78 | ) | $ | (40 | ) | $ | (40 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Inception value of new contracts when entered(2) |
| 6 |
| 5 |
| 1 |
| 29 |
| 18 |
| 11 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Changes in fair value attributable to changes in valuation techniques and assumptions(3) |
| 14 |
| 6 |
| 9 |
| 10 |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other changes in fair value(4) |
| 89 |
| 26 |
| 5 |
| 53 |
| 17 |
| (11 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Option premiums paid/(received) |
| 20 |
| 1 |
| — |
| 15 |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Contract reclassifications(5) |
| 14 |
| 18 |
| 5 |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Contract acquisition(6) |
| (16 | ) | — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Contracts settled |
| (70 | ) | (42 | ) | (13 | ) | (11 | ) | 33 |
| 33 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fair value of contracts outstanding at end of period |
| $ | 75 |
| $ | 42 |
| $ | — |
| $ | 18 |
| $ | 28 |
| $ | (7 | ) |
(1) The results of Cinergy also include amounts related to non-registrants.
(2) Represents fair value, recognized in income, attributable to long-term, structured contracts, primarily in power, which is recorded on the date a deal is signed. These contracts are primarily with end-use customers or municipalities that seek to limit their risk to power price volatility. While caps and floors often exist in such contracts, the amount of power supplied can vary from hour to hour to mirror the customers’ load volatility. See “Accounting Changes” for additional information regarding inception gains.
(3) Represents changes in fair value recognized in income, caused by changes in assumptions used in calculating fair value or changes in modeling techniques.
(4) Represents changes in fair value, recognized in income, primarily attributable to fluctuations in price. This amount includes both realized and unrealized gains on energy trading contracts.
(5) Includes reclassifications of the settlement value of contracts that have been terminated as a result of counterparty non-performance to Non-Current Liabilities-Other. These contracts no longer have price risk and are therefore not considered energy trading contracts.
(6) Capital & Trading Inc. (CC&T),acquired a subsidiaryportfolio of Investments,
specializinggas contracts and inventory in energyJuly 2002. This amount represents the fair value of net Energy risk management marketing,liabilities assumed. There was no inception gain or loss recognized at the date of acquisition.
77
The following table presents the expected maturity of the Energy risk management assets and proprietary arbitrage
trading, actively trades derivative commodity instruments, customarily settled
in cash, including futures, forwards, swaps,Energy risk management liabilities as of December 31, 2002 for Cinergy, CG&E, and options. CRI also utilizes
derivative commodity instruments, customarily settled in cash, to hedge
purchases and salesPSI:
|
| Fair Value of Contracts at December 31, 2002 |
| |||||||||||||
|
| Maturing |
| Total |
| |||||||||||
Source of Fair Value(1) |
| 2003 |
| 2004-2005 |
| 2006-2007 |
| Thereafter |
|
| ||||||
|
| (in millions) |
| |||||||||||||
Cinergy(2) |
|
|
|
|
|
|
|
|
|
|
| |||||
Prices actively quoted |
| $ | 33 |
| $ | (23 | ) | $ | — |
| $ | — |
| $ | 10 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Prices based on models and other valuation methods |
| 23 |
| 26 |
| 7 |
| 9 |
| 65 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ | 56 |
| $ | 3 |
| $ | 7 |
| $ | 9 |
| $ | 75 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E |
|
|
|
|
|
|
|
|
|
|
| |||||
Prices actively quoted |
| $ | (3 | ) | $ | (13 | ) | $ | — |
| $ | — |
| $ | (16 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Prices based on models and other valuation methods |
| 12 |
| 23 |
| 6 |
| 17 |
| 58 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ | 9 |
| $ | 10 |
| $ | 6 |
| $ | 17 |
| $ | 42 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI |
|
|
|
|
|
|
|
|
|
|
| |||||
Prices actively quoted |
| $ | (4 | ) | $ | (10 | ) | $ | — |
| $ | — |
| $ | (14 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Prices based on models and other valuation methods |
| 5 |
| 6 |
| 3 |
| — |
| 14 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ | 1 |
| $ | (4 | ) | $ | 3 |
| $ | — |
| $ | — |
|
| ||||||||||||||||
(1) Active quotes are considered to be available for two years for standard electricity transactions and three years for standard gas transactions. Non-standard transactions are classified based on the extent, if any, of modeling used in determining fair value. Long-term transactions can have portions in both categories depending on the tenor. (2) The results of Cinergy also include amounts related to non-registrants. |
Concentrations of natural gas. The trading and hedging activities of CC&T
and the hedging activities of CRI were not significant to Cinergy's financial
condition or results of operations.
Cinergy, CG&E, PSI, and ULH&P
Credit Risk
Credit risk representsis the risk ofexposure to economic loss whichthat would occur as a result of nonperformance by counterparties, pursuant to the terms of their contractual obligations with the Company. Concentrationsobligations. Specific components of credit risk relate to
significant customers or counterparties, or groups of customers or
counterparties, possessing similar economic or industry characteristics that
would cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions.
Concentrationinclude counterparty default risk, collateral risk, concentration risk, and settlement risk.
Trade Receivables and Physical Power Portfolio
Our concentration of credit risk with respect to Cinergy's trade accounts receivable from electric and gas retail customers is limited due to Cinergy'slimited. The large number of customers and diversified customer base of residential, commercial, and industrial customers. Sales for resale customers on Cinergy's electric system
includesignificantly reduces our credit risk. Contracts within the physical portfolio of power marketing and trading operations are primarily with the traditional electric cooperatives and municipalities and other investor-owned utilities. At December 31, 2002, we believe the likelihood of significant losses associated with which CG&Ecredit risk in our trade accounts receivable or our physical power portfolio is remote.
78
Energy Trading Credit Risk
Cinergy’s extension of credit for energy marketing and PSI have long-standing relationships. Contractstrading is governed by a Corporate Credit Policy. Written guidelines document the management approval levels for salescredit limits, evaluation of electricity for
resale outside of Cinergy's systemcreditworthiness, and credit risk mitigation procedures. Exposures to credit risks are principally with power marketers, other
investor owned utilities, electric cooperatives, and municipalities.monitored daily by the Corporate Credit Risk function. As of December 31, 1997,2002, approximately 65%96 percent of Cinergy's powerthe credit exposure related to energy trading and marketing activity was with counterparties rated Investment Grade or the counterparties’ obligations were guaranteed by a parent company or other entity rated Investment Grade. No single non-investment grade counterparty accounts for more than one percent of our total credit exposure. Energy commodity prices can be extremely volatile and trading
activity represents commitments with 10 counterparties. The majoritythe market can, at times, lack liquidity. Because of these contracts areissues, credit risk is generally greater than with other commodity trading.
In December 2001, Enron filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities with Enron in the months prior to its bankruptcy filing. We intend to resolve any contract differences pursuant to the terms of one yearthose contracts, business practices, and the applicable provisions of the Bankruptcy Code, as approved by the court. While we cannot predict the resolution of these matters, we do not believe that any exposure relating to those contracts would have a material impact on our financial position or less. Asresults of operations.
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 competitive electric power
market expands, counterparties will increasingly include new market entrants,
such as other power marketers, brokers, and commodities traders. This increased
level of new market entrants, as well as competitive pressuresindustry. Counterparty credit limits may be adjusted on the utility
market participants, could increase Cinergy'sa daily basis in response to changes in a counterparty’s financial status, or public debt ratings.
Financial Derivatives
Potential exposure to credit risk. Asrisk also exists from our use of December 31, 1997, Cinergy's management believesfinancial derivatives such as currency swaps, foreign exchange forward contracts, interest rate swaps, and treasury locks. Because these financial instruments are transacted with highly rated financial institutions, we do not anticipate nonperformance of contractual
obligations by any one counterparty of Cinergy's power marketing and trading
function would not result in losses which are significant to the financial
condition or results of operations of Cinergy.
Cinergy, CG&E, and PSI
Cinergy's energy commodities business unit has established a risk management
function and has implemented active risk management policies and procedures tocounterparties.
Risk Management
We manage, and minimize its exposure to price risks and associated volatilities,
other market risks, and credit risk. Cinergy maintains credit policies with
regard to its counterparties in order to manage and minimize its exposure to
credit risk. These policies include requiring parent company guaranties and
various forms of collateral under certain circumstances and the use of mutual
netting/closeout agreements. Cinergy manages, on a portfolio basis, the market risks inherent in its powerour energy marketing and trading transactions subject to parameters established by Cinergy'sour Risk Policy Committee. MarketOur market and credit risks are monitored by the Global Risk Management Group of Cinergy's energy commodities business
unit, which operates separately from the units which originate or actively
manage the market risk exposures,function to ensure compliance with Cinergy's stated risk management policies and procedures. These policiesThe Global Risk Management function operates independently from the business units and other corporate functions, which originate and actively manage the market risk exposures. Policies and procedures are periodically reviewed and monitored on a continuous basis to ensure their responsiveness to changing market and business conditions. In addition, efforts are ongoing to
develop systems to improveCredit risk mitigation practices include requiring parent company guarantees, various forms of collateral, and the timeliness and qualityuse of market and credit risk
information.
mutual netting/closeout agreements.
Exchange Rate Sensitivity
Cinergy
Cinergy has exposure to fluctuations in exchange rates between the US dollar/UK pound sterling exchange
rate through its investment in Midlands. Cinergy usedU.S. dollar denominated
variable interest rate debtand the currencies of foreign countries where we have investments. When it is appropriate we will
79
hedge our exposure to fund this investment, and has hedged the exchange
rate exposure related to this transaction through a currency swap executed in
February 1997. Under the swap, Cinergy exchanged $500 million for 330 million
pounds sterling. When the swap terminates in the year 2002, these amounts will
be re-exchanged; that is, Cinergy will be repaid $500 million and will be
obligated to repay to the counterparty 330 million pounds sterling. To fund this
repayment, Cinergy could buy 330 million pounds sterling in the foreign exchange
market at the prevailing spot rate or enter into a new currency swap.
The purpose of this swap is to hedge the value of Cinergy's investment in
Midlands against changes in the dollar/sterling exchange rate. When the pound
sterling weakens relative to the dollar, the dollar value of Cinergy's
investment in Midlands as shown on its books declines; however, the value of the
swap increases, offsetting the decline in the investment. The reverse is true
when the pound sterling appreciates relative to the dollar. The translation
gains and losses related to the principal exchange on the swap and on Cinergy's
original investment in Midlands are recorded in the cumulative foreign currency
translation adjustment which is reportedcash flow transactions, such as a separate componentdividend payment by one of common stock
equity in the Consolidated Financial Statements.
In connection with this swap, Cinergy must pay semi-annual interest on its pound
sterling obligation and will receive interest on the dollar notional amount. At
December 31, 1997, the fair value of this swap, reflecting the semi-annual
interest obligations through February 2002, and the final principal exchange,
was $(48) million. This was largely offset by a $41 million currency translation
gain to date on Cinergy's investment in Midlands.
The following table summarizes the details of the swap. (For presentation
purposes, the pound sterling payment obligation has been converted to US dollars
using the dollar/sterling spot exchange rate at December 31, 1997, of 1.64515.
The interest rates are based on the six-month London Interbank Offered Rate
(LIBOR) implied forward rates at December 31, 1997.)
Expected Maturity Date
There-
1998 1999 2000 2001 2002 after Total
Currency Swap ($US Equivalent in millions)
Receive principal ($US) $ - $ - $ - $ - $500 $ - $500
Average interest
receive rate - % - % - % - % 6.1% - % 6.1%
Pay principal (pound
sterling UK) $ - $ - $ - $ - $543 $ - $543
Average interest
pay rate - % - % - % - % 7.0% - % 7.0%
our foreign subsidiaries.
Interest Rate Sensitivity
Cinergy, CG&E, PSI, and ULH&P
Cinergy's
Our net exposure to changes in interest rates primarily consists of short-term debt instruments with floating(including net money pool borrowings) and certain pollution control debt. The following table reflects the different instruments used and the method of benchmarking interest rates, that are benchmarked to
US short-term money market indices. as of December 31, 2002:
| Interest Benchmark |
| 2002 |
| |||||
|
|
|
|
|
|
| (in millions) |
| |
|
|
|
|
|
|
|
|
| |
Short-term Bank Loans/Commercial Paper/Money Pool | • |
| Short-term Money Market |
| Cinergy |
| $ | 521 |
|
| • |
| Commercial Paper |
| CG&E and subsidiaries |
| — |
| |
|
|
| Composite Rate(2) |
| PSI |
| 138 |
| |
| • |
| LIBOR(1) |
| ULH&P |
| 14 |
| |
|
|
|
|
|
|
|
|
| |
Pollution Control Debt | • |
| Daily Market |
| Cinergy |
| 147 |
| |
| • |
| Auction Rate |
| CG&E and subsidiaries |
| 112 |
| |
|
|
|
|
| PSI |
| 35 |
| |
(1) London Inter-Bank Offered Rate (LIBOR)
(2) 30-day Federal Reserve “AA” Industrial Commercial Paper Composite Rate
The weighted-average interest rates on the above instruments at December 31, were as follows:
2002 | |||
Short-term Bank Loans/Commercial Paper | 1.9 | % | |
Money Pool | 1.3 | % | |
Pollution Control Debt | 1.8 | % |
At December 31, 1997, this included (i)
short-term bank loans and commercial paper totaling $870 million ($105 million
for CG&E and $131 million for PSI), (ii) $244 million of pollution control
related debt ($184 million for CG&E and $60 million for PSI) which is classified
as other short-term obligations on Cinergy's, CG&E's, and PSI's respective
Balance Sheets, and (iii) a $252 million sale of accounts receivable ($167
million sold by CG&E and its subsidiaries, including $29 million sold by ULH&P,
and $85 million sold by PSI) (Cinergy's, CG&E's, PSI's, and ULH&P's respective
Balance Sheets are net of this sale). At December 31, 1997, interest rates on
bank loans, commercial paper, and the sale of accounts receivable approximated
6%, and the interest rate on the pollution control debt approximated 4%. Current2002, forward yield curves project no significant changean increase in applicable short-term interest rates over the next five years.
80
The following table presents the principal cash repayments, and related weighted
average interest rates by maturity date and other selected information, for Cinergy and certain of its utility
subsidiaries'each registrant’s long-term fixed-rate debt, other debt, and capital lease obligations as of December 31, 1997:
|
| Expected Maturity Date |
| ||||||||||||||||||||||
Liabilities |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| There- |
| Total |
| Fair |
| ||||||||
|
| (in millions) | |||||||||||||||||||||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Long-term Debt(1) |
| $ | 176 |
| $ | 812 |
| $ | 201 | (4)(5) | $ | 328 |
| $ | 367 |
| $ | 2,088 |
| $ | 3,972 |
| $ | 4,166 |
|
Weighted-average interest rate(2) |
| 6.2 | % | 5.6 | % | 6.8 | % | 6.7 | % | 7.6 | % | 6.2 | % | 6.3 | % |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other(3) |
| $ | 15 |
| $ | 3 |
| $ | 3 |
| $ | 7 |
| $ | 7 |
| $ | 263 |
| $ | 298 |
| $ | 315 |
|
Weighted-average interest rate(2) |
| 6.7 | % | 5.9 | % | 6.0 | % | 5.3 | % | 5.4 | % | 6.3 | % | 6.3 | % |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Capital Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fixed-rate leases |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 5 |
| $ | 22 |
| $ | 43 |
| $ | 43 |
|
Interest rate(2) |
| 5.8 | % | 5.8 | % | 5.8 | % | 5.7 | % | 5.7 | % | 5.2 | % | 5.5 | % |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
CG&E and subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Long-term Debt(1) |
| $ | 120 |
| $ | 110 |
| $ | 150 | (5) | $ | — |
| $ | 100 |
| $ | 1,212 |
| $ | 1,692 |
| $ | 1,745 |
|
Weighted-average interest rate(2) |
| 6.3 | % | 6.5 | % | 6.9 | % |
|
| 6.9 | % | 6.1 | % | 6.2 | % |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Capital Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fixed-rate leases |
| $ | 2 |
| $ | 2 |
| $ | 2 |
| $ | 3 |
| $ | 3 |
| $ | 13 |
| $ | 25 |
| $ | 25 |
|
Interest rate(2) |
| 5.7 | % | 5.7 | % | 5.7 | % | 5.7 | % | 5.6 | % | 5.1 | % | 5.4 | % |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
PSI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Long-term Debt(1) |
| $ | 56 |
| $ | 2 |
| $ | 51 | (4) | $ | 328 |
| $ | 267 |
| $ | 676 |
| $ | 1,380 |
| $ | 1,481 |
|
Weighted-average interest rate(2) |
| 5.9 | % | 6.0 | % | 6.5 | % | 6.7 | % | 7.8 | % | 6.4 | % | 6.7 | % |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Capital Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fixed-rate leases |
| $ | 1 |
| $ | 2 |
| $ | 2 |
| $ | 2 |
| $ | 2 |
| $ | 9 |
| $ | 18 |
| $ | 18 |
|
Interest rate(2) |
| 5.9 | % | 5.9 | % | 5.9 | % | 5.8 | % | 5.8 | % | 5.2 | % | 5.6 | % |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
ULH&P |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Long-term Debt(1) |
| $ | 20 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 55 |
| $ | 75 |
| $ | 79 |
|
Weighted-average interest rate(2) |
| 6.1 | % |
|
|
|
|
|
|
|
| 7.3 | % | 7.0 | % |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Capital Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fixed-rate leases |
| $ | — |
| $ | — |
| $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 3 |
| $ | 6 |
| $ | 6 |
|
Interest rate(2) |
|
|
|
|
| 5.9 | % | 5.8 | % | 5.8 | % | 5.3 | % | 5.6 | % |
|
| ||||||||
(1) Long-term Debt includes amounts reflected as long-term debt due within one year.
(2) The weighted-average interest rate is calculated as follows: (1) for Long-term Debt and Other, the weighted-average interest rate is based on the interest rates at December 31, 2002 of the debt that is maturing in the year reported; and (2) for Capital Leases, the weighted-average interest rate is based on the average interest rate of the lease payments made during the year reported.
(3) Long-term Debt related to investments under Global Resources.
(4) Includes 6.50% Debentures due August 1, 2026, reflected as maturing in 2005, as the interest rate resets on August 1, 2005.
(5) Includes 6.90% Debentures due June 1, 2025, reflected as maturing in 2005, as the debentures are putable to CG&E and PSI
To manage Cinergy's at the option of the holders on June 1, 2005.
81
Our current policy in managing exposure to fluctuations in interest rates andis to lower
funding costs, Cinergy constantly evaluatesmaintain approximately 30 percent of the usetotal amount of and has entered into,
severaloutstanding debt in floating interest rate debt instruments. In maintaining this level of exposure, we use interest rate swaps. Under thesethe swaps, Cinergy or its subsidiarieswe agree with counterpartiesother parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated on an agreed upon notional amount. This interest differential paid or received is recognized in
the Consolidated Statements of Income as a component of interest expense.
Through twoCG&E has an outstanding interest rate swap agreements, agreement that decreased the percentage of floating-rate debt. Under the provisions of the swap, which has a notional amount of $100 million, CG&E pays a fixed-rate and receives a floating-rate through October 2007. This swap qualifies as a cash flow hedge under the provisions of Statement 133. As the terms of the swap agreement mirror the terms of the debt agreement that it is hedging, we anticipate that this swap will continue to be effective as a hedge. Changes in fair value of this swap are recorded in Accumulated other comprehensive income (loss), beginning with our adoption of Statement 133 on January 1, 2001. Cinergy Corp.has effectively fixed thethree outstanding interest rate on the pound sterling denominated obligation created by the
currency swap discussed above. Each contract requires Cinergy to pay
semi-annuallyswaps with a fixed rate and receive a floating rate through February 2002.
The combined notional amount of both$250 million. Under the provisions of the swaps, is 330 million pounds sterling.
Translation gainsCinergy Corp. will receive fixed-rate interest payments and losses related to Cinergy'spay floating-rate interest obligation, which is
payable in pounds sterling, are recognizedpayments through September 2004. These swaps qualify as a componentfair value hedges under the provisions of interest expense in
the Consolidated Statements of Income.
At December 31, 1997, PSI had two interest rate swap agreements outstanding with
notional amounts of $1OO million each. One contract, with three years remaining
of a four-year term, requires PSI to pay a floating rate and receive a fixed
rate. The second contract, with a six-month term, requires PSI to pay a fixed
rate and receive a floating rate. In both cases, the floating rate is based on
applicable LIBOR. The following table presents notional principal amounts and
weighted average interest rates by contractual maturity dates for the interest
rateStatement 133. We anticipate that these swaps of Cinergy and PSI. The variable rates are the average implied
forward rates during the contract based on the six month LIBOR yield curve at
December 31, 1997. Although Cinergy's swaps require paymentswill continue to be madeeffective as hedges. See Note 1(l) of the “Notes to Financial Statements” in pounds sterling,“Item 8. Financial Statements and Supplementary Data” for additional information on financial derivatives. In the table reflects the dollar equivalent notional amounts based
on spotfuture, we will continually monitor market foreign currency exchange rates at December 31, 1997.
Expected Maturity Date
There- Fair
1998 1999 2000 2001 2002 after Total Value
Interest Rate ($US Equivalentconditions to evaluate whether to modify our level of exposure to fluctuations in millions)
Derivatives
Interest Rate Swaps
Receive fixed/pay
variable ($US) $ - $ - $100 $ - $ - $ - $100 $ -
Average pay rate 5.9% 6.0% 6.1% - % - % - % 6.0%
Average receive rate 6.1% 6.1% 6.1% - % - % - % 6.1%
Receive variable/pay
fixed ($US) $100 $ - $ - $ - $ - $ - $100 $ -
Average pay rate 6.0% - % - % - % - % - % 6.0%
Average receive rate 5.9% - % - % - % - % - % 5.9%
Receive variable/pay
fixed (pound
sterling UK) $ - $ - $ - $ - $543(a) $ - $543(a) $(3)
Average pay rate - % - % - % - % 7.1% - % 7.1%
Average receive rate - % - % - % - % 6.9% - % 6.9%
(a) Notional converted to US dollars using the Sterling spot exchange rate at
December 31, 1997, of 1.64515.
interest rates.
INFLATION
Cinergy, CG&E, PSI, and ULH&P
Cinergy believes
We believe that the recent inflation rates do not materially affect itsimpact our financial condition or results of operations.condition. However, under existing regulatory practice for all of PSI, ULH&P, and the non-generating portion of CG&E, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years.
DIVIDEND RESTRICTIONS
Cinergy, CG&E,
ACCOUNTING MATTERS
Critical Accounting Policies
Preparation of financial statements and PSI
See Note 2(b)related disclosures in compliance with GAAP requires the use of assumptions and estimates. In certain instances, the "Notesapplication of GAAP requires judgments regarding future events, including the likelihood of success of particular initiatives, legal and regulatory challenges, and anticipated recovery of costs. Therefore, the possibility exists for materially different reported amounts under different conditions or assumptions. The following discusses relevant accounting policies and should be read in conjunction with the “Notes to Financial Statements"Statements” in "Item“Item 8. Financial Statements and Supplementary Data."
RESULTS OF OPERATIONS
Cinergy, CG&E, PSI,Data”.
Fair Value Accounting for Energy Marketing and ULH&P
ReferenceTrading
We use fair value accounting for energy trading contracts, which is maderequired, with certain exceptions, by Statement 133. Short-term contracts used in our trading activities are generally priced using exchange based or over-the-counter price quotes. Long-term contracts typically must be valued using model pricing due to "Itemthe lack of actively quoted prices. The period for which actively quoted prices are available varies by commodity and pricing point, but is generally shorter for electricity than gas. Use of model pricing requires estimation surrounding
82
factors such as volatility and future price expectations beyond the actively quoted portion of the price curve. In addition, some contracts do not have fixed notional amounts and therefore must be valued using estimates of volumes to be consumed by the counterparty. See “Changes in Fair Value” for additional information.
We measure these risks by using complex valuation tools, both external and proprietary, which allow us to model prices for periods for which active quotes are unavailable. These models are dynamic and are continuously updated with the most recent data to improve estimates of future expectations. We measure risks for contracts that do not contain fixed notional amounts by obtaining historical data and projecting expected consumption. These models incorporate expectations surrounding the impacts that weather may play in future consumption. The results of these measures assist us in managing such risks within our portfolio. We also have a Corporate Risk Management function within Cinergy that is independent of the marketing and trading function and is under the oversight of a risk policy committee comprised primarily of senior company executives. This group provides an independent evaluation of both forward price curves and the valuation of energy contracts. See “Value at Risk” for additional information.
There is inherent risk in valuation modeling given the complexity and volatility of energy markets. Fair value accounting has risk, including its application to short-term contracts, as gains and losses recorded through its use are not yet realized. Therefore, it is possible that results in future periods may be materially different as contracts are ultimately settled.
For financial reporting purposes, assets and liabilities associated with energy trading transactions accounted for using fair value are reflected on the Balance Sheets as Energyrisk management assets current and non-current and Energy risk management liabilities current and non-current, classified as current or non-current pursuant to each contract’s tenor. Net gains and losses resulting from revaluation of contracts during the period are recognized currently in the Statements of Income.
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Retail Customer Revenue Recognition
Our retail revenues include amounts that are not yet billed 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 revenue” and is a widely recognized and accepted practice for utilities. In making our estimates of unbilled revenue we use complex systems that consider various factors, including weather, in our calculation of retail customer consumption at the end of each month. Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. Related receivables are sold under the accounts receivable sales agreement and therefore are not reflected on our Balance Sheets. See Note 6 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data."
Data” for additional information.
The amount of unbilled revenues for Cinergy, CG&E, PSI, and ULH&P as of December 31, 2002, 2001, and 2000 were as follows:
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in millions) |
| |||||||
|
|
|
|
|
|
|
| |||
Cinergy |
| $ | 153 |
| $ | 172 |
| $ | 231 |
|
CG&E and subsidiaries |
| 89 |
| 104 |
| 153 |
| |||
PSI |
| 64 |
| 68 |
| 78 |
| |||
ULH&P |
| 15 |
| 18 |
| 26 |
| |||
Regulatory Accounting
PSI, CG&E, and ULH&P are regulated utility companies. Except with respect to the electric generation-related assets and liabilities of CG&E, the companies apply the provisions of Statement 71. In accordance with Statement 71, regulatory actions may result in accounting treatment different from that of non-rate regulated companies. The deferral of costs (as regulatory assets) or accrual of refund obligations (as regulatory liabilities) may be appropriate when the future recovery of such costs or making of refunds is probable. In assessing probability, we consider such factors as regulatory precedent and the current regulatory environment. To the extent recovery of costs is no longer deemed probable, related regulatory assets would be required to be recognized in current period earnings.
At December 31, 2002, regulatory assets totaled $605 million for CG&E (including $5 million for ULH&P) and $418 million for PSI. Current rates include the recovery of $598 million for CG&E and $360 million for PSI. Of the $58 million not yet approved for recovery by PSI, $42 million relates to reorganization costs incurred in connection with the merger with CG&E. Deferral of these costs for subsequent recovery was previously authorized by the IURC. PSI will request recovery of these costs in its rate testimony expected to be filed in March 2003. Should the IURC deny recovery of those costs, a charge to current period earnings would be required. See Note 1(c) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional detail regarding regulatory assets.
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Pension and Other Postretirement Benefits
Cinergy’s reported costs of providing pension and other postretirement benefits (as described in Note 9 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”) are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience.
Pension costs associated with Cinergy’s defined benefit pension plans, for example, are impacted by employee demographics (including age, compensation levels, and employment periods), the level of contributions we make to the plan, and earnings on plan assets. Changes made to the provisions of the plan may impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs.
In accordance with Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions (Statement 87), changes in pension obligations associated with the above factors may not be immediately recognized as pension costs on the income statement, but may be deferred and amortized in the future over the average remaining service period of active plan participants to the extent that Statement 87 recognition provisions are triggered. For the years ended December 31, 2002, 2001, and 2000, we recorded pension costs for our defined benefit pension plans (including early retirement program costs recognized in accordance with Statement of Financial Accounting Standards No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (Statement 88)) of approximately $68 million, $32 million, and $44 million, respectively.
Cinergy’s pension plan assets are principally comprised of equity and fixed income investments. Differences between actual portfolio returns and expected returns may result in increased or decreased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could also increase or decrease recorded pension costs.
In selecting our discount rate assumption we considered rates of return on high-quality fixed-income investments that are expected to be available through the maturity dates of the pension benefits. In establishing our expected long-term rate of return assumption, we utilize analysis prepared by our investment advisor. Our expected long-term rate of return on pension plan assets is based on our targeted asset allocation assumption of 60 percent equity investments and 40 percent fixed income investments. Our 60 percent equity investment target includes allocations to domestic, international, and emerging markets managers. Our asset allocation is designed to achieve a moderate level of overall portfolio risk in keeping with Cinergy’s desired risk objective. We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation as appropriate.
We base our determination of pension cost on a market-related valuation of assets that reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual fair value of assets.
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Based on our assumed long-term rate of return of 9 percent, discount rate of 6.75 percent, and various other assumptions, we estimate that our pension costs associated with our defined benefit pension plans will increase from $29 million (excluding Statement 88 costs) in 2002 to approximately $53 million in 2003. Modifying the expected long-term rate of return on our pension plan assets by .25 percent would change pension costs for 2003 by approximately $2 million. Modifying the discount rate assumption by .25 percent would change 2003 pension costs by approximately $3 million.
Other postretirement benefit costs are impacted by employee demographics, per capita claims costs, and health care cost trend rates. Other postretirement benefit costs may also be significantly affected by changes in key actuarial assumptions, including the discount rates used in determining the accumulated postretirement benefit obligation and the postretirement benefit costs. In accordance with Statement of Financial Accounting Standards No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (Statement 106), changes in postretirement benefit obligations associated with these factors may not be immediately recognized as postretirement benefit costs but may be deferred and amortized in the future over the average remaining service period of active plan participants to the extent that Statement 106 recognition provisions are triggered. For the years ended December 31, 2002, 2001, and 2000, we recorded other postretirement benefit costs of approximately $29 million, $27 million, and $25 million, respectively, in accordance with the provisions of Statement 106. Based upon a discount rate of 6.75 percent and various other assumptions, we estimate that our other postretirement benefit costs will increase from $29 million in 2002 to approximately $35 million in 2003.
Impairment of Long-lived Assets
Current accounting standards require long-lived assets be measured for impairment whenever indicators of impairment exist. If deemed impaired under the standards, assets are written down to fair value with a charge to current period earnings. As a producer of electricity, Cinergy, CG&E, and PSI are owners of generating plants, which are largely coal-fired. At December 31, 2002, the carrying value of these generating plants is $4 billion for Cinergy, $2 billion for CG&E and $2 billion for PSI. As a result of the various emissions and by-products of coal consumption, the companies are subject to extensive environmental regulations and are currently subject to a number of environmental contingencies. See Note 11 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information. While we cannot predict the potential affect the resolution of these matters will have on our financial position or results of operations, we believe that these assets are not impaired. In making this assessment, we consider such factors as the expected ability to recover additional investment in environmental compliance expenditures, the relative pricing of wholesale electricity in the region, the anticipated demand, and the cost of fuel. We will continue to evaluate these assets for impairment when events or circumstances indicate the carrying value may not be recoverable.
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Accounting Changes
Energy Trading
The Emerging Issues Task Force (EITF) has been discussing several issues related to the accounting and disclosure of energy trading activities under EITF 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10). In October 2002, the EITF reached consensus in EITF Issue 02-3, Accounting for Contracts Involved in Energy Trading and Risk Management Activities to (a) rescind EITF 98-10, (b) generally preclude the recognition of gains at the inception of new derivatives, and (c) require all realized and unrealized gains and losses on energy trading derivatives to be presented net in the Statements of Income, whether or not settled physically.
The consensus to rescind EITF 98-10 will require all energy trading contracts that do not qualify as derivatives to be accounted for on an accrual basis, rather than at fair value. The consensus was immediately effective for all new contracts executed after October 25, 2002, and will require a cumulative effect adjustment to income, net of tax, on January 1, 2003, for all contracts executed on or prior to October 25, 2002. The cumulative effect adjustment, on a net of tax basis, will be a loss of approximately $13 million, which includes primarily the impact of coal contracts accounted for at fair value, gas inventory accounted for at fair value, and certain gas contracts. We expect the value of these items to be realized when the contracts settle. The general restriction on recognition of inception gains is not expected to have a material impact on our future financial position or results of operations.
The consensus to require all gains and losses on energy trading derivatives to be presented net in the Statements of Income is effective beginning January 1, 2003 and will require restatement for all periods presented. This will result in substantial reductions in reported Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense. However, Operating Income and Net Income will not be affected by this change. Pro-forma Operating Revenues for Cinergy, CG&E, and PSI for the year ended December 31, 2002, under this requirement would have been as follows:
|
| 2002 |
| |
|
| (in millions) |
| |
|
|
|
| |
Cinergy(1) |
| $ | 4,028 |
|
CG&E and subsidiaries |
| 2,154 |
| |
PSI |
| 1,623 |
| |
(1) The results of Cinergy also include amounts related to non-registrants.
Business Combinations and Intangible Assets
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and Statement 142. Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives will no longer be subject to amortization. Statement 142 requires that goodwill be assessed for impairment upon adoption and at least annually thereafter by applying a fair-value-based test, as opposed to
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the undiscounted cash flow test applied under prior accounting standards. This test must be applied at the “reporting unit” level, which is not permitted to be broader than the current business segments discussed in Note 16 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”. Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so.
We began applying Statement 141 in the third quarter of 2001 and Statement 142 in the first quarter of 2002. The discontinuance of amortization of goodwill, which began in the first quarter of 2002, was not material to our financial position or results of operations. We finalized our transition impairment test in the fourth quarter of 2002 and have recognized a non-cash impairment charge of approximately $11 million (net of tax) for goodwill related to certain of our international assets. This charge reflects a general decline in value of international assets. Additionally, Cinergy’s combined heat and power plants located in the Czech Republic faced downward pressure in their selling prices for electricity due to the continued restructuring of the market in that country. In calculating this impairment charge, the fair value of the reporting unit was determined through both discounted cash flow analysis and offers being considered on certain businesses within the reporting unit. This amount is reflected in Cinergy’s Statements of Income as a Cumulative effect of a change in accounting principle. While Statement 142 did not require the initial transition impairment test to be completed until December 31, 2002, it requires any transition impairment charge to be reflected as of January 1, 2002. As such, Note 14 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” reconciles Net Income and Earnings Per Share from the amounts originally presented in the first quarter of 2002 to the amounts revised for this change. We will continue to perform goodwill impairment tests annually, as required by Statement 142, or when circumstances indicate that the fair value of a reporting unit has declined significantly.
Asset Retirement Obligations
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143), which requires fair value recognition of legal obligations associated with the retirement or removal of long-lived assets at the time the obligations are incurred. The initial recognition of this liability will be accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability will be adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the passage of time (recognized as an operating expense). Additional depreciation expense will be recorded prospectively for any property, plant, and equipment increases. We adopted Statement 143 on January 1, 2003. The impact of adoption on our results of operations will be reflected as a cumulative effect adjustment to income, net of tax.
We currently accrue costs of removal on many long-lived assets through depreciation expense if we believe removal of the assets at the end of their useful life is likely. The SEC staff has interpreted Statement 143 to disallow the accrual of cost of removal when no obligation exists under Statement 143, even if removal of the asset is likely. Any amounts currently recorded in Accumulated depreciation must be removed through the cumulative effect adjustment on January 1, 2003. However, if accruing cost of removal is allowed for ratemaking purposes and Statement
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71 is applicable, accumulated cost of removal will not be reversed upon adoption of Statement 143. Rather, the amount of accrued cost of removal will remain, but will be disclosed in all future periods. PSI, CG&E, except for its generation assets, and ULH&P expect to continue to accrue costs of removal under Statement 71.
We are finalizing our evaluation of the impact of adopting Statement 143. However, we have not determined whether its impact will be material pending (a) resolution of certain legal conclusions and (b) final calculations on the amount of accumulated cost of removal to be reversed upon adoption for CG&E’s generation assets.
Derivatives
During 1998, the FASB issued Statement 133. This standard was effective for Cinergy beginning in 2001, and requires us to record derivative instruments, which are not exempt under certain provisions of Statement 133, as assets or liabilities, measured at fair value (i.e., mark-to-market). Our financial statements reflect the adoption of Statement 133 in the first quarter of 2001. Since many of our derivatives were previously required to use fair value accounting, the effects of implementation were not material.
Our adoption did not reflect the potential impact of applying fair value accounting to selected electricity options and capacity contracts. We had not historically accounted for these instruments at fair value because they were intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered trading activities. At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In June 2001, the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While many of the criteria in this guidance are consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of implementation for these contracts were not material to our financial position or results of operations. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.
In December 2001, the FASB staff revised the current guidance to make the evaluation of whether electricity contracts qualify as normal purchases and sales more qualitative than quantitative. This new guidance uses several factors to distinguish between capacity contracts, which qualify for the normal purchases and sales exemption, and options, which do not. These factors include deal tenor, pricing structure, specification of the source of power, and various other factors. We adopted this guidance in the third quarter of 2002, and its impact was not material to our financial position or results of operations.
In October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward component) and flexibility to take additional quantity at a fixed price (an option component). While this guidance was issued primarily to address optionality in fuel supply contracts, it applies to all derivatives (subject to certain exceptions for capacity contracts in electricity discussed in the previous paragraphs). This guidance concludes that such contracts are not eligible for the normal purchases and sales exemption due to the existence of optionality in the
89
contract. We adopted this guidance in the second quarter of 2002, consistent with the transition provisions. Cinergy has certain contracts that contain fixed-price optionality, primarily coal contracts, which we reviewed to determine the impact of this new guidance. Due to a lack of liquidity with respect to coal markets in our region, we determined that our coal contracts do not meet the net settlement criteria of Statement 133 and thus do not qualify as derivatives. Given these conclusions, the results of applying this new guidance were not material to our financial position or results of operations.
In May 2002, the FASB issued an exposure draft that would amend Statement 133 to incorporate certain implementation conclusions reached by the FASB staff. We do not believe the amendments, as currently drafted, will have a material effect on our financial position or results of operations.
Asset Impairment
In August 2001, the FASB issued Statement 144, which addresses accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 was effective beginning with the first quarter of 2002. The impact of implementation on our financial position or results of operations was not material.
Exit Activities
In August 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 addresses accounting and reporting for the recognition of exit costs, including, but not limited to, one-time employee benefit terminations, contract cancellations, and facility consolidations. This statement requires that such costs be recognized only when they meet the definition of a liability under GAAP. However, Statement 146 applies only to exit activities initiated in 2003 and after. All costs recorded through December 31, 2002, are unaffected by this pronouncement. The impact of implementation on our financial position or results of operations is not expected to be material.
Accounting for Stock-Based Compensation
We have historically accounted for our stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). In July 2002, Cinergy announced that it would adopt Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123) for all employee awards granted or modified after January 1, 2003, and would begin measuring the compensation cost of stock-based awards under the fair value method. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (Statement 148), which amends Statement 123 and APB Opinion No. 28, Interim Financial Reporting. Statement 148 provides alternative methods of transition to Statement 123 and more expanded disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. Cinergy adopted Statement 148 on January 1, 2003, and has adopted the transition provisions that require expensing options prospectively in the year of adoption, consistent with the original pronouncement. Existing awards will continue to follow
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the intrinsic value method prescribed by APB 25. The impact of adoption on our financial position and results of operations, assuming award levels and fair values similar to past years, is not material. This change will primarily impact the accounting for stock options and other performance based awards related to the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan and Cinergy Corp. Employee Stock Purchase and Savings Plan. See Note 2 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information.
Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45). Interpretation 45 addresses accounting and reporting obligations under certain guarantees. It requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of Interpretation 45 are applicable to guarantees issued or modified after December 31, 2002. However, the incremental disclosure requirements in Interpretation 45 are effective for this annual report. The impact of implementation on our financial position or results of operations is not expected to be material. For a further discussion of guarantees, see Note 11(b) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”.
Consolidation of Special Purpose Entities
The FASB issued Interpretation 46 in January 2003. This interpretation will significantly change the consolidation requirements for SPEs. We have begun reviewing the impact of this interpretation but have not yet concluded whether consolidation of certain SPEs will be required. There are two SPEs for which consolidation may be required. These SPEs have individual power sale agreements to an unrelated third party for approximately 45 MW, ending in 2009, and 35 MW, ending in 2016. In addition, the SPEs have individual power purchase agreements with Capital & Trading to supply the power. Capital & Trading also provides various services, including certain credit support facilities.
Cinergy’s quantifiable exposure to loss as a result of involvement with these two SPEs is $28 million, which includes investments in these entities of $3 million and exposure under the capped credit facilities of approximately $25 million. There is also a non-capped facility, but it can only be called upon in the event the SPE breaches representations, violates covenants, or other unlikely events.
If appropriate, consolidation of all assets and liabilities of these two SPEs, at their carrying values, will be required in the third quarter of 2003. Approximately $225 million of non-recourse debt would be included in Cinergy’s Balance Sheets upon initial consolidation. However, the impact on our results of operations would be expected to be immaterial.
Cinergy believes that its accounts receivable sale facility, as discussed in Note 6 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”, would remain unconsolidated since it involves transfers of financial assets to a qualifying SPE, which is exempted from consolidation by Statement 140 and this interpretation.
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Other Matters
Voluntary Early Retirement Programs (VERP)
Throughout 2002, Cinergy offered various VERP to the following employee groups:
Employee Group |
| Number of Employees |
| Number of Employees |
|
|
|
|
|
|
|
Non-union |
| 279 |
| 213 |
|
|
|
|
|
|
|
Utility Workers Union of America(1) |
| 70 |
| 41 |
|
|
|
|
|
|
|
International Brotherhood of Electrical Workers #1393 and #1347 |
| 75 |
| 48 |
|
|
|
|
|
|
|
Total |
| 424 |
| 302 |
|
(1) Union was formerly named the Independent Utilities Union.
As a result of the employees accepting a VERP in 2002, Cinergy, CG&E, and PSI recorded expenses of approximately $43 million, $19 million (including $3 million related to ULH&P), and $21 million, respectively.
New Business Initiatives
In the third quarter of 2002, Capital & Trading completed an acquisition of a coal-based synthetic fuel production facility which converts coal feedstock into synthetic fuel for sale to a third party. The cost of this acquisition was approximately $60 million. The synthetic fuel produced at this facility qualifies for tax credits in accordance with Section 29 of the Internal Revenue Code. Eligibility for these tax credits expires in 2007. We anticipate these tax credits will benefit our net income.
Federal Tax Law Changes
In March 2002, President Bush signed into law the Job Creation and Worker Assistance Act of 2002, also known as the Economic Stimulus Package. The primary benefit to Cinergy is the allowance of additional first-year depreciation deductions for tax purposes, equal to 30 percent of the adjusted tax basis of qualified property. This provision applies to qualifying additions after September 11, 2001. The provisions of this bill will not have a material impact on our financial position or results of operations.
Indiana Tax Law Changes
In June 2002, the Indiana Legislature passed a bill, which was signed by the Governor, containing new tax law provisions in Indiana that apply to both utility and non-utility companies with operations in the state. After review of the new provisions, we do not believe that these changes will materially impact Cinergy or PSI.
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PUCO Review of Financial Condition of Ohio Regulated Utilities
In October 2002, as the result of recent financial problems experienced by certain public utility companies and the current state of the economy, the PUCO issued an order initiating a review of the financial condition of the 19 large public utilities (gas, electric, and telecommunication) serving Ohio customers, including CG&E. The PUCO intends to identify available measures to ensure that the regulated operations of the Ohio public utilities are not adversely impacted by the parent or affiliate companies’ unregulated operations. The PUCO requested initial comments and reply comments by November 12, 2002, and November 22, 2002, respectively, regarding how the review should be conducted and on the potential measures the PUCO could take to protect the financial condition of the regulated utilities. CG&E filed comments; however, we cannot predict the outcome of this review at this time.
Shareholder Rights Plan
In July 2000, Cinergy Corp.’s board of directors approved a Shareholder Rights Plan. Under the plan, each shareholder of record on October 30, 2000, received, as a dividend, a right to purchase from Cinergy Corp. one share of common stock at a price of $100. The rights were scheduled to expire in October 2010.
As part of its dedication to ensure a leadership position in adopting corporate governance practices that are considered best in class, in August 2002 Cinergy Corp.’s board of directors approved a resolution to accelerate the termination date of the company’s Shareholder Rights Plan. Under the resolution, the company terminated the plan, effective September 16, 2002. The company also amended the contract with the plan’s agent and notified the SEC and the New York Stock Exchange of the change.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Cinergy, CG&E, PSI, and ULH&P
Reference is made to the "Market“Market Risk Sensitive Instruments and Positions"Positions” section in "Itemof “Item 7. Management'sManagement’s Discussion and Analysisanalysis of Financial Condition and Results of Operations."
Index to Financial Statements and Financial Statement Schedules
Page Number
Financial Statements
Cinergy, CG&E, PSI, and ULH&P
Report of Independent Public Accountants Operations”. . . . . . .
Cinergy
Consolidated Statements of Income for the
three years ended December 31, 1997. . . . . . . . .
Consolidated Balance Sheets at
December 31, 1997 and 1996 . . . . . . . . . . . . .
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1997. . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997. . . . .
Results of Operations. . . . . . . . . . . . . . . . .
CG&E
Consolidated Statements of Income for the
three years ended December 31, 1997. . . . . . . . .
Consolidated Balance Sheets at
December 31, 1997 and 1996 . . . . . . . . . . . . .
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1997. . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997. . . . .
Results of Operations. . . . . . . . . . . . . . . . .
PSI
Consolidated Statements of Income for the
three years ended December 31, 1997. . . . . . . . .
Consolidated Balance Sheets at
December 31, 1997 and 1996 . . . . . . . . . . . . .
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1997. . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997. . . . .
Results of Operations. . . . . . . . . . . . . . . . .
ULH&P
Statements of Income for the three years ended
December 31, 1997. . . . . . . . . . . . . . . . . .
Balance Sheets at December 31, 1997 and 1996 . . . . .
Statements of Changes in Common Stock Equity
for the three years ended December 31, 1997. . . . .
Statements of Cash Flows for the three years
ended December 31, 1997. . . . . . . . . . . . . . .
Results of Operations. . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . .
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Cinergy . . . . . . . . . . . . . . . . . . . . . .
CG&E. . . . . . . . . . . . . . . . . . . . . . . .
PSI . . . . . . . . . . . . . . . . . . . . . . . .
ULH&P . . . . . . . . . . . . . . . . . . . . . . .
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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The information required to be submitted in schedules other than those indicated above has been included in the balance sheets,Balance Sheets, the statementsStatements of income,Income, related schedules, the notes thereto, or omitted as not required by the Rules of Regulation S-X.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS’ REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and& Power Company:
We have audited the financialaccompanying consolidated balance sheets and statements of capitalization of Cinergy Corp. (a Delaware
Corporation),and subsidiaries and the separate consolidated balance sheets and statements of capitalization of The Cincinnati Gas & Electric Company (an Ohio Corporation),and subsidiaries and PSI Energy, Inc. (an Indiana Corporation), and subsidiary and the separate balance sheets and statements of capitalization of The Union Light, Heat and Power Company (a Kentucky Corporation), as of December 31, 19972002 and 1996,2001 and the related consolidated statements of income, changes in common stock equity and cash flows for each of the three years in the period ended December 31, 1997, as2002. Our audits also included the financial statement schedules listed in the index
on page 53.Table of Contents at Item 15. These financial statements and thefinancial statement schedules referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted auditing
standards.in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, thesuch financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cinergy Corp., and subsidiaries and the financial position of The Cincinnati Gas & Electric Company and subsidiaries and PSI Energy, Inc., and subsidiary and the financial position of The Union Light, Heat and& Power Company as of December 31, 19972002 and 1996,2001, and the respective results of their operations and their cash flows for each of the three years in the period ended December 31, 1997,2002, in conformity with accounting principles generally accepted accounting principles.
Our audits were made forin the purposeUnited States of forming anAmerica. Also, in our opinion, onsuch financial statement schedules, when considered in relation to the respective basic consolidated financial statements taken as a whole. The supplemental financial statement
schedules listed in the index on page 54 pursuant to Item 14, are presented for
purposes of complying with the Securities and Exchange Commission's Rules and
Regulations under the Securities Exchange Act of 1934 and are not a required
part of the basic financial statements. The supplemental financial statement
schedules have been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, arewhole, present fairly stated in all material respects the information set forth therein.
As discussed in DELOITTE & TOUCHE LLP Cincinnati, Ohio February 12, 2003 95 CINERGY CORP. 96 CINERGY CORP. CONSOLIDATED STATEMENTS OF INCOME 2002 2001 2000 (dollars in thousands, except per share amounts) Operating Revenues (Note 1(q)(i)) Electric $ 6,912,349 $ 8,255,847 $ 5,359,358 Gas 4,916,919 4,662,916 2,941,753 Other 130,813 78,246 95,969 Total Operating Revenues 11,960,081 12,997,009 8,397,080 Operating Expenses Fuel and purchased and exchanged power (Note 1(q)(i)) 4,511,891 6,005,803 3,139,274 Gas purchased (Note 1(q)(i)) 4,668,941 4,431,899 2,674,449 Operation and maintenance 1,298,398 1,013,326 1,112,255 Depreciation 414,004 374,399 341,927 Taxes other than income taxes 263,002 227,652 268,346 Total Operating Expenses 11,156,236 12,053,079 7,536,251 Operating Income 803,845 943,930 860,829 Equity in Earnings (Losses) of Unconsolidated Subsidiaries 15,261 1,494 6,231 Miscellaneous - Net 12,288 39,672 13,282 Interest 249,906 265,792 223,615 Preferred Dividend Requirement of Subsidiary Trust (Note 3) 23,832 1,067 — Income Before Taxes 557,656 718,237 656,727 Income Taxes (Note 10) 157,320 255,978 251,607 Preferred Dividend Requirements of Subsidiaries 3,433 3,433 4,585 Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle 396,903 458,826 400,535 Discontinued operations, net of tax (Note 15) (25,428 ) (16,547 ) (1,069 ) Cumulative effect of a change in accounting principle, net of tax (Note 14) (10,899 ) — — Net Income $ 360,576 $ 442,279 $ 399,466 Average Common Shares Outstanding 167,047 159,110 158,938 Earnings Per Common Share (Note 17) Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle $ 2.37 $ 2.88 $ 2.52 Discontinued operations, net of tax (0.15 ) (0.10 ) (0.01 ) Cumulative effect of a change in accounting principle, net of tax (0.06 ) — — Net Income $ 2.16 $ 2.78 $ 2.51 Earnings Per Common Share - Assuming Dilution (Note 17) Income Before Discontinued Operations and Cumulative Effect of a Change in Accounting Principle $ 2.34 $ 2.85 $ 2.51 Discontinued operations, net of tax (0.15 ) (0.10 ) (0.01 ) Cumulative effect of a change in accounting principle, net of tax (0.06 ) — — Net Income $ 2.13 $ 2.75 $ 2.50 Dividends Declared Per Common Share $ 1.80 $ 1.80 $ 1.80 The accompanying notes as they relate to Cinergy Corp. are an integral partrelationNote 14 to the basic financial statements, taken as a
whole.
Arthur Andersen LLP
Cincinnati, Ohio
January 27, 1998
Subsidiaries
CINERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
1997 1996 1995
(in thousands, except per share amounts)
Operating Revenues
Electric $3 861 698 $2 768 706 $2 612 579
Gas 491 145 474 034 410 852
4 352 843 3 242 740 3 023 431
Operating Expenses
Fuel used in electric production 693 435 713 250 716 754
Gas purchased 266 158 249 116 206 250
Purchased and exchanged power 1 219 358 158 838 47 632
Other operation 637 945 598 434 520 590
Maintenance 176 471 193 908 182 180
Depreciation 289 077 282 763 279 759
Amortization of phase-in deferrals 13 483 13 598 9 091
Post-in-service deferred operating
expenses - net 4 362 (1 509) (2 500)
Income taxes (Note 11) 248 937 218 269 221 429
Taxes other than income taxes 265 024 257 815 255 533
3 814 250 2 684 482 2 436 718
Operating Income 538 593 558 258 586 713
Other Income and Expenses - Net
Allowance for equity funds used
during construction 98 1 225 1 964
Post-in-service carrying costs - 1 223 3 186
Phase-in deferred return 8 008 8 372 8 537
Equity in earnings of unconsolidated
subsidiaries (Note 1(e)) 60 392 25 430 -
Income taxes (Note 11) 35 937 19 536 7 358
Other - net (31 502) (40 464) (3 051)
72 933 15 322 17 994
Income Before Interest and Other Charges 611 526 573 580 604 707
Interest and Other Charges
Interest on long-term debt 181 772 190 617 213 911
Other interest 59 947 31 169 20 826
Allowance for borrowed funds used
during construction (5 400) (6 183) (8 065)
Preferred dividend requirements of
subsidiaries 12 569 23 180 30 853
248 888 238 783 257 525
Net Income Before Extraordinary Item $ 362 638 $ 334 797 $ 347 182
Extraordinary Item - Equity Share of
Windfall Profits Tax (Less Applicable
Income Taxes of $0) (Note 17) (109 400) - -
Net Income $ 253 238 $ 334 797 $ 347 182
Average Common Shares Outstanding 157 685 157 678 156 620
Earnings Per Common Share (Note 16)
Net income before extraordinary item $2.30 $2.00 $2.22
Net income $1.61 $2.00 $2.22
Earnings Per Common Share - Assuming
Dilution (Note 16)
Net income before extraordinary item $2.28 $1.99 $2.20
Net income $1.59 $1.99 $2.20
Dividends Declared Per Common Share $1.80 $1.74 $1.72
AND SUBSIDIARY COMPANIES of these consolidated financial
statements.
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1997 1996
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $8 981 182 $8 809 786
Gas 746 903 713 829
Common 186 078 185 255
9 914 163 9 708 870
Accumulated depreciation 3 800 322 3 591 858
6 113 841 6 117 012
Construction work in progress 183 262 172 614
Total utility plant 6 297 103 6 289 626
Current Assets
Cash and temporary cash investments 53 310 19 327
Restricted deposits 2 319 1 721
Accounts receivable less accumulated provision
for doubtful accounts of $10,382 in 1997 and
$10,618 in 1996 (Note 6) 413 626 199 361
Materials, supplies, and fuel - at average cost
Fuel for use in electric production 57 916 71 730
Gas stored for current use 29 174 32 951
Other materials and supplies 76 066 80 292
Prepayments and other 38 171 37 049
670 582 442 431
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 374 456 377 194
Post-in-service carrying costs and deferred
operating expenses 178 504 186 396
Coal contract buyout costs 122 485 138 171
Deferred demand-side management costs 109 596 134 742
Phase-in deferred return and depreciation 89 689 95 163
Deferred merger costs 90 346 93 999
Unamortized costs of reacquiring debt 66 242 70 518
Other 45 533 72 483
Investments in unconsolidated
subsidiaries (Note 1(e)) 537 720 592 660
Other 275 897 231 551
1 890 468 1 992 877
$8 858 153 $8 724 934
The accompanying notes are an integral part of these consolidated financial
statements.
CINERGY CORP.
CAPITALIZATION AND LIABILITIES
December 31
1997 1996
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $.01 par value;
authorized shares - 600,000,000;
outstanding shares - 157,744,658 in 1997
and 157,679,129 in 1996 $ 1 577 $ 1 577
Paid-in capital 1 573 064 1 590 735
Retained earnings 965 084 992 273
Cumulative foreign currency
translation adjustment (525) (131)
Total common stock equity 2 539 200 2 584 454
Cumulative Preferred Stock of Subsidiaries (Note 3)
Not subject to mandatory redemption 177 989 194 232
Long-term Debt (Note 4) 2 150 902 2 326 378
Total capitalization 4 868 091 5 105 064
Current Liabilities
Long-term debt due within one year (Note 4) 85 000 140 000
Notes payable and other short-term
obligations (Note 5) 1 114 028 922 217
Accounts payable 488 716 305 420
Accrued taxes 187 033 199 479
Accrued interest 46 622 55 590
Other 79 193 114 653
2 000 592 1 737 359
Other Liabilities
Deferred income taxes (Note 11) 1 248 543 1 146 263
Unamortized investment tax credits 166 262 175 935
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 297 142 263 319
Other 277 523 296 994
1 989 470 1 882 511
Commitments and Contingencies (Note 12)
$8 858 153 $8 724 934
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Cumulative
Foreign
Currency
Common Paid-in Retained Translation Total Common
Stock Capital Earnings Adjustment Stock Equity
(dollars in thousands)
Balance December 31, 1994 $1 552 $1 535 658 $877 061 $ - $2 414 271
Net income 347 182 347 182
Issuance of 2,472,103 shares of
common stock - net 25 60 343 60 368
Common stock issuance expenses (229) (229)
Dividends on common stock (see
page 57 for per share amounts) (268 851) (268 851)
Other 1 278 (5 176) (3 898)
Balance December 31, 1995 1 577 1 597 050 950 216 - 2 548 843
Net income 334 797 334 797
Issuance of 8,988 shares of
common stock - net 311 311
Treasury shares purchased (4) (14 887) (14 891)
Treasury shares reissued 4 8 599 8 603
Dividends on common stock (see
page 57 for per share amounts) (274 358) (274 358)
Translation adjustments (131) (131)
Costs of reacquisition of
preferred stock of subsidiary (18 391) (18 391)
Other (338) 9 ____ (329)
Balance December 31, 1996 1 577 1 590 735 992 273 (131) 2 584 454
Net income 253 238 253 238
Issuance of 65,529 shares of
common stock - net 2 066 2 066
Treasury shares purchased (11) (46 199) (46 210)
Treasury shares reissued 11 26 729 26 740
Dividends on common stock (see
page 57 for per share amounts) (283 866) (283 866)
Translation adjustments (394) (394)
Other (267) 3 439 3 172
Balance December 31, 1997 $1 577 $1 573 064 $965 084 $(525) $2 539 200
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
(in thousands)
Operating Activities
Net income $253 238 $334 797 $347 182
Items providing or (using) cash:
Depreciation 289 077 282 763 279 759
Deferred income taxes and investment
tax credits - net 67 638 47 912 28 411
Equity in earnings of unconsolidated
subsidiaries (35 239) (25 430) -
Extraordinary item - equity share of windfall
profits tax 109 400 - -
Allowance for equity funds used during
construction (98) (1 225) (1 964)
Regulatory assets - net 71 310 39 282 33 324
Changes in current assets and current
liabilities
Restricted deposits (598) (358) (1 035)
Accounts receivable, net of reserves
on receivables sold (217 157) 132 749 (71 641)
Materials, supplies, and fuel 21 817 44 005 51 214
Accounts payable 183 296 37 281 1 672
Litigation settlement - (80 000) -
Accrued taxes and interest (21 414) (1 289) 52 233
Other items - net 32 175 44,604 16 538
Net cash provided by operating activities 753 445 855 091 735 693
Financing Activities
Issuance of common stock 2 066 311 60 139
Issuance of long-term debt 100 062 150 217 260 280
Funds on deposit from issuance of long-term debt - 973 9 987
Retirement of preferred stock of subsidiaries (16 269) (212 487) (93 466)
Redemption of long-term debt (336 312) (237 183) (398 833)
Change in short-term debt 191 811 572 417 20 900
Dividends on common stock (283 866) (274 358) (268 851)
Net cash used in financing activities (342 508) (110) (409 844)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (328 055) (323 013) (324 905)
Deferred demand-side management costs (19 867) (44 344) (57 571)
Investments in unconsolidated subsidiaries (29 032) (503 349) -
Equity investments in Argentine utilities - - 19 799
Net cash used in investing activities (376 954) (870 706) (362 677)
Net increase (decrease) in cash and temporary
cash investments 33 983 (15 725) (36 828)
Cash and temporary cash investments at beginning
of period 19 327 35 052 71 880
Cash and temporary cash investments at end of
period $ 53 310 $ 19 327 $ 35 052
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $235 948 $207 393 $218 357
Income taxes 140 655 141 917 140 189
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - CINERGY
Kilowatt-Hour (kwh) Sales
Increased activity in Cinergy's power marketing and trading operations led to
higher non-firm power sales for resale and significantly contributed to the
increase in total kwh sales of 78.7%, as compared to 1996. The increase in
retail sales, which reflects a higher average number of commercial and
industrial customers, was partially offset by a decline in residential sales as
a result of mild weather. (See Note 1(c) of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data" and the "Market Risk
Sensitive Instruments and Positions" section for discussions on Cinergy's power
marketing and trading operations.)
Cinergy's total kwh sales in 1996, as compared to 1995, increased 11.0%
reflecting an increase in sales to all customer classes. Increased activity in
Cinergy's power marketing and trading operations led to higher non-firm power
sales for resale. The increase in retail sales which reflects a higher average
number of residential and commercial customers was partially offset by the
return to more normal weather in 1996. The increase in industrial sales was due
to growth in the primary metals sector.
As compared to 1994, total kwh sales in 1995 increased 4.1% reflecting higher
sales to all retail customer classes. Contributing significantly to this
increase were higher residential and commercial sales due to warmer weather
during the 1995 summer cooling season and colder weather during the fourth
quarter of 1995. Additionally, increased sales to industrial customers,
reflecting growth in the primary metals and chemicals sectors, contributed to
the increased kwh sales level. These increases were offset, in part, by a
decline in non-firm power sales for resale.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (3.8)% 2.4% 5.8%
Commercial 1.6 1.3 4.3
Industrial 2.9 3.3 4.6
Total retail .3 2.4 4.9
Sales for resale
Firm power obligations 15.5 10.5 1.7
Non-firm power transactions 460.3 82.0 (1.3)
Total sales for resale 363.9 59.6 (.4)
Total sales 78.7 11.0 4.1
Cinergy currently forecasts a 2% annual compound growth rate in kwh sales over
the 1998 through 2002 period. This forecast excludes non-firm power sales for
resale and any potential new off-system, long-term firm power sales.
Thousand Cubic Feet (Mcf) Sales and Transportation
The milder weather experienced in 1997 contributed to a decrease in residential
and commercial gas sales volumes and led to an 8.2% decrease in total sales
volumes and a 1.1% decrease in total sales and transportation volumes, as
compared to 1996. An increase in gas transportation volumes and a decline in
industrial sales resulted from customers electing to purchase gas directly from
suppliers using transportation services provided by Cinergy.
Mcf gas sales and transportation volumes increased 8.4% in 1996, as compared to
1995. Colder weather in the first half of 1996 led to increased gas sales to
residential and commercial customers. Also contributing to the increase in total
sales was an increase in the number of residential and commercial customers.
Industrial sales decreased and gas transported increased as customers continued
to purchase gas directly from suppliers.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. Increased sales to residential customers, resulting from colder weather
during the fourth quarter of 1995 and an increase in the number of customers,
contributed to the higher sales levels. Additionally, increases in commercial
and industrial transportation volumes, which resulted from customers electing to
purchase gas directly from suppliers, more than offset declines in industrial
and commercial sales.
Year-to-year changes in Mcf sales for each major class of customers and Mcf
transportation volumes are shown below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (6.4)% 3.6% 10.5%
Commercial (9.7) 7.8 (2.0)
Industrial (8.8) (13.3) (26.6)
Total sales (8.2) 2.1 1.5
Gas transported 10.1 19.8 24.4
Total gas sold and transported (1.1) 8.4 8.6
Operating Revenues
ELECTRIC OPERATING REVENUES
Increased kwh sales, as previously discussed, a full year's effects of PSI's
retail rate increases approved in the September 1996 Order, as amended in August
1997, and the December 1996 DSM Order significantly contributed to the $1
billion (39%) increase in electric operating revenues, when compared to 1996.
Also contributing to the increase was the return of approximately $13 million to
customers in 1996 in accordance with the February 1995 Order. The February 1995
Order required all retail operating income above a certain rate of return to be
refunded to customers. Partially offsetting these increases was the operation of
CG&E's fuel adjustment clauses reflecting a lower average cost of fuel used in
electric production.
The $156 million (6%) increase in 1996 electric operating revenues, as compared
to 1995, is due, in large part, to the increase in kwh sales as previously
discussed. Also contributing to the increase was the effect of PSI's September
1996 Order, as well as, a full year's effect of PSI's 4.3% retail rate increase
approved in the February 1995 Order and PSI's 1.9% increase for carrying costs
on construction work in progress property which was approved by the IURC in
March 1995. These rate increases were offset by the return of approximately $10
million to PSI's customers in accordance with the February 1995 Order, the
operation of CG&E's fuel adjustment clauses reflecting a lower average cost of
fuel used in electric production, and a decrease in ULH&P's electric rates
reflecting a reduction in the cost of electricity purchased from CG&E.
Higher retail kwh sales, PSI's electric rate increases which became effective in
February 1995 and March 1995, and a full year's effect of CG&E's electric rate
increase which became effective in May 1994, significantly contributed to the
$167 million (7%) increase in electric operating revenues for 1995, when
compared to 1994.
An analysis of electric operating revenues for the past three years is shown
below:
1997 1996 1995
(dollars in millions)
Previous year's electric
operating revenues $2 769 $2 613 $2 446
Increase (Decrease) due to change in:
Price per kwh
Retail 9 (1) 54
Sales for resale
Firm power obligations (10) (4) (1)
Non-firm power transactions 113 - 4
Total change in price per kwh 112 (5) 57
Kwh sales
Retail 7 56 109
Sales for resale
Firm power obligations 14 9 1
Non-firm power transactions 956 94 (1)
Total change in kwh sales 977 159 109
Other 4 2 1
Current year's electric
operating revenues $3 862 $2 769 $2 613
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and using CG&E facilities to transport the gas (see the "Mcf Sales and
Transportation" section) continues to put downward pressure on gas operating
revenues. Since providing transportation services does not necessitate recovery
of the cost of gas purchased, the revenue per Mcf transported is less than the
revenue per Mcf sold. As a result, a higher relative volume of gas transported
to gas sold translates into lower gas operating revenues.
CG&E's gas rate increase of 2.5% ($9 million annually) approved by the PUCO in
the December 1996 Order and the operation of a gas cost recovery mechanism,
reflecting a higher average cost per Mcf of gas purchased, contributed to the
$17 million (4%) increase in gas operating revenues as compared to 1996. These
increases were partially offset by the previously discussed changes in Mcf gas
sales.
In 1996, gas operating revenues increased $63 million (15%), as compared to
1995. This increase is attributable to the increase in gas sales and
transportation volumes. Also contributing to the increase was the operation of
fuel adjustment clauses, reflecting a higher average cost per Mcf of gas
purchased.
Gas operating revenues declined $32 million (7%) in 1995, as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of fuel adjustment clauses, reflecting a lower average cost
per Mcf of gas purchased.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs declined $20 million (3%)
when compared to 1996.
An analysis of fuel costs for the past three years is shown below:
1997 1996 1995
(in millions)
Previous year's fuel expense $713 $717 $713
Increase (Decrease) due to change in:
Price of fuel 7 (48) (23)
Deferred fuel cost (55) 42 (2)
Kwh generation 28 2 29
Current year's fuel expense $693 $713 $717
Gas Purchased The increase in gas purchased expense of $17 million (7%) in 1997,
as compared to 1996, reflects a higher average cost per Mcf of gas purchased.
This increase was partially offset by a decline in the volumes of gas purchased.
Gas purchased increased $43 million (21%) in 1996, as compared to 1995, due to
an increase in volumes purchased and a higher average cost per Mcf of gas
purchased.
In 1995, gas purchased expense decreased $42 million (17%), as compared to 1994,
primarily reflecting a decline in the average cost per Mcf of gas purchased.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $1.1 billion and $111 million in 1997
and 1996, respectively. These increases primarily reflect increased purchases of
non-firm power for resale to others as a result of increased activity in
Cinergy's power marketing and trading operations. (See Note 1(c) of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" and the "Market Risk Sensitive Instruments and Positions" section for
discussions on Cinergy's power marketing and trading operations.)
OTHER OPERATION
Other operation expenses increased $40 million (7%) in 1997, as compared to
1996. This increase is primarily due to higher other operation expenses of PSI
relating to the Clean Coal Project, amortization of deferred DSM expenses, and
amortization of deferred expenses associated with the Clean Coal Project, all of
which are being recovered in revenues pursuant to either the September 1996
Order or the December 1996 DSM Order. The effect of PSI discontinuing deferral
of certain DSM-related costs in accordance with provisions of the December 1996
DSM Order also added to the increase. Further contributing to the increase is
the effect of CG&E curtailing certain deferrals associated with its DSM programs
for new participants after December 31, 1996, due to the December 1996 Order
that changed the benefit/cost tests that DSM programs must surpass in Ohio in
order for certain DSM-related costs to be eligible for deferral. These increases
were partially offset by the effect of charges in 1996 for early retirement and
severance programs and the December 1996 Order (see below).
Other operation expenses increased $78 million (15%) in 1996, as compared to
1995. This increase is due to a number of factors, including increased
administrative and general expenses reflecting, in part, charges of $35 million
for voluntary early retirement and severance programs and charges totaling $6
million related to the December 1996 Order.
In 1995, other operation expenses decreased $29 million (5%), as compared to
1994. Charges of $62 million in 1994 for Merger Costs and other expenditures
which cannot be recovered from customers under the merger savings sharing
mechanisms authorized by regulators significantly contributed to the decrease.
In addition, emphasis on achieving merger savings and other cost reductions led
to lower operating costs for 1995. These decreases were partially offset by the
recognition of postretirement benefit costs on an accrual basis, an increase in
the ongoing level of DSM expenses, and the amortization of deferred
postretirement benefit costs, deferred Merger Costs, and deferred DSM costs, all
of which are being recovered in revenues pursuant to the February 1995 Order.
MAINTENANCE
In 1997, maintenance costs decreased $17 million (9%), as compared to 1996. This
decrease is primarily attributable to reduced outage related charges and other
maintenance costs associated with PSI's and CG&E's electric production
facilities. Reduced maintenance costs associated with PSI's electric
transmission and distribution facilities also contributed to the decrease for
1997.
An increase of $12 million (6%) in maintenance costs for 1996, as compared to
1995, is primarily attributable to increased maintenance associated with the
Clean Coal Project which began commercial operation in November 1995. Increased
transmission and distribution expenses also contributed to the higher level of
maintenance expense.
Maintenance costs decreased $19 million (9%) in 1995, as compared to 1994,
primarily due to improved scheduling of routine maintenance on electric
generating units. Lower maintenance costs on gas and electric distribution
facilities also contributed to this decrease.
DEPRECIATION
In 1995, depreciation expense decreased $15 million (5%), when compared to 1994,
due in large part to the adoption of lower depreciation rates for PSI effective
in March 1995. This decrease was partially offset by the effect of additions to
utility plant.
AMORTIZATION OF PHASE-IN DEFERRALS AND PHASE-IN DEFERRED RETURN
Amortization of phase-in deferrals and phase-in deferred return reflect the
PUCO-ordered phase-in plan for the Wm. H. Zimmer Generating Station (Zimmer).
(See Note 1(k) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect various deferrals of
depreciation, operation and maintenance expenses (exclusive of fuel costs), and
property taxes on certain generating units and other utility plant from the
in-service date until the related plant is reflected in retail rates, net of
amortization of these deferralsconsolidated financial statements.
97
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
|
| December 31 |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (dollars in thousands) |
| ||||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 221,083 |
| $ | 111,067 |
|
Restricted deposits |
| 8,116 |
| 8,055 |
| ||
Notes receivable (Note 6) |
| 135,873 |
| 31,173 |
| ||
Accounts receivable less accumulated provision for doubtful accounts of $16,374 at December 31, 2002, and $34,110 at December 31, 2001 (Note 6) |
| 1,292,410 |
| 1,116,225 |
| ||
Materials, supplies, and fuel (Note 1(f)) |
| 319,456 |
| 239,648 |
| ||
Energy risk management current assets (Note 1(m)) |
| 464,028 |
| 449,397 |
| ||
Prepayments and other |
| 118,208 |
| 110,102 |
| ||
Total Current Assets |
| 2,559,174 |
| 2,065,667 |
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment - at Cost |
|
|
|
|
| ||
Utility plant in service |
| 8,641,351 |
| 8,089,961 |
| ||
Construction work in progress |
| 469,300 |
| 464,560 |
| ||
Total Utility Plant |
| 9,110,651 |
| 8,554,521 |
| ||
Non-regulated property, plant, and equipment |
| 4,704,904 |
| 4,478,087 |
| ||
Accumulated depreciation |
| 5,166,881 |
| 4,840,757 |
| ||
Net Property, Plant, and Equipment |
| 8,648,674 |
| 8,191,851 |
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Regulatory assets (Note 1(c)) |
| 1,022,696 |
| 1,015,863 |
| ||
Investments in unconsolidated subsidiaries |
| 417,188 |
| 332,027 |
| ||
Energy risk management non-current assets (Note 1(m)) |
| 162,773 |
| 134,445 |
| ||
Other investments |
| 163,851 |
| 164,155 |
| ||
Goodwill |
| 43,717 |
| 53,587 |
| ||
Other intangible assets |
| 14,736 |
| 22,144 |
| ||
Other |
| 273,099 |
| 258,120 |
| ||
Total Other Assets |
| 2,098,060 |
| 1,980,341 |
| ||
|
|
|
|
|
| ||
Assets of Discontinued Operations (Note 15) |
| 1,120 |
| 61,954 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 13,307,028 |
| $ | 12,299,813 |
|
The accompanying notes as they relate to Cinergy Corp. are recovered through retail rates. (See
Note 1(h)an integral part of the "Notesthese consolidated financial statements.
98
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
| December 31 |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (dollars in thousands) |
| ||||
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 1,321,968 |
| $ | 1,024,412 |
|
Accrued taxes |
| 254,823 |
| 195,976 |
| ||
Accrued interest |
| 64,340 |
| 56,216 |
| ||
Notes payable and other short-term obligations (Note 5) |
| 667,973 |
| 1,144,955 |
| ||
Long-term debt due within one year (Note 4) |
| 191,454 |
| 148,431 |
| ||
Energy risk management current liabilities (Note 1(m)) |
| 407,710 |
| 429,794 |
| ||
Other |
| 108,056 |
| 125,436 |
| ||
Total Current Liabilities |
| 3,016,324 |
| 3,125,220 |
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt (Note 4) |
| 4,080,768 |
| 3,596,730 |
| ||
Deferred income taxes (Note 10) |
| 1,471,872 |
| 1,302,042 |
| ||
Unamortized investment tax credits |
| 118,095 |
| 127,385 |
| ||
Accrued pension and other postretirement benefit costs (Note 9) |
| 626,167 |
| 498,801 |
| ||
Energy risk management non-current liabilities (Note 1(m)) |
| 143,991 |
| 135,619 |
| ||
Other |
| 183,613 |
| 187,760 |
| ||
Total Non-Current Liabilities |
| 6,624,506 |
| 5,848,337 |
| ||
|
|
|
|
|
| ||
Liabilities of Discontinued Operations (Note 15) |
| 1,707 |
| 15,637 |
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 9,642,537 |
| 8,989,194 |
| ||
|
|
|
|
|
| ||
Preferred Trust Securities (Note 3) |
|
|
|
|
| ||
Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company |
| 308,187 |
| 306,327 |
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock of Subsidiaries |
|
|
|
|
| ||
Not subject to mandatory redemption |
| 62,828 |
| 62,833 |
| ||
|
|
|
|
|
| ||
Common Stock Equity (Note 2) |
|
|
|
|
| ||
Common Stock - $.01 par value; authorized shares - 600,000,000; outstanding shares - 168,663,115 at December 31, 2002, and 159,402,839 at December 31, 2001 |
| 1,687 |
| 1,594 |
| ||
Paid-in capital |
| 1,918,136 |
| 1,619,659 |
| ||
Retained earnings |
| 1,403,453 |
| 1,337,135 |
| ||
Accumulated other comprehensive income (loss) (Note 19) |
| (29,800 | ) | (16,929 | ) | ||
Total Common Stock Equity |
| 3,293,476 |
| 2,941,459 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies (Note 11) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 13,307,028 |
| $ | 12,299,813 |
|
The accompanying notes as they relate to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
TAXES OTHER THANCinergy Corp. are an integral part of these consolidated financial statements.
99
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
|
| Common |
| Paid-in |
| Retained |
| Accumulated |
| Total |
| |||||
|
| (dollars in thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2000 |
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance (158,923,399 shares) |
| $ | 1,589 |
| $ | 1,597,554 |
| $ | 1,064,319 |
| $ | (9,741 | ) | $ | 2,653,721 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 399,466 |
| — |
| 399,466 |
| |||||
Other comprehensive income (loss), net of tax effect of $2,755 (Note 19) |
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment (Note 1(r)) |
| — |
| — |
| — |
| 2,074 |
| 2,074 |
| |||||
Minimum pension liability adjustment |
| — |
| — |
| — |
| (1,099 | ) | (1,099 | ) | |||||
Unrealized gain (loss) on investment trusts |
| — |
| — |
| — |
| (2,129 | ) | (2,129 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 398,312 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock - net (44,262 shares) |
| 1 |
| 1,769 |
| — |
| — |
| 1,770 |
| |||||
Treasury shares purchased (1,764,758 shares) |
| — |
| (3,969 | ) | — |
| — |
| (3,969 | ) | |||||
Treasury shares reissued (1,764,758 shares) |
| — |
| 11,008 |
| — |
| — |
| 11,008 |
| |||||
Dividends on common stock ($1.80 per share) |
| — |
| — |
| (285,242 | ) | — |
| (285,242 | ) | |||||
Other |
| — |
| 12,791 |
| 570 |
| — |
| 13,361 |
| |||||
Ending balance (158,967,661 shares) |
| $ | 1,590 |
| $ | 1,619,153 |
| $ | 1,179,113 |
| $ | (10,895 | ) | $ | 2,788,961 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2001 |
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 442,279 |
| — |
| 442,279 |
| |||||
Other comprehensive income (loss), net of tax effect of $1,454 (Note 19) |
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment (Note 1(r)) |
| — |
| — |
| — |
| 1,641 |
| 1,641 |
| |||||
Minimum pension liability adjustment |
| — |
| — |
| — |
| (1,555 | ) | (1,555 | ) | |||||
Unrealized gain (loss) on investment trusts |
| — |
| — |
| — |
| (841 | ) | (841 | ) | |||||
Cumulative effect of change in accounting principle (Note 14) |
| — |
| — |
| — |
| (2,500 | ) | (2,500 | ) | |||||
Cash flow hedges (Note 1(l)) |
| — |
| — |
| — |
| (2,779 | ) | (2,779 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 436,245 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock - net (435,178 shares) |
| 4 |
| 9,896 |
| — |
| — |
| 9,900 |
| |||||
Treasury shares purchased (344,034 shares) |
| — |
| (10,015 | ) | — |
| — |
| (10,015 | ) | |||||
Treasury shares reissued (344,034 shares) |
| — |
| 9,157 |
| — |
| — |
| 9,157 |
| |||||
Dividends on common stock ($1.80 per share) |
| — |
| — |
| (286,289 | ) | — |
| (286,289 | ) | |||||
Stock purchase contracts (Note 2(e)) |
| — |
| (23,200 | ) | — |
| — |
| (23,200 | ) | |||||
Other |
| — |
| 14,668 |
| 2,032 |
| — |
| 16,700 |
| |||||
Ending balance (159,402,839 shares) |
| $ | 1,594 |
| $ | 1,619,659 |
| $ | 1,337,135 |
| $ | (16,929 | ) | $ | 2,941,459 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2002 |
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 360,576 |
| — |
| 360,576 |
| |||||
Other comprehensive income (loss), net of tax effect of $13,575 (Note 19) |
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment, net of reclassification adjustments (Note 1(r)) |
| — |
| — |
| — |
| 25,917 |
| 25,917 |
| |||||
Minimum pension liability adjustment |
| — |
| — |
| — |
| (13,763 | ) | (13,763 | ) | |||||
Unrealized gain (loss) on investment trusts |
| — |
| — |
| — |
| (5,277 | ) | (5,277 | ) | |||||
Cash flow hedges (Note 1(l)) |
| — |
| — |
| — |
| (19,748 | ) | (19,748 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 347,705 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of common stock - net (9,260,276 shares) |
| 93 |
| 267,768 |
| — |
| — |
| 267,861 |
| |||||
Dividends on common stock ($1.80 per share) |
| — |
| — |
| (298,292 | ) | — |
| (298,292 | ) | |||||
Other |
| — |
| 30,709 |
| 4,034 |
| — |
| 34,743 |
| |||||
Ending balance (168,663,115 shares) |
| $ | 1,687 |
| $ | 1,918,136 |
| $ | 1,403,453 |
| $ | (29,800 | ) | $ | 3,293,476 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
100
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (dollars in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Operating Activities |
|
|
|
|
|
|
| |||
Net income |
| $ | 360,576 |
| $ | 442,279 |
| $ | 399,466 |
|
Items providing or (using) cash currently: |
|
|
|
|
|
|
| |||
Depreciation |
| 414,004 |
| 374,399 |
| 341,927 |
| |||
Loss on discontinued operations, net of tax |
| 25,428 |
| 16,547 |
| 1,069 |
| |||
Cumulative effect of a change in accounting principle |
| 10,899 |
| — |
| — |
| |||
Change in net position of energy risk management activities |
| (43,202 | ) | (96,850 | ) | (22,533 | ) | |||
Deferred income taxes and investment tax credits - net |
| 148,467 |
| 123,806 |
| 47,404 |
| |||
Gain on sale of investment in unconsolidated subsidiaries |
| (16,518 | ) | — |
| — |
| |||
Equity in earnings of unconsolidated subsidiaries |
| (15,261 | ) | (1,494 | ) | (6,231 | ) | |||
Allowance for equity funds used during construction |
| (12,861 | ) | (8,628 | ) | (5,813 | ) | |||
Regulatory assets deferrals |
| (110,867 | ) | (141,324 | ) | (99,661 | ) | |||
Regulatory assets amortization |
| 116,512 |
| 119,344 |
| 92,856 |
| |||
Accrued pension and other postretirement benefit costs |
| 127,366 |
| 34,246 |
| 58,549 |
| |||
Changes in current assets and current liabilities: |
|
|
|
|
|
|
| |||
Restricted deposits |
| (61 | ) | (1,409 | ) | (3,567 | ) | |||
Accounts and notes receivable, net of reserves on receivables sold |
| (236,226 | ) | 502,902 |
| (960,048 | ) | |||
Materials, supplies, and fuel |
| (83,458 | ) | (81,398 | ) | 46,269 |
| |||
Prepayments |
| (10,041 | ) | (14,385 | ) | (16,046 | ) | |||
Accounts payable |
| 307,860 |
| (466,973 | ) | 761,708 |
| |||
Accrued taxes and interest |
| 66,971 |
| (42,165 | ) | 25,737 |
| |||
Other assets |
| (15,793 | ) | (21,675 | ) | (24,364 | ) | |||
Other liabilities |
| (37,596 | ) | (19,373 | ) | (4,677 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) operating activities |
| 996,199 |
| 717,849 |
| 632,045 |
| |||
|
|
|
|
|
|
|
| |||
Financing Activities |
|
|
|
|
|
|
| |||
Change in short-term debt |
| (476,982 | ) | 27,954 |
| 582,122 |
| |||
Issuance of long-term debt |
| 649,020 |
| 940,785 |
| 126,420 |
| |||
Issuance of preferred trust securities |
| — |
| 306,327 |
| — |
| |||
Redemption of long-term debt |
| (138,379 | ) | (131,413 | ) | (234,247 | ) | |||
Retirement of preferred stock of subsidiaries |
| (3 | ) | (1 | ) | (29,393 | ) | |||
Issuance of common stock |
| 267,861 |
| 9,900 |
| 1,770 |
| |||
Dividends on common stock |
| (298,292 | ) | (286,289 | ) | (285,242 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) financing activities |
| 3,225 |
| 867,263 |
| 161,430 |
| |||
|
|
|
|
|
|
|
| |||
Investing Activities |
|
|
|
|
|
|
| |||
Construction expenditures (less allowance for equity funds used during construction) |
| (857,104 | ) | (858,870 | ) | (531,896 | ) | |||
Acquisitions and other investments |
| (118,375 | ) | (708,229 | ) | (250,444 | ) | |||
Proceeds from sale of subsidiaries and equity investments |
| 86,071 |
| — |
| — |
| |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) investing activities |
| (889,408 | ) | (1,567,099 | ) | (782,340 | ) | |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and cash equivalents |
| 110,016 |
| 18,013 |
| 11,135 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of period |
| 111,067 |
| 93,054 |
| 81,919 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at end of period |
| $ | 221,083 |
| $ | 111,067 |
| $ | 93,054 |
|
|
|
|
|
|
|
|
| |||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
| |||
Cash paid during the year for: |
|
|
|
|
|
|
| |||
Interest (net of amount capitalized) |
| $ | 253,266 |
| $ | 271,323 |
| $ | 236,104 |
|
Income taxes |
| $ | 57,739 |
| $ | 153,092 |
| $ | 216,556 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
101
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
|
| December 31 |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (dollars in thousands) |
| ||||
|
|
|
|
|
| ||
Long-term Debt (excludes current portion) |
|
|
|
|
| ||
Cinergy Corp. |
|
|
|
|
| ||
Other Long-term Debt: |
|
|
|
|
| ||
6.53% Debentures due December 16, 2008 |
| $ | 200,000 |
| $ | 200,000 |
|
6.125% Debentures due April 15, 2004 |
| 200,000 |
| 200,000 |
| ||
6.25% Debentures due September 1, 2004 (Executed interest rate swaps of $250 million set at London Inter-Bank Offered Rate (LIBOR) plus 2.44%) |
| 512,554 |
| 500,341 |
| ||
Total Other Long-term Debt |
| 912,554 |
| 900,341 |
| ||
Unamortized Premium and Discount - Net |
| (165 | ) | (255 | ) | ||
Total - Cinergy Corp. |
| 912,389 |
| 900,086 |
| ||
|
|
|
|
|
| ||
Cinergy Global Resources, Inc. |
|
|
|
|
| ||
Other Long-term Debt: |
|
|
|
|
| ||
6.20% Debentures due November 3, 2008 |
| 150,000 |
| 150,000 |
| ||
Variable interest rate of LIBOR plus 1.75%, due July 2012 |
| 12,792 |
| 14,042 |
| ||
Variable interest rate of LIBOR plus 2.5%, due July 2009 |
| 5,281 |
| 5,840 |
| ||
Variable interest rates ranging between the 3 month Prague Inter-Bank Offered Rate plus 0.55% to the 3 month Euro Inter-Bank Offered Rate (EURIBOR) plus 4.12%, maturing March 2004 to March 2005 |
| — |
| 2,752 |
| ||
Fixed interest rates 6.1% - 7.4%, maturing March 2003 to May 2003 |
| — |
| 10,271 |
| ||
Fixed interest rates ranging between 6.35% and 9.911%, maturing September 2010 to September 2019 |
| 33,277 |
| 13,420 |
| ||
Fixed interest rate of 11.5%, maturing November 2023 to November 2024 |
| 17,850 |
| 17,850 |
| ||
Variable interest rate of EURIBOR plus 1.2%, maturing November 2016 |
| 63,675 |
| 52,274 |
| ||
Total Other Long-term Debt |
| 282,875 |
| 266,449 |
| ||
Unamortized Premium and Discount - Net |
| (193 | ) | (227 | ) | ||
Total - Cinergy Global Resources, Inc. |
| 282,682 |
| 266,222 |
| ||
|
|
|
|
|
| ||
Operating Companies (See operating companies’ Consolidated Statements of Capitalization for details) |
|
|
|
|
| ||
The Cincinnati Gas & Electric Company (CG&E) and subsidiaries |
|
|
|
|
| ||
First Mortgage Bonds |
| 470,200 |
| 470,200 |
| ||
Other Long-term Debt |
| 1,101,721 |
| 637,721 |
| ||
Unamortized Premium and Discount - Net |
| (2,208 | ) | (2,588 | ) | ||
Total Long-term Debt |
| 1,569,713 |
| 1,105,333 |
| ||
PSI Energy, Inc. (PSI) |
|
|
|
|
| ||
First Mortgage Bonds |
| 620,720 |
| 620,720 |
| ||
Secured Medium-term Notes |
| 104,300 |
| 160,300 |
| ||
Other Long-term Debt |
| 598,700 |
| 552,079 |
| ||
Unamortized Premium and Discount - Net |
| (7,736 | ) | (8,010 | ) | ||
Total Long-term Debt |
| 1,315,984 |
| 1,325,089 |
| ||
|
|
|
|
|
| ||
Total Consolidated Long-term Debt |
| $ | 4,080,768 |
| $ | 3,596,730 |
|
|
|
|
|
|
| ||
Preferred Trust Securities |
|
|
|
|
| ||
Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company (Note 3) |
| $ | 308,187 |
| $ | 306,327 |
|
|
|
|
|
|
| ||
Cumulative Preferred Stock of Subsidiaries (See operating companies’ Consolidated Statements of Capitalization for details) |
|
|
|
|
| ||
|
|
|
|
|
| ||
CG&E and subsidiaries |
| $ | 20,485 |
| $ | 20,486 |
|
PSI |
| 42,343 |
| 42,347 |
| ||
Total Cumulative Preferred Stock of Subsidiaries |
| $ | 62,828 |
| $ | 62,833 |
|
|
|
|
|
|
| ||
Common Stock Equity |
|
|
|
|
| ||
Common Stock - $.01 par value; authorized shares - 600,000,000; outstanding shares - 168,663,115 at December 31, 2002, and 159,402,839 at December 31, 2001 |
| $ | 1,687 |
| $ | 1,594 |
|
Paid-in capital |
| 1,918,136 |
| 1,619,659 |
| ||
Retained earnings |
| 1,403,453 |
| 1,337,135 |
| ||
Accumulated other comprehensive income (loss) (Note 19) |
| (29,800 | ) | (16,929 | ) | ||
Total Common Stock Equity |
| 3,293,476 |
| 2,941,459 |
| ||
|
|
|
|
|
| ||
Total Consolidated Capitalization |
| $ | 7,745,259 |
| $ | 6,907,349 |
|
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
102
THE CINCINNATI GAS & ELECTRIC COMPANY
AND SUBSIDIARY COMPANIES
103
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME TAXES
Taxes other than income taxes increased $12 million (5%) in 1995, primarily due
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (dollars in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Operating Revenues (Note 1(q)(i)) |
|
|
|
|
|
|
| |||
Electric |
| $ | 4,514,283 |
| $ | 4,155,827 |
| $ | 2,745,852 |
|
Gas |
| 437,092 |
| 596,429 |
| 490,972 |
| |||
Total Operating Revenues |
| 4,951,375 |
| 4,752,256 |
| 3,236,824 |
| |||
|
|
|
|
|
|
|
| |||
Operating Expenses |
|
|
|
|
|
|
| |||
Fuel and purchased and exchanged power (Note 1(q)(i)) |
| 3,286,278 |
| 2,940,442 |
| 1,562,036 |
| |||
Gas purchased (Note 1(q)(i)) |
| 232,558 |
| 396,764 |
| 266,339 |
| |||
Operation and maintenance |
| 533,255 |
| 442,173 |
| 491,545 |
| |||
Depreciation |
| 196,539 |
| 186,986 |
| 180,978 |
| |||
Taxes other than income taxes |
| 197,827 |
| 174,320 |
| 208,385 |
| |||
Total Operating Expenses |
| 4,446,457 |
| 4,140,685 |
| 2,709,283 |
| |||
|
|
|
|
|
|
|
| |||
Operating Income |
| 504,918 |
| 611,571 |
| 527,541 |
| |||
|
|
|
|
|
|
|
| |||
Miscellaneous - Net |
| 9,742 |
| 4,657 |
| (2,119 | ) | |||
Interest |
| 95,623 |
| 103,047 |
| 99,204 |
| |||
|
|
|
|
|
|
|
| |||
Income Before Taxes |
| 419,037 |
| 513,181 |
| 426,218 |
| |||
|
|
|
|
|
|
|
| |||
Income Taxes (Note 10) |
| 155,341 |
| 186,527 |
| 159,398 |
| |||
|
|
|
|
|
|
|
| |||
Net Income |
| $ | 263,696 |
| $ | 326,654 |
| $ | 266,820 |
|
|
|
|
|
|
|
|
| |||
Preferred Dividend Requirement |
| 846 |
| 846 |
| 847 |
| |||
|
|
|
|
|
|
|
| |||
Net Income Applicable to Common Stock |
| $ | 262,850 |
| $ | 325,808 |
| $ | 265,973 |
|
The accompanying notes as they relate to 104 THE CINCINNATI GAS & ELECTRIC COMPANY ASSETS December 31 2002 2001 (dollars in thousands) Current Assets Cash and cash equivalents $ 45,336 $ 9,074 Restricted deposits 3,071 3,540 Notes receivable from affiliated companies (Note 6) 148,823 — Accounts receivable less accumulated provision for doubtful accounts of $5,942 at December 31, 2002, and $25,874 at December 31, 2001 (Note 6) 117,269 332,970 Accounts receivable from affiliated companies 97,584 12,112 Materials, supplies, and fuel 121,881 138,119 Energy risk management current assets (Note 1(m)) 57,912 44,360 Prepayments and other 8,560 13,087 Total Current Assets 600,436 553,262 Property, Plant, and Equipment - at Cost Utility plant in service Electric 2,073,133 2,000,595 Gas 1,003,870 926,381 Common 248,938 253,978 Total Utility Plant In Service 3,325,941 3,180,954 Construction work in progress 84,249 96,247 Total Utility Plant 3,410,190 3,277,201 Non-regulated property, plant, and equipment 3,445,056 3,314,285 Accumulated depreciation 2,712,105 2,555,639 Net Property, Plant, and Equipment 4,143,141 4,035,847 Other Assets Regulatory assets (Note 1(c)) 604,776 592,491 Energy risk management non-current assets (Note 1(m)) 64,762 48,982 Other Investments 1,082 1,080 Other 127,550 128,082 Total Other Assets 798,170 770,635 Total Assets $ 5,541,747 $ 5,359,744 The accompanying notes increased property taxes resulting from a greater investment in taxable
property and higher property tax rates.
Other Income and Expenses - Net
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on certain
generating units and other utility plant from the in-service date until the
related plant is reflected in retail rates. (See Note 1(h) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The increase in equity in earnings of unconsolidated subsidiaries of $35 million
for 1997, as compared to 1996, primarily reflects a full year's effect of the
investment in Midlands. Midlands was purchased during the second quarter of
1996.
OTHER - NET
The $9 million change in other - net for 1997, as compared to 1996, is due, in
part, to charges in 1996 of approximately $14 million associated with the
December 1996 Order, a gain of approximately $4 million in 1997 on the sale of a
PSI investment, and a loss of approximately $5 million in 1996 on the sale of a
foreign subsidiary. These items were partially offset by gains of approximately
$6 million in 1996 related to the sale of certain CG&E assets, approximately $2
million of increased expenses in 1997 associated with the sales of accounts
receivable for PSI, CG&E, and ULH&P, and expenses of approximately $4 million
resulting from the inclusion of the Greenwich acquisition in 1997.
In 1996, other - net changed $37 million, as compared to 1995, due to a number
of factors including $4 million of interest received in 1995 on an income tax
refund related to prior years, charges totaling $14 million associated with the
December 1996 Order, expenses associated with CG&E's and ULH&P's sales of
accounts receivable in 1996, and the effect of a $10 million gain in 1995 on the
sale of Cinergy's investment in an Argentine utility.
The $31 million change in other - net in 1995, as compared to 1994, is due, in
part, to interest on the income tax refund and the $10 million gain discussed
above and charges of $17 million in 1994 for merger-related and other
expenditures which cannot be recovered from customers.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased $23 million (11%) in 1996, as compared to
1995, due to the refinancing and redemptions of long-term debt by CG&E, PSI, and
ULH&P during 1995 and 1996.
OTHER INTEREST
The $29 million increase in other interest, as compared to 1996, is primarily
due to interest expense on increased short-term borrowings used to fund CG&E's
redemption of first mortgage bonds and Cinergy's investments in non-regulated
companies, including Avon Energy.
In 1996, other interest increased $10 million (50%), as compared to 1995,
primarily reflecting increased interest expense on short-term borrowings used to
fund Cinergy's investment in Avon Energy.
PREFERRED DIVIDEND REQUIREMENTS OF SUBSIDIARIES
Preferred dividend requirements of subsidiaries decreased $11 million (46%) and
$8 million (25%) in 1997 and 1996, respectively. These decreases were primarily
attributable to the reacquisition of approximately 90% of the outstanding
preferred stock of CG&E, pursuant to Cinergy's tender offer. (See Note 3(b) of
the "Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
Extraordinary Item - Equity Share of Windfall Profits Tax
Extraordinary item - equity share of windfall profits tax represents the one-
time charge for the windfall profits tax levied against Midlands as recorded in
the third quarter of 1997. (See Note 17 of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data.")
and subsidiaries
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME
1997 1996 1995
(in thousands)
Operating Revenues
Electric
Non-affiliated companies $1 920 915 $1 458 828 $1 407 119
Affiliated companies 35 341 43 180 30 104
Gas
Non-affiliated companies 491 145 474 034 410 852
Affiliated companies 4 475 7 -
2 451 876 1 976 049 1 848 075
Operating Expenses
Fuel used in electric production 300 487 349 197 327 353
Gas purchased 266 123 249 116 206 250
Purchased and exchanged power
Non-affiliated companies 583 065 46 333 13 870
Affiliated companies 12 473 21 921 42 575
Other operation 308 239 330 169 291 874
Maintenance 90 097 96 205 94 688
Depreciation 163 418 160 951 158 986
Amortization of phase-in deferrals 13 483 13 598 9 091
Amortization of post-in-service
deferred operating expenses 3 290 3 290 3 290
Income taxes (Note 11) 172 047 145 075 136 386
Taxes other than income taxes 211 303 207 904 203 680
2 124 025 1 623 759 1 488 043
Operating Income 327 851 352 290 360 032
Other Income and Expenses - Net
Allowance for equity funds
used during construction 98 1 225 1 790
Phase-in deferred return 8 008 8 372 8 537
Income taxes (Note 11) 33 286 9 139 4 587
Other - net (14 262) (21 296) 4 221
27 130 (2 560) 19 135
Income Before Interest 354 981 349 730 379 167
Interest
Interest on long-term debt 110 134 123 616 143 334
Other interest 10 327 2 793 3 486
Allowance for borrowed funds
used during construction (4 633) (3 859) (3 854)
115 828 122 550 142 966
Net Income 239 153 227 180 236 201
Preferred Dividend Requirement 868 10 643 17 673
Costs of Reacquisition of
Preferred Stock (Note 3(b)) - 18 391 -
Net Income Applicable to
Common Stock $ 238 285 $ 198 146 $ 218 528
CONSOLIDATED BALANCE SHEETS are an integral part of these consolidated financial
statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1997 1996
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $4 700 631 $4 631 605
Gas 746 903 713 829
Common 186 078 185 255
5 633 612 5 530 689
Accumulated depreciation 2 008 005 1 868 579
3 625 607 3 662 110
Construction work in progress 118 133 95 984
Total utility plant 3 743 740 3 758 094
Current Assets
Cash and temporary cash investments 2 349 5 120
Restricted deposits 1 173 1 171
Notes receivable from affiliated companies 27 193 31 740
Accounts receivable less accumulated
provision for doubtful accounts of $9,199 in
1997 and $9,178 in 1996 (Note 6) 193 549 117 912
Accounts receivable from affiliated companies 35 507 2 453
Materials, supplies, and fuel - at average cost
Fuel for use in electric production 29 682 29 865
Gas stored for current use 29 174 32 951
Other materials and supplies 49 111 52 023
Prepayments and other 31 827 32 433
399 565 305 668
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 350 515 344 126
Post-in-service carrying costs and deferred
operating expenses 134 672 141 492
Phase-in deferred return and depreciation 89 689 95 163
Deferred demand-side management costs 38 318 33 534
Deferred merger costs 16 557 17 709
Unamortized costs of reacquiring debt 36 575 38 439
Other 1 439 19 545
Other 103 368 89 908
771 133 779 916
$4 914 438 $4 843 678
The accompanying notes are an integral part of these consolidated financial
statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CAPITALIZATION AND LIABILITIES
December 31
1997 1996
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $8.50 par value;
authorized shares - 120,000,000;
outstanding shares - 89,663,086 in 1997 and
89,663,086 in 1996 $ 762 136 $ 762 136
Paid-in capital 534 649 536 276
Retained earnings 313 803 247 403
Total common stock equity 1 610 588 1 545 815
Cumulative Preferred Stock (Note 3)
Not subject to mandatory redemption 20 793 21 146
Long-term Debt (Note 4) 1 324 432 1 381 108
Total capitalization 2 955 813 2 948 069
Current Liabilities
Long-term debt due within one year (Note 4) - 130 000
Notes payable and other short-term
obligations (Note 5) 289 000 214 488
Notes payable to affiliated companies 12 253 103
Accounts payable 249 538 166 064
Accounts payable to affiliated companies 10 821 12 726
Accrued taxes 149 129 144 261
Accrued interest 25 430 30 570
Other 29 950 32 191
766 121 730 403
Other Liabilities
Deferred income taxes (Note 11) 794 396 767 085
Unamortized investment tax credits 116 966 123 185
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 180 566 165 282
Other 100 576 109 654
1 192 504 1 165 206
Commitments and Contingencies (Note 12)
$4 914 438 $4 843 678
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 1994 $762 136 $337 874 $432 962 $1 532 972
Net income 236 201 236 201
Dividends on preferred stock (17 673) (17 673)
Dividends on common stock (219 550) (219 550)
Other 1 227 (4 714) (3 487)
Balance December 31, 1995 762 136 339 101 427 226 1 528 463
Net income 227 180 227 180
Dividends on preferred stock (10 643) (10 643)
Dividends on common stock (377 969) (377 969)
Contribution from parent company 197 207 197 207
Costs of reacquisition of
preferred stock (18 391) (18 391)
Other (32) (32)
Balance December 31, 1996 762 136 536 276 247 403 1 545 815
Net income 239 153 239 153
Dividends on preferred stock (871) (871)
Dividends on common stock (170 400) (170 400)
Other (1 627) (1 482) (3 109)
Balance December 31, 1997 $762 136 $534 649 $313 803 $1 610 588
The accompanying notes are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
(in thousands)
Operating Activities
Net income $239 153 $227 180 $236 201
Items providing or (using) cash:
Depreciation 163 418 160 951 158 986
Deferred income taxes and investment
tax credits - net 16 443 18 929 26 938
Allowance for equity funds used during
construction (98) (1 225) (1 790)
Regulatory assets - net 32 822 39 561 21 454
Changes in current assets and current
liabilities
Restricted deposits (2) (27) (1 046)
Accounts and notes receivable, net of
reserves on receivables sold (105 829) 156 182 (65 350)
Materials, supplies, and fuel 6 872 2 437 14 039
Accounts payable 81 569 19 587 38 386
Accrued taxes and interest (272) 10 165 17 533
Other items - net 4 629 46 601 297
Net cash provided by operating activities 438 705 680 341 445 648
Financing Activities
Issuance of long-term debt 100 062 - 260 280
Retirement of preferred stock (234) - (93 450)
Redemption of long-term debt (290 612) (162 583) (338 378)
Change in short-term debt 86 662 30 591 69 500
Dividends on preferred stock (871) (10 643) (17 673)
Dividends on common stock (170 400) (377 969) (219 550)
Net cash used in financing activities (275 393) (520 604) (339 271)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (156 499) (142 053) (138 325)
Deferred demand-side management costs (9 584) (19 176) (13 956)
Net cash used in investing activities (166 083) (161 229) (152 281)
Net decrease in cash and temporary cash investments (2 771) (1 492) (45 904)
Cash and temporary cash investments at beginning
of period 5 120 6 612 52 516
Cash and temporary cash investments at end of
period $ 2 349 $ 5 120 $ 6 612
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $115 801 $117 848 $137 892
Income taxes 106 154 109 034 79 769
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - CG&E
Kwh Sales
Increased activity in Cinergy's power marketing and trading operations led to
higher non-firm power sales for resale and significantly contributed to the
increase in total kwh sales of 72.6%, as compared to 1996. Partially offsetting
this increase was a decline in residential sales, as a result of mild weather.
Kwh sales (and related revenues and expenses) outside of Cinergy's control area
resulting from Cinergy's power marketing and trading operations are allocated
50%/50% between CG&E and PSI. (See Note 1(c) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data" and the
"Market Risk Sensitive Instruments and Positions" section for discussions on
Cinergy's power marketing and trading operations.)
CG&E's total kwh sales increased 10.6% in 1996, as compared to 1995, reflecting
an increase in sales to all customer classes. The increase in retail sales,
which reflects a higher average number of residential and commercial customers,
was partially offset by the return to more normal weather in 1996. The increase
in industrial sales was due to growth in the primary metals sector. Increased
activity in Cinergy's power marketing and trading operations led to higher
non-firm power sales for resale.
Kwh sales for 1995 increased 15.3% over 1994, reflecting increased sales to all
customer classes. Significantly contributing to this increase were higher
non-firm power sales for resale primarily due to increased sales to PSI, as a
result of the coordination of CG&E's and PSI's electric dispatch systems. Higher
residential and commercial sales resulted primarily from warmer weather during
the 1995 summer cooling season and colder weather during the fourth quarter of
1995. Additionally, increased sales to industrial customers were mainly
attributable to growth in the primary metals and chemicals sectors.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (6.8)% 4.7% 3.8%
Commercial 1.9 2.3 3.4
Industrial 4.1 3.4 3.9
Total retail (.5) 3.3 3.8
Sales for resale
Firm power obligations (8.4) 3.7 6.3
Non-firm power transactions 356.5 51.7 211.8
Total sales for resale 337.5 48.1 172.6
Total sales 72.6 10.6 15.3
CG&E currently forecasts a 2% annual compound growth rate in kwh sales over the
1998 through 2002 period. This forecast excludes non-firm power sales for resale
and any potential new off-system, long-term firm power sales.
Mcf Sales and Transportation
The milder weather experienced in 1997 contributed to a decrease in residential
and commercial gas sales volumes and led to an 8.2% decrease in total sales
volumes and a 1.1% decrease in total sales and transportation volumes, as
compared to 1996. An increase in gas transportation volumes and a decline in
industrial sales resulted from customers electing to purchase gas directly from
suppliers, using transportation services provided by CG&E.
Mcf gas sales and transportation volumes increased 8.4% in 1996, as compared to
1995. Colder weather in the first half of 1996 led to increased gas sales to
residential and commercial customers. Also contributing to the increase in total
sales was an increase in the number of residential and commercial customers.
Industrial sales decreased and gas transported increased as customers continued
to purchase gas directly from suppliers.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. Increased sales to residential customers, resulting from colder weather
during the fourth quarter of 1995 and an increase in the number of customers,
contributed to the higher sales levels. Additionally, increases in commercial
and industrial transportation volumes, which resulted from customers electing to
purchase gas directly from suppliers, more than offset declines in industrial
and commercial sales.
Year-to-year changes in Mcf sales for each major class of customers and Mcf
transportation volumes are shown below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (6.4)% 3.6% 10.5%
Commercial (9.7) 7.8 (2.0)
Industrial (8.8) (13.3) (26.6)
Total sales (8.2) 2.1 1.5
Gas transported 10.1 19.8 24.4
Total gas sold and transported (1.1) 8.4 8.6
Operating Revenues
ELECTRIC OPERATING REVENUES
Electric operating revenues increased by $454 million (30%) in 1997 and $65
million (5%) in 1996. These increases primarily reflect the increased kwh sales,
as previously discussed. Partially offsetting these increases was the operation
of the fuel adjustment clause reflecting a lower average cost of fuel used in
electric production.
Electric operating revenues increased $91 million (7%) in 1995, as compared to
1994. This increase reflects the higher kwh sales, as previously discussed and a
full year's effect of CG&E's electric rate increase which became effective in
May 1994. This increase was partially offset by the operation of fuel adjustment
clauses reflecting a lower average cost of fuel used in electric production.
An analysis of electric operating revenues for the past three years is shown
below:
1997 1996 1995
(in millions)
Previous year's electric
operating revenues $1 502 $1 437 $1 346
Increase (Decrease) due to change in:
Price per kwh
Retail (44) (13) (10)
Sales for resale
Firm power obligations - - 1
Non-firm power transactions 107 (10) (9)
Total change in price per kwh 63 (23) (18)
Kwh sales
Retail (8) 44 49
Sales for resale
Firm power obligations (1) 1 1
Non-firm power transactions 395 41 60
Total change in kwh sales 386 86 110
Other 5 2 (1)
Current year's electric
operating revenues $1 956 $1 502 $1 437
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and using CG&E facilities to transport the gas (see the "Mcf Sales and
Transportation" section) continues to put downward pressure on gas operating
revenues. Since providing transportation services does not necessitate recovery
of the cost of gas purchased, the revenue per Mcf transported is less than the
revenue per Mcf sold. As a result, a higher relative volume of gas transported
to gas sold translates into lower gas operating revenues.
CG&E's gas rate increase of 2.5% ($9 million annually) approved by the PUCO in
the December 1996 Order and the operation of a gas cost recovery mechanism,
reflecting a higher average cost per Mcf of gas purchased, contributed to the
$22 million (5%) increase in gas operating revenues as compared to 1996. These
increases were partially offset by the previously discussed changes in Mcf gas
sales.
Gas operating revenues increased $63 million (15%) in 1996, as compared to 1995.
This increase is attributable to the increase in gas sales and transportation
volumes. Also contributing to the increase was the operation of the fuel
adjustment clause, reflecting a higher average cost per Mcf of gas purchased.
In 1995, gas operating revenues declined $32 million (7%), as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of the fuel adjustment clause, reflecting a lower average cost
per Mcf of gas purchased.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs decreased $49 million (14%)
in 1997, when compared to 1996.
An analysis of fuel costs for the past three years is shown below:
1997 1996 1995
(in millions)
Previous year's fuel expense $349 $327 $325
Increase (Decrease) due to change in:
Price of fuel 8 (38) (10)
Deferred fuel cost (50) 34 (10)
Kwh generation (7) 26 22
Current year's fuel expense $300 $349 $327
Gas Purchased The increase in gas purchased expense of $17 million (7%) in 1997,
as compared to 1996, reflects a higher average cost per Mcf of gas purchased.
This increase was partially offset by a decline in the volumes of gas purchased.
Gas purchased increased $43 million (21%) in 1996, as compared to 1995, due to
an increase in volumes purchased and a higher average cost per Mcf of gas
purchased.
In 1995, gas purchased expense decreased $42 million (17%), as compared to 1994,
primarily reflecting a decline in the average cost per Mcf of gas purchased.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $527 million and $12 million in 1997 and
1996, respectively. These increases primarily reflect increased purchases of
non-firm power for resale to others as a result of increased activity in
Cinergy's power marketing and trading operations. (See Note 1(c) of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" and the "Market Risk Sensitive Instruments and Positions" section for
discussion on Cinergy's power marketing and trading operations.)
Purchased and exchanged power costs increased $36 million in 1995, as compared
to 1994, reflecting increased purchases from PSI resulting from the coordination
of PSI's and CG&E's electric dispatch systems. This increase was partially
offset by a decline in third-party, short-term power sales to other utilities.
OTHER OPERATION
Other operation expenses decreased $22 million (7%) in 1997, as compared to
1996. This decrease is primarily due to the effect of charges in 1996 for early
retirement and severance programs and the December 1996 Order (see below). This
decrease is partially offset by the effect of CG&E curtailing certain deferrals
associated with its DSM programs for new participants after December 31, 1996,
due to the December 1996 Order that changed the benefit/cost tests that DSM
programs must surpass in Ohio in order for certain DSM-related costs to be
eligible for deferral.
Other operation increased $38 million (13%) in 1996, as compared to 1995. This
increase is attributable to higher administrative and general expenses
reflecting, in part, charges of $30 million for voluntary early retirement and
severance programs and charges totaling $6 million related to the December 1996
Order. The increase is partially offset by a decrease in electric distribution
expenses.
In 1995, other operation expenses decreased $44 million (13%), as compared to
1994. Charges of $52 million in 1994 for Merger Costs and other expenditures,
which cannot be recovered from customers under the merger savings sharing
mechanism authorized by the PUCO, significantly contributed to the decrease. In
addition, emphasis on achieving merger savings and other cost reductions led to
lower operating costs for 1995. The decrease was partially offset by the
write-off of obsolete inventory in December 1995.
MAINTENANCE
In 1997, maintenance costs decreased $6 million (6%), as compared to 1996. This
decrease is primarily attributable to reduced outage related charges and other
maintenance costs associated with electric production facilities. Reduced
maintenance costs associated with electric distribution facilities also
contributed to the decrease for 1997.
The decrease in maintenance expense of $12 million (11%) in 1995, as compared to
1994, was primarily attributable to improved scheduling of routine maintenance
on electric generating units. Lower maintenance costs on gas and electric
distribution facilities also contributed to the decline.
AMORTIZATION OF PHASE-IN DEFERRALS AND PHASE-IN DEFERRED RETURN
Amortization of phase-in deferrals and phase-in deferred return reflect the
PUCO-ordered phase-in plan for Zimmer. (See Note 1(k) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")
AMORTIZATION OF POST-IN-SERVICE DEFERRED OPERATING EXPENSES
Amortization of post-in-service deferred operating expenses reflect the
amortization of certain deferrals as they relate to The Cincinnati Gas & Electric Company are recovered through retail rates.
These deferrals include depreciation, operation and maintenance expenses
(exclusivean integral part of fuel costs)these consolidated financial statements.
105
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER’S EQUITY
|
| December 31 |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (dollars in thousands) |
| ||||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 195,812 |
| $ | 350,589 |
|
Accounts payable to affiliated companies |
| 146,558 |
| 30,419 |
| ||
Accrued taxes |
| 159,199 |
| 116,616 |
| ||
Accrued interest |
| 22,872 |
| 16,570 |
| ||
Notes payable and other short-term obligations (Note 5) |
| 112,100 |
| 196,100 |
| ||
Notes payable to affiliated companies (Note 5) |
| 8,947 |
| 444,801 |
| ||
Long-term debt due within one year (Note 4) |
| 120,000 |
| 100,000 |
| ||
Energy risk management current liabilities (Note 1(m)) |
| 49,288 |
| 23,341 |
| ||
Other |
| 37,160 |
| 33,217 |
| ||
Total Current Liabilities |
| 851,936 |
| 1,311,653 |
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt (Note 4) |
| 1,569,713 |
| 1,105,333 |
| ||
Deferred income taxes (Note 10) |
| 882,628 |
| 779,295 |
| ||
Unamortized investment tax credits |
| 85,198 |
| 91,246 |
| ||
Accrued pension and other postretirement benefit costs (Note 9) |
| 201,284 |
| 180,725 |
| ||
Energy risk management non-current liabilities (Note 1(m)) |
| 31,326 |
| 41,773 |
| ||
Other |
| 88,843 |
| 92,143 |
| ||
Total Non-Current Liabilities |
| 2,858,992 |
| 2,290,515 |
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 3,710,928 |
| 3,602,168 |
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock |
|
|
|
|
| ||
Not subject to mandatory redemption |
| 20,485 |
| 20,486 |
| ||
|
|
|
|
|
| ||
Common Stock Equity (Note 2) |
|
|
|
|
| ||
Common Stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at December 31, 2002, and December 31, 2001 |
| 762,136 |
| 762,136 |
| ||
Paid-in capital |
| 586,292 |
| 571,926 |
| ||
Retained earnings |
| 487,652 |
| 408,706 |
| ||
Accumulated other comprehensive income (loss) (Note 19) |
| (25,746 | ) | (5,678 | ) | ||
Total Common Stock Equity |
| 1,810,334 |
| 1,737,090 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies (Note 11) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholder’s Equity |
| $ | 5,541,747 |
| $ | 5,359,744 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.
106
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
|
| Common |
| Paid-in |
| Retained |
| Accumulated |
| Total |
| |||||
|
| (dollars in thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2000 |
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance |
| $ | 762,136 |
| $ | 562,851 |
| $ | 335,144 |
| $ | (966 | ) | $ | 1,659,165 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 266,820 |
| — |
| 266,820 |
| |||||
Other comprehensive income (loss), net of tax effect of $15 (Note 19) |
|
|
|
|
|
|
|
|
|
|
| |||||
Minimum pension liability adjustment |
| — |
| — |
| — |
| (28 | ) | (28 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 266,792 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends on preferred stock |
| — |
| — |
| (847 | ) | — |
| (847 | ) | |||||
Dividends on common stock |
| — |
| — |
| (232,334 | ) | — |
| (232,334 | ) | |||||
Contribution from parent company for reallocation of taxes |
| — |
| 2,894 |
| — |
| — |
| 2,894 |
| |||||
Other |
| — |
| 32 |
| 128 |
| — |
| 160 |
| |||||
Ending balance |
| $ | 762,136 |
| $ | 565,777 |
| $ | 368,911 |
| $ | (994 | ) | $ | 1,695,830 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2001 |
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 326,654 |
| — |
| 326,654 |
| |||||
Other comprehensive income (loss), net of tax effect of $2,970 (Note 19) |
| — |
| — |
| — |
| 134 |
| 134 |
| |||||
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
| |||||
Unrealized gain (loss) on investment trust |
| — |
| — |
| — |
| 461 |
| 461 |
| |||||
Cumulative effect of change in accounting principle |
| — |
| — |
| — |
| (2,500 | ) | (2,500 | ) | |||||
Cash flow hedges (Note 1(l)) |
| — |
| — |
| — |
| (2,779 | ) | (2,779 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 321,970 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends on preferred stock |
| — |
| — |
| (846 | ) | — |
| (846 | ) | |||||
Dividends on common stock |
| — |
| — |
| (286,269 | ) | — |
| (286,269 | ) | |||||
Contribution from parent company for reallocation of taxes |
| — |
| 6,149 |
| — |
| — |
| 6,149 |
| |||||
Other |
| — |
| — |
| 256 |
| — |
| 256 |
| |||||
Ending balance |
| $ | 762,136 |
| $ | 571,926 |
| $ | 408,706 |
| $ | (5,678 | ) | $ | 1,737,090 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2002 |
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 263,696 |
| — |
| 263,696 |
| |||||
Other comprehensive income (loss), net of tax effect of $13,060 (Note 19) |
| — |
| — |
| — |
| — |
|
|
| |||||
Minimum pension liability adjustment |
| — |
| — |
| — |
| (872 | ) | (872 | ) | |||||
Unrealized gain (loss) on investment trusts |
| — |
| — |
| — |
| (462 | ) | (462 | ) | |||||
Cash flow hedges (Note 1(l)) |
| — |
| — |
| — |
| (18,734 | ) | (18,734 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 243,628 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends on preferred stock |
| — |
| — |
| (846 | ) | — |
| (846 | ) | |||||
Dividends on common stock |
| — |
| — |
| (185,909 | ) | — |
| (185,909 | ) | |||||
Contribution from parent company for reallocation of taxes |
| — |
| 14,366 |
| — |
| — |
| 14,366 |
| |||||
Other |
| — |
| — |
| 2,005 |
| — |
| 2,005 |
| |||||
Ending balance |
| $ | 762,136 |
| $ | 586,292 |
| $ | 487,652 |
| $ | (25,746 | ) | $ | 1,810,334 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.
107
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (dollars in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Operating Activities |
|
|
|
|
|
|
| |||
Net income |
| $ | 263,696 |
| $ | 326,654 |
| $ | 266,820 |
|
Items providing or (using) cash currently: |
|
|
|
|
|
|
| |||
Depreciation |
| 196,539 |
| 186,986 |
| 180,978 |
| |||
Deferred income taxes and investment tax credits - net |
| 104,103 |
| 43,834 |
| 36,238 |
| |||
Change in net position of energy risk management activities |
| (7,061 | ) | (67,979 | ) | (7,077 | ) | |||
Allowance for equity funds used during construction |
| (356 | ) | (2,672 | ) | (4,459 | ) | |||
Regulatory assets deferrals |
| (61,321 | ) | (116,365 | ) | (35,777 | ) | |||
Regulatory assets amortization |
| 44,339 |
| 56,703 |
| 18,154 |
| |||
Accrued pension and other postretirement benefit costs |
| 20,559 |
| (632 | ) | 4,972 |
| |||
Changes in current assets and current liabilities: |
|
|
|
|
|
|
| |||
Restricted deposits |
| 469 |
| (3,380 | ) | (28 | ) | |||
Accounts and notes receivable, net of reserves on receivables sold |
| 84,193 |
| 174,385 |
| (235,094 | ) | |||
Materials, supplies, and fuel |
| 16,238 |
| (39,058 | ) | (62 | ) | |||
Prepayments |
| 1,750 |
| 19,192 |
| (3,281 | ) | |||
Accounts payable |
| (38,441 | ) | (183,982 | ) | 248,630 |
| |||
Accrued taxes and interest |
| 48,885 |
| (37,209 | ) | 16,902 |
| |||
Other assets |
| 5,020 |
| 8,516 |
| 11,648 |
| |||
Other liabilities |
| (25,583 | ) | (21,875 | ) | (28,394 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) operating activities |
| 653,029 |
| 343,118 |
| 470,170 |
| |||
|
|
|
|
|
|
|
| |||
Financing Activities |
|
|
|
|
|
|
| |||
Change in short-term debt, including net affiliate notes |
| (587,259 | ) | 305,155 |
| 40,684 |
| |||
Issuance of long-term debt |
| 580,570 |
| — |
| — |
| |||
Redemption of long-term debt |
| (100,000 | ) | (1,200 | ) | — |
| |||
Retirement of preferred stock |
| (1 | ) | — |
| (168 | ) | |||
Dividends on preferred stock |
| (846 | ) | (845 | ) | (847 | ) | |||
Dividends on common stock |
| (185,909 | ) | (286,269 | ) | (232,334 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) financing activities |
| (293,445 | ) | 16,841 |
| (192,665 | ) | |||
|
|
|
|
|
|
|
| |||
Investing Activities |
|
|
|
|
|
|
| |||
Construction expenditures (less allowance for equity funds used during construction) |
| (323,320 | ) | (371,885 | ) | (266,455 | ) | |||
Other investments |
| (2 | ) | 363 |
| 33 |
| |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) investing activities |
| (323,322 | ) | (371,522 | ) | (266,422 | ) | |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and cash equivalents |
| 36,262 |
| (11,563 | ) | 11,083 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of period |
| 9,074 |
| 20,637 |
| 9,554 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at end of period |
| $ | 45,336 |
| $ | 9,074 |
| $ | 20,637 |
|
|
|
|
|
|
|
|
| |||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
| |||
Cash paid during the year for: |
|
|
|
|
|
|
| |||
Interest (net of amount capitalized) |
| $ | 86,895 |
| $ | 101,579 |
| $ | 94,018 |
|
Income taxes |
| $ | 28,687 |
| $ | 147,471 |
| $ | 121,158 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.
108
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
|
| December 31 |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (dollars in thousands) |
| ||||
|
|
|
|
|
| ||
Long-term Debt (excludes current portion) |
|
|
|
|
| ||
CG&E |
|
|
|
|
| ||
First Mortgage Bonds: |
|
|
|
|
| ||
6.45% Series due February 15, 2004 |
| $ | 110,000 |
| $ | 110,000 |
|
7.20% Series due October 1, 2023 |
| 265,500 |
| 265,500 |
| ||
5.45% Series due January 1, 2024 (Pollution Control) |
| 46,700 |
| 46,700 |
| ||
5 ½% Series due January 1, 2024 (Pollution Control) |
| 48,000 |
| 48,000 |
| ||
Total First Mortgage Bonds |
| 470,200 |
| 470,200 |
| ||
|
|
|
|
|
| ||
Other Long-term Debt: |
|
|
|
|
| ||
Liquid Asset Notes with Coupon Exchange due October 1, 2007 (Executed interest rate swap set at 6.87% through maturity commencing at October 19, 2000) |
| 100,000 |
| 100,000 |
| ||
6.40% Debentures due April 1, 2008 |
| 100,000 |
| 100,000 |
| ||
6.90% Debentures due June 1, 2025 (Redeemable at the option of the holders on June 1, 2005) |
| 150,000 |
| 150,000 |
| ||
8.28% Junior Subordinated Debentures due July 1, 2025 |
| 100,000 |
| 100,000 |
| ||
6.35% Debentures due June 15, 2038 (Interest rate resets June 15, 2003) |
| — |
| 100,000 |
| ||
5.70% Debentures due September 15, 2012 |
| 500,000 |
| — |
| ||
Series 2002A, Ohio Air Quality Development Revenue Refunding Bonds, due September 1, 2037 (Pollution Control) |
| 42,000 |
| — |
| ||
Series 2002B, Ohio Air Quality Development Revenue Refunding Bonds, due September 1, 2037 (Pollution Control) |
| 42,000 |
| — |
| ||
Series 1992A, 6.50% Collateralized Pollution Control Revenue Refunding Bonds, due November 15, 2022 |
| 12,721 |
| 12,721 |
| ||
Total Other Long-term Debt |
| 1,046,721 |
| 562,721 |
| ||
|
|
|
|
|
| ||
Unamortized Premium and Discount - Net |
| (1,861 | ) | (2,209 | ) | ||
Total Long-term Debt |
| 1,515,060 |
| 1,030,712 |
| ||
|
|
|
|
|
| ||
The Union Light, Heat and Power Company (ULH&P) |
|
|
|
|
| ||
Other Long-term Debt: |
|
|
|
|
| ||
6.11% Debentures due December 8, 2003 |
| — |
| 20,000 |
| ||
6.50% Debentures due April 30, 2008 |
| 20,000 |
| 20,000 |
| ||
7.65% Debentures due July 15, 2025 |
| 15,000 |
| 15,000 |
| ||
7.875% Debentures due September 15, 2009 |
| 20,000 |
| 20,000 |
| ||
Total Other Long-term Debt |
| 55,000 |
| 75,000 |
| ||
|
|
|
|
|
| ||
Unamortized Premium and Discount - Net |
| (347 | ) | (379 | ) | ||
Total Long-term Debt |
| 54,653 |
| 74,621 |
| ||
|
|
|
|
|
| ||
Total Consolidated Long-term Debt |
| $ | 1,569,713 |
| $ | 1,105,333 |
|
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.
109
|
| December 31 |
| |||||||||||||
|
| 2002 |
| 2001 |
| |||||||||||
|
| (dollars in thousands) |
| |||||||||||||
|
|
|
|
|
| |||||||||||
Cumulative Preferred Stock |
|
|
|
|
| |||||||||||
|
|
|
|
|
| |||||||||||
Par/Stated |
| Authorized |
| Shares |
| Series |
| Mandatory |
|
|
|
|
| |||
$ | 100 |
| 6,000,000 |
| 204,849 |
| 4% - 4 ¾ | % | No |
| $ | 20,485 |
| $ | 20,486 |
|
|
| |||||||||||||||
Common Stock Equity |
|
|
|
|
| |||||||||||
Common Stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at December 31, 2002, and December 31, 2001 |
| $ | 762,136 |
| $ | 762,136 |
| |||||||||
Paid-in capital |
| 586,292 |
| 571,926 |
| |||||||||||
Retained earnings |
| 487,652 |
| 408,706 |
| |||||||||||
Accumulated other comprehensive income (loss) |
| (25,746 | ) | (5,678 | ) | |||||||||||
Total Common Stock Equity |
| 1,810,334 |
| 1,737,090 |
| |||||||||||
|
|
|
|
|
| |||||||||||
Total Consolidated Capitalization |
| $ | 3,400,532 |
| $ | 2,862,909 |
| |||||||||
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.
110
PSI ENERGY, and property taxes on certain generating units and
other utility plant from the in-service date until the related plant is
reflected in retail rates. (See Note 1(h) of the "NotesINC.
AND SUBSIDIARY COMPANY
111
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (dollars in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Operating Revenues (Note 1(q)(i)) |
|
|
|
|
|
|
| |||
Electric |
| $ | 2,359,178 |
| $ | 4,108,182 |
| $ | 2,691,274 |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Operating Expenses |
|
|
|
|
|
|
| |||
Fuel and purchased and exchanged power (Note 1(q)(i)) |
| 1,275,960 |
| 3,165,652 |
| 1,731,733 |
| |||
Operation and maintenance |
| 488,903 |
| 413,275 |
| 463,649 |
| |||
Depreciation |
| 156,102 |
| 149,467 |
| 141,512 |
| |||
Taxes other than income taxes |
| 56,695 |
| 49,955 |
| 56,908 |
| |||
Total Operating Expenses |
| 1,977,660 |
| 3,778,349 |
| 2,393,802 |
| |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Operating Income |
| 381,518 |
| 329,833 |
| 297,472 |
| |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Miscellaneous - Net |
| 20,582 |
| 19,541 |
| 4,723 |
| |||
Interest |
| 73,142 |
| 80,955 |
| 78,250 |
| |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Income Before Taxes |
| 328,958 |
| 268,419 |
| 223,945 |
| |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Income Taxes (Note 10) |
| 114,709 |
| 106,086 |
| 88,547 |
| |||
|
|
|
|
|
|
|
| |||
Net Income |
| $ | 214,249 |
| $ | 162,333 |
| $ | 135,398 |
|
|
|
|
|
|
|
|
| |||
Preferred Dividend Requirement |
| 2,587 |
| 2,587 |
| 3,738 |
| |||
|
|
|
|
|
|
|
| |||
Net Income Applicable to Common Stock |
| $ | 211,662 |
| $ | 159,746 |
| $ | 131,660 |
|
The accompanying notes as they relate to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data.")
Other Income and Expenses - Net
OTHER - NET
The $7 million change in other - net for 1997, as compared to 1996, is due
primarily to charges in 1996 of approximately $14 million associated with the
December 1996 Order. These charges were partially offset by gains of
approximately $6 million in 1996 related to the sale of certain CG&E assets, and
approximately $2 million of increased expenses in 1997 associated with the sales
of accounts receivable for CG&E and ULH&P.
The change in other - net of $26 million in 1996, as compared to 1995, is due to
a number of factors including $4 million of interest received in 1995 on an
income tax refund related to prior years, charges totaling $14 million
associated with the December 1996 Order, and expenses associated with CG&E's and
ULH&P's sales of accounts receivable in 1996.
The increase in other - net of $11 million in 1995, as compared to 1994, is due,
in part, to interest on the income tax refund discussed above and charges of $12
million in 1994 for merger-related and other expenditures which cannot be
recovered from customers.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
In 1997, interest on long-term debt decreased $13 million (11%), as compared to
1996, primarily due to the redemptions and maturities of long-term debt in 1996
and 1997.
Interest on long-term debt decreased $20 million (14%) in 1996, as compared to
1995, due to the refinancing and redemptions of long-term debt in 1996 and 1995.
OTHER INTEREST
The $8 million increase in other interest, as compared to 1996, is primarily due
to interest expense on increased short-term borrowings used to fund CG&E's
redemption of first mortgage bonds.
PREFERRED DIVIDEND REQUIREMENT
Preferred dividend requirements decreased $10 million (92%) and $7 million (40%)
in 1997 and 1996, respectively. These decreases were primarily attributable to
the reacquisition of approximately 90% of the outstanding preferred stock of
CG&E, pursuant to Cinergy's tender offer. (See Note 3(b) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
In 1995, CG&E's preferred dividend requirement decreased $5 million (21%), as
compared to 1994. The decrease was attributable to the early redemption of
preferred stock in April 1994 and July 1995.
and Subsidiaries
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
1997 1996 1995
(in thousands)
Operating Revenues
Non-affiliated companies $1 940 783 $1 309 878 $1 205 460
Affiliated companies 17 686 22 084 42 575
1 958 469 1 331 962 1 248 035
Operating Expenses
Fuel 392 948 364 053 389 401
Purchased and exchanged power
Non-affiliated companies 636 293 112 505 33 762
Affiliated companies 29 932 43 343 30 104
Other operation 344 878 268 478 228 508
Maintenance 86 374 97 703 87 492
Depreciation 125 659 121 812 120 773
Post-in-service deferred operating
expenses - net 1 072 (4 799) (5 790)
Income taxes (Note 11) 76 890 73 194 85 043
Taxes other than income taxes 53 721 49 911 51 853
1 747 767 1 126 200 1 021 146
Operating Income 210 702 205 762 226 889
Other Income and Expenses - Net
Allowance for equity funds
used during construction - - 174
Post-in-service carrying costs - 1 223 3 186
Income taxes (Note 11) (1 039) (3 997) 941
Other - net 6 997 1 878 (3 188)
5,958 (896) 1 113
Income Before Interest 216 660 204 866 228 002
Interest
Interest on long-term debt 71 638 67 001 70 577
Other interest 13 584 14 511 15 821
Allowance for borrowed funds
used during construction (767) (2 324) (4 211)
84 455 79 188 82 187
Net Income 132 205 125 678 145 815
Preferred Dividend Requirement 11 701 12 537 13 180
Net Income Applicable to Common Stock $ 120 504 $ 113 141 $ 132 635
The accompanying notes are an integral part of these consolidated financial
statements.
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1997 1996
(dollars in thousands)
Electric Utility Plant - Original Cost
In service $4 280 551 $4 178 181
Accumulated depreciation 1 792 317 1 723 279
2 488 234 2 454 902
Construction work in progress 65 129 76 630
Total electric utility plant 2 553 363 2 531 532
Current Assets
Cash and temporary cash investments 18 169 2 911
Restricted deposits 1 146 550
Notes receivable from affiliated companies 21 998 3
Accounts receivable less accumulated provision
for doubtful accounts of $1,183 in 1997 and
$1,269 in 1996 (Note 6) 198 008 74 289
Accounts receivable from affiliated companies 6 384 4 016
Materials, supplies, and fuel - at average cost
Fuel 28 234 41 865
Other materials and supplies 26 955 28 268
Prepayments and other 4 438 3 184
305 332 155 086
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 23 941 33 068
Post-in-service carrying costs and deferred
operating expenses 43 832 44 904
Coal contract buyout costs 122 485 138 171
Deferred demand-side management costs 71 278 101 208
Deferred merger costs 73 789 76 290
Unamortized costs of reacquiring debt 29 667 32 079
Other 44 094 52 938
Other 138 650 129 667
547 736 608 325
$3 406 431 $3 294 943
The accompanying notes are an integral part of these consolidated financial
statements.
PSI ENERGY, INC.
CAPITALIZATION AND LIABILITIES
December 31
1997 1996
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - without par value; $.01 stated
value; authorized shares - 60,000,000;
outstanding shares - 53,913,701 in 1997 and 1996 $ 539 $ 539
Paid-in capital 400 893 402 947
Retained earnings 636 228 626 089
Total common stock equity 1 037 660 1 029 575
Cumulative Preferred Stock (Note 3)
Not subject to mandatory redemption 157 196 173 086
Long-term Debt (Note 4) 826 470 945 270
Total capitalization 2 021 326 2 147 931
Current Liabilities
Long-term debt due within one year (Note 4) 85 000 10 000
Notes payable and other short-term
obligations (Note 5) 190 600 171 729
Notes payable to affiliated companies 16 435 13 186
Accounts payable 212 833 114 330
Accounts payable to affiliated companies 41 326 12 850
Accrued taxes 69 304 73 206
Accrued interest 21 369 24 045
Other 2 560 17 107
639 427 436 453
Other Liabilities
Deferred income taxes (Note 11) 403 535 372 997
Unamortized investment tax credits 49 296 52 750
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 116 576 98 037
Other 176 271 186 775
745 678 710 559
Commitments and Contingencies (Note 12)
$3 406 431 $3 294 943
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 1994 $539 $389 309 $493 103 $ 882 951
Net income 145 815 145 815
Dividends on preferred stock (13 181) (13 181)
Contribution from parent company 13 926 13 926
Other 18 (462) (444)
Balance December 31, 1995 539 403 253 625 275 1 029 067
Net income 125 678 125 678
Dividends on preferred stock (12 629) (12 629)
Dividends on common stock (112 076) (112 076)
Other (306) (159) (465)
Balance December 31, 1996 539 402 947 626 089 1 029 575
Net income 132 205 132 205
Dividends on preferred stock (11 795) (11 795)
Dividends on common stock (113 600) (113 600)
Other (2 054) 3 329 1 275
Balance December 31, 1997 $539 $400 893 $636 228 $1 037 660
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
(in thousands)
Operating Activities
Net income $132 205 $125 678 $145 815
Items providing or (using) cash:
Depreciation 125 659 121 812 120 773
Deferred income taxes and investment
tax credits - net 35 661 29 925 5 201
Allowance for equity funds used during
construction - - (174)
Regulatory assets - net 38 488 (279) 11 870
Changes in current assets and current
liabilities
Restricted deposits (596) (336) 16
Accounts and notes receivable, net of
reserves on receivables sold (149 290) 2 722 (57 926)
Materials, supplies, and fuel 14 944 41 343 31 748
Accounts payable 126 979 10 363 (25 958)
Litigation settlement - (80 000) -
Accrued taxes and interest (6 578) 6 704 34 078
Other items - net 14 630 3 813 18 714
Net cash provided by operating activities 332 102 261 745 284 157
Financing Activities
Issuance of long-term debt - 150 217 -
Funds on deposit from issuance of long-term debt - 973 9 987
Retirement of preferred stock (16 035) (15 116) (16)
Redemption of long-term debt (45 700) (74 600) (60 455)
Change in short-term debt 22 120 (13 616) 4 958
Dividends on preferred stock (11 795) (12 629) (13 181)
Dividends on common stock (113 600) (112 076) -
Capital contribution from parent company - - 13 926
Net cash provided by (used in) financing
activities (165 010) (76 847) (44 781)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (141 552) (172 341) (186 580)
Deferred demand-side management costs (10 282) (25 168) (43 615)
Net cash used in investing activities (151 834) (197 509) (230 195)
Net increase (decrease) in cash and temporary
cash investments 15 258 (12 611) 9 181
Cash and temporary cash investments at beginning
of period 2 911 15 522 6 341
Cash and temporary cash investments at end of
period $ 18 169 $ 2 911 $ 15 522
Supplemental Disclosure Of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $ 82 959 $ 76 655 $ 80 465
Income taxes 58 671 37 048 60 148
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - PSI
Kwh Sales
Increased activity in Cinergy's power marketing and trading operations led to
higher non-firm power sales for resale and significantly contributed to the
increase in total kwh sales of 69.1%, as compared to 1996. The increase in
retail sales reflects a higher average number of commercial and industrial
customers, which was partially offset by a decrease in residential sales, as a
result of mild weather. Kwh sales (and related revenues and expenses) outside of
Cinergy's control area resulting from Cinergy's power marketing and trading
operations are allocated 50%/50% between CG&E and PSI. (See Note 1(c) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" and the "Market Risk Sensitive Instruments and Positions"
section for discussions on Cinergy's power marketing and trading operations.)
PSI's total kwh sales increased 11.0% in 1996, as compared to 1995. Increased
activity in Cinergy's power marketing and trading operations led to higher
non-firm power sales for resale. The increase in retail sales, which reflects a
higher average number of residential and industrial customers, was partially
offset by the return to more normal weather in 1996. The increase in industrial
sales was due to growth in the primary metals and transportation equipment
sectors.
As compared to 1994, total kwh sales in 1995 increased 6.3%, reflecting
increased sales to all customer classes. Contributing significantly to this
increase were higher residential and commercial sales due to warmer weather
during the 1995 summer cooling season, colder weather during the fourth quarter
of 1995, and an increase in the number of residential and commercial customers.
Increased sales to industrial customers, reflecting growth in the primary
metals, chemicals, and food products sectors, also contributed to the increased
kwh sales level. This increase also reflects higher non-firm power sales for
resale resulting from an increase in sales to CG&E reflecting the coordination
of PSI's and CG&E's electric dispatch systems.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (.5)% - % 7.9%
Commercial 1.3 0.4 5.2
Industrial 2.1 3.3 5.1
Total retail 1.1 1.5 6.0
Sales for resale
Firm power obligations 18.7 11.4 1.1
Non-firm power transactions 277.9 51.6 10.2
Total sales for resale 219.1 40.2 7.4
Total sales 69.1 11.0 6.3
PSI currently forecasts a 3% annual compound growth rate in kwh sales over the
1998 through 2002 period. This forecast excludes non-firm power sales for resale
and any potential new off-system, long-term firm power sales.
Operating Revenues
Increased kwh sales, as previously discussed, a full year's effects of PSI's
retail rate increases approved in the September 1996 Order, as amended in August
1997, and the December 1996 DSM Order significantly contributed to the $626
million (47%) increase in electric operating revenues, when compared to 1996.
Also contributing to the increase was the return of approximately $13 million to
customers in 1996 in accordance with the February 1995 Order. The February 1995
Order required all retail operating income above a certain rate of return to be
refunded to customers.
Operating revenues increased $84 million (7%) in 1996, as compared to 1995, due,
in large part, to the increase in kwh sales as previously discussed. Also
contributing to the increase was the effect of a 7.6% retail rate increase
approved in the September 1996 Order, as well as a full year's effect of a 4.3%
retail rate increase approved in the February 1995 Order and a 1.9% increase for
carrying costs on construction work in progress (CWIP) property which was
approved by the IURC in March 1995. Partially offsetting these increases was the
return of approximately $10 million to customers in accordance with the February
1995 Order.
Higher kwh sales and electric rate increases which became effective in February
1995 and March 1995 significantly contributed to the $134 million (12%) increase
in operating revenues for 1995, when compared to 1994.
An analysis of operating revenues for the past three years is shown below:
1997 1996 1995
(in millions)
Previous year's operating revenues $1 332 $1 248 $1 114
Increase (Decrease) due to change in:
Price per kwh
Retail 56 8 68
Sales for resale
Firm power obligations (10) (3) (1)
Non-firm power transactions 93 - 1
Total change in price per kwh 139 5 68
Kwh sales
Retail 12 16 55
Sales for resale
Firm power obligations 14 8 1
Non-firm power transactions 451 55 9
Total change in kwh sales 477 79 65
Other 10 - 1
Current year's operating revenues $1 958 $1 332 $1 248
Operating Expenses
FUEL
Electric fuel costs increased $29 million (8%) in 1997, when compared to 1996.
An analysis of fuel costs for the past three years is shown below:
1997 1996 1995
(in millions)
Previous year's fuel expense $364 $389 $387
Increase (Decrease) due to change in:
Price of fuel (2) (10) (13)
Deferred fuel cost (5) 8 8
Kwh generation 36 (23) 7
Current year's fuel expense $393 $364 $389
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $510 million and $92 million in 1997 and
1996, respectively. These increases primarily reflect increased purchases of
non-firm power for resale to others as a result of increased activity in
Cinergy's power marketing and trading operations. (See Note 1(c) of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" and the "Market Risk Sensitive Instruments and Positions" section for
discussions on Cinergy's power marketing and trading operations.)
Purchased and exchanged power increased $22 million (54%) in 1995, as compared
to 1994, reflecting increased purchases from CG&E as a result of the
coordination of PSI's and CG&E's electric dispatch systems. This increase was
partially offset by a decline in third party, short-term power sales to other
utilities.
OTHER OPERATION
Other operation expenses increased $76 million (28%) in 1997, as compared to
1996. This increase is primarily due to higher other operation expenses relating
to the Clean Coal Project, amortization of deferred DSM expenses, and
amortization of deferred expenses associated with the Clean Coal Project, all of
which are being recovered in revenues pursuant to either the September 1996
Order or the December 1996 DSM Order. The effect of discontinuing deferral of
certain DSM-related costs in accordance with provisions of the December 1996 DSM
Order also added to the increase. These increases were partially offset by the
effect of charges in 1996 for early retirement and severance programs.
Other operation expenses increased approximately $40 million (17%) in 1996, as
compared to 1995. This increase was due to a number of factors, including an
increase related to the ongoing level and amortization of DSM expenses and an
increase in production expenses associated with the operations of the Clean Coal
Project, all of which are being recovered in revenues pursuant to the February
1995 and September 1996 Orders. Charges related to voluntary early retirement
and severance programs and increased transmission costs also contributed to the
higher level of other operation expenses.
In 1995, other operation expenses increased $15 million (7%), as compared to
1994. This increase was due to a number of factors, including the recognition of
postretirement benefit costs on an accrual basis, an increase in the ongoing
level of DSM expenses, and the amortization of deferred postretirement benefit
costs, deferred Merger Costs, and deferred DSM costs, all of which are being
recovered in revenues pursuant to the February 1995 Order. These increases were
partially offset by charges of $10 million in 1994 for severance benefits to
former officers of PSI which cannot be recovered from customers under the merger
savings sharing mechanisms authorized by the IURC. In addition, emphasis on
achieving merger savings and other cost reductions also partially offset the
increase in other operation expenses.
MAINTENANCE
In 1997, maintenance costs decreased $11 million (12%), as compared to 1996.
This decrease is primarily attributable to reduced outage related charges and
other maintenance costs associated with electric production facilities. Reduced
maintenance costs associated with electric transmission and distribution
facilities also contributed to the decrease for 1997.
An increase of $10 million (12%) in maintenance costs in 1996, as compared to
1995, is primarily attributable to increased maintenance associated with the
Clean Coal Project which began commercial operation in November 1995. Increased
transmission and distribution costs also contributed to the higher level of
maintenance costs.
Maintenance costs decreased $7 million (7%) in 1995, as compared to 1994,
primarily due to improved scheduling of routine maintenance on generating units
and lower maintenance costs on transmission and distribution facilities.
DEPRECIATION
In 1995, depreciation expense decreased $17 million (12%), when compared to
1994, due, in large part, to the adoption of lower depreciation rates effective
in March 1995. This decrease was partially offset by the effect of additions to
utility plant.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect the deferral of
depreciation on certain major projects, primarily environmental in nature, from
the in-service date until the related projects are reflected in retail rates,
net of amortization of these deferralsconsolidated financial statements.
112
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
|
| December 31 |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (dollars in thousands) |
| ||||
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 2,007 |
| $ | 1,587 |
|
Restricted deposits |
| 20 |
| 519 |
| ||
Notes receivable from affiliated companies (Note 6) |
| 53,755 |
| 444,801 |
| ||
Accounts receivable less accumulated provision for doubtful accounts of $5,656 at December 31, 2002, and $6,773 at December 31, 2001 (Note 6) |
| 84,819 |
| 336,994 |
| ||
Accounts receivable from affiliated companies |
| 437 |
| 10,470 |
| ||
Materials, supplies, and fuel |
| 137,292 |
| 87,661 |
| ||
Energy risk management current assets (Note 1(m)) |
| 8,701 |
| 28,201 |
| ||
Prepayments and other |
| 44,725 |
| 41,041 |
| ||
Total Current Assets |
| 331,756 |
| 951,274 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Property, Plant, and Equipment - at Cost |
|
|
|
|
| ||
Utility plant in service |
| 5,315,410 |
| 4,909,007 |
| ||
Construction work in progress |
| 385,051 |
| 368,313 |
| ||
Total Utility Plant |
| 5,700,461 |
| 5,277,320 |
| ||
Accumulated depreciation |
| 2,334,157 |
| 2,216,908 |
| ||
Net Property, Plant, and Equipment |
| 3,366,304 |
| 3,060,412 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Other Assets |
|
|
|
|
| ||
Regulatory assets (Note 1(c)) |
| 417,920 |
| 423,372 |
| ||
Energy risk management non-current assets (Note 1(m)) |
| 16,590 |
| 30,164 |
| ||
Other investments |
| 54,683 |
| 57,633 |
| ||
Other |
| 35,703 |
| 47,927 |
| ||
Total Other Assets |
| 524,896 |
| 559,096 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 4,222,956 |
| $ | 4,570,782 |
|
The accompanying notes as they relate to PSI Energy, Inc. are recovered. (See Note 1(h)an integral part of the "Notesthese consolidated financial statements.
113
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER’S EQUITY
|
| December 31 |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (dollars in thousands) |
| ||||
Current Liabilities |
|
|
|
|
| ||
Accounts payable |
| $ | 113,563 |
| $ | 312,707 |
|
Accounts payable to affiliated companies |
| 107,364 |
| 27,370 |
| ||
Accrued taxes |
| 105,960 |
| 102,317 |
| ||
Accrued interest |
| 23,078 |
| 23,760 |
| ||
Notes payable and other short-term obligations (Note 5) |
| 35,000 |
| 148,600 |
| ||
Notes payable to affiliated companies (Note 5) |
| 138,055 |
| 422,263 |
| ||
Long-term debt due within one year (Note 4) |
| 56,000 |
| 23,000 |
| ||
Energy risk management current liabilities (Note 1(m)) |
| 8,000 |
| 23,185 |
| ||
Other |
| 22,335 |
| 41,695 |
| ||
Total Current Liabilities |
| 609,355 |
| 1,124,897 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Non-Current Liabilities |
|
|
|
|
| ||
Long-term debt (Note 4) |
| 1,315,984 |
| 1,325,089 |
| ||
Deferred income taxes (Note 10) |
| 538,745 |
| 486,694 |
| ||
Unamortized investment tax credits |
| 32,897 |
| 36,139 |
| ||
Accrued pension and other postretirement benefit costs (Note 9) |
| 184,299 |
| 160,169 |
| ||
Energy risk management non-current liabilities (Note 1(m)) |
| 17,157 |
| 41,773 |
| ||
Other |
| 80,879 |
| 58,187 |
| ||
Total Non-Current Liabilities |
| 2,169,961 |
| 2,108,051 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities |
| 2,779,316 |
| 3,232,948 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Cumulative Preferred Stock |
|
|
|
|
| ||
Not subject to mandatory redemption |
| 42,343 |
| 42,347 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
Common Stock Equity (Note 2) |
|
|
|
|
| ||
Common Stock - without par value; $0.01 stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701 at December 31, 2002, and December 31, 2001 |
| 539 |
| 539 |
| ||
Paid-in capital |
| 426,931 |
| 416,414 |
| ||
Retained earnings |
| 981,946 |
| 880,129 |
| ||
Accumulated other comprehensive income (loss) (Note 19) |
| (8,119 | ) | (1,595 | ) | ||
Total Common Stock Equity |
| 1,401,297 |
| 1,295,487 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies (Note 11) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total Liabilities and Shareholder’s Equity |
| $ | 4,222,956 |
| $ | 4,570,782 |
|
The accompanying notes as they relate to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
TAXES OTHER THANPSI Energy, Inc. are an integral part of these consolidated financial statements.
114
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
|
| Common |
| Paid-in |
| Retained |
| Accumulated |
| Total |
| |||||
|
| (dollars in thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2000 |
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance |
| $ | 539 |
| $ | 411,198 |
| $ | 642,569 |
| $ | 1,391 |
| $ | 1,055,697 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 135,398 |
| — |
| 135,398 |
| |||||
Other comprehensive income (loss), net of tax effect of $584 (Note 19) |
|
|
|
|
|
|
|
|
|
|
| |||||
Minimum pension liability adjustment |
| — |
| — |
| — |
| (47 | ) | (47 | ) | |||||
Unrealized gain (loss) on investment trust |
| — |
| — |
| — |
| (1,864 | ) | (1,864 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 133,487 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends on preferred stock |
| — |
| — |
| (3,738 | ) | — |
| (3,738 | ) | |||||
Dividends on common stock |
| — |
| — |
| (54,000 | ) | — |
| (54,000 | ) | |||||
Contribution from parent company for reallocation of taxes |
| — |
| 1,989 |
| — |
| — |
| 1,989 |
| |||||
Other |
| — |
| 336 |
| (76 | ) | — |
| 260 |
| |||||
Ending balance |
| $ | 539 |
| $ | 413,523 |
| $ | 720,153 |
| $ | (520 | ) | $ | 1,133,695 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2001 |
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 162,333 |
| — |
| 162,333 |
| |||||
Other comprehensive income (loss), net of tax effect of $538 (Note 19) |
|
|
|
|
|
|
|
|
|
|
| |||||
Minimum pension liability adjustment |
| — |
| — |
| — |
| (49 | ) | (49 | ) | |||||
Unrealized gain (loss) on investment trusts |
| — |
| — |
| — |
| (1,026 | ) | (1,026 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 161,258 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends on preferred stock |
| — |
| — |
| (2,587 | ) | — |
| (2,587 | ) | |||||
Contribution from parent company for reallocation of taxes |
| — |
| 2,894 |
| — |
| — |
| 2,894 |
| |||||
Other |
| — |
| (3 | ) | 230 |
| — |
| 227 |
| |||||
Ending balance |
| $ | 539 |
| $ | 416,414 |
| $ | 880,129 |
| $ | (1,595 | ) | $ | 1,295,487 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2002 |
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| — |
| — |
| 214,249 |
| — |
| 214,249 |
| |||||
Other comprehensive income (loss), net of tax effect of $4,189 (Note 19) |
|
|
|
|
|
|
|
|
|
|
| |||||
Minimum pension liability adjustment |
| — |
| — |
| — |
| (2,138 | ) | (2,138 | ) | |||||
Unrealized gain (loss) on investment trusts |
| — |
| — |
| — |
| (4,386 | ) | (4,386 | ) | |||||
Total comprehensive income |
| — |
| — |
| — |
| — |
| 207,725 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends on preferred stock |
| — |
| — |
| (2,587 | ) | — |
| (2,587 | ) | |||||
Dividends on common stock |
| — |
| — |
| (111,842 | ) | — |
| (111,842 | ) | |||||
Contribution from parent company for reallocation of taxes |
| — |
| 10,519 |
| — |
| — |
| 10,519 |
| |||||
Other |
| — |
| (2 | ) | 1,997 |
| — |
| 1,995 |
| |||||
Ending balance |
| $ | 539 |
| $ | 426,931 |
| $ | 981,946 |
| $ | (8,119 | ) | $ | 1,401,297 |
|
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.
115
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (dollars in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Operating Activities |
|
|
|
|
|
|
| |||
Net income |
| $ | 214,249 |
| $ | 162,333 |
| $ | 135,398 |
|
Items providing or (using) cash currently: |
|
|
|
|
|
|
| |||
Depreciation |
| 156,102 |
| 149,467 |
| 141,512 |
| |||
Deferred income taxes and investment tax credits - net |
| 33,908 |
| 41,543 |
| (6,582 | ) | |||
Change in net position of energy risk management activities |
| 9,544 |
| (33,158 | ) | (7,077 | ) | |||
Allowance for equity funds used during construction |
| (12,505 | ) | (5,956 | ) | (1,354 | ) | |||
Regulatory assets deferrals |
| (49,546 | ) | (24,959 | ) | (63,884 | ) | |||
Regulatory assets amortization |
| 72,173 |
| 62,641 |
| 74,702 |
| |||
Accrued pension and other postretirement benefit costs |
| 24,130 |
| 10,597 |
| 11,794 |
| |||
Changes in current assets and current liabilities: |
|
|
|
|
|
|
| |||
Restricted deposits |
| 499 |
| (178 | ) | (341 | ) | |||
Accounts and notes receivable, net of reserves on receivables sold |
| 233,040 |
| 119,311 |
| (178,453 | ) | |||
Materials, supplies, and fuel |
| (49,631 | ) | (33,823 | ) | 49,652 |
| |||
Prepayments |
| (2,908 | ) | (120 | ) | (677 | ) | |||
Accounts payable |
| (119,032 | ) | (84,577 | ) | 176,820 |
| |||
Accrued taxes and interest |
| 2,961 |
| 21,374 |
| (15,342 | ) | |||
Other assets |
| (22,161 | ) | 17,074 |
| (4,322 | ) | |||
Other liabilities |
| 8,224 |
| 342 |
| 31,192 |
| |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) operating activities |
| 499,047 |
| 401,911 |
| 343,038 |
| |||
|
|
|
|
|
|
|
| |||
Financing Activities |
|
|
|
|
|
|
| |||
Change in short-term debt, including net affiliate notes |
| 46,993 |
| (195,912 | ) | 143,030 |
| |||
Issuance of long-term debt |
| 47,600 |
| 322,471 |
| 53,075 |
| |||
Redemption of long-term debt |
| (23,979 | ) | (89,248 | ) | (187,097 | ) | |||
Retirement of preferred stock |
| (2 | ) | (1 | ) | (29,225 | ) | |||
Dividends on preferred stock |
| (2,587 | ) | (2,587 | ) | (3,738 | ) | |||
Dividends on common stock |
| (111,842 | ) | — |
| (54,000 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) financing activities |
| (43,817 | ) | 34,723 |
| (77,955 | ) | |||
|
|
|
|
|
|
|
| |||
Investing Activities |
|
|
|
|
|
|
| |||
Construction expenditures (less allowance for equity funds used during construction) |
| (451,326 | ) | (427,787 | ) | (263,317 | ) | |||
Other investments |
| (3,484 | ) | (8,571 | ) | (9,297 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) investing activities |
| (454,810 | ) | (436,358 | ) | (272,614 | ) | |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and cash equivalents |
| 420 |
| 276 |
| (7,531 | ) | |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at beginning of period |
| 1,587 |
| 1,311 |
| 8,842 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents at end of period |
| $ | 2,007 |
| $ | 1,587 |
| $ | 1,311 |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
| |||
Cash paid during the year for: |
|
|
|
|
|
|
| |||
Interest (net of amount capitalized) |
| $ | 89,865 |
| $ | 97,917 |
| $ | 98,283 |
|
Income taxes |
| $ | 27,401 |
| $ | 41,419 |
| $ | 112,210 |
|
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.
116
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
|
| December 31 |
| |||||||||||||
|
| 2002 |
| 2001 |
| |||||||||||
|
| (dollars in thousands) |
| |||||||||||||
Long-term Debt (excludes current portion) |
|
|
|
|
| |||||||||||
|
|
|
|
|
| |||||||||||
First Mortgage Bonds: |
|
|
|
|
| |||||||||||
Series ZZ, 53/4% due February 15, 2028 (Pollution Control) |
| $ | 50,000 |
| $ | 50,000 |
| |||||||||
Series AAA, 71/8% due February 1, 2024 |
| 30,000 |
| 30,000 |
| |||||||||||
Series BBB, 8.0% due July 15, 2009 |
| 124,665 |
| 124,665 |
| |||||||||||
Series CCC, 8.85% due January 15, 2022 |
| 53,055 |
| 53,055 |
| |||||||||||
Series DDD, 8.31% due September 1, 2032 |
| 38,000 |
| 38,000 |
| |||||||||||
Series EEE, 6.65% due June 15, 2006 |
| 325,000 |
| 325,000 |
| |||||||||||
Total First Mortgage Bonds |
| 620,720 |
| 620,720 |
| |||||||||||
|
|
|
|
|
| |||||||||||
Secured Medium-term Notes: |
|
|
|
|
| |||||||||||
Series A, 8.37% to 8.81%, due November 8, 2006 to June 1, 2022 |
| 34,300 |
| 34,300 |
| |||||||||||
Series B, 6.37% to 8.24%, due August 15, 2008 to August 22, 2022 |
| 70,000 |
| 126,000 |
| |||||||||||
(Series A and B, 7.623% weighted average interest rate and 13.9 year weighted average remaining life) |
|
|
|
|
| |||||||||||
Total Secured Medium-term Notes |
| 104,300 |
| 160,300 |
| |||||||||||
|
|
|
|
|
| |||||||||||
Other Long-term Debt: |
|
|
|
|
| |||||||||||
Series 2000A, Indiana Development Finance Authority Environmental Refunding Revenue Bonds, due May 1, 2035 |
| 44,025 |
| 44,025 |
| |||||||||||
Series 2000B, Indiana Development Finance Authority Environmental Refunding Revenue Bonds, due April 1, 2022 |
| 10,000 |
| 10,000 |
| |||||||||||
6.35% Debentures due November 15, 2006 |
| 50 |
| 50 |
| |||||||||||
6.50% Synthetic Putable Yield Securities due August 1, 2026 (Interest rate resets August 1, 2005) |
| 50,000 |
| 50,000 |
| |||||||||||
7.25% Junior Maturing Principal Securities due March 15, 2028 |
| 2,658 |
| 2,658 |
| |||||||||||
6.00% Rural Utilities Service Obligation payable in annual installments |
| 82,025 |
| 83,004 |
| |||||||||||
6.52% Senior Notes due March 15, 2009 |
| 97,342 |
| 97,342 |
| |||||||||||
7.85% Debentures due October 15, 2007 |
| 265,000 |
| 265,000 |
| |||||||||||
Series 2002A, Indiana Development Finance Authority Environmental Refunding Revenue Bonds, due March 1, 2031 |
| 23,000 |
| — |
| |||||||||||
Series 2002B, Indiana Development Finance Authority Environmental Refunding Revenue Bonds, due March 1, 2019 |
| 24,600 |
| — |
| |||||||||||
Total Other Long-term Debt |
| 598,700 |
| 552,079 |
| |||||||||||
|
|
|
|
|
| |||||||||||
Unamortized Premium and Discount - Net |
| (7,736 | ) | (8,010 | ) | |||||||||||
Total Long-term Debt |
| 1,315,984 |
| 1,325,089 |
| |||||||||||
|
|
|
|
|
| |||||||||||
Cumulative Preferred Stock |
|
|
|
|
| |||||||||||
|
|
|
|
|
| |||||||||||
Par/Stated |
| Authorized |
| Shares |
| Series |
| Mandatory |
|
|
|
|
| |||
$ | 100 |
| 5,000,000 |
| 347,545 |
| 31/2% - 67/8% |
| No |
| $ | 34,754 |
| $ | 34,758 |
|
$ | 25 |
| 5,000,000 |
| 303,544 |
| 4.16% - 4.32% |
| No |
| 7,589 |
| 7,589 |
| ||
Total Preferred Stock |
| 42,343 |
| 42,347 |
| |||||||||||
|
|
|
|
|
| |||||||||||
Common Stock Equity |
|
|
|
|
| |||||||||||
|
|
|
|
|
| |||||||||||
Common Stock - without par value; $0.01 stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701 at December 31, 2002, and December 31, 2001 |
| $ | 539 |
| $ | 539 |
| |||||||||
Paid-in capital |
| 426,931 |
| 416,414 |
| |||||||||||
Retained earnings |
| 981,946 |
| 880,129 |
| |||||||||||
Accumulated other comprehensive income (loss) |
| (8,119 | ) | (1,595 | ) | |||||||||||
Total Common Stock Equity |
| 1,401,297 |
| 1,295,487 |
| |||||||||||
|
|
|
|
|
| |||||||||||
Total Consolidated Capitalization |
| $ | 2,759,624 |
| $ | 2,662,923 |
| |||||||||
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.
117
THE UNION LIGHT, HEAT AND POWER COMPANY
118
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF INCOME TAXES
Taxes other than income taxes increased $4 million (8%) in 1997,
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (dollars in thousands) |
| |||||||
|
|
|
| |||||||
Operating Revenues |
|
|
|
|
|
|
| |||
Electric |
| $ | 226,856 |
| $ | 230,960 |
| $ | 225,601 |
|
Gas |
| 81,706 |
| 109,333 |
| 91,950 |
| |||
Total Operating Revenues |
| 308,562 |
| 340,293 |
| 317,551 |
| |||
|
|
|
|
|
|
|
| |||
Operating Expenses |
|
|
|
|
|
|
| |||
Electricity purchased from parent company for resale (Note 1(s)(ii)) |
| 159,734 |
| 151,562 |
| 159,915 |
| |||
Gas purchased |
| 46,886 |
| 72,593 |
| 51,591 |
| |||
Operation and maintenance |
| 50,223 |
| 39,501 |
| 40,699 |
| |||
Depreciation |
| 17,350 |
| 17,039 |
| 15,685 |
| |||
Taxes other than income taxes |
| 4,598 |
| 3,901 |
| 3,938 |
| |||
Total Operating Expenses |
| 278,791 |
| 284,596 |
| 271,828 |
| |||
|
|
|
|
|
|
|
| |||
Operating Income |
| 29,771 |
| 55,697 |
| 45,723 |
| |||
|
|
|
|
|
|
|
| |||
Miscellaneous - Net |
| 666 |
| 239 |
| (982 | ) | |||
Interest |
| 5,938 |
| 6,313 |
| 6,308 |
| |||
|
|
|
|
|
|
|
| |||
Income Before Taxes |
| 24,499 |
| 49,623 |
| 38,433 |
| |||
|
|
|
|
|
|
|
| |||
Income Taxes (Note 10) |
| 12,349 |
| 13,699 |
| 13,801 |
| |||
|
|
|
|
|
|
|
| |||
Net Income |
| $ | 12,150 |
| $ | 35,924 |
| $ | 24,632 |
|
The accompanying notes as 119 THE UNION LIGHT, HEAT AND POWER COMPANY ASSETS December 31 2002 2001 (dollars in thousands) Current Assets Cash and cash equivalents $ 3,926 $ 4,099 Notes receivable from affiliated companies (Note 6) 13,337 — Accounts receivable less accumulated provision for doubtful accounts of $84 at December 31, 2002, and $1,196 at December 31, 2001 (Note 6) 703 16,785 Accounts receivable from affiliated companies 1,671 2,401 Materials, supplies, and fuel 8,182 10,835 Prepayments and other 316 300 Total Current Assets 28,135 34,420 Property, Plant, and Equipment - at Cost Utility plant in service Electric 258,094 248,223 Gas 215,505 197,301 Common 31,679 50,289 Total Utility Plant In Service 505,278 495,813 Construction work in progress 14,745 11,004 Total Utility Plant 520,023 506,817 Accumulated depreciation 187,876 178,567 Net Property, Plant, and Equipment 332,147 328,250 Other Assets Regulatory assets (Note 1(c)) 5,134 7,838 Other 16,811 6,582 Total Other Assets 21,945 14,420 Total Assets $ 382,227 $ 377,090 The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements. 120 THE UNION LIGHT, HEAT AND POWER COMPANY LIABILITIES AND SHAREHOLDER’S EQUITY December 31 2002 2001 (dollars in thousands) Current Liabilities Accounts payable $ 8,816 $ 7,960 Accounts payable to affiliated companies 22,297 16,156 Accrued taxes 1,487 7,051 Accrued interest 1,226 643 Long-term debt due within one year (Note 4) 20,000 — Notes payable to affiliated companies (Note 5) 14,076 26,432 Other 6,368 5,322 Total Current Liabilities 74,270 63,564 Non-Current Liabilities Long-term debt (Note 4) 54,653 74,621 Deferred income taxes (Note 10) 43,360 28,323 Unamortized investment tax credits 3,143 3,411 Accrued pension and other postretirement benefit costs (Note 9) 15,620 13,277 Other 14,017 21,691 Total Non-Current Liabilities 130,793 141,323 Total Liabilities 205,063 204,887 Common Stock Equity (Note 2) Common Stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333 at December 31, 2002, and December 31, 2001 8,780 8,780 Paid-in capital 23,644 21,111 Retained earnings 144,800 142,320 Accumulated other comprehensive income (loss) (60 ) (8 ) Total Common Stock Equity 177,164 172,203 Commitments and Contingencies (Note 11) Total Liabilities and Shareholder’s Equity $ 382,227 $ 377,090 The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements. 121 THE UNION LIGHT, HEAT AND POWER COMPANY Common Paid-in Retained Accumulated Total (dollars in thousands) 2000 Beginning balance $ 8,780 $ 20,142 $ 103,128 $ — $ 132,050 Net income — — 24,632 — 24,632 Dividends on common stock — — (9,657 ) — (9,657 ) Contribution from parent company for reallocation of taxes — 163 — — 163 Ending balance $ 8,780 $ 20,305 $ 118,103 $ — $ 147,188 2001 Comprehensive income: Net income — — 35,924 — 35,924 Other comprehensive income (loss), net of tax effect of $5 Minimum pension liability adjustment — — — (8 ) (8 ) Total comprehensive income (loss) — — — — 35,916 Dividends on common stock — — (11,707 ) — (11,707 ) Contribution from parent company for reallocation of taxes — 806 — — 806 Ending balance $ 8,780 $ 21,111 $ 142,320 $ (8 ) $ 172,203 2002 Comprehensive income: Net income — — 12,150 — 12,150 Other comprehensive income (loss), net of tax effect of $36 Minimum pension liability adjustment — — — (52 ) (52 ) Total comprehensive income (loss) — — — — 12,098 Dividends on common stock — — (9,670 ) — (9,670 ) Contribution from parent company for reallocation of taxes — 2,533 — — 2,533 Ending balance $ 8,780 $ 23,644 $ 144,800 $ (60 ) $ 177,164 The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements. 122 THE UNION LIGHT, HEAT AND POWER COMPANY 2002 2001 2000 (dollars in thousands) Operating Activities Net income $ 12,150 $ 35,924 $ 24,632 Items providing or (using) cash currently: Depreciation 17,350 17,039 15,685 Deferred income taxes and investment tax credits - net 3,116 (7,116 ) 8,926 Allowance for equity funds used during construction (794 ) (143 ) (61 ) Regulatory assets deferrals 3,954 1,098 (12 ) Regulatory assets amortization (1,452 ) 1,038 271 Accrued pension and other postretirement benefit costs 2,343 154 790 Changes in current assets and current liabilities: Accounts and notes receivable, net of reserves on receivables sold 8,997 12,112 (14,269 ) Materials, supplies, and fuel 2,653 (4,535 ) 1,354 Prepayments (16 ) (26 ) (55 ) Accounts payable 6,997 (20,325 ) 15,832 Accrued taxes and interest (4,981 ) 12,239 (6,582 ) Other assets 2,852 (1,838 ) 2,158 Other liabilities 7,538 2,145 890 Net cash provided by (used in) operating activities 60,707 47,766 49,559 Financing Activities Change in short-term debt (12,356 ) (2,971 ) (8,349 ) Dividends on common stock (9,670 ) (11,707 ) (9,657 ) Net cash provided by (used in) financing activities (22,026 ) (14,678 ) (18,006 ) Investing Activities Construction expenditures (less allowance for equity funds used during construction) (38,854 ) (35,449 ) (28,734 ) Net cash provided by (used in) investing activities (38,854 ) (35,449 ) (28,734 ) Net increase (decrease) in cash and cash equivalents (173 ) (2,361 ) 2,819 Cash and cash equivalents at beginning of period 4,099 6,460 3,641 Cash and cash equivalents at end of period $ 3,926 $ 4,099 $ 6,460 Supplemental Disclosure of Cash Flow Information Cash paid during the year for: Interest (net of amount capitalized) $ 5,067 $ 6,594 $ 6,103 Income taxes $ 2,398 $ 10,848 $ 11,760 The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements. 123 THE UNION LIGHT, HEAT AND POWER COMPANY December 31 2002 2001 (dollars in thousands) Long-term Debt (excludes current portion) Other Long-term Debt: 6.11% Debentures due December 8, 2003 $ — $ 20,000 6.50% Debentures due April 30, 2008 20,000 20,000 7.65% Debentures due July 15, 2025 15,000 15,000 7.875% Debentures due September 15, 2009 20,000 20,000 Total Other Long-term Debt 55,000 75,000 Unamortized Premium and Discount - Net (347 ) (379 ) Total Long-term Debt 54,653 74,621 Common Stock Equity Common Stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333 at December 31, 2002, and December 31, 2001 $ 8,780 $ 8,780 Paid-in capital 23,644 21,111 Retained earnings 144,800 142,320 Accumulated other comprehensive income (loss) (60 ) (8 ) Total Common Stock Equity 177,164 172,203 Total Capitalization $ 231,817 $ 246,824 The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements. 124 In this report Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred tocomparedthey relate to
1996, primarily due to an increase in the Indiana Corporate Gross Income Tax.
Taxes other than income taxes increased $6 million (12%) in 1995, as compared to
1994, primarily due to increased property taxes resulting from a greater
investment in taxable property.
Other Income and Expenses - Net
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on certain
major projects, primarily environmental in nature, from the in-service date
until the related projects are reflected in retail rates. (See Note 1(h) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
OTHER - NET
The $5 million change in other - net for 1997, as compared to 1996, is primarily
due to a gain in 1997 on the sale of a PSI investment.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
In 1997, interest on long-term debt increased $5 million (7%) over the prior
year. The increase was primarily due to the net issuance of approximately $100
million of long-term debt during 1996 and 1997.
Interest on long-term debt decreased $4 million (5%) in 1996, as compared to
1995, due to the redemption of $135 million of long-term debt during the period
from August 1995 through December 1996.
ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION
Allowance for borrowed funds used during construction decreased $2 million (45%)
in 1996, as compared to 1995. This decrease is primarily attributable to a
decrease in the average balance of CWIP, resulting from the Clean Coal Project
being completed at the end of 1995.
Allowance for borrowed funds used during construction decreased $5 million (55%)
in 1995, as compared to 1994, primarily as a result of a decrease in the average
balance of CWIP, which was partially offset by an increase in the debt component
of the AFUDC rate.
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF INCOME
1997 1996 1995
(in thousands)
Operating Revenues
Electric $192 774 $190 900 $187 180
Gas 78 848 76 868 70 288
271 622 267 768 257 468
Operating Expenses
Electricity purchased from parent
company for resale 145 906 143 839 142 308
Gas purchased 44 354 41 185 36 745
Other operation 31 153 30 934 30 712
Maintenance 5 764 4 997 4 580
Depreciation 12 369 11 909 11 438
Income taxes (Note 11) 9 586 9 834 7 887
Taxes other than income taxes 4 055 4 036 3 968
253 187 246 734 237 638
Operating Income 18 435 21 034 19 830
Other Income and Expenses - Net
Allowance for equity funds used
during construction 97 (8) 71
Income taxes (Note 11) 1 100 (352) (44)
Other - net (1 947) (1 417) 6
(750) (1 777) 33
Income Before Interest 17 685 19 257 19 863
Interest
Interest on long-term debt 3 523 4 016 7 161
Other interest 1 396 703 728
Allowance for borrowed funds used
during construction (151) (58) (198)
4 768 4 661 7 691
Net Income $ 12 917 $ 14 596 $ 12 172
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
BALANCE SHEETS
ASSETS
December 31
1997 1996
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $204 111 $195 053
Gas 155 167 148 203
Common 19 073 19 285
378 351 362 541
Accumulated depreciation 133 213 122 310
245 138 240 231
Construction work in progress 14 346 9 050
Total utility plant 259 484 249 281
Current Assets
Cash and temporary cash investments 546 1 197
Notes receivable from affiliated companies - 100
Accounts receivable less accumulated provision
for doubtful accounts of $996 in 1997 and
$1,024 in 1996 (Note 6) 7 308 12 763
Accounts receivable from affiliated companies 446 620
Materials, supplies, and fuel - at average cost
Gas stored for current use 5 401 6 351
Other materials and supplies 693 716
Income tax refundable - 1 670
Prepayments and other 385 370
14 779 23 787
Other Assets
Regulatory assets (Note 1(f))
Deferred merger costs 5 213 5 218
Unamortized costs of reacquiring debt 3 590 3 764
Other 2 262 2 357
Other 6 262 5 146
17 327 16 485
$291 590 $289 553
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
CAPITALIZATION AND LIABILITIES
December 31
1997 1996
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $15.00 par value;
authorized shares - 1,000,000;
outstanding shares - 585,333 in 1997
and 1996 $ 8 780 $ 8 780
Paid-in capital 18 683 18 839
Retained earnings 95 450 92 484
Total common stock equity 122 913 120 103
Long-term Debt (Note 4) 44 671 44 617
Total capitalization 167 584 164 720
Current Liabilities
Notes payableare an integral part of these financial statements.
BALANCE SHEETS
BALANCE SHEETS
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Stock
Capital
Earnings
Other
Comprehensive
Income (Loss)
Common
Stock
Equity
STATEMENTS OF CASH FLOWS
STATEMENTS OF CAPITALIZATION affiliated companies 23 487 30 649
Accounts payable 11 097 12 018
Accounts payable to affiliated companies 19 712 16 771
Accrued taxes 6 332 84
Accrued interest 1 286 1 284
Other 4 364 5 248
66 278 66 054
Other Liabilities
Deferred income taxes (Note 11) 26 211 33 463
Unamortized investment tax credits 4 516 4 797
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 14 044 12 983
Income taxes refundable through rates 6 566 5 121
Other 6 391 2 415
57 728 58 779
Commitments and Contingencies (Note 12)
$291 590 $289 553
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 1994 $8 780 $18 839 $74 203 $101 822
Net income 12 172 12 172
Dividends on common stock (3 512) (3 512)
Balance December 31, 1995 8 780 18 839 82 863 110 482
Net income 14 596 14 596
Dividends on common stock (4 975) (4 975)
Balance December 31, 1996 8 780 18 839 92 484 120 103
Net income 12 917 12 917
Dividends on common stock (9 951) (9 951)
Other - (156) - (156)
Balance December 31, 1997 $8 780 $18 683 $95 450 $122 913
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CASH FLOWS
1997 1996 1995
(in thousands)
Operating Activities
Net income $12 917 $14 596 $12 172
Items providing or (using) cash:
Depreciation 12 369 11 909 11 438
Deferred income taxes and investment
tax credits - net (6 124) 9 857 652
Allowance for equity funds used during
construction (97) 8 (71)
Regulatory assets 100 (1 500) 170
Changes in current assets and current
liabilities
Accounts and notes receivable, net
of reserves on receivables sold 4 507 20 758 (4 003)
Materials, supplies, and fuel 973 (1 339) 1 894
Accounts payable 2 020 (4 690) 11 824
Accrued taxes and interest 7 920 (1 494) (1 607)
Other items - net 5 343 (6 554) 4 412
Net cash provided by operating activities 39 928 41 551 36 881
Financing Activities
Issuance of long-term debt - - 14 704
Redemption of long-term debt - (26 083) (37 036)
Change in short-term debt (7 162) 7 606 8 543
Dividends on common stock (9 951) (4 975) (3 512)
Net cash used in financing activities (17 113) (23 452) (17 301)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (23 466) (18 652) (18 901)
Net cash used in investing activities (23 466) (18 652) (18 901)
Net increase (decrease) in cash and temporary
cash investments (651) (553) 679
Cash and temporary cash investments at beginning
of period 1 197 1 750 1 071
Cash and temporary cash investments at end of
period $ 546 $ 1 197 $ 1 750
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $ 4 490 $ 4 667 $ 8 121
Income taxes 2 859 1 240 7 727
The accompanying notes are an integral part of these financial statements.
RESULTS OF OPERATIONS - ULH&P
Kwh Sales
Kwh sales decreased by 1.2%, compared to 1996. This decrease was a result of
mild weather. This decline was partially offset by an increase in commercial
sales, which reflects a higher average number of customers.
In 1996, total kwh sales increased 5.8% as compared to 1995, reflecting
increased sales to all customer classes. The increase in retail sales, which
reflects a higher average number of residential and commercial customers, was
partially offset by the return to more normal weather in 1996. The increased
industrial sales primarily reflect growth in the food products sector.
Total kwh sales in 1995, as compared to 1994, increased 7.2% reflecting
increased sales to all customer classes. The increase in residential and
commercial kwh sales was due to warmer weather during the 1995 summer cooling
season and colder weather during the fourth quarter of 1995 and an increase in
the average number of customers. The increased industrial sales primarily
reflect growth in the primary metals sector.
ULH&P currently forecasts a 2% annual compound growth rate in kwh sales over the
1998 through 2002 period.
Mcf Sales and Transportation
Mcf gas sales and transportation volumes decreased slightly, as compared to
1996. The milder weather experienced in 1997 contributed to a decrease in
residential and commercial sales. Gas transportation volumes increased and
industrial gas sales decreased as customers continued to purchase gas directly
from suppliers using transportation services provided by ULH&P.
Mcf gas sales and transportation volumes increased 6.6%, as compared to 1995.
Colder weather in the first quarter of 1996, cooler than normal weather early in
the second quarter of 1996, and increases in the average number of customers led
to increased sales to residential and commercial customers. This increase was
partially offset by a decrease in industrial salesperson as customers continued to
purchase gas directly from suppliers.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. The colder weather during the fourth quarter of 1995 primarily
attributed to the increase in residential and commercial sales. These increases
were partially offset by a decline in industrial sales resulting from customers
electing to purchase directly from suppliers, creating additional demand for
transportation services.
Operating Revenues
ELECTRIC OPERATING REVENUES
Electric operating revenues increased $2 million (1%) in 1997, $4 million (2%)
in 1996, and $10 million (5%) in 1995. The increase in 1997 was partially due to
the effect of an order issued by the Kentucky Public Service Commission in July
1996. This order authorized a decrease in electric rates, retroactive to July
1995, reflecting a reduction in the cost of electricity purchased from CG&E.
Partially offsetting this increase was a decline in kwh sales, as previously
discussed. Increases in 1996 and 1995 reflect higher kwh sales, which was
partially offset by the lower average cost of electricity purchased.
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and using ULH&P facilities to transport the gas (see the "Mcf Sales
and Transportation" section) continues to put downward pressure on gas operating
revenues. Since providing transportation services does not necessitate recovery
of gas purchased costs, the revenue per Mcf transported is less than the revenue
per Mcf sold. As a result, a higher relative volume of gas transported to gas
sold translates into lower gas operating revenues.
The $2 million (3%) increase in gas operating revenues in 1997, as compared to
1996, was due to the operation of the fuel adjustment clause reflecting a higher
average cost per Mcf of gas purchased.
Gas operating revenues increased $7 million (9%) in 1996, as compared to 1995.
The increase was primarily attributable to the operation of the fuel adjustment
clause reflecting an increase in the average cost per Mcf of gas purchased and
an increase in total volumes sold and transported.
In 1995, gas operating revenues declined $2 million (2%)“we”, as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of the fuel adjustment clause reflecting a lower average cost
per Mcf of gas purchased.
Operating Expenses
ELECTRICITY PURCHASED FROM PARENT COMPANY FOR RESALE
Electricity purchased increased $7 million (6%) in 1995, as compared to 1994,
due to an increase in volumes purchased.
GAS PURCHASED
The increase in gas purchased expense of $3 million (8%) in 1997, as compared to
1996, reflects a higher average cost per Mcf of gas purchased partially offset
by a decline in the volumes of gas purchased.
Gas purchased increased $4 million (12%) in 1996, as compared to 1995, due to an
increase in volumes purchased and a higher average cost per Mcf of gas
purchased, as previously discussed.
In 1995, gas purchased expense decreased $4 million (9%) from 1994 primarily due
to a decrease in the average cost per Mcf of gas purchased.
OTHER OPERATION
In 1995, other operation expense decreased $2 million (5%)“our”, as compared to 1994,
due, in part, to decreased gas and electric distribution expenses and decreased
gas production expenses.
MAINTENANCE
In 1997, maintenance costs increased $1 million (15%), as compared to 1996. This
increase is primarily attributable to increased maintenance costs on electric
distribution facilities.
In 1996, maintenance costs increased $.4 million (9%) as compared to 1995,
primarily as a result of increased transmission and distribution costs.
Maintenance costs decreased $1 million (16%) in 1995, as compared to 1994,
primarily as a result of reduced maintenance costs on gas and electric
distribution facilities.
DEPRECIATION
Depreciation expense increased $1 million (8%) in 1995, as compared to 1994,
primarily due to additions to electric and gas plant in service.
Other Income and Expenses - Net
OTHER - NET
The $.5 million change in other - net for 1997, as compared to 1996, is
primarily due to increased expenses associated with ULH&P's sales of accounts
receivable.
The decrease in other - net of $1 million in 1996, as compared to 1995, is
primarily attributable to expenses associated with the sales of accounts
receivables in 1996.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
The $.5 million (12%) decrease in interest on long-term debt, as compared to
1996, is primarily due to the redemption of $25 million of long-term debt in
1996.
Interest on long-term debt decreased $3 million (44%) in 1996, as compared to
1995, due to the redemption of $25 million and $35 million of long-term debt in
1996 and 1995, respectively.
OTHER INTEREST
The $1 million increase in other interest, as compared to 1996, is primarily due
to increased short-term borrowings from affiliated companies through Cinergy's
money pool arrangement.
NOTES TO FINANCIAL STATEMENTS
or “us”.
1. Summary of Significant Accounting Policies
Cinergy, CG&E, PSI, and ULH&P
(a) Nature of Operations
Cinergy Corp., a Delaware corporation (Cinergy or
Company)created in October 1994, owns all outstanding common stock of The Cincinnati Gas & Electric Company (CG&E) and PSI Energy, Inc. (PSI), isboth of which are public utility subsidiaries. As a registeredresult of this ownership, we are considered a utility holding company. Because we are a holding company with material utility subsidiaries operating in multiple states, we are registered with and are subject to regulation by the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, as amended (PUHCA). Our other principal subsidiaries are:
•Cinergy was created in the October 1994 merger of
PSIServices, Inc. (Services);
• Cinergy Investments, Inc. (Investments);
• Cinergy Global Resources, Inc. (Resources)(Global Resources); and The Cincinnati Gas & Electric Company
(CG&E). Cinergy's utility subsidiaries are CG&E and PSI
• Cinergy Wholesale Energy, Inc. (PSI)(Wholesale Energy).
CG&E, an Ohio corporation, is a combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through its five wholly-owned
utility subsidiaries, (includingin nearby areas of Kentucky and Indiana. CG&E’s principal subsidiary, The Union Light, Heat and Power Company (ULH&P), is a Kentucky combinationcorporation that provides electric and gas utility (ULH&P)),service in northern Kentucky. CG&E’s other subsidiaries are primarily engagedinsignificant to its results of operations.
In 2001, CG&E began a transition to electric deregulation and customer choice. Currently, the competitive retail electric market in Ohio is in the production, transmission, distribution, and sale of electric energy and/or
the sale and transportation of natural gas in the southwestern portiondevelopment stage. CG&E is recovering its Public Utilities Commission of Ohio (PUCO) approved costs and adjacent areas in Kentucky and Indiana. retail electric rates are frozen during this market development period. See Note 18 for a discussion of key elements of Ohio deregulation.
PSI, an Indiana corporation, is a vertically integrated and regulated electric utility and
previously Resources' utility subsidiary, is engaged in the production,
transmission, distribution, and sale of electric energythat provides service in north central, central, and southern Indiana.
125
The majorityfollowing table presents further information related to the operations of Cinergy'sour domestic utility companies (our operating revenues are
derived from the sale of electricity and the sale and transportation of natural
gas.
Cinergy's non-utility subsidiaries are Cinergy Investments, Inc. (Investments)
and Cinergy companies):
Principal Line(s) of Business | ||
CG&E and | • | Generation, transmission, distribution, and sale of electricity |
• | Sale and/or transportation of natural gas | |
PSI | • | Generation, transmission, distribution, and sale of electricity |
ULH&P | • | Transmission, distribution, and sale of electricity |
• | Sale and transportation of natural gas | |
Services Inc. (Services). Investments, a Delaware corporation, is a non-utility subholdingservice company that was formed to hold and operate Cinergy's
non-utility businesses and interests. Investments' principal activities include
investments in Midlands Electricity plc (Midlands), Cinergy Global Power, Inc.,
and Trigen-Cinergy Solutions LLC (Trigen-Cinergy). (See Note 1(e) for a further
discussion of Midlands.) Services, a Delaware corporation, is the service
company for the Cinergy system, providing member companiesprovides our subsidiaries with a variety of centralized administrative, management, and support services. Investments holds most of our domestic non-regulated, energy-related businesses and investments, including gas marketing and trading operations. Global Resources holds most of our international businesses and investments.
Wholesale Energy, through a wholly-owned subsidiary, Cinergy CG&E, PSI,Power Generation Services, LLC (Generation Services), provides electric production-related construction, operation, and ULH&P
maintenance services to certain affiliates and non-affiliated third parties.
We conduct operations through our subsidiaries and manage through the following three business units:
• Energy Merchant Business Unit (Energy Merchant);
• Regulated Businesses Business Unit (Regulated Businesses); and
• Power Technology and Infrastructure Services Business Unit (Power Technology).
For further discussion of business units see Note 16.
(b) Presentation The accompanying Consolidated Financial
Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles (GAAP). Actual results could differ, as these estimates and assumptions involve judgment. These estimates and assumptions affect various matters, including:
• the reported amounts of assets and liabilities in our Balance Sheets at the dates of the financial statements;
• the disclosure of contingent assets and liabilities at the dates of the financial statements; and
• the reported amounts of revenues and expenses in our Statements of Income during the reporting periods.
126
Additionally, we have reclassified certain prior-year amounts in the financial statements of Cinergy, CG&E, PSI, and PSIULH&P to conform to current presentation.
We use three different methods to report investments in subsidiaries or other companies: the consolidation method, the equity method, and the cost method.
(i) Consolidation Method
We use the consolidation method when we own a majority of the voting stock of or have the ability to control a subsidiary. We eliminate all significant intercompany transactions when we consolidate these accounts. Our consolidated financial statements include the accounts of Cinergy, CG&E, and PSI respectively,, and their wholly-owned subsidiaries. Investments in business entities
(ii) Equity Method
We use the equity method to report investments, joint ventures, partnerships, subsidiaries, and affiliated companies in which the
Company doeswe do not have control, but hashave the ability to exercise influence over operating and financial policies (generally, 20 percent to 50 percent ownership). Under the equity method we report:
• our investment in the entity as Investments in unconsolidated subsidiaries in our Consolidated Balance Sheets; and
• our percentage share of the earnings from the entity as Equity in earnings (losses) of unconsolidated subsidiaries in our Consolidated Statements of Income.
(iii) Cost Method
We use the cost method to report investments, joint ventures, partnerships, subsidiaries, and affiliated companies in which we do not have control and are unable to exercise significant influence over operating and financial policies (generally, 20%up to 50%20 percent ownership) are accounted. Under the cost method we report our investments in the entity as Other investments in our Balance Sheets.
(c) Regulation
Our operating companies and certain of our non-utility subsidiaries must comply with the rules prescribed by the SEC under the PUHCA. Our operating companies must also comply with the rules prescribed by the Federal Energy Regulatory Commission (FERC) and the state utility commissions of Ohio, Indiana, and Kentucky.
Our operating companies use the same accounting policies and practices for usingfinancial reporting purposes as non-regulated companies under GAAP. However, sometimes actions by the equity method. All significant
intercompany transactionsFERC and balances have been eliminated.
The preparationthe state utility commissions result in accounting treatment different from that used by non-regulated companies. When this occurs, we apply the provisions of financial statements in conformityFinancial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (Statement 71). In accordance with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts ofStatement 71, we record regulatory assets and liabilities (expenses deferred for future recovery from customers or obligations to be refunded to customers) on our Balance Sheets.
127
Comprehensive electric deregulation legislation was passed in Ohio on July 6, 1999. As required by the legislation, CG&E filed its Proposed Transition Plan for approval by the PUCO on December 28, 1999. On August 31, 2000, the PUCO approved a stipulation agreement relating to CG&E’s transition plan. This plan created a Regulatory Transition Charge (RTC), designed to recover CG&E’s generation-related regulatory assets and transition costs over a ten-year period which began January 1, 2001. Accordingly, Statement 71 was discontinued for the disclosuregeneration portion of contingentCG&E’s business and Statement of Financial Accounting Standards No. 101, Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71 was applied. The effect of this change on the financial statements was immaterial. Except with respect to the generation-related assets and liabilities atof CG&E, as of December 31, 2002, PSI, CG&E, and ULH&P continue to meet the datecriteria of Statement 71. However, to the financial
statementsextent other states implement deregulation legislation, the application of Statement 71 will need to be reviewed. Based on our operating companies’ current regulatory orders and the reported amountsregulatory environment in which they currently operate, the recovery of revenues and expenses during the
reporting period. Actual results could differ from those estimates. (See Note
12.)
Certain reclassifications of prior years' data have been made to conform with
the current year's presentation.
Cinergy, CG&E, and PSI
(c) Power Marketing and Trading Cinergy's power marketing and trading function
actively markets and trades over-the-counter forward and option contracts for
the purchase and sale of electricity. The majority of these contracts are
settled via physical delivery of electricity or netted out in accordance with
industry trading standards. Option premiums are deferred and includedregulatory assets recognized in the Consolidatedaccompanying Balance Sheets as of December 31, 2002, is probable. For a further discussion of Ohio deregulation see Note 18.
128
Our regulatory assets and amounts authorized for recovery through regulatory orders at December 31, 2002, and 2001, are as follows:
|
| 2002 |
| 2001 |
| ||||||||||||||
|
| CG&E(1) |
| PSI |
| Cinergy |
| CG&E(1) |
| PSI |
| Cinergy |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
| ||||||||||||||||
Amounts due from customers - income taxes(2) |
| $ | 53 |
| $ | 25 |
| $ | 78 |
| $ | 57 |
| $ | 5 |
| $ | 62 |
|
Gasification services agreement buyout costs(3)(7) |
| — |
| 240 |
| 240 |
| — |
| 244 |
| 244 |
| ||||||
Post-in-service carrying costs and deferred operating expenses(7)(8) |
| 1 |
| 42 |
| 43 |
| — |
| 39 |
| 39 |
| ||||||
Coal contract buyout costs(4)(7) |
| — |
| 10 |
| 10 |
| — |
| 26 |
| 26 |
| ||||||
Deferred demand-side management costs |
| — |
| 3 |
| 3 |
| — |
| 9 |
| 9 |
| ||||||
Deferred merger costs |
| 1 |
| 51 |
| 52 |
| 6 |
| 56 |
| 62 |
| ||||||
Unamortized costs of reacquiring debt |
| 9 |
| 30 |
| 39 |
| 10 |
| 33 |
| 43 |
| ||||||
Coal gasification services expenses(7) |
| — |
| 4 |
| 4 |
| — |
| 8 |
| 8 |
| ||||||
RTC recoverable assets(5)(7) |
| 537 |
| — |
| 537 |
| 511 |
| — |
| 511 |
| ||||||
Other |
| 4 |
| 13 |
| 17 |
| 9 |
| 3 |
| 12 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total regulatory assets |
| $ | 605 |
| $ | 418 |
| $ | 1,023 |
| $ | 593 |
| $ | 423 |
| $ | 1,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Authorized for recovery(6) |
| $ | 598 |
| $ | 360 |
| $ | 958 |
| $ | 573 |
| $ | 379 |
| $ | 952 |
|
(1) | Includes $5 million at December 31, 2002, and $8 million at December 31, 2001, related to ULH&P. Of these amounts, $3.6 million at December 31, 2002, and $.6 million at December 31, 2001, have been authorized for recovery. |
(2) | The various regulatory commissions overseeing the regulated business operations of our operating companies regulate income tax provisions reflected in customer rates. In accordance with the provisions of Statement 71, we have recorded net regulatory assets for CG&E and PSI. |
(3) | PSI reached an agreement with Dynegy, Inc. to purchase the remainder of its 25-year contract for coal gasification services. In accordance with an order from the Indiana Utility Regulatory Commission (IURC), PSI began recovering this asset over an 18-year period that commenced upon the termination of the gas services agreement in 2000. |
(4) | In August 1996, PSI entered into a coal supply agreement, which expired December 31, 2000. The agreement provided for a buyout charge, which is being recovered through the fuel adjustment clause. |
(5) | In August 2000, CG&E’s deregulation transition plan was approved. Effective January 1, 2001, a RTC went into effect and provides for recovery of all then existing generation-related regulatory assets and various transition costs over a ten-year period. Because a separate charge provides for recovery, these assets were aggregated and are included as a single amount in this presentation. The classification of all transmission and distribution related regulatory assets has remained the same. |
(6) | At December 31, 2002, these amounts were being recovered through rates charged to customers over a period ranging from 1 to 50 years for CG&E, 1 to 31 years for PSI, and 1 to 18 years for ULH&P. |
(7) | Regulatory assets earning a return at December 31, 2002. |
(8) | For PSI amount includes $10 million that is not yet authorized for recovery and currently is not earning a return at December 31, 2002. |
(d) Cash and Cash Equivalents
We define Cash equivalents on our Balance Sheets and amortizedStatements of Cash Flows as investments with maturities of three months or less when acquired.
(e) Operating Revenues, Energy Purchases, and Fuel Costs
Our operating companies record Operating Revenues and associated expenses for electric and gas service when they provide the service to "Operating Revenues - Electric"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 "Purchasedelectricity has been consumed. This is termed
129
“unbilled revenue” and exchanged power"is a widely recognized and accepted practice for utilities. In making our estimates of unbilled revenue we use complex systems that consider various factors, including weather, in our calculation of retail customer consumption at the Consolidatedend of each month. Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. Related receivables are sold under the accounts receivable sales agreement and therefore are not reflected on our Balance Sheets. See Note 6 for additional information.
The amount of unbilled revenues for Cinergy, CG&E, PSI, and ULH&P as of December 31, 2002, 2001, and 2000, were as follows:
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in millions) |
| |||||||
|
|
|
| |||||||
Cinergy |
| $ | 153 |
| $ | 172 |
| $ | 231 |
|
CG&E and subsidiaries |
| 89 |
| 104 |
| 153 |
| |||
PSI |
| 64 |
| 68 |
| 78 |
| |||
ULH&P |
| 15 |
| 18 |
| 26 |
| |||
The expenses associated with these electric and gas services include:
• fuel used to generate electricity;
• electricity purchased from others;
• natural gas purchased from others; and
• transportation costs associated with the purchase of fuel, electricity, and natural gas.
These expenses are shown in the Statements of Income overof Cinergy, CG&E, and PSI as Fuel and purchased and exchanged power expense and Gas purchased expense. These expenses are shown in ULH&P’s Statements of Income as Electricity purchased from parent for resale expense and Gas purchased expense. Any portion of these costs that are recoverable or refundable to customers in future periods is deferred in either Accounts receivable or Accounts payable in our Balance Sheets.
Indiana law limits the termamount of fuel costs that PSI can recover to an amount that will not result in earning a return in excess of that allowed by the option contract.IURC. Due to deregulation in the state of Ohio, the recovery of fuel costs in retail electric rates has been frozen.
PSI utilizes a purchased power tracking mechanism (Tracker) approved by the IURC for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not recovered through the existing fuel adjustment clause. See Note 11(m) for additional information.
(f) Inventory
Natural gas inventory for Cinergy values its portfolio of
over-the-counter forward and option contracts usingMarketing & Trading, LP (Marketing & Trading) is accounted for at fair value. All other inventory is accounted for at the aggregate lower of cost or market, cost being determined through the weighted average method. ToEffective January 1, 2003,
130
Marketing & Trading’s gas inventory will be adjusted to the extentcost method with a cumulative effect adjustment, as required by Emerging Issues Task Force (EITF) Issue 02-3, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3). See 1(q)(i) below for additional discussion of the impacts of EITF 02-3.
(g) Property, Plant, and Equipment
Property, Plant, and Equipment includes the utility and non-regulated business property and equipment that is in use, being held for future use, or under construction. We report our Property, Plant, and Equipment at its original cost, which includes:
• materials;
• salaries;
• payroll taxes;
• fringe benefits;
• financing costs of funds used during construction (described below in (i) and (j)); and
• other miscellaneous amounts.
We capitalize costs for regulated property, plant, and equipment that are associated with the replacement or the addition of equipment that is considered a property unit. Property units are intended to describe an item or group of items. The cost of normal repairs and maintenance is expensed as incurred. When regulated property, plant, and equipment is retired, Cinergy charges the original cost plus the cost of retirement, less salvage, to accumulated depreciation. A gain or loss is recorded on the sale of regulated property, plant, and equipment if an entire operating unit, as defined by the FERC, is sold. A gain or loss is recorded on non-regulated property, plant, and equipment whenever there is a related sale or retirement.
In August 2000, the generation assets of CG&E were released from the first mortgage indenture lien. CG&E’s transmission and distribution assets, and any generating assets added after August 2000, remain subject to the lien of the first mortgage bond indenture. The utility property of PSI is also subject to the lien of its first mortgage bond indenture.
131
(h) Depreciation
We determine the provisions for depreciation expense using the straight-line method. The depreciation rates are based on periodic studies of the estimated useful lives and the net aggregate lossescost to remove the properties. Inclusion of cost of removal in depreciation rates will be discontinued for all non-regulated property beginning in 2003 as a result of adopting Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (Statement 143). See (q)(iii) below for additional discussion of this change. Our operating companies use composite depreciation rates, which are approved by the respective state commissions. The average depreciation rates for Property, Plant, and Equipment, excluding software, are presented in the portfolio,
Cinergy reservestable below.
|
| 2002 |
| 2001 |
| 2000 |
|
|
|
|
|
|
|
|
|
Cinergy(1) |
| 3.0 | % | 3.0 | % | 3.0 | % |
|
|
|
|
|
|
|
|
CG&E and subsidiaries |
| 2.9 |
| 2.9 |
| 2.9 |
|
|
|
|
|
|
|
|
|
PSI |
| 3.0 |
| 3.0 |
| 3.0 |
|
|
|
|
|
|
|
|
|
ULH&P |
| 3.2 |
| 3.3 |
| 3.3 |
|
(1) | The results of Cinergy also include amounts related to non-registrants. |
(i) Allowance for such losses. Net gains are recognized when realized. DueFunds Used During Construction (AFUDC)
Our operating companies finance construction projects with borrowed funds and equity funds. Regulatory authorities allow us to record the lackcosts of liquidity andthese funds as part of the volatility currently experienced in the power
markets, significant assumptions must be madecost of construction projects. AFUDC is calculated using a methodology authorized by the Company when estimating
current market valuesregulatory authorities. The borrowed funds component of AFUDC, which is recorded on a pre-tax basis, for purposesthe years ended December 31, 2002, 2001, and 2000, were as follows:
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in millions) |
| |||||||
|
|
|
| |||||||
Cinergy |
| $ | 10.1 |
| $ | 8.4 |
| $ | 8.2 |
|
CG&E and subsidiaries |
| 1.0 |
| 1.0 |
| 5.0 |
| |||
PSI |
| 9.1 |
| 7.4 |
| 3.2 |
| |||
ULH&P |
| 0.2 |
| 0.2 |
| 0.4 |
| |||
With the deregulation of CG&E’s generation assets, the AFUDC method is no longer used to capitalize the cost of funds used during generation-related construction at CG&E. See (j) below for a discussion of capitalized interest.
(j) Capitalized Interest
Cinergy capitalizes interest costs for non-regulated construction projects in accordance with Statement of Financial Accounting Standards No. 34, Capitalization of Interest Cost (Statement 34).
132
The primary differences from AFUDC are that Statement 34 methodology does not include a component for equity funds and does not emphasize short-term borrowings over long-term borrowings. Capitalized interest costs, which are recorded on a pre-tax basis, for the years ended December 31, 2002, 2001, and 2000, were as follows:
|
| 2002 |
| 2001 |
| 2000(1) |
| |||
|
| (in millions) |
| |||||||
|
|
|
| |||||||
Cinergy(2) |
| $ | 7.2 |
| $ | 7.1 |
| $ | — |
|
CG&E and subsidiaries |
| 7.2 |
| 5.5 |
| — |
| |||
(1) | Amounts for 2000 were immaterial. |
(2) | The results of Cinergy also include amounts related to non-registrants. |
(k) Federal and State Income Taxes
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, requires an asset and liability approach for financial accounting and reporting of income taxes. The tax effects of differences between the financial reporting and tax basis of accounting are reported as Deferred income tax assets or liabilities in our Balance Sheets and are based on currently enacted income tax rates.
Investment tax credits, which have been used to reduce our federal income taxes payable, have been deferred for financial reporting purposes. These deferred investment tax credits are being amortized over the useful lives of the aggregate lowerproperty to which they are related. For a further discussion of cost or market
comparison. It is possible that the actual gains and losses from the Company's
power marketing and trading activities could differ substantially from the gains
and losses estimated currently.
Cinergy, CG&E, and PSI
(d)income taxes see Note 10.
(l) Financial Derivatives Cinergy and its subsidiaries
We use derivative financial instruments to hedge exposuresmanage:
• funding costs;
• exposure to fluctuations in interest rates; and
• exposure to foreign currency exchange rates, lower funding
costs,rates.
We account for derivatives under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and manage exposuresHedging Activities (Statement 133), which requires all derivatives that are not exempted to fluctuationsbe accounted for at fair value. Changes in interest rates. Instruments usedthe derivative’s fair value must be recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivatives that qualify as hedges can (a) offset related fair value changes on the hedged item in the income statement for fair value hedges; or (b) be recorded in other comprehensive income for cash flow hedges. To qualify for hedge accounting, financial instruments must be designated as a hedge (for example, an offset of foreign exchange or interest rate risks) at the inception of the contract and must be effective at reducing the risk associated with the exposure being
hedged.hedged item. Accordingly, changes in marketthe fair values or cash flows of instruments designated hedge instrumentsas hedges must be highly correlated with changes in marketthe fair values or cash flows of the related hedged items.
133
From time to time, we may use foreign currency contracts (for example, a contract obligating one party to buy, and the other to sell, a specified quantity of a foreign currency for a fixed price at a future date) and currency swaps (for example, a contract whereby two parties exchange principal and interest cash flows denominated in different currencies) to hedge foreign currency denominated purchase and sale commitments (cash flow hedges) and certain of our net investments in foreign operations (net investment hedges) against currency exchange rate fluctuations. Reclassification of unrealized gains or losses on foreign currency cash flow hedges from other comprehensive income occurs when the underlying hedged items at inception of the hedge and over the life of the hedge contract.
Cinergy utilizes a currency swap to hedge its pound sterling denominated net
investment in Avon Energy Partners Holdings (Avon Energy). Accordingly, any
translation gains or losses related to the principal exchange on the currency
swap areitem is recorded in the cumulative foreign currency translation adjustment
which is a separate component of common stock equity. Aggregate translation
losses related to the principal exchange of the currency swap are reflected in
"Current Liabilities - Other" in the Consolidated Balance Sheets.
Interestincome.
We also use interest rate swaps are accounted(an agreement by two parties to exchange fixed-interest rate cash flows for underfloating-interest rate cash flows) and treasury locks (an agreement that fixes the yield or price on a specific treasury security for a specific period, which we sometimes use in connection with the issuance of fixed rate debt). Through December 31, 2000, we utilized the accrual method.method to account for these interest rate swaps and treasury locks. Accordingly, gains and losses were calculated based on any interest differentialthe current period difference between the fixed-rate and the floating-rate interest amounts, calculated onusing agreed upon notional principal
amounts, areamounts. These gains and losses were recognized in the Consolidatedour Statements of Income as a component of interest expense as realizedInterest over the life of the agreement. Cinergy
(e) InvestmentsEffective with our adoption of Statement 133 in Unconsolidated Subsidiaries
Except for Cinergy's investment in Avon Energy, investments in unconsolidated
subsidiaries are not significant. In May 1996, Cinergy and GPU, Inc. (GPU), a
Pennsylvania corporation, entered into a 50%/50% joint venture agreement and
formed Avon Energy, incorporated in London, England. Avon Energy, through a
wholly-owned subsidiary, immediately began acquiring the outstanding common
stock of Midlands, a United Kingdom (UK) regional electric company. During the
thirdfirst quarter of 1996, Avon2001, we began accounting for all derivatives (including interest rate swaps and treasury locks) using fair value accounting, and we assess the effectiveness of any interest rate swaps and/or treasury locks used in hedging activities.
At December 31, 2002, the ineffectiveness of instruments that we have classified as cash flow hedges of variable-rate debt instruments was not material. Reclassification of unrealized gains or losses on cash flow hedges of debt instruments from Accumulated other comprehensive income (loss) occurs as interest is accrued on the debt instrument. We currently estimate that on an after-tax basis, $5 million of unrealized losses will be reclassified as a charge to Interest during the twelve-month period ending December 31, 2003. See (q)(iv) below for further discussion of Statement 133.
(m) Energy completedMarketing and Trading
We market and trade electricity, natural gas, coal, and other energy-related products. We designate transactions as accrual or trading at the acquisition oftime they are originated. Contracts are classified as accrual only when we (a) have the intent and projected ability to fulfill substantially all obligations from company-owned assets, and (b) meet the requirements to consider the contract a normal purchase or sale under Statement 133 (if a derivative), or meet the requirements to consider the contract non-trading under EITF Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities (EITF 98-10) (if not a derivative under Statement 133). Such classification is generally limited to the sale of generation to third parties when it is not required to meet native load requirements (end-use customers within our public utility companies’ franchise service territory). All other energy contracts (excluding electric, coal, and gas purchase contracts for use in serving our native load requirements) are classified as trading. Gas trading is comprised of transactions for which gas is physically delivered to a customer (physical gas trading), as well as transactions that are financial in nature for which delivery rarely occurs (financial gas trading). Since Cinergy owns no gas production and has limited transmission capabilities, all gas transactions (other than
134
procurement and sale of gas to CG&E and ULH&P retail customers) are considered trading whether physical or financial.
We account for accrual transactions by recognizing revenues and costs when the underlying commodity is delivered and trading transactions using the fair value method of accounting. Under the fair value method of accounting, unrealized trading transactions are shown at fair value in our Balance Sheets as Energy risk management assets and Energy risk management liabilities. In October 2002, the EITF reached a consensus in EITF 02-3 to rescind EITF 98-10. This decision will require that non-derivative contracts currently accounted for at fair value be accounted for on an accrual basis in the future. See (q)(i) below for further discussion.
We reflect unrealized gains and losses, resulting from changes in fair value, on a net basis in Operating Revenues. For physical gas trading and for all power trading, we recognize both revenues and costs on a gross basis in Operating Revenues and in Fuel and purchased and exchanged power expense and Gas purchased expense, respectively, when transactions are settled. For financial gas trading, realized gains and losses are recorded on a net basis in Operating Revenues when transactions are settled. EITF 02-3 will also require realized and unrealized gains and losses on all energy trading derivatives to be presented net in Operating Revenues, beginning in 2003. See (q)(i) below for further discussion.
Although we intend to settle accrual contracts with company-owned assets, occasionally we settle these contracts with purchases on the open trading markets. The cost of these purchases could be in excess of the outstanding common stockassociated revenues. We recognize the gains or losses on these transactions as delivery occurs. Due to the infrequency of Midlands. The total consideration paid by
Avon Energy was approximately 1.7 billion pounds sterling ($2.6 billion at then
existing currency exchange rates). The fundssuch settlements, both historical and projected, and the fact that physical settlement to the customer still occurs, we continue to apply the normal purchases and sales exemption to such physical contracts that constitute derivatives. Open market purchases may occur for the acquisition were obtained
from Cinergy'sfollowing reasons:
• generating station outages;
• least-cost alternative;
• native load requirements; and GPU's investment in Avon Energy of approximately 330 million
pounds sterling each ($500 million each), with the remainder being obtained by
Avon Energy through the issuance of non-recourse debt. As a result
• extreme weather.
We anticipate that some of the allocationelectricity obligations, even though considered trading contracts, will ultimately be settled using company-owned generation. The cost of this generation is usually below the market price at which the trading portfolio has been valued. The potential for earnings volatility from period to period is increased due to the risks associated with marketing and trading electricity, natural gas, and other energy-related products.
We value contracts in the trading portfolio using end-of-the-period fair values, utilizing the following factors (as applicable):
• closing exchange prices (that is, closing prices for standardized electricity and natural gas products traded on an organized exchange, such as the New York Mercantile Exchange);
• broker-dealer and over-the-counter price quotations; and
135
• model pricing (which considers time value and historical volatility factors of electricity and natural gas).
(n) Business Combinations and Intangible Assets
We account for business combinations using the purchase price, Avon Energy has recordedmethod. Goodwill and other intangibles with indefinite lives are no longer amortized. Prior to January 1, 2002, we amortized goodwill of
approximately 1.4 billion pounds sterling ($2 billion) in connection with its
acquisition of Midlands. The goodwill is being amortized on a straight-line basis over its estimated useful life, not to exceed 40 years. SummarizedThe discontinuance of this amortization was not material to our financial informationposition or results of operations. Goodwill is assessed for Avon Energyimpairment annually, or when circumstances indicate that the fair value of a reporting unit has declined significantly, by applying a fair-value-based test. This test is applied at the “reporting unit” level, which is not broader than the current business segments discussed in Note 16. Acquired intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of intent to do so.
(o) Impairment of Long-Lived Assets
We evaluate long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted future cash flows attributable to the assets, as follows:
December 31, 1997
Avon Energy
Assets (in millions)
Property, plant, and equipment $1 890
Current assets 676
Other assets 2 148
Total assets $4 714
Capitalization and Liabilities
Total common shareholders' equity $1 006
Long-term debt 1 533
Other liabilities 2 175
Total capitalization and
liabilities $4 714
Cinergy's investments in unconsolidated
subsidiaries: Avon Energy $ 505
Other companies 33
Total investments in unconsolidated
subsidiaries $ 538
Year Ended
December 31, 1997
Avon Energy
(in millions)
Operating revenues $2 176
Net income before extraordinary item $ 127
Extraordinary item - windfall profits
tax (less applicable income taxes of $0) $ (219)
Net loss $ (92)
Cinergy's equity in earnings of Avon Energy
before extraordinary item $ 63
Cinergy's equity in extraordinary item $ (109)
Cinergy's equity in earnings of: Avon Energy $ (46)
Other companies (3)
Total equity in the earnings of unconsolidated
subsidiaries $ (49)
During 1997, Cinergy received $25 million of dividends from Avon Energy.
The pro forma financial information for 1996 presented below assumes 100% of
Midlands was acquired on January 1, 1996. The pro forma adjustments include
recognition of equity in the estimated earnings of Avon Energy, an adjustment
for interest expense on debt associated with Cinergy's investment in Avon
Energy, and related income taxes. The estimated earnings of Avon Energy include
the historical earnings of Midlands prior to its acquisition by Avon Energy,
adjusted for the estimated effect of purchase accounting (including the
amortization of goodwill) and conversion to United States (US) GAAP, interest
expense on debt issued by Avon Energy associatedcompared with the acquisition,carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and related income taxes. The equity in earningsrecording a provision for an impairment loss if the carrying value is greater than the fair value. Until the assets are disposed of, Avon Energy has been converted
from pounds sterlingtheir estimated fair value is reevaluated when circumstances or events change.
In 2002, Cinergy sold and/or classified as held for sale, certain non-core investments. Pursuant to dollars using the average exchange rate for 1996 of
$1.53/pound sterling.
Year Ended December 31, 1996
Net Earnings Per Share(1)
Income Basic Diluted
(in millions, except
per share amounts)
Cinergy $335 $2.00(2) $1.99(2)
Pro forma adjustments:
Equity in earnings of Avon Energy 20
Interest expense (14)
Income taxes 6
Pro forma results $347 $2.08 $2.06
(1) See Note 16.
(2) Earnings per share after a charge of $.12 per share for the cost of
reacquiring preferred stock of CG&E through a tender offer.
Cinergy, CG&E, PSI, and ULH&P
(f) Regulation Cinergy, its utility subsidiaries (CG&E, together with its
subsidiaries, and PSI), and certain of its non-utility subsidiaries are subject
to regulation by the Securities and Exchange Commission (SEC) under the PUHCA.
Cinergy's utility subsidiaries are also subject to regulation by the Federal
Energy Regulatory Commission (FERC) and the state utility commissions of
Indiana, Kentucky, and Ohio.
The accounting policies of Cinergy's utility subsidiaries conform to the
accounting requirements and ratemaking practices of these regulatory authorities
and to GAAP, including the provisions of Statement of Financial Accounting Standards No. 71, 144, Accounting for the EffectsImpairment of Certain Types of RegulationLong-Lived Assets (Statement 71).
Under the provisions of Statement 71, regulatory assets represent probable
future revenue associated with deferred costs to be recovered from customers
through the ratemaking process. Certain criteria must be met for regulatory
assets to be recorded and for the continued application of the provisions of
Statement 71, including regulated rates designed to recover the specific
utility's costs. Failure to satisfy the criteria in Statement 71 would eliminate
the basis for recognition of regulatory assets.
Based on Cinergy's current regulatory orders and the regulatory environment in
which it currently operates, the recognition of its regulatory assets as of
December 31, 1997, is fully supported. The regulatory assets of PSI and CG&E and
its utility subsidiaries as of December 31 are as follows:
1997 1996
PSI CG&E 1/Cinergy PSI CG&E 1/Cinergy
(in millions)
Amounts due from customers -
income taxes (Note 1(g)) $ 24 $350 $ 374 $ 33 $344 $ 377
Post-in-service carrying costs and
deferred operating expenses
(Note 1(h)) 44 135 179 45 141 186
Coal contract buyout costs (Note 1(i)) 122 - 122 138 - 138
Deferred demand-side management (DSM)
costs (Note 1(j)) 71 39 110 102 33 135
Phase-in deferred return and
depreciation (Note 1(k)) - 90 90 - 95 95
Deferred merger costs (Note 1(l)) 74 16 90 76 18 94
Unamortized costs of reacquiring
debt (Note 1(m)) 30 36 66 32 39 71
Coal gasification services expenses
(Note 1(n)) 22 - 22 25 - 25
Other 22 2 24 28 20 48
Total $409 $668 $1 077 $479 $690 $1 169
1/ Includes $11 million related to ULH&P at both December 31, 1997, and 1996.
PSI has previously received regulatory orders authorizing the recovery of $399
million of its total regulatory assets at December 31, 1997. CG&E has previously
received regulatory orders authorizing the recovery of $595 million (including
$4 million for ULH&P) of its total regulatory assets at December 31, 1997. Both
PSI and CG&E (including ULH&P) will request recovery of additional amounts in
future proceedings, which could include proceedings, if any, related to
transition to customer choice in each applicable jurisdiction.
Cinergy, CG&E, PSI, and ULH&P
(g) Federal and State Income Taxes Under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement
109)144), deferred tax assets and liabilities are recognized for the income tax
consequences of transactions treated differently for financial reporting and tax
return purposes, measured on the basis of statutory tax rates. Investment tax
credits utilized to reduce Federal income taxes payablethese investments have been deferredclassified as Discontinued operations, net of tax in our financial statements. See Note 15 for financial reporting purposes and are being amortized over the useful lives of
the property which gave rise to such credits.
Income tax provisions reflected in customer rates are regulated by the various
regulatory commissions overseeing the regulated business operations of PSI,
CG&E, and CG&E's utility subsidiaries. In accordance with the provisions of
Statement 71, Cinergy, PSI, and CG&Efurther information.
136
(p) Stock-Based Compensation
We have recorded a regulatory asset, "Amounts
due from customers - income taxes," representing the probable recovery from
customers of additional income taxes established under Statement 109. ULH&P has
recorded a regulatory liability "Income taxes refundable through rates"
representing the probable repayment to customers of income taxes established
under Statement 109 to the extent deferred income taxes recovered in rates
exceed amounts payable in future periods.
Cinergy, CG&E, and PSI
(h) Post-in-service Carrying Costs and Deferred Operating Expenses CG&E received
various orders from the Public Utilities Commission of Ohio (PUCO) which
permitted the deferral of carrying costs and non-fuel operating expenses
(including depreciation)historically accounted for the Wm. H. Zimmer Generating Station (Zimmer) and
Woodsdale Generating Station (Woodsdale) units. Effective with the dates of the
PUCO's orders reflecting the units in customer rates, the deferrals of
post-in-service carrying costs are being recovered over the lives of the
applicable units and the deferred non-fuel operating expenses are being
recovered over a 10-year period.
PSI received authority from the Indiana Utility Regulatory Commission (IURC) for
the accrual of the debt component of carrying costs (to the extent not recovered
currently in retail rates) and the deferral of depreciation expense on certain
major projects which are primarily environmental in nature. These projects
include a 262-megawatt clean coal power generating facility located at the
Wabash River Generating Station (Clean Coal Project) and a scrubber at Gibson
Generating Station (Gibson). In a February 1995 order (February 1995 Order) and
a September 1996 order (September 1996 Order), the IURC authorized the recovery
of deferred costs incurred prior to August 31, 1995. These deferred costs are to
be recovered over the remaining lives of the related assets. Deferrals incurred
after this date will be requested for recovery in future proceedings. These
proceedings could include proceedings, if any, related to transition to customer
choice.
Cinergy and PSI
(i) Coal Contract Buyout Costs In August 1996, PSI entered into a coal supply
agreement with Eagle Coal Company (Eagle) for the supply of approximately three
million tons of coal per year. The agreement, which terminates December 31,
2000, provides for a buyout fee of $179 million (including interest) to be
included in the price of coal to PSI over the term of the contract. This fee
represents the costs to Eagle of the buyout of the coal supply agreement between
PSI and Exxon Coal and Minerals Company. The retail jurisdictional portion of
the buyout charge, excluding the portion applicable to joint owners, is being
recovered through the quarterly fuel adjustment clause, with carrying costs on
unrecovered amounts, through December 2002. PSI has also filed a petition at the
FERC for recovery of the wholesale jurisdictional portion of the buyout costs
through the wholesale fuel adjustment clause. Generally, the FERC will allow
recovery if the utility can demonstrate there will be net benefits to customers
during the buyout cost recovery period. The FERC is expected to issue an order
on PSI's petition early in 1998.
Cinergy, CG&E, PSI, and ULH&P
(j) DSM A settlement agreement between PSI and certain intervenors, in a
proceeding established to review PSI's current and proposed DSM programs, was
approved by the IURC in December 1996. Beginning January 1, 1997, and continuing
through December 31, 2000, the settlement agreement allows PSI to recover $35
million per year through a non-bypassable charge in PSI's retail rates. The $35
million is designed to recover all previously incurred, but as yet unrecovered,
DSM costs and all costs related to satisfying remaining commitments associated
with a previous DSM settlement agreement. The $35 million also includes recovery
of carrying costs. Further, the agreement authorizes PSI to spend up to $8
million annually on ongoing DSM programs through the year 1999 and to collect
such amounts currently in retail rates.
Additionally, in December 1996, the PUCO issued an order applicable to CG&E's
DSM programs. The order requires CG&E to spend up to one-half of the annual $5
million currently included in retail rates on PUCO-sanctioned low-income
residential programs. The remaining portion of the $5 million is to be applied
to the recovery of DSM cost deferrals. CG&E's participation in the low-income
programs will be a factor considered by the PUCO in setting future rates of
return and approving competitive transition plans.
The Kentucky Public Service Commission has authorized concurrent recovery of
costs related to various DSM programs of ULH&P.
Cinergy and CG&E
(k) Phase-in Deferred Return and Depreciation In May 1992, the PUCO issued an
order (May 1992 Order) establishing a rate phase-in plan for Zimmer. In the
first three years of the rate phase-in plan, rates charged to customers did not
fully recover depreciation expense and return on investment. In accordance with
the provisions of the May 1992 Order, this deficiency has been recognized as a
regulatory asset and is being recovered over a seven-year period which began in
May 1995.
Cinergy, CG&E, PSI, and ULH&P
(l) Deferred Merger Costs CG&E and its utility subsidiaries have deferred a
portion of merger transaction costs and costs to achieve merger savings
(collectively, Merger Costs) incurred through December 31, 1996, for future
recovery in customer rates.
In accordance with various IURC orders, PSI has deferred Merger Costs incurred
through October 31, 1996, and is recovering $44 million of these deferred costs
incurred through August 31, 1995, over a ten-year period.
CG&E and PSI completed voluntary workforce reduction and severance programs in
1996. The pre-tax costs of these programs and the related accounting were as
follows:
1996 Programs
(in millions)
CG&E 1/ PSI
Costs expensed $30 $ 5
Costs deferred 9 33
$39 $38
1/ Includes $2 million related to ULH&P.
The above amounts reflect approximately $61 million ($31 million for CG&E and
$30 million for PSI) of costs associated with additional pension benefits
further discussed in Note 9.
Cinergy, CG&E, PSI, and ULH&P
(m) Debt Discount, Premium, and Issuance Expenses and Costs of Reacquiring Debt
Debt discount, premium, and issuance expenses on outstanding long-term debt of
Cinergy's utility subsidiaries are amortized over the lives of the respective
issues.
In accordance with established ratemaking practices, Cinergy's utility
subsidiaries have deferred costs (principally call premiums) from the
reacquisition of long-term debt and are amortizing such amounts over periods
ranging from 1 to 24 years (4 to 24 years for CG&E and its subsidiaries, 1 to 24
years for PSI, and 11 to 23 for ULH&P).
Cinergy and PSI
(n) Coal Gasification Services Expenses In November 1995, upon commercial
operation of the Clean Coal Project, PSI and Destec Energy, Inc. (Destec) began
a 25-year contractual agreement for the provision of coal gasification services.
The agreement requires PSI to pay Destec a base monthly fee including certain
monthly operating expenses. Over the next five years (1998 through 2002), the
base monthly fees and expenses are expected to total $201 million. PSI received
authorization in the September 1996 Order for the inclusion of the costs of the
Clean Coal Project in retail rates. PSI also received authorization to defer,
for subsequent recovery in retail rates, the base monthly fees and expenses
incurred prior to the effective date of the September 1996 Order.
Cinergy, CG&E, PSI, and ULH&P
(o) Utility Plant Utility plant is stated at the original cost of construction,
which includes an allowance for funds used during construction (AFUDC) and a
proportionate share of overhead costs. Construction overhead costs include
salaries, payroll taxes, fringe benefits, and other expenses.
Substantially all utility plant is subject to the lien of each applicable
company's first mortgage bond indenture.
Cinergy, CG&E, PSI, and ULH&P
(p) AFUDC Cinergy's utility subsidiaries capitalize AFUDC, a non-cash income
item, which is defined in the regulatory system of accounts prescribed by the
FERC as including "the net cost for the period of construction of borrowed funds
used for construction purposes and a reasonable rate on other funds when so
used." AFUDC accrual rates were as follows and are compounded semi-annually:
1997 1996 1995
Cinergy average 6.3% 7.1% 7.9%
CG&E and its utility
subsidiaries average 6.4 8.7 8.8
ULH&P average 6.9 8.8 7.0
PSI average 5.9 5.4 7.0
Cinergy, CG&E, PSI, and ULH&P
(q) Depreciation and Maintenance Provisions for depreciation are determined by
using the straight-line method applied to the cost of depreciable plant in
service. The rates are based on periodic studies of the estimated service lives
and net cost of removal of the properties. The average depreciation rates for
utility plant are:
1997 1996 1995
PSI 3.0% 3.0% 3.1%
CG&E and its utility subsidiaries
Electric 2.9 2.9 2.9
Gas 2.9 2.8 2.8
Common 3.0 3.0 3.4
ULH&P
Electric 3.3 3.3 3.3
Gas 3.1 3.1 3.1
Common 5.0 5.1 5.1
For Cinergy's utility subsidiaries, maintenance and repairs of property units
and replacements of minor items of property are charged to maintenance expense.
The costs of replacements of property units are capitalized. The original cost
of the property retired and the related costs of removal, less salvage
recovered, are charged to accumulated depreciation.
Cinergy, CG&E, PSI, and ULH&P
(r) Operating Revenues and Fuel Costs Cinergy's utility subsidiaries recognize
revenues for electric and gas service rendered during the month, including
revenues associated with sales unbilled at the end of each month. The costs of
electricity and gas purchased and the cost of fuel used in electric production
are expensed as recovered through revenues. Any portion of these costs which are
recoverable or refundable in future periods is deferred in the accompanying
Balance Sheets. PSI's recovery of fuel costs is subject to a determination that
such recovery will not result in PSI earning a return in excess of that allowed
in the September 1996 Order. Prior to January 1, 1998, this earnings test was
calculated in accordance with the settlement agreement approved in the February
1995 Order and the Indiana statute in effect at the time of the settlement
agreement. Effective January 1, 1998, PSI will follow the provisions of the
current Indiana statute, which are generally less stringent with regard to the
earnings test.
Cinergy, CG&E, and ULH&P
(s) Order 636 In 1992, the FERC issued order 636 (Order 636). CG&E and certain
of its utility subsidiaries are subject to Order 636 which restructured
operations between interstate gas pipelines and their customers for gas sales
and transportation services. Order 636 also allowed pipelines to recover from
customers transition costs incurred in complying with the order. In July 1994,
the PUCO issued an order approving a stipulation between CG&E and its
residential and industrial customer groups providing for recovery of these
pipeline transition costs. CG&E is presently recovering its Order 636 transition
costs pursuant to a PUCO-approved tariff. CG&E's utility subsidiaries, including
ULH&P, recover such costs through their gas cost recovery mechanisms. These
costs are deferred as incurred by CG&E and its applicable utility subsidiaries
and amortized as recovered from customers.
Cinergy, CG&E, PSI, and ULH&P
(t) Statements of Cash Flows All temporary cash investments with maturities of
three months or less, when acquired, are reported as cash equivalents. See Notes
3(b) and 8(a)(i) for information concerning non-cash investing transactions
during 1996.
Cinergy
(u) Translation of Foreign Currency All assets and liabilities reported in the
balance sheets of foreign subsidiaries whose functional currency is other than
the US dollar are translated at year-end exchange rates; income and expense
items are translated at the average exchange rate prevailing during the month
the respective transactions occur. Translation gains and losses are accumulated
as a separate component of common stock equity.
2. Common Stock
(a) Changes in Common Stock Outstanding
Cinergy
The following table reflects the shares of Cinergy common stock reserved for
issuance at December 31, 1997, and shares issued in 1997, 1996, and 1995 for the
Company's stock-based plans.
Shares
Reserved at Shares Issued
Dec. 31, 1997 1997 1996 1995
401(k) Savings Plans 6 469 373 - - 1 222 379
Dividend Reinvestment and
Stock Purchase Plan 1 798 486 - - 935 711
Directors' Deferred
Compensation Plan 200 000 - - -
Performance Shares Plan (PSP) 771 301 - 492 28 207
Employee Stock Purchase
and Savings Plan 1 932 384 - - 1 010
Stock Option Plan 4 558 777 22 219 15 007 403 997
1996 Long-term Incentive
Compensation Plan (LTIP) 6 956 386 43 614 - -
Cinergy retired 304, 6,511, and 119,211 shares of common stock in 1997, 1996,
and 1995, respectively, primarily representing shares tendered as payment for
the exercise of previously granted stock options. In 1995, Cinergy issued 10
shares of common stock, representing the remainder of a non-officer employee
award program granted in 1994.
ULH&P
All of ULH&P's common stock is held by CG&E.
Cinergy, CG&E, and PSI
(b) Dividend Restrictions Cinergy owns all of the common stock of CG&E and PSI.
The ability of Cinergy to pay dividends to holders of its common stock is
principally dependent on the ability of CG&E and PSI to pay common dividends to
Cinergy. CG&E and PSI cannot purchase or otherwise acquire for value or pay
dividends on their common stock if dividends are in arrears on their preferred
stock. The amount of common stock dividends that each company can pay also may
be limited by certain capitalization and earnings requirements. Currently, these
requirements do not impact the ability of either company to pay dividends on
common stock.
Cinergy
(c) Stock-based Compensation Plans Cinergy has four stock-based compensation
plans: the LTIP, the Stock Option Plan, the PSP, and the Employee Stock Purchase
and Savings Plan. Cinergy ceased accrual of incentive compensation under the PSP
as of December 31, 1996, and on January 1, 1997, implemented the LTIP.
Cinergy accounts for itsour stock-based compensation plans using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees under
which stock option-type awards are recorded at intrinsic value. For 1997, 1996,
and 1995, compensation cost related to Cinergy's (APB 25) (see Note 2 for further information on our stock-based compensation plans,
before income taxes, recognized inplans). In July 2002, we announced that we would prospectively adopt the Consolidated Statements of Income was $6
million, $2 million, and $1 million, respectively.
Net income and earnings per share for 1997, 1996, and 1995, assuming
compensation cost for these plans had been determined at fair value consistent
with therecognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement(Statement 123), would have
been as follows:
1997 1996 1995
(in millions, except per share amounts)
amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (Statement 148), for all employee awards granted or modified after January 1, 2003. The following table illustrates the effect on our Net income - as reported $253 $335 $347
- pro forma $251 $334 $346
and Earnings per share - as reported $1.61 $2.00 $2.22
- pro forma $1.59 $1.99 $2.21
Diluted earnings per share - as reported $1.59 $1.99 $2.20
- pro forma $1.58 $1.99 $2.20
In accordance with (EPS) if the provisions of Statement 123,fair value based method had been applied to all outstanding and unvested awards in each period.
|
| Year Ended December 31 |
| ||||||||
|
| (dollars in millions, except per share amounts) |
| ||||||||
|
| 2002 |
| 2001 |
| 2000 |
| ||||
|
|
|
| ||||||||
|
|
|
| ||||||||
Net income, as reported |
| $ | 361 |
| $ | 442 |
| $ | 399 |
| |
|
|
|
|
|
|
|
| ||||
Add: | Stock-based employee compensation expense included in reported net income, net of related tax effects. |
| 24 |
| 13 |
| 9 |
| |||
|
|
|
|
|
|
|
|
| |||
Deduct: | Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects. |
| 23 |
| 13 |
| 9 |
| |||
|
|
|
|
|
|
|
| ||||
Pro-forma net income |
| $ | 362 |
| $ | 442 |
| $ | 399 |
| |
|
|
|
|
|
|
|
| ||||
EPS - as reported |
| $ | 2.16 |
| $ | 2.78 |
| $ | 2.51 |
| |
EPS - pro-forma |
| $ | 2.17 |
| $ | 2.78 |
| $ | 2.51 |
| |
|
|
|
|
|
|
|
| ||||
EPS assuming dilution - as reported |
| $ | 2.13 |
| $ | 2.75 |
| $ | 2.50 |
| |
EPS assuming dilution - pro-forma |
| $ | 2.14 |
| $ | 2.75 |
| $ | 2.50 |
| |
In estimating the pro formapro-forma amounts, the fair value method of accounting was not applied to options granted prior to January 1, 1995. This is in accordance with the provisions of Statement 123, as amended by Statement 148. As a result, the pro formapro-forma effect on net incomeNet Income and earnings per shareEPS may not be representative of future years. In addition, the pro formapro-forma amounts reflect certain assumptions used in estimating fair values. These fair value assumptions are described in Note 2.
(q) Accounting Changes
(i) Energy Trading
The EITF has been discussing several issues related to the accounting and disclosure of energy trading activities under eachEITF 98-10. In October 2002, the EITF reached consensus in EITF 02-3, to (a) rescind EITF 98-10, (b) generally preclude the recognition of gains at the inception of new derivatives, and (c) require all realized and unrealized gains and losses on energy trading derivatives to be presented net in the Statements of Income, whether or not settled physically.
137
The consensus to rescind EITF 98-10 will require all energy trading contracts that do not qualify as derivatives to be accounted for on an accrual basis, rather than at fair value. The consensus was immediately effective for all new contracts executed after October 25, 2002, and will require a cumulative effect adjustment to income, net of tax, on January 1, 2003, for all contracts executed on or prior to October 25, 2002. The cumulative effect adjustment, on a net of tax basis, will be a loss of approximately $13 million, which includes primarily the impact of coal contracts accounted for at fair value, gas inventory accounted for at fair value, and certain gas contracts. We expect the value of these items to be realized when the contracts settle. The general restriction on recognition of inception gains is not expected to have a material impact on our future financial position or results of operations.
The consensus to require all gains and losses on energy trading derivatives to be presented net in the Statements of Income is effective beginning January 1, 2003, and will require restatement for all periods presented. This will result in substantial reductions in reported Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense. However, Operating Income and Net Income will not be affected by this change. Pro-forma Operating Revenues for Cinergy, CG&E, and PSI for the year ended December 31, 2002, under this requirement would have been as follows:
|
| 2002 |
| |
|
| (in millions) |
| |
|
|
|
| |
Cinergy(1) |
| $ | 4,028 |
|
CG&E and subsidiaries |
| 2,154 |
| |
PSI |
| 1,623 |
| |
(1) | The results of Cinergy also include amounts related to non-registrants. |
(ii) Business Combinations and Intangible Assets
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142). Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives will no longer be subject to amortization. Statement 142 requires that goodwill be assessed for impairment upon adoption and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under prior accounting standards. This test must be applied at the “reporting unit” level, which is not permitted to be broader than the current business segments discussed in Note 16. Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so.
We began applying Statement 141 in the third quarter of 2001 and Statement 142 in the first quarter of 2002. The discontinuance of amortization of goodwill, which began in the first quarter of 2002, was not material to our financial position or results of operations. We finalized our transition impairment test in the fourth quarter of 2002 and have recognized a non-cash impairment charge of approximately $11 million (net of tax) for goodwill related to certain of
138
our international assets. This charge reflects a general decline in value of international assets. Additionally, Cinergy’s combined heat and power plants located in the Czech Republic faced downward pressure in their selling prices for electricity due to the continued restructuring of the market in that country. In calculating this impairment charge, the fair value of the reporting unit was determined through both discounted cash flow analysis and offers being considered on certain businesses within the reporting unit. This amount is reflected in Cinergy’s Statements of Income as a Cumulative effect of a change in accounting principle. While Statement 142 did not require the initial transition impairment test to be completed until December 31, 2002, it requires any transition impairment charge to be reflected as of January 1, 2002. As such, Note 14 reconciles Net Income and EPS from the amounts originally presented in the first quarter of 2002 to the amounts revised for this change. We will continue to perform goodwill impairment tests annually, as required by Statement 142, or when circumstances indicate that the fair value of a reporting unit has declined significantly.
(iii) Asset Retirement Obligations
In July 2001, the FASB issued Statement 143, which requires fair value recognition of legal obligations associated with the retirement or removal of long-lived assets at the time the obligations are incurred. The initial recognition of this liability will be accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability will be adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the passage of time (recognized as an operating expense). Additional depreciation expense will be recorded prospectively for any property, plant, and equipment increases. We adopted Statement 143 on January 1, 2003. The impact of adoption on our results of operations will be reflected as a cumulative effect adjustment to income, net of tax.
We currently accrue costs of removal on many long-lived assets through depreciation expense if we believe removal of the assets at the end of their useful life is likely. The SEC staff has interpreted Statement 143 to disallow the accrual of cost of removal when no obligation exists under Statement 143, even if removal of the asset is likely. Any amounts currently recorded in Accumulated depreciation must be removed through the cumulative effect adjustment on January 1, 2003. However, if accruing cost of removal is allowed for ratemaking purposes and Statement 71 is applicable, plan discussion
below.
(i)LTIPaccumulated cost of removal will not be reversed upon adoption of Statement 143. Rather, the amount of accrued cost of removal will remain, but will be disclosed in all future periods. PSI, CG&E, except for its generation assets, and ULH&P expect to continue to accrue costs of removal under Statement 71.
We are finalizing our evaluation of the impact of adopting Statement 143. However, we have not determined whether its impact will be material pending (a) resolution of certain legal conclusions and (b) final calculations on the amount of accumulated cost of removal to be reversed upon adoption for CG&E’s generation assets.
139
(iv) Derivatives
During 1998, the FASB issued Statement 133. This standard was effective for Cinergy beginning in 2001, and requires us to record derivative instruments, which are not exempt under certain provisions of Statement 133, as assets or liabilities, measured at fair value (i.e., mark-to-market). Our financial statements reflect the adoption of Statement 133 in the first quarter of 2001. Since many of our derivatives were previously required to use fair value accounting, the effects of implementation were not material.
Our adoption did not reflect the potential impact of applying fair value accounting to selected electricity options and capacity contracts. We had not historically accounted for these instruments at fair value because they were intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered trading activities. At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In 1996, CinergyJune 2001, the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While many of the criteria in this guidance are consistent with the existing guidance in Statement 133, some criteria were added. We adopted the LTIP.new guidance in the third quarter of 2001, and the effects of implementation for these contracts were not material to our financial position or results of operations. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.
In December 2001, the FASB staff revised the current guidance to make the evaluation of whether electricity contracts qualify as normal purchases and sales more qualitative than quantitative. This new guidance uses several factors to distinguish between capacity contracts, which qualify for the normal purchases and sales exemption, and options, which do not. These factors include deal tenor, pricing structure, specification of the source of power, and various other factors. We adopted this guidance in the third quarter of 2002, and its impact was not material to our financial position or results of operations.
In October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward component) and flexibility to take additional quantity at a fixed price (an option component). While this guidance was issued primarily to address optionality in fuel supply contracts, it applies to all derivatives (subject to certain exceptions for capacity contracts in electricity discussed in the previous paragraphs). This guidance concludes that such contracts are not eligible for the normal purchases and sales exemption due to the existence of optionality in the contract. We adopted this guidance in the second quarter of 2002, consistent with the transition provisions. Cinergy has certain contracts that contain fixed-price optionality, primarily coal contracts, which we reviewed to determine the impact of this new guidance. Due to a lack of liquidity with respect to coal markets in our region, we determined that our coal contracts do not meet the net settlement criteria of Statement 133 and thus do not qualify as derivatives. Given these conclusions, the results of applying this new guidance were not material to our financial position or results of operations.
In May 2002, the FASB issued an exposure draft that would amend Statement 133 to incorporate certain implementation conclusions reached by the FASB staff. We do not believe the
140
amendments, as currently drafted, will have a material effect on our financial position or results of operations.
(v) Asset Impairment
In August 2001, the FASB issued Statement 144, which addresses accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 was effective beginning with the first quarter of 2002. The impact of implementation on our financial position or results of operations was not material.
(vi) Exit Activities
In August 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 addresses accounting and reporting for the recognition of exit costs, including, but not limited to, one-time employee benefit terminations, contract cancellations, and facility consolidations. This statement requires that such costs be recognized only when they meet the definition of a liability under GAAP. However, Statement 146 applies only to exit activities initiated in 2003 and after. All costs recorded through December 31, 2002, are unaffected by this pronouncement. The impact of implementation on our financial position or results of operations is not expected to be material.
(vii) Accounting for Stock-Based Compensation
We have historically accounted for our stock-based compensation plans under APB 25. In July 2002, Cinergy announced that it would adopt Statement 123 for all employee awards granted or modified after January 1, 2003, and would begin measuring the compensation cost of stock-based awards under the fair value method. In December 2002, the FASB issued Statement 148, which amends Statement 123 and APB Opinion No. 28, Interim Financial Reporting. Statement 148 provides alternative methods of transition to Statement 123 and more expanded disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. Cinergy adopted Statement 148 on January 1, 2003, and has adopted the transition provisions that require expensing options prospectively in the year of adoption, consistent with the original pronouncement. Existing awards will continue to follow the intrinsic value method prescribed by APB 25. The impact of adoption on our financial position and results of operations, assuming award levels and fair values similar to past years, is not material. This change will primarily impact the accounting for stock options and other performance based awards related to the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan (LTIP) and Cinergy Corp. Employee Stock Purchase and Savings Plan. See Note 2 for additional information.
(viii) Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45). Interpretation 45 addresses accounting and reporting obligations under certain guarantees. It requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial
141
recognition and measurement provisions of Interpretation 45 are applicable to guarantees issued or modified after December 31, 2002. However, the incremental disclosure requirements in Interpretation 45 are effective for this annual report. The impact of implementation on our financial position or results of operations is not expected to be material. For a further discussion of guarantees, see Note 11(b).
(ix) Consolidation of Special Purpose Entities
The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities in January 2003. This interpretation will significantly change the consolidation requirements for special purpose entities (SPE). We have begun reviewing the impact of this interpretation but have not yet concluded whether consolidation of certain SPEs will be required. There are two SPEs for which consolidation may be required. These SPEs have individual power sale agreements to an unrelated third party for approximately 45 megawatts (MW), ending in 2009, and 35 MW, ending in 2016. In addition, the SPEs have individual power purchase agreements with Cinergy Capital & Trading, Inc. (Capital & Trading) to supply the power. Capital & Trading also provides various services, including certain credit support facilities.
Cinergy’s quantifiable exposure to loss as a result of involvement with these two SPEs is $28 million, which includes investments in these entities of $3 million and exposure under the capped credit facilities of approximately $25 million. There is also a non-capped facility, but it can only be called upon in the event the SPE breaches representations, violates covenants, or other unlikely events.
If appropriate, consolidation of all assets and liabilities of these two SPEs, at their carrying values, will be required in the third quarter of 2003. Approximately $225 million of non-recourse debt would be included in Cinergy’s Balance Sheets upon initial consolidation. However, the impact on results of operations would be expected to be immaterial.
Cinergy believes that its accounts receivable sale facility, as discussed in Note 6, would remain unconsolidated since it involves transfers of financial assets to a qualifying SPE, which is exempted from consolidation by Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (Statement 140) and this interpretation.
(r)Translation of Foreign Currency
We translate the assets and liabilities of foreign subsidiaries, whose functional currency (generally, the local currency of the country in which the subsidiary is located) is not the United States (U.S.) dollar, using the appropriate exchange rate as of the end of the year. We translate income and expense items using the average exchange rate prevailing during the month the respective transaction occurs. We record translation gains and losses in Accumulated other comprehensive income (loss), which is a component of common stock equity. When a foreign subsidiary is sold, the cumulative translation gain or loss as of the date of sale is removed from Accumulated other comprehensive income (loss) and is recognized as a component of the gain or loss on the sale of the subsidiary in our Statements of Income.
142
(s)Related Party Transactions
Cinergy and its subsidiaries engage in related party transactions. These transactions, which are eliminated upon consolidation, are generally performed at cost and in accordance with the SEC regulations under the PUHCA and the applicable state and federal commission regulations. The Balance Sheets of our operating companies reflect amounts payable to and/or receivable from related parties as Accounts payable to affiliated companies and Accounts receivable from affiliated companies. The significant related party transactions are disclosed below.
(i) Services
Services provides our regulated and non-regulated subsidiaries with a variety of centralized administrative, management, and support services in accordance with agreements approved by the SEC under the PUHCA. The cost of these services are charged to our operating companies on a direct basis, or for general costs which cannot be directly attributed, based on predetermined allocation factors, including the following ratios:
• sales;
• electric peak load;
• number of employees;
• number of customers;
• construction expenditures; and
• other statistical information.
These costs were as follows for the years ended December 31, 2002, 2001, and 2000:
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in millions) |
| |||||||
|
|
|
| |||||||
Cinergy(1) |
| $ | 472 |
| $ | 483 |
| $ | 479 |
|
CG&E and subsidiaries |
| 206 |
| 240 |
| 250 |
| |||
PSI |
| 190 |
| 196 |
| 187 |
| |||
ULH&P |
| 23 |
| 24 |
| 25 |
| |||
(1) | The results of Cinergy also include amounts related to non-registrants. |
143
Generation Services, which began operations on January 1, 2001, supplies electric production-related construction, operation and maintenance services to certain of our subsidiaries pursuant to agreements approved by the SEC under the PUHCA. The cost of these services were as follows for the years ended December 31, 2002 and 2001:
|
| 2002(2) |
| 2001 |
| ||
|
| (in millions) |
| ||||
|
|
|
| ||||
Cinergy(1) |
| $ | 179 |
| $ | 92 |
|
CG&E |
| 104 |
| 67 |
| ||
PSI |
| 58 |
| 21 |
| ||
(1) | The results of Cinergy also include amounts related to non-registrants. |
(2) | Increase reflects movement of Services’ employees to Generation Services. |
(ii) Purchased Energy
ULH&P purchases energy from CG&E pursuant to a new contract effective January 1, 2002, which was approved by the FERC and the Kentucky Public Service Commission (KPSC). This five-year agreement is a negotiated fixed-rate contract with CG&E and replaces the previous cost-of-service based contract, which expired on December 31, 2001. ULH&P purchased energy from CG&E for resale in the amounts of $160 million, $152 million, and $160 million for the years ended 2002, 2001, and 2000, respectively. These amounts are reflected in the Statements of Income for ULH&P as Electricity purchased from parent company for resale.
PSI and CG&E purchase energy from each other under various federal and state approved joint operating agreements. These sales and purchases are reflected in the Statements of Income of PSI and CG&E as Electric operating revenues and Fuel and purchased and exchanged power expense and were as follows for the years ended December 31, 2002, 2001, and 2000:
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in millions) |
| |||||||
|
|
|
| |||||||
CG&E |
|
|
|
|
|
|
| |||
Electric operating revenues |
| $ | 59 |
| $ | 90 |
| $ | 111 |
|
Fuel and purchased and exchanged power |
| 43 |
| 92 |
| 94 |
| |||
PSI |
|
|
|
|
|
|
| |||
Electric operating revenues |
| 43 |
| 92 |
| 94 |
| |||
Fuel and purchased and exchanged power |
| 59 |
| 90 |
| 111 |
| |||
To supplement native load requirements for 2002, CG&E and PSI agreed to purchase peaking power from Capital & Trading, an indirect wholly-owned subsidiary of Cinergy Corp., pursuant to the terms of a wholesale market-based tariff. For the year ended December 31, 2002, payments under these contracts totaled approximately $27 million for CG&E and $28 million for PSI. To the extent these payments were deferred for future recovery, the amounts are included in Regulatory assets on the Balance Sheets of CG&E and PSI. The remaining
144
payments are reflected as Fuel and purchased and exchanged power expense on the Statements of Income for CG&E and PSI.
CG&E and PSI have an agreement with Marketing & Trading to purchase gas for certain gas-fired peaking plants pursuant to the terms of the wholesale market-based agreements. CG&E purchased natural gas from Marketing & Trading in the amount of $9 million and $12 million for the years ended December 31, 2002 and 2001, respectively. PSI purchased natural gas from Marketing & Trading in the amount of $5 million and $4 million for the years ended December 31, 2002 and 2001, respectively. The amounts are reflected in the Statements of Income of CG&E and PSI as Fuel and purchased and exchanged power expense.
(iii) Other
In December 2001, CG&E and ULH&P entered into agreements with Mirant Americas Energy Marketing, LP (Mirant) in which CG&E and ULH&P assigned Mirant the rights to CG&E’s and ULH&P’s gas supply contracts, interstate pipeline transportation contracts and gas in storage, and Mirant agreed to deliver gas to meet CG&E’s and ULH&P’s firm gas requirements, and to pay CG&E and ULH&P monthly fees. Mirant assigned these contracts and the agreements to Marketing & Trading in November 2002, and CG&E and ULH&P consented to such assignments. The agreements will expire in October 2003. Payments under these agreements were approximately $33 million and $7 million for CG&E and ULH&P, respectively. These amounts are recorded in the Statements of Income for CG&E and ULH&P as Gas purchased expense. The assignment of the Mirant/ULH&P agreements are subject to the approval of the KPSC, and ULH&P has filed an application with the KPSC seeking such approval. No other regulatory approvals are required.
Cinergy Corp. and our operating companies participate in a money pool arrangement by which those companies with surplus cash provide short-term loans to others. For a further discussion on the money pool agreement see Note 5.
145
2. Common Stock
(a)Changes In Common Stock Outstanding
The following table reflects information related to shares of common stock issued for stock-based plans.
|
| Shares |
|
|
| ||||
|
| Authorized for |
| Shares Used to Grant or |
| ||||
|
| Issuance under |
| Settle Awards |
| ||||
|
| Plan |
| 2002 |
| 2001 |
| 2000 |
|
LTIP |
| 14,500,000 |
| 674,005 |
| 72,225 |
| 93,855 |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. Stock Option Plan (SOP) |
| 5,000,000 |
| 870,867 |
| 263,070 |
| 108,941 |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. Employee Stock Purchase and Savings Plan |
| 2,000,000 |
| 4,912 |
| 227,847 |
| 2,718 |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. UK Sharesave Scheme |
| 75,000 |
| 8,878 |
| 121 |
| — |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. Retirement Plan for Directors |
| 175,000 | (1) | 1,768 |
| 29,135 |
| 9,435 |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. Directors’ Equity Compensation Plan |
| 75,000 |
| 196 |
| 1,858 |
| 150 |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. Directors’ Deferred Compensation Plan |
| 200,000 |
| — |
| 14,211 |
| — |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. 401(k) Plans |
| 6,469,373 | (1) | 964,615 |
| 69,500 |
| — |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment |
| 3,000,000 | (1) | 657,943 |
| 649,834 |
| 533,932 |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. 401(k) Excess Plan |
| 100,000 | (1) | — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Director, Officer, and Key Employee Stock Purchase Program |
| 2,110,817 | (3) | — |
| — |
| 1,627,788 |
|
|
|
|
|
|
|
|
|
|
|
Cinergy Corp. Long-Term Incentive Compensation Sub-Scheme |
| 7,000,000 |
| — |
| — |
| — |
|
(1) Plan does not contain an authorization limit. The number of shares presented reflects amounts registered with the SEC as of December 31, 2002.
(2) Shares issued prior to April 2001 were for the previous Cinergy Corp. Dividend Reinvestment and Stock Purchase Plan, which is no longer active.
(3) Plan authorized a maximum amount of $50 million of Cinergy Corp. common stock to be purchased. The number of shares presented reflects amounts registered with the SEC as of December 31, 2002. See Note 2(d) for additional information.
We retired 422,908 shares of common stock in 2002, 72,739 shares in 2001, and 32,988 shares in 2000, mainly representing shares tendered as payment for the exercise of previously granted stock options.
In April 2001, Cinergy adopted the Direct Stock Purchase and Dividend Reinvestment Plan, a plan designed to provide investors with a convenient method to purchase shares of Cinergy Corp. common stock and to reinvest cash dividends in the purchase of additional shares. This plan replaced the Dividend Reinvestment and Stock Purchase Plan.
In November 2001, Cinergy chose to reinstitute the practice of issuing new Cinergy Corp. common shares to satisfy obligations under its various employee stock plans and the Cinergy
146
Corp. Direct Stock Purchase and Dividend Reinvestment Plan. This replaces our previous practice of purchasing shares in the open market to fulfill certain plan obligations.
In January 2002, Cinergy registered 100,000 shares of common stock under the Cinergy Corp. 401(k) Excess Plan.
In February 2002, Cinergy sold 6.5 million shares of Cinergy Corp. common stock with net proceeds of approximately $200 million.
Cinergy Corp. owns all of the common stock of CG&E and PSI. All of ULH&P’s common stock is held by CG&E.
(b) Dividend Restrictions
Cinergy Corp.’s ability to pay dividends to holders of its common stock is principally dependent on the ability of CG&E and PSI to pay Cinergy Corp. common stock dividends. Cinergy Corp., CG&E, and PSI cannot pay dividends on their common stock if their respective preferred stock dividends or preferred trust dividends are in arrears. The amount of common stock dividends that each company can pay is also limited by certain capitalization and earnings requirements under CG&E’s and PSI’s credit instruments. Currently, these requirements do not impact the ability of either company to pay dividends on its common stock.
(c) Stock-based Compensation Plans
We currently have the following stock-based compensation plans:
• LTIP;
• SOP;
• Employee Stock Purchase and Savings Plan;
• UK Sharesave Scheme;
• Retirement Plan for Directors;
• Directors’ Equity Compensation Plan;
• Directors’ Deferred Compensation Plan;
• 401(k) Excess Plan; and
• 2001 Long-Term Incentive Compensation Sub-Scheme.
The LTIP, the SOP, and the Employee Stock Purchase and Savings Plan are discussed below. The activity in 2002, 2001, and 2000 for the remaining stock-based compensation plans was not significant.
We have historically accounted for our stock-based compensation plans in accordance with APB 25. However, we will prospectively adopt the fair value recognition provisions of Statement 123, as amended by Statement 148, effective with all employee awards granted or modified after January 1, 2003. See “Stock-Based Compensation” in Note 1(p) for additional information on costs we recognized in 2002, 2001, and 2000, related to stock-based compensation plans, and for our pro-forma disclosure assuming compensation costs for these plans had been determined at fair value, consistent with Statement 123, as amended by Statement 148.
147
(i) LTIP
The LTIP was originally adopted in 1996 and was subsequently amended effective January 2002. Under this plan, certain key employees may be granted incentive and non-qualified stock options, stock appreciation rights (SAR), restricted stock, dividend equivalents, the opportunity to earn performance-based shares and restricted shares of Cinergy common
stock.certain other stock-based awards. Stock options are granted atto participants with an option price equal to or greater than the fair market value of the shares on the grant date, and generally with a vesting period of grant. Theseeither three or five years. The vesting period begins on the grant date and all options vest in three years and expire inwithin 10 years from the
date of grant. None of the stock options were exercisable as of December 31,
1997. Restricted shares are granted at the fair market value of the shares on
the date of grant, discounted to reflect the inability to sell the shares during
the three-year restriction period. In addition to the stock options and
restricted shares, participants may earn additional shares if Cinergy's Total
Shareholder Return (TSR) exceeds that of the average annual median TSR of a
selected peer group. Conversely, if Cinergy's TSR falls below that of the peer
group, participants would lose some or all of the restricted shares. Dividends
on any restricted stock awards and additional performance shares will be paid in
shares of common stock during the payout period in the years 2000 to 2002. No
stock-based awards were made under the LTIP prior to 1997. In 1997, 425,938
performance-based restricted shares at a weighted average price of $29.95 and
369,600 stock options at a weighted average exercise price of $33.60 were
granted to certain key employees.date. The number of shares of common stock to be
awardedissuable under the LTIP is limited into a total of 14.5 million shares.
Entitlement to performance-based shares is based on Cinergy’s total shareholder return (TSR) over designated Cycles as measured against a pre-defined peer group. Target grants of performance-based shares were made for the aggregate to 7,000,000 shares.
LTIP stock option activity for 1997 is summarized as follows:
1997
Weighted
Average
Exercise
Number Price
Outstanding, beginning of year - -
Granted 369 600 $33.60
Outstanding, end of year 369 600 $33.60
Exercisable, end of year - -
Weighted average fair value of
options granted during the year $3.71
The fair values of options granted were estimated asfollowing Cycles:
Cycle | Grant | Performance | Target | ||||
(in thousands) | |||||||
V | 1/2001 | 2001-2003 | 301 | ||||
VI | 1/2002 | 2002-2004 | 343 | ||||
VII | 1/2003 | 2003-2005 | 371 |
Participants may earn additional performance shares if Cinergy’s TSR exceeds that of the date of grant using
a Black-Scholes option pricing model. peer group. For the three-year performance period ended December 31, 2002 (Cycle IV), approximately 817,000 shares were earned, based on our relative TSR.
(ii) SOP
The weighted averages for the assumptions
used in determining the fair values of options granted were as follows:
1997
Risk-free interest rate 6.2%
Expected dividend yield 5.4%
Expected lives 6.5 yrs.
Expected common stock variance 1.7%
(ii) Stock Option Plan The Cinergy Stock Option PlanSOP is designed to align executive compensation with shareholder interests. Under the Stock Option Plan,SOP, incentive and non-qualified stock options, stock appreciation rights (SARs),SARs, and SARs in tandem with stock options may be granted to key employees, officers, and outside directors. The activity under this plan has predominantly consisted of the issuance of stock options. Options are granted atwith an option price equal to the fair market value of the shares on the date of grant.grant date. Options generally vest over five years at a rate of 20%20 percent per year, beginning on the grant date, and expire 10 years from the date of grant.grant date. The total number of shares of common stock availableissuable under the Stock Option PlanSOP may not exceed 5,000,000 shares. No stock options may be granted under the plan after October 24, 2004.
Stock Option Plan activity for 1997, 1996, and 1995 is summarized as follows (no
SARs have been granted under this plan):
(iii) PSP Cinergy's PSP is a long-term incentive plan developed to reward
officers and other key employees for achieving corporate and individual goals.
Under the PSP, participants are granted contingent shares of common stock. A
percentage of these contingent shares is earned with respect to each participant
based on the level of goal attainment at the completion of a performance cycle.
Performance cycles consist of overlapping four-year periods, beginning every two
years. Awards earned under the PSP are paid in two installments: one-half of the
award is paid in the year immediately following the end of the performance cycle
and one-half of the award is paid in the subsequent year. The most recently
commenced four-year performance cycle under the PSP began January 1, 1996, and
was scheduled to end December 31, 1999. As previously discussed, Cinergy
implemented the LTIP effective January 1, 1997, and ceased accrual of incentive
compensation under the PSP as of December 31, 1996. The total number of shares
of common stock available under this plan may not exceed 800,000 shares. Final
payouts for performance cycle four that began January 1, 1992, were made in
1997. Final payouts for cycles five and six, which began in January 1994 and
January 1996, respectively, will be made in 1999.
The following table provides certain information regarding contingent shares
granted under the PSP for the performance cycle which began January 1, 1996:
1996
Number of contingent shares granted 166 280
Fair value at date of grant (dollars in thousands) $ 3 508
Weighted average per share amounts $24.47
The fair values of contingent shares and the weighted average per share amounts
are measured at the market price of a share of common stock as if it were vested
and issued on the date of grant, adjusted for expected forfeitures and the
estimated present value of dividends foregone during the related performance
cycle.
(iv) Employee Stock Purchase and Savings Plan Cinergy's
The Employee Stock Purchase and Savings Plan allows essentially all full-time, regular employees to purchase shares of common stock pursuant to a stock option feature. Under the Employee Stock Purchase and Savings Plan, after-tax funds are withheld from a participant'sparticipant’s compensation during a 26-month offering period and are deposited in an interest-bearing account. At the end of the offering period, participants may apply amounts deposited in the account, plus interest, toward the purchase of shares of common stock at astock. The purchase price is equal to 95 percent of the fair market value of a share of common stock on the first date of the
148
offering period, less five
percent.period. Any funds not applied toward the purchase of shares are returned to the participant. A participant may elect to terminate participation in the plan at any time. Participation also will terminate if the participant'sparticipant’s employment with
Cinergy ceases. Upon termination of participation, all funds, including interest, are returned to the participant without penalty. A newThe sixth (current) offering period began JanuaryMay 1, 1997,2001, and will end February 28, 1999.ends June 30, 2003. The purchase price for all shares under this offering is $31.825.$32.78. The most recently completedfifth offering period ended December 31, 1996. The purchase price under this offering was $21.7312.April 30, 2001, with 227,968 shares purchased and the remaining cash distributed to the respective participants. The total number of shares of common stock availableissuable under the Employee Stock Purchase and Savings Plan may not exceed 2,000,000.
Activity for 2002, 2001, and 2000 for the LTIP, SOP, and Employee Stock Purchase and Savings Plan activity for 1997, 1996, and 1995 is summarized as follows:
|
| LTIP and SOP |
| Employee Stock Purchase and |
| ||||||
|
| Shares Subject |
| Weighted Average |
| Shares Subject |
| Weighted Average |
| ||
Balance at December 31, 1999 |
| 6,187,249 |
| $ | 27.17 |
| 359,305 |
| $ | 27.73 |
|
|
|
|
|
|
|
|
|
|
| ||
Options granted |
| 1,329,800 |
| 24.59 |
| — |
| — |
| ||
Options exercised |
| (123,978 | ) | 23.50 |
| (2,718 | ) | 27.73 |
| ||
Options forfeited |
| (402,200 | ) | 26.68 |
| (76,261 | ) | 27.73 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Balance at December 31, 2000 |
| 6,990,871 |
| 26.77 |
| 280,326 |
| 27.73 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Options granted |
| 811,700 |
| 33.90 |
| 299,793 |
| 32.78 |
| ||
Options exercised |
| (275,393 | ) | 24.39 |
| (227,968 | ) | 27.73 |
| ||
Options forfeited |
| (79,400 | ) | 27.29 |
| (73,826 | ) | 29.20 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Balance at December 31, 2001 |
| 7,447,778 |
| 27.63 |
| 278,325 |
| 32.78 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Options granted |
| 1,241,200 | (2) | 32.27 |
| — |
| — |
| ||
Options exercised |
| (1,308,738 | ) | 23.96 |
| (4,912 | ) | 32.78 |
| ||
Options forfeited |
| (18,540 | ) | 31.57 |
| (55,243 | ) | 32.78 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Balance at December 31, 2002 |
| 7,361,700 |
| $ | 29.06 |
| 218,170 |
| $ | 32.78 |
|
|
|
|
|
|
|
|
|
|
| ||
Options Exercisable(1): |
|
|
|
|
|
|
|
|
| ||
At December 31, 2000 |
| 3,195,191 |
| $ | 26.20 |
|
|
|
|
| |
At December 31, 2001 |
| 3,763,558 |
| $ | 27.32 |
|
|
|
|
| |
At December 31, 2002 |
| 3,744,420 |
| $ | 28.98 |
|
|
|
|
| |
(1) The options under the Employee Stock Purchase and Savings Plan are only exercisable at the end of the offering period.
(2) Options were not granted under the SOP during 2002.
149
The weighted average fair value of options granted under the combined LTIP and the SOP plans was $4.95 in 2002, $5.42 in 2001, and $2.75 in 2000. The weighted average fair value of options granted under the Employee Stock Purchase and Savings Plan was $5.85 in 2001 (no options were granted in 2002 or 2000). The fair values of options granted were estimated as of the grant date using the Black-Scholes option-pricing model and the following assumptions:
|
| LTIP and SOP(1) |
| Employee Stock Purchase |
| ||||
|
| 2002 |
| 2001 |
| 2000 |
| 2001 |
|
Risk-free interest rate |
| 3.92 | % | 4.78 | % | 6.57 | % | 4.22 | % |
Expected dividend yield |
| 5.66 | % | 5.42 | % | 7.32 | % | 5.26 | % |
Expected lives |
| 5.42 | yrs. | 5.37 | yrs. | 4.86 | yrs. | 2.17 | yrs. |
Expected volatility |
| 26.45 | % | 25.01 | % | 20.18 | % | 30.67 | % |
(1) | Options were not granted under the SOP in 2002. |
(2) | Options were not granted under the Employee Stock Purchase and Savings Plan in 2002 or 2000. |
Price ranges, along with certain other information, for options outstanding under the combined LTIP and SOP plans at December 31, 2002, were as follows:
|
| Outstanding |
| Exercisable |
| |||||||||||||
Exercise |
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
| |||||||
$ | 22.88 | - | $ | 23.81 |
|
| 2,100,970 |
| $ | 23.69 |
| 6.33 yrs. |
| 1,433,890 |
| $ | 23.64 |
|
$ | 23.88 | - | $ | 32.65 |
|
| 2,492,830 |
| $ | 26.82 |
| 6.70 yrs. |
| 768,330 |
| $ | 25.63 |
|
$ | 33.31 | - | $ | 38.59 |
|
| 2,767,900 |
| $ | 35.15 |
| 6.69 yrs. |
| 1,542,200 |
| $ | 35.62 |
|
(d) Director, Officer, and Key Employee Stock Purchase Program
In December 1999, Cinergy Corp. adopted the Director, Officer, and Key Employee Stock Purchase Program (Stock Purchase Program). The purpose of grant usingthe Stock Purchase Program is to facilitate the purchase and ownership of Cinergy Corp.’s common stock by its directors, officers, and key employees, thereby further aligning their interests with those of its shareholders.
In February 2000, Cinergy Corp. purchased approximately 1.6 million shares of common stock on behalf of the participants at an average price of $24.82 per share.
Participants had the option of financing the purchases through a Black-Scholes option pricing model.five-year credit facility arranged by Cinergy Corp. with a bank. Each participant is obligated to repay the bank any loan principal, interest, and prepayment fees, and each has assigned his or her dividend rights on the purchased shares to the bank to be applied to interest payments as due on the loan.
Services, and in part, Cinergy Corp., have guaranteed repayment to the bank of 100 percent of each participant’s loan obligations and the associated interest, and each participant has agreed to indemnify the guarantor for any payments made by it under the guaranty on the participant’s
150
behalf. A participant’s obligations to the bank are unsecured and no restrictions are placed on the participant’s ability to sell, pledge, or otherwise encumber or dispose of his or her purchased shares.
(e)Stock Purchase Contracts
In December 2001, Cinergy Corp. issued approximately $316 million notional amount of combined securities, a component of which was stock purchase contracts. These contracts obligate the holder to purchase common shares of Cinergy Corp. stock in, and/or before, February 2005. The weighted averagesnumber of shares to be issued is contingent upon the market price of Cinergy Corp. stock, but subject to predetermined ceiling and floor prices. See Note 3 for further discussion of these combined securities.
3. Preferred Trust Securities
In December 2001, Cinergy Corp. issued approximately $316 million notional amount of combined securities consisting of (a) 6.9 percent preferred trust securities, due February 2007, and (b) stock purchase contracts obligating the holders to purchase between 9.2 and 10.8 million shares of Cinergy Corp. common stock in, and/or before, February 2005. A $50 preferred trust security and stock purchase contract were sold together as a single security unit (Unit). The proceeds of $306 million, which is net of approximately $10 million of issuance costs, were used to pay down Cinergy Corp.’s short-term indebtedness. In February 2005, the preferred trust securities will be remarketed and the dividend rate reset, no lower than 6.9 percent, to yield $316 million in the remarketing. The holders will use the proceeds from this remarketing to fund their obligation to purchase shares of Cinergy Corp. common stock under the stock purchase contract. The holders will pay the market price for the assumptions
used in determiningstock at that time, subject to a ceiling of $34.40 per share and a floor of $29.15 per share. The number of shares to be issued will vary according to the fair valuesstock price, subject to the total proceeds equaling $316 million. These preferred trust securities were issued through a wholly-owned trust of options granted wereCinergy Corp. and are recorded on Cinergy Corp.’s Balance Sheets, net of discount and expense, as follows:
1997 1995
Risk-free interest rate 5.9% 7.7%
Expected dividend yield 5.4% 7.3%
Expected lives 2.0 yrs. 2.0 yrs.
Expected common stock variance 1.6% 1.7%
3. Preferred StockCompany obligated, mandatorily redeemable, preferred trust securities of Subsidiaries
Cinergy, CG&E, and PSI
(a) Schedulesubsidiary, holding solely debt securities of Cumulative Preferred Stock
December 31
CG&E 1997 1996
Authorized 6,000,000 shares (dollars in thousands)
Not subject to mandatory redemption
Par value $100 per share - outstanding
4% Series 169,834 shares in 1997 and 169,835 shares in 1996 $ 16 983 $ 16 984
4 3/4% Series 38,096 shares in 1997 and 41,621 shares in 1996 3 810 4 162
Total 20 793 21 146
PSI
Not subject to mandatory redemption
Par value $25 per share - authorized 5,000,000 shares - outstanding
4.32% Series 169,161 shares in 1997 and 169,162 in 1996 4 229 4 229
4.16% Series 148,763 shares in 1997 and 1996 3 719 3 719
7.44% Series 3,408,712 shares in 1997 and 1996 85 218 85 218
Par value $100 per share - authorized 5,000,000 shares - outstanding
3 1/2% Series 40,302 shares in 1997 and 40,567 shares in 1996 4 030 4 056
6 7/8% Series 600,000 shares in 1997 and 1996 60 000 60 000
7.15% Series 158,640 shares in 1996 - 15 864
Total 157 196 173 086
Total - Cinergy
Total not subject to mandatory redemption $177 989 $194 232
Cinergy, CG&E, and PSI
(b) Changes in Cumulative Preferred Stock Outstanding
Changes in cumulative preferred stock outstanding during 1997, 1996, and 1995,
were as follows:
Shares Par
Retired Value
(dollars in
thousands)
1997
Not subject to mandatory redemption
Par value $100 per share
CG&E
4% Series 1 $ 1
4 3/4% Series 3 525 352
PSI
3 1/2% Series 265 26
7.15% Series 158 640 15 864
Par value $25 per share
PSI
4.32% Series 1 -
1996
Not subject to mandatory redemption
Par value $100 per share
CG&E
4% Series 100 165 $10 016
4 3/4% Series 88 379 8 838
PSI
3 1/2% Series 276 29
Par value $25 per share
PSI
7.44% Series 591 288 14 782
Subject to mandatory redemption
Par value $100 per share
CG&E
7 7/8% Series 800 000 80 000
7 3/8% Series 800 000 80 000
1995
Not subject to mandatory redemption
Par value $100 per share
CG&E
7.44% Series 400 000 $40 000
PSI
3 1/2% Series 329 32
Subject to mandatory redemption
Par value $100 per share
CG&E
9.15% Series 500 000 50 000
Cinergy and CG&E
During the third quarter of 1996, Cinergy commenced an offer to purchase any and
all outstanding shares of preferred stock of CG&E. Cinergy purchased 1,788,544
shares of preferred stock and made a capital contribution to CG&E of all the
shares it acquired and CG&E canceled the shares.company. The cost of reacquiring the
preferred stock, totaling $18 million, represents the difference between the parfair value of the stock purchase contracts was charged to Paid-in capital with a corresponding credit to Non-Current Liabilities-Other.
Each Unit will receive quarterly cash payments of 9.5 percent per annum of the notional amount, which includes the preferred trust security dividend of 6.9 percent and payment of 2.6 percent, which represents principal and interest on the stock purchased andpurchase contracts. Upon delivery of the price paid (including fees paidshares, these stock purchase contract payments will cease.
4. Long-Term Debt
Refer to In Januarytender agents) and is reflected as a charge to "Retained Earnings" in the
Consolidated Statements of Changes in Common Stock EquityCapitalization for detailed information for Cinergy’s, CG&E’s, PSI’s, and as a deduction
from "Net Income" in the Consolidated Statements of Income for purposes of
determining net income and earnings per share applicable to common stock for
Cinergy. The 4 3/4% Series no longer meets listing requirements of the New York
Stock Exchange (NYSE) and has been delisted.
Cinergy, CG&E, PSI, and ULH&P
4. Long-term Debt
(a) Schedule of Long-term Debt (excluding amounts reflected in current
liabilities)
December 31
1997 1996
CG&E and Subsidiaries (dollars in thousands)
CG&E
First Mortgage Bonds
5.80% Series due February 15, 1999 $ 110 000 $ 110 000
7 3/8% Series due May 1, 1999 50 000 50 000
7 3/8% Series due November 1, 2001 60 000 60 000
7 1/4% Series due September 1, 2002 100 000 100 000
8 1/8% Series due August 1, 2003 - 60 000
6.45% Series due February 15, 2004 110 000 110 000
8.95% Series due December 15, 2021 - 100 000
8 1/2% Series due September 1, 2022 100 000 100 000
7.20% Series due October 1, 2023 300 000 300 000
5.45% Series due&P’s long-term debt. 1, 2024 (Pollution Control) 46 700 46 700
5 1/2% Series due January 1, 2024 (Pollution Control) 48 000 48 000
Total first mortgage bonds 924 700 1 084 700
Pollution Control Notes
6.50% due November 15, 2022 12 721 12 721
Other Long-term Debt
6.90% Debentures due June 1, 2025
(Redeemable at the option of the holders on June 1, 2005) 150 000 150 000
8.28% Junior subordinated debentures due July 1, 2025 100 000 100 000
Variable rate Liquid Asset Notes with Coupon Exchange
(LANCEs) due October 1, 2007
(Redeemable at the option of CG&E)
(Variable interest rate sets at 6.50% commencing
October 1, 1999)
(Holders of not less than 66 2/3% in an
aggregate principal amount of the LANCEs have the one-time
right to convert from the 6.50% fixed rate to a LIBOR-
based floating rate at any interest rate payment date
between October 1, 1999 and October 1, 2002) 100 000 -
Total other long-term debt 350 000 250 000
Unamortized Premium and Discount - Net (8 860) (12 130)
Total - CG&E 1 278 561 1 335 291
ULH&P
First Mortgage Bonds
6 1/2% Series due August 1, 1999 20 000 20 000
8% Series due October 1, 2003 10 000 10 000
Total first mortgage bonds 30 000 30 000
Other Long-term Debt
7.65% Debentures due July 15, 2025 15 000 15 000
Unamortized Premium and Discount - Net (329) (383)
Total - ULH&P 44 671 44 617
Lawrenceburg Gas Company (Lawrenceburg)
First Mortgage Bonds
9 3/4% Series due October 1, 2001 1 200 1 200
Total - CG&E and subsidiaries $1 324 432 $1 381 108
PSI
First Mortgage Bonds
Series S, 7%, due January 1, 2002 $ 26 429 $ 26 429
Series Y, 7 5/8%, due January 1, 2007 24 140 24 140
Series NN, 7.60%, due March 15, 2012 (Pollution Control) - 35 000
Series QQ, 8 1/4%, due June 15, 2013 (Pollution Control) 23 000 23 000
Series TT, 7 3/8%, due March 15, 2012 (Pollution Control) 10 000 10 000
Series UU, 7 1/2%, due March 15, 2015 (Pollution Control) 14 250 14 250
Series YY, 5.60%, due February 15, 2023 (Pollution Control) 29 945 29 945
Series ZZ, 5 3/4%, due February 15, 2028 (Pollution Control) 50 000 50 000
Series AAA, 7 1/8%, due February 1, 2024 50 000 50 000
Total first mortgage bonds 227 764 262 764
Secured Medium-term Notes
Series A, 7.15% to 8.88%, due January 6, 1999 to
June 1, 2022 290 000 290 000
Series B, 5.22% to 8.26%, due September 17, 1998
to August 22, 2022 195 000 230 000
(Series A and B, 7.66% weighted average interest rate
and 14 year weighted average remaining life)
Total secured medium-term notes 485 000 520 000
Other Long-term Debt
Series 1994A Promissory Note, non-interest bearing,
due January 3, 2001 19 825 19 825
6.25%, due December 15, 2005
(Notes are callable and/or putable on December 15, 1998) - 50 000
6.35% Debentures due November 15, 2006
(Redeemable in whole or in part at the option of the
holders on November 15, 2000) 100 000 100 000
Total other long-term debt 119 825 169 825
Unamortized Premium and Discount - Net (6 119) (7 319)
Total - PSI $ 826 470 $ 945 270
Total - Cinergy
First Mortgage Bonds $1 183 664 $1 378 664
Secured Medium-term Notes 485 000 520 000
Pollution Control Notes 12 721 12 721
Other Long-term Debt 484 825 434 825
Unamortized Premium and Discount - Net (15 308) (19 832)
Total long-term debt $2 150 902 $2 326 378
(b) Mandatory Redemption and Other Requirements
Long-term debt maturities for the next five years (excluding $50 million of
6.25% notes, due December 15, 2005, which are callable and/or putable on
December 15, 1998) are as follows:
Cinergy and CG&E and
Subsidiaries Subsidiaries PSI ULH&P
(in millions)
1998 $ 35 $ - $ 35 $ -
1999 186 180 6 20
2000 31 - 31 -
2001 100 61 39 - 2002, 149 100 49 -
$501 $341 $160 $20
On February 27, 1998, CG&E announced its intention to redeem on March 29, 1998,
$41PSI repaid at maturity $23 million principal amount of its 7 3/8%Medium-Term Notes, Series First Mortgage Bonds (due
NovemberA. The securities were not replaced by new issues of long-term debt.
151
In May 2002, an indirect, wholly-owned subsidiary of Global Resources entered into a senior term loan and a junior term loan, borrowing $13.8 million and $7.1 million, respectively. Each of the loans have periodic principal reduction payments, with the senior loan having a final maturity of March 15, 2019, and the junior loan having a final maturity of March 15, 2012. The annual interest rate on the senior loan is fixed at 6.97 percent and the junior loan is fixed at 6.35 percent.
On September 1, 2001)2002, CG&E repaid at a redemption price of 100.30% and to redeem on March 30,
1998, the entirematurity $100 million principal amount of its 8 1/2% Series First Mortgage Bonds, (due7 ¼% Series.
On September 1, 2022) at a redemption price10, 2002, CG&E borrowed the proceeds from the issuance by the Ohio Air Quality Development Authority of 100%, both
through the maintenance and replacement fund (M&R Fund) provision of CG&E's
first mortgage bond indenture. Additionally, on the same date, CG&E announced
its intention to redeem on March 30, 1998, the remaining $19$84 million principal amount of its State of Ohio Air Quality Development Revenue Refunding Bonds 2002 Series A, due September 1, 2037. The issuance consists of two $42 million tranches, with the interest rate on one tranche being reset every 35 days by auction and the interest rate on the other tranche being reset every 7 3/8%days by auction. The initial interest rates for the 35-day and 7-day tranches were 1.40 percent and 1.35 percent, respectively. Proceeds from the borrowing were used on October 7, 2002 to redeem, at par, two $42 million Series 1985 A&B Air Quality Development Authority State of Ohio Customized Purchase Revenue Bonds, due December 1, 2015. The redeemed bonds had been classified in Notes payable and other short-term obligations.
On September 12, 2002, PSI borrowed the proceeds from the issuance by the Indiana Development Finance Authority of $23 million principal amount of its Environmental Refunding Revenue Bonds Series 2002A, due March 1, 2031. The initial interest rate for the bonds was 1.40 percent. The interest rate resets every 35 days by auction. Proceeds from the borrowing were used on October 1, 2002 to redeem, at par, the $23 million principal amount of Indiana Development Finance Authority Environmental Refunding Revenue Bonds Series 1998, due August 1, 2028. The redeemed bonds had been classified in Notes payable and other short-term obligations.
On September 12, 2002, PSI borrowed the proceeds from the issuance by the Indiana Development Finance Authority of $24.6 million principal amount of its Environmental Refunding Revenue Bonds Series 2002B, due March 1, 2019. The initial interest rate for the bonds was 1.35 percent. The interest rate resets every 7 days by auction. Proceeds from the issuance were used on October 1, 2002 to redeem, at par, the $24.6 million principal amount of City of Princeton, Indiana Pollution Control Revenue Refunding Bonds 1996 Series, due March 1, 2019. The redeemed bonds had been classified in Notes payable and other short-term obligations.
The holders of the newly issued Ohio Air Quality Development Authority and Indiana Development Finance Authority bonds mentioned above have the benefit of a financial guaranty insurance policy that insures the payment of principal of, and interest on, the bonds when due. CG&E and PSI have each entered into an insurance agreement with the bond insurer and have pledged first mortgage bonds to secure their respective reimbursement obligations under such agreements.
On September 23, 2002, CG&E issued $500 million principal amount of its 5.70 percent Debentures due September 15, 2012. Proceeds from the offering were used to repay short-term
152
indebtedness incurred in connection with general corporate purposes including capital expenditures related to environmental compliance construction, and the repayment at maturity of $100 million principal amount of CG&E’s First Mortgage Bonds, (due November 1, 2001)7 ¼% Series. In July 2002, CG&E executed a treasury lock with a notional amount of $250 million, which was designated as a cash flow hedge of 50 percent of the forecasted interest payments on this debt offering. With the issuance of the debt, the treasury lock was settled. See Note 8(a) for additional information on this treasury lock.
The following table reflects the long-term debt maturities excluding any redemptions due to the exercise of call provisions or capital lease obligations. Callable means the issuer has the right to buy back a given security from the holder at a redemptionspecified price of 100.87%. M&R Fundbefore maturity. Putable means the holder has the right to sell a given security back to the issuer at a specified price before maturity.
Long-term Debt Maturities
|
| Cinergy(1) |
| CG&E and |
| PSI |
| |||
|
|
|
| (in millions) |
|
|
| |||
|
|
|
|
|
|
|
| |||
2003 |
| $ | 191 |
| $ | 120 | (2) | $ | 56 |
|
2004 |
| 815 |
| 110 |
| 2 |
| |||
2005(3) |
| 204 |
| 150 |
| 51 |
| |||
2006 |
| 335 |
| — |
| 328 |
| |||
2007 |
| 374 |
| 100 |
| 267 |
| |||
Thereafter |
| 2,351 |
| 1,212 | (4) | 676 |
| |||
|
|
|
|
|
|
|
| |||
|
| $ | 4,270 |
| $ | 1,692 |
| $ | 1,380 |
|
(1) | The results of Cinergy also include amounts related to non-registrants. |
(2) | Includes $100 million of CG&E’s long-term debt with a periodic put provision beginning in June 2003, and ULH&P’s $20 million maturing in 2003. |
(3) | CG&E and subsidiaries includes long-term debt with put provisions of $150 million in 2005. PSI includes long-term debt with put provisions of $50 million in 2005. |
(4) | Includes ULH&P’s $55 million of long-term debt. |
Maintenance and replacement fund provisions contained in CG&E's, PSI's, and
ULH&P'sPSI’s first mortgage bond indentures requireindenture require: (1) cash payments, (2) bond retirements, or (3) pledges of unfunded property additions each year based on an amount related to thePSI’s net revenues of the respective company.
revenues.
153
5. Notes Payable and Other Short-term Obligations
Short-term obligations may include:
• short-term notes;
• commercial paper;
• variable rate pollution control notes; and
• money pool.
Short-term Notes
Short-term borrowings mature within one year from the date of issuance. We primarily use unsecured revolving lines of credit and the sale of commercial paper for short-term borrowings. A portion of each company’s revolving lines is used to provide credit support for commercial paper. When revolving lines are reserved for commercial paper or backing letters of credit, they are not available for additional borrowings. The fees we paid to secure short-term borrowings were immaterial during each of the years ended December 31, 2002, 2001, and 2000.
At December 31, 2002, Cinergy Corp. had $494 million remaining unused and available capacity relating to its $1 billion revolving credit facilities. These revolving credit facilities include the following:
Credit Facility |
| Expiration |
| Established |
| Outstanding |
| Unused and |
| |||||
|
|
|
|
|
| (in millions) |
|
|
| |||||
|
|
|
|
|
|
|
|
|
| |||||
364-day senior revolving |
| April 2003 |
|
|
|
|
|
|
| |||||
Direct borrowing |
|
|
| $ |
|
| $ | — |
| $ |
|
| ||
Commercial Paper support |
|
|
|
|
| 473 |
|
|
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Total 364-day facility |
|
|
| 600 |
| 473 |
| 127 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Three-year senior revolving |
| May 2004 |
|
|
|
|
|
|
| |||||
Direct borrowing |
|
|
|
|
| 25 |
|
|
| |||||
Commercial Paper support |
|
|
|
|
| — |
|
|
| |||||
Letter of Credit support |
|
|
|
|
| 8 |
|
|
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Total Three-year facility |
|
|
| 400 |
| 33 |
| 367 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Total Credit Facilities |
|
|
| $ | 1,000 |
| $ | 506 |
| $ | 494 |
| ||
In addition to revolving credit facilities, Cinergy Corp., CG&E, and PSI also maintain uncommitted lines of credit. These facilities are not guaranteed sources of capital and ULH&P
Obligations representingrepresent an informal agreement to lend money, subject to availability, with pricing to be determined at the time of advance. Cinergy Corp., CG&E, and PSI have established uncommitted lines of $65 million, $15 million, and $60 million, respectively, all of which remained unused as of December 31, 2002.
154
Commercial Paper
Cinergy Corp.’s $800 million commercial paper program is supported by Cinergy Corp.’s $1 billion revolving credit facilities. The commercial paper program at the Cinergy Corp. level supports, in part, the short-term borrowing needs of CG&E and PSI and eliminates their need for separate commercial paper programs. As of December 31, 2002, Cinergy Corp. had $473 million in commercial paper outstanding.
Variable Rate Pollution Control Notes
CG&E and PSI have issued certain variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes). Because the holders of these notes have the right to have their notes redeemed on a daily, monthly, or annual basis, they are reflected in Notes payable and other short-term obligations
(excluding notes payable to affiliated companies) on the Balance Sheets of Cinergy, CG&E, and weighted average interest
rates were as follows:
Cinergy
In October 2002, CG&E and PSI
Cinergy's committed lines are comprised caused the redemption of an acquisition line and a revolving
line and are maintained by commitment fees which were immaterial during the 1995
through 1997 period. The established revolving line (as shown in the above
table) also provides credit support for the newly instituted commercial paper
program. Such program is limited to a maximum outstanding principal amountcertain series’ of
$200 million. The majority of the proceeds from the commercial paper sales were
used to reduce the acquisition line to the year-end level of $350 million. CG&E
and PSI also have the capacity to issue commercial paper that must be supported
by committed lines (unsecured lines of credit) of the respective company.
Neither CG&E nor PSI issued commercial paper in 1997 or 1996.
Cinergy, CG&E, PSI, and ULH&P
Cinergy's utility subsidiaries had regulatory authority to borrow up to $853
million ($453 million for CG&E and its subsidiaries, including $50 million for
ULH&P, and $400 million for PSI) as of December 31, 1997. In connection with
this authority, committed lines, as well as, uncommitted lines (short-term
borrowings with various banks on an "as offered" basis) have been arranged. The
established committed lines (as shown in the above table) include $100 million
designated as backup for certain of the uncommitted lines at December 31, 1997.
Further, the committed lines are maintained by commitment fees, which were
immaterial during the 1995 through 1997 period.
Cinergy
In addition, Cinergy UK, Inc. (Cinergy UK), a subsidiary of Investments, which
holds Cinergy's 50% investment in Avon Energy, entered into a $40 million
non-recourse credit agreement in 1996, which was terminated in October of 1997.
This agreement was replaced by a one-year $115 million non-recourse revolving
credit agreement. The commitment fees paid for these lines were immaterial for
the 1996 through 1997 period.
Cinergy, CG&E, PSI, and ULH&P
Amounts outstanding of the committed lines for Cinergy, the utility
subsidiaries, and Cinergy UK would become immediately due upon an event of
default which includes non-payment, default under other agreements governing
company indebtedness, bankruptcy, or insolvency. Certain of the uncommitted
lines have similar default provisions.
Cinergy, CG&E, and PSI
Both CG&E and PSI have issued variable rate pollution control notes.notes with a principal amount of $84 million and $47.6 million, respectively. Holders of thesethe notes had the option of having their notes redeemed at various times ranging from any business day to annually. The notes were redeemed with proceeds from the issuance of new series’ of variable rate pollution control notes that do not have the rightredemption features mentioned above, and are therefore classified as Long-term debt obligations. See Note 4 for further discussion of this redemption.
Money Pool
Cinergy Corp., Services, and our operating companies participate in a money pool arrangement to put their notes on any business
day. Accordingly, these issuances are reflected in the Consolidated Balance
Sheets as "Notes payable and other short-term obligations."
Cinergy, CG&E, PSI, and ULH&P
To better manage cash and working capital requirements, Cinergy's utility
subsidiaries, including CG&E, PSI, and ULH&P, participate in a money pooling
arrangement.requirements. Under this arrangement, Cinergy systemthose companies with surplus short-term funds whetherprovide short-term loans to affiliates (other than Cinergy Corp.) participating under this arrangement. This surplus cash may be from internal or external sources, provide short-term
loans to other system companies at rates that reflect (1) the actual costs of
the external borrowing and/or (2) the costs of the internal funds which are set
at the 30-day Federal Reserve "AA" industrial commercial paper rate.sources. The SEC's
approval of the money pool, pursuant to the PUHCA, extends through December 31,
2002. For amounts outstanding under this money pool arrangement at December 31,
1997 and December 31, 1996, see "Notesare shown as a component of Notes receivable from affiliated companies and/or Notes payable to affiliated companies"companies on the
Consolidated Balance Sheets for CG&E and PSI and the Balance Sheets for of CG&E, PSI, and ULH&P.
&P. Any money pool borrowings outstanding reduce the unused and available short-term debt regulatory authority of CG&E, PSI, and ULH&P.
155
The following table summarizes our Notes payable and other short-term obligations, and Notes payable to affiliated companies.
|
| December 31, 2002 |
| December 31, 2001 |
| |||||||||||||||||
|
| Established |
| Outstanding |
| Weighted |
| Established |
| Outstanding |
| Weighted |
| |||||||||
|
| (in millions) |
| |||||||||||||||||||
|
|
|
| |||||||||||||||||||
Cinergy |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Cinergy Corp. |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Revolving lines |
| $ | 1,000 |
| $ | 25 |
| 2.02 | % | $ | 1,175 |
| $ | 599 |
| 2.55 | % | |||||
Uncommitted lines(1) |
| 65 |
| — |
| — |
| 40 |
| — |
| — |
| |||||||||
Commercial paper(2) |
| 800 |
| 473 |
| 1.81 |
| 800 |
| 125 |
| 3.49 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Operating companies |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Uncommitted lines(1) |
| 75 |
| — |
| — |
| 75 |
| 66 |
| 3.73 |
| |||||||||
Pollution control notes |
|
|
| 147 |
| 1.82 |
|
|
| 279 |
| 2.10 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Non-regulated subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Revolving lines |
| 7 |
| 1 |
| 3.28 |
| 46 |
| 32 |
| 2.94 |
| |||||||||
Short-term debt |
| 22 |
| 22 |
| 2.93 |
| 49 |
| 44 |
| 4.81 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Cinergy Total |
|
|
| $ | 668 |
| 1.86 | % |
|
| $ | 1,145 |
| 2.71 | % | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
CG&E and subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Uncommitted lines(1) |
| $ | 15 |
| $ | — |
| — | % | $ | 15 |
| $ | — |
| — | % | |||||
Pollution control notes |
|
|
| 112 |
| 1.87 |
|
|
| 196 |
| 2.00 |
| |||||||||
Money Pool |
|
|
| 9 |
| 1.29 |
|
|
| 445 |
| 2.73 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
CG&E Total |
|
|
| $ | 121 |
|
|
|
|
| $ | 641 |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
PSI |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Uncommitted lines(1) |
| $ | 60 |
| $ | — |
| — | % | $ | 60 |
| $ | 66 |
| 3.73 | % | |||||
Pollution control notes |
|
|
| 35 |
| 1.65 |
|
|
| 83 |
| 2.33 |
| |||||||||
Money Pool |
|
|
| 138 |
| 1.29 |
|
|
| 422 |
| 2.58 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
PSI Total |
|
|
| $ | 173 |
|
|
|
|
| $ | 571 |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
ULH&P |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Money Pool |
|
|
| $ | 14 |
| 1.29 | % |
|
| $ | 26 |
| 2.73 | % | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
ULH&P Total |
|
|
| $ | 14 |
|
|
|
|
| $ | 26 |
|
|
| |||||||
(1) | Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines. |
(2) | The commercial paper program is supported by Cinergy Corp.’s revolving lines. |
In our credit facilities, Cinergy CG&E, PSI,Corp. has covenanted to maintain:
• a consolidated net worth of $2 billion; and ULH&P
• a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.
A breach of these covenants could result in the termination of the credit facilities and the acceleration of the related indebtedness. In addition to breaches of covenants, certain other
156
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.
6. Sale Sales of Accounts Receivable
In January 1996,
During 2001, CG&E, PSI, and ULH&P entered into had an agreement to sell, on a revolving basis, undivided percentage interests in certain of their accounts receivable and the related collections up to an aggregate maximum of $350 million,million. CG&E retained servicing responsibilities for its role as a collection agent of which $252 million
($167 million by the amounts due on the sold receivables. However, the purchaser assumed the risk of collection on the sold receivables without recourse to CG&E, PSI, and its subsidiaries, including $29 million by ULH&P in the event of a loss. Proceeds from a portion of the sold receivables were held back as a reserve to reduce the purchaser’s credit risk. CG&E, PSI, and $85 million by PSI),ULH&P did not retain any ownership interest in the sold receivables, but did retain undivided interests in their remaining balances of accounts receivable. The recorded amounts of the retained interests were measured at net of reserves, has been sold as of December 31, 1997.realizable value. The Consolidated Balance Sheets of Cinergy, CG&E and PSI andAccounts receivable on the Balance Sheets of Cinergy, CG&E, PSI, and ULH&P are were net of the amounts sold at December 31, 19972001.
In February 2002, CG&E, PSI, and 1996.
7. Leases
ULH&P replaced their previous agreement to sell certain of their accounts receivable and related collections. Cinergy Corp. formed Cinergy Receivables Company, LLC (Cinergy Receivables) to purchase, on a revolving basis, nearly all of the retail accounts receivable and related collections of CG&E,PSI, and ULH&P.Cinergy Corp. does not consolidate Cinergy Receivables since it meets the requirements to be accounted for as a qualifying SPE. The sales of receivables are accounted for under Statement 140.
The proceeds obtained from the sales of receivables are largely cash but do include a subordinated note from Cinergy Receivables for a portion of the purchase price (typically approximates 25 percent of the total proceeds). The note is subordinate to senior loans that Cinergy Receivables obtains from commercial paper conduits controlled by unrelated financial institutions. Cinergy Receivables provides credit enhancement related to senior loans in the form of over-collateralization of the purchased receivables. However, the over-collateralization is calculated monthly and does not extend to the entire pool of receivables held by Cinergy Receivables at any point in time. As such, these senior loans do not have recourse to all assets of Cinergy Receivables. These loans provide the cash portion of the proceeds paid to CG&E,PSI, and ULH&P.
This subordinated note is a retained interest (right to receive a specified portion of cash flows from the sold assets) under Statement 140 and is classified within Notes receivable from affiliated companies in the accompanying Balance Sheets of CG&E, PSI, and ULH&P and is classified within Notes receivable on Cinergy Corp.’s Balance Sheets. In addition, Cinergy Corp.’s investment in Cinergy Receivables constitutes a purchased beneficial interest (purchased right to receive specified cash flows, in our case residual cash flows), which is subordinate to the
157
retained interests held by CG&E, PSI, and ULH&P. The carrying values of the retained interests are determined by allocating the carrying value of the receivables between the assets sold and the interests retained based on relative fair value. The key assumptions in estimating fair value are credit losses and selection of discount rates. Because (a) the receivables generally turn in less than two months, (b) credit losses are reasonably predictable due to each company’s broad customer base and lack of significant concentration, and (c) the purchased beneficial interest is subordinate to all retained interests and thus would absorb losses first, the allocated basis of the subordinated notes are not materially different than their face value. Interest accrues to CG&E, PSI, and ULH&P on the retained interests using the accretable yield method, which generally approximates the stated rate on the notes since the allocated basis and the face value are nearly equivalent. Cinergy Corp. records income from Cinergy Receivables in a similar manner. We record an impairment charge against the carrying value of both the retained interests and purchased beneficial interest whenever we determine that an other-than-temporary impairment has occurred (which is unlikely unless credit losses on the receivables far exceed the anticipated level).
The key assumptions used in measuring the retained interests for sales since the inception of the new agreement are as follows (all amounts are averages of the assumptions used in each sale during the period):
|
| Cinergy |
| CG&E and |
| PSI |
| ULH&P |
|
|
|
|
|
|
|
|
|
|
|
Anticipated credit loss rate |
| 0.6 | % | 0.6 | % | 0.5 | % | 1.0 | % |
Discount rate on expected cash flows |
| 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % |
Receivables turnover rate(1) |
| 12.9 | % | 13.7 | % | 11.8 | % | 13.5 | % |
(1) | Receivables at each month-end divided by annualized sales for the month. |
The hypothetical effect on the fair value of the retained interests assuming both a 10 percent and 20 percent unfavorable variation in credit losses or discount rates is not material due to the short turnover of receivables and historically low credit loss history.
CG&E retains servicing responsibilities for its role as a collection agent on the amounts due on the sold receivables. However, Cinergy Receivables assumes the risk of collection on the purchased receivables without recourse to CG&E, PSI, and ULH&P in the event of a loss. While no direct recourse to CG&E, PSI, and ULH&P exists, these entities risk loss in the event collections are not sufficient to allow for full recovery of their retained interests. No servicing asset or liability is recorded since the servicing fee paid to CG&E approximates a market rate.
158
The following table shows the gross and net receivables sold, retained interests, purchased beneficial interest, sales during the period, and cash flows during the period as of December 31, 2002.
|
| Cinergy |
| CG&E and subsidiaries |
| PSI |
| ULH&P |
| ||||
|
| (dollars in millions) |
| ||||||||||
|
|
|
| ||||||||||
Receivables sold as of period end |
| $ | 483 |
| $ | 299 |
| $ | 184 |
| $ | 45 |
|
Less: Retained interests |
| 135 |
| 81 |
| 54 |
| 13 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net receivables sold as of period end |
| $ | 348 |
| $ | 218 |
| $ | 130 |
| $ | 32 |
|
|
|
|
|
|
|
|
|
|
| ||||
Purchased beneficial interests |
| $ | 10 |
| $ | — |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
| ||||
Sales during period |
|
|
|
|
|
|
|
|
| ||||
Receivables sold |
| $ | 3,233 |
| $ | 1,840 |
| $ | 1,392 |
| $ | 287 |
|
Loss recognized on sale |
| 32 |
| 19 |
| 13 |
| 3 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows during period |
|
|
|
|
|
|
|
|
| ||||
Cash proceeds from sold receivables |
| $ | 3,184 |
| $ | 1,813 |
| $ | 1,371 |
| $ | 283 |
|
Collection fees received |
| 2 |
| 1 |
| 1 |
| — |
| ||||
Return received on retained interests |
| 16 |
| 9 |
| 7 |
| 1 |
| ||||
A decline in the long-term senior unsecured credit ratings of CG&E, PSI, or ULH&P below investment grade would result in a termination of the sale program and discontinuance of future sales of receivables, and could prevent Cinergy Receivables from borrowing additional funds from commercial paper conduits.
159
7. Leases
(a)Operating Leases
Cinergy and its subsidiaries
We have entered into operating lease agreements coveringfor various facilities and properties including office space andsuch as computer, communications,communication and transportation equipment.equipment, and office space. Total rental payments on operating leases for each of the past three years were are follows:
1997 1996 1995
(in millions)
Cinergy and subsidiaries $36 $31 $36
CG&E and subsidiaries 18 18 22
PSI 18 13 14
ULH&P 1 2 5
Futuredetailed in the table below. This table also shows future minimum lease payments required underfor operating leases with remaining non-cancelable lease terms in excess of one year as of December 31, 1997, are as
follows:
2002:
|
| Actual Payments |
| Estimated Minimum Payments |
| ||||||||||||||||||||||||||
|
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| After |
| Total |
| ||||||||||
|
| (in millions) |
| ||||||||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||
Cinergy(1) |
| $ | 56 |
| $ | 61 |
| $ | 64 |
| $ | 43 |
| $ | 33 |
| $ | 26 |
| $ | 22 |
| $ | 18 |
| $ | 52 |
| $ | 194 |
|
CG&E and subsidiaries |
| 30 |
| 33 |
| 30 |
| 9 |
| 7 |
| 7 |
| 6 |
| 5 |
| 12 |
| 46 |
| ||||||||||
PSI |
| 21 |
| 21 |
| 23 |
| 10 |
| 8 |
| 7 |
| 7 |
| 6 |
| 19 |
| 57 |
| ||||||||||
ULH&P(2) |
| 4 |
| 5 |
| 4 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||
(1) | The results of Cinergy also include amounts related to non-registrants. |
(2) | Estimated minimum lease payments are immaterial. |
(b)Capital Leases
In each of the years 1999 through 2002, CG&E, PSI, and CG&E and
Subsidiaries Subsidiaries PSI ULH&P*
(in millions, ULH&P in thousands)
1998 $ 36 $ 9 $11 $124
1999 29 9 7 110
2000 22 7 5 59
2001 13 5 3 -
2002 7 4 2 -
After 2002 26 22 3 -
$133 $56 $31 $293
* Excludes amounts applicable to CG&E's non-cancelable leases allocated to
ULH&P.
Cinergy and CG&E
(b) Capital Lease
In November 1996, CG&E entered into a sale-leaseback agreement for certain
equipment at Woodsdale.capital lease agreements to fund the purchase of gas and electric meters. The lease terms are for 120 months commencing with the date of purchase and contain various buyout options ranging from 48 to 105 months. It is a capitalour objective to own the meters indefinitely and the operating companies plan to exercise the buyout option at month 105. The effective lease with an initial lease term
of five years. Atrates given the end ofearly buyout option at 105 months are 6.71 percent for the initial lease term,1999 leases, 6.09 percent for the lease may be renewed at
mutually agreed upon terms or2000 leases, 6.00 percent for the equipment may be repurchased by CG&E at2001 leases, and 4.48 percent for the original sale amount.2002 leases. The monthly lease payment, comprised of interest only, is
based on the applicable London Interbank Offered Rate (LIBOR) and, therefore,
the capital lease obligation will not be amortized over the initial lease term.
The property under the capital lease ismeters are depreciated at the same rate as if the
property were still owned by CG&E. the operating companies. CG&E, PSI, and ULH&P each recorded a capital lease obligation, of
$22 million, which representedincluded in Non-Current Liabilities-Other.
160
The total minimum lease payments and the net book value of the equipment at the
beginning of the lease.
present values for these capital lease items are shown below:
|
| Total Minimum Lease Payments |
| ||||||||||
|
| Cinergy |
| CG&E and |
| PSI |
| ULH&P |
| ||||
|
| (in millions) |
| ||||||||||
|
|
|
| ||||||||||
Total minimum lease payments(1) |
| $ | 55 |
| $ | 32 |
| $ | 23 |
| $ | 8 |
|
Less: amount representing interest |
| (12 | ) | (7 | ) | (5 | ) | (2 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Present value of minimum lease payments |
| $ | 43 |
| $ | 25 |
| $ | 18 |
| $ | 6 |
|
(1) Annual minimum lease payments are immaterial. |
8.Financial Instruments
Cinergy, CG&E, and PSI
(a)Financial Derivatives Cinergy has
We have entered into financial derivative contracts for the purposespurpose described below.
Cinergy
(i) Foreign Exchange Hedging Activity Cinergy has hedged its pound sterling
denominated investment in Midlands through a currency swap. The currency swap
requires Cinergy to exchange a series of pound sterling denominated cash flows
for a series of dollar denominated cash flows based on Cinergy's initial
exchange of $500 million for 330 million pounds sterling. Translation gains and
losses related to the principal exchange on the currency swap have been recorded
in the cumulative foreign currency translation adjustment which is reported as a
separate component of common stock equity in the Consolidated Financial
Statements of Cinergy. At December 31, 1997, translation losses of approximately
$43 million related to the principal exchange of the currency swap have been
reflected in "Current Liabilities - Other" in the Consolidated Balance Sheets of
Cinergy.
Cinergy, CG&E, and PSI
(ii)
Interest Rate Risk Management Cinergy and its subsidiaries enter into
interest rate swaps to lower funding costs and manage exposures
Our current policy of managing exposure to fluctuations in interest rates. Under theserates is to maintain approximately 30 percent of the total amount of outstanding debt in floating interest rate debt instruments. In maintaining this level of exposure, we use interest rate swaps. Under the swaps, Cinergy and its subsidiarieswe agree with counterpartiesother parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated on an agreed notional amount. CG&E has an outstanding interest rate swap agreement that decreased the percentage of floating-rate debt. Under the provisions of the swap, which has a notional amount of $100 million, CG&E pays a fixed-rate and receives a floating-rate through October 2007. This swap qualifies as a cash flow hedge under the provisions of Statement 133. As the terms of the swap agreement mirror the terms of the debt agreement that it is hedging, we anticipate that this swap will continue to be effective as a hedge. Changes in fair value of this swap are recorded in Accumulated other comprehensive income (loss), beginning with our adoption of Statement 133 on January 1, 2001. Cinergy Corp. has three outstanding interest rate swaps with a combined notional amount of $250 million. Under the provisions of the swaps, Cinergy Corp. receives fixed-rate interest payments and pays floating-rate interest payments through September 2004. These swaps qualify as fair value hedges under the provisions of Statement 133. We anticipate that these swaps will continue to be effective as hedges.
Treasury locks are agreements that fix the yield or price on a specified treasury security for a specified period, which we sometimes use in connection with the issuance of fixed-rate debt. On September 23, 2002, CG&E issued $500 million principal amount. At December 31, 1997, Cinergy hasamount senior unsecured debentures due September 15, 2012, with an interest rate of 5.70 percent. In July 2002, CG&E executed a treasury lock with a notional amount of $250 million, which was designated as a cash flow hedge of 50 percent of the forecasted interest payments on this debt offering. The treasury lock effectively fixed the benchmark interest rate applicable to(i.e., the pound sterling denominated leg of its
currency swap through two interest rate swap agreements. These contracts require
Cinergy to pay a fixed rate and receive a floating rate. Bothtreasury component of the interest rate, swaps are forward starting swaps that effectively fixbut
161
not the interest rate
applicable to the ensuing four year periodcredit spread) for 50 percent of the currency swap. These contracts
have a total notional principaloffering from July 2002 through the issuance date in order to reduce the exposure associated with treasury rate volatility. With the issuance of the debt, the treasury lock was settled. Given the use of hedge accounting, this settlement is reflected in Accumulated other comprehensive income (loss) on an after-tax basis in the amount of 330$13 million, pounds sterling.
Translation gains and losses relatedrather than a charge to Cinergy's interest obligation, which is
payable in pounds sterling, are recognized as a component of interestnet income. This amount will be reclassified to Interest expense inover the Consolidated Statements of Income. At December 31, 1997, PSI had two
interest rate swap agreements outstanding with notional amounts of $100 million
each. One contract, with three years remaining from a four-year term, requires
PSI to pay a floating rate and receive a fixed rate. The second contract, with a
six-month term, requires PSI to pay a fixed rate and receive a floating rate. In
all cases, the floating rate is based on the applicable LIBOR and the interest
differential paid or received is recognized in the Consolidated Statements of
Income as a component of interest expense. The fair values10-year life of the related debt as interest rate
swap agreements at December 31, 1997, were not significant.
Cinergy, CG&E, PSI, and ULH&P
is accrued.
See Note 1(l) for additional information on financial derivatives. In the future, we will continually monitor market conditions to evaluate whether to modify our level of exposure to fluctuations in interest rates.
(b)Fair Value of Other Financial Instruments
The estimated fair values of Cinergy's and its subsidiaries' other financial instruments were as follows (this information does not purportclaim to be a valuation of the companies as a whole):
|
| December 31, 2002 |
| December 31, 2001 |
| ||||||||
Financial Instruments |
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
|
|
|
| (in millions) |
|
|
| ||||||
|
|
|
|
|
|
|
| ||||||
Cinergy(1) |
|
|
|
|
|
|
|
|
| ||||
First mortgage bonds and other long-term debt(2) |
| $ | 4,272 |
| $ | 4,483 |
| $ | 3,745 |
| $ | 3,805 |
|
|
|
|
|
|
|
|
|
|
| ||||
CG&E and subsidiaries |
|
|
|
|
|
|
|
|
| ||||
First mortgage bonds and other long-term debt(2) |
| $ | 1,690 |
| $ | 1,743 |
| $ | 1,205 |
| $ | 1,214 |
|
|
|
|
|
|
|
|
|
|
| ||||
PSI |
|
|
|
|
|
|
|
|
| ||||
First mortgage bonds and other long-term debt(2) |
| $ | 1,372 |
| $ | 1,473 |
| $ | 1,348 |
| $ | 1,379 |
|
|
|
|
|
|
|
|
|
|
| ||||
ULH&P |
|
|
|
|
|
|
|
|
| ||||
Other long-term debt(2) |
| $ | 75 |
| $ | 78 |
| $ | 75 |
| $ | 76 |
|
(1) The results of Cinergy also include amounts related to non-registrants.
(2) Includes amounts reflected as Long-term debt due within one year.
The following methods and assumptions were used to estimate the fair values of each major class of financial instruments:
(i)Cash and Temporary Cash Investments,cash equivalents, Restricted Deposits,deposits, and Notes Payablepayable and Other Short-Term Obligations other short-term obligations
Due to the short period to maturity, the carrying amounts reflected on the Balance Sheets approximate fair values.
First Mortgage Bonds and Other Long-Term Debt
(ii)Long-term debt
The fair values of long-term debt issues were estimated based on the latest quoted market prices or, if not listed on the NYSE,New York Stock Exchange, on the present value of future cash flows. The discount rates used approximate the incremental borrowing costs for similar instruments.
Cinergy, CG&E, PSI, and ULH&P
162
(c)Concentrations of Credit Risk
Credit risk representsis the risk ofexposure to economic loss whichthat would occur as a result of nonperformance by counterparties, pursuant to the terms of their contractual obligations with the Company. Concentrationsobligations. Specific components of credit risk relate to
significant customers or counterparties, or groups of customers or
counterparties, possessing similar economic or industry characteristics that
would cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions.
Concentrationinclude counterparty default risk, collateral risk, concentration risk, and settlement risk.
(i)Trade Receivables and Physical Power Portfolio
Our concentration of credit risk with respect to Cinergy's trade accounts receivable from electric and gas retail customers is limited due to Cinergy'slimited. The large number of customers and diversified customer base of residential, commercial, and industrial customers. Sales for resale customers on Cinergy's electric system
includesignificantly reduces our credit risk. Contracts within the physical portfolio of power marketing and trading operations are primarily with the traditional electric cooperatives and municipalities and other investor-owned utilities. At December 31, 2002, we believe the likelihood of significant losses associated with which CG&Ecredit risk in our trade accounts receivable or physical power portfolio is remote.
(ii)Energy Trading Credit Risk
Cinergy’s extension of credit for energy marketing and PSI have long-standing relationships. Contractstrading is governed by a Corporate Credit Policy. Written guidelines document the management approval levels for salescredit limits, evaluation of electricity for
resale outside of Cinergy's systemcreditworthiness, and credit risk mitigation procedures. Exposures to credit risks are principally with power marketers, other
investor owned utilities, electric cooperatives, and municipalities.monitored daily by the Corporate Credit Risk function. As of December 31, 1997,2002, approximately 65%96 percent of Cinergy's powerthe credit exposure related to energy trading and marketing activity was with counterparties rated Investment Grade or the counterparties’ obligations were guaranteed by a parent company or other entity rated Investment Grade. No single non-investment grade counterparty accounts for more than one percent of our total credit exposure. Energy commodity prices can be extremely volatile and trading
activity represents commitments with 10 counterparties. The majoritythe market can, at times, lack liquidity. Because of these contracts areissues, credit risk is generally greater than with other commodity trading.
In December 2001, Enron Corp. (Enron) filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities with Enron in the months prior to its bankruptcy filing. We intend to resolve any contract differences pursuant to the terms of one year or less. Asthose contracts, business practices, and the competitive electric power
market expands, counterparties will increasingly include new market entrants,
suchapplicable provisions of the Bankruptcy Code, as other power marketers, brokers, and commodities traders. This increased
levelapproved by the court. While we cannot predict the resolution of new market entrants, as well as competitive pressuresthese matters, we do not believe that any exposure relating to those contracts would have a material impact on the utility
market participants, could increase Cinergy's exposure to credit risk. As of
December 31, 1997, Cinergy's management believes nonperformance of contractual
obligations by any one counterparty of Cinergy's power marketing and trading
function would not result in losses which are significant to theour financial conditionposition or results of operations of Cinergy.
operations.
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.
(iii)Financial Derivatives
Potential exposure to credit risk also exists from Cinergy'sour use of financial derivatives such as currency swaps, andforeign exchange forward contracts, interest rate swaps.swaps, and treasury locks. Because
163
these financial instruments are transacted only with highly rated financial institutions, Cinergy doeswe do not anticipate nonperformance by any of the counterparties.
9.Pension Plans
Cinergy, CG&E, PSI, and ULH&P
Cinergy'sOther Postretirement Benefits
We provide benefits to retirees in the form of pensions and other postretirement benefits.
Our qualified defined benefit pension plans cover substantially all U.S. employees meeting certain minimum age and service requirements. Plan benefits are
determined under aA final average pay formula with consideration ofdetermines plan benefits. These plan benefits are based on:
• years of participation,participation;
• age at retirement,retirement; and
• the applicable average Social Security wage base or benefit amount.
Cinergy's
Our pension plan funding policy for U.S. employees is to contribute annually toat least the plans an amount which
is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974, and not more thanup to the maximum amount deductible for income tax purposes. Contributions applicable to the last three plan years are: $8
million for 1997, $7 million for 1996, and $18 million for 1995. Of these
amounts, CG&E and its subsidiaries had contributions of $4 million applicable to
the 1997 plan year and $7 million applicable to each of the 1996 and 1995 plan
years. PSI had contributions of $4 million applicable to the 1997 plan year, no
contributions for the 1996 plan year, and contributions of $11 million for the
1995 plan year. The plans'pension plans’ assets consist of investments in equity and fixed income securities.
Effective January 1, 1998, Cinergy reconfigured its defined benefit pension
plans. The reconfigured plans cover the same employees as the previous plans and
established a uniform final average pay formula for all employees. When an
employee retires, he or she will receive the greater of the benefit accrued
under the previous plan as of December 31, 1997, or the benefit accrued under
the new plan as of the retirement date. The reconfiguration of the pension plans
is not expected to have a significant impact on the Company's financial
condition or results of operations.
Cinergy
Cinergy's pension cost for 1997, 1996, and 1995 included the following
components:
1997 1996 1995
(in millions)
Benefits earned during the period $ 19.8 $21.2 $ 18.5
Interest accrued on projected
benefit obligations 67.8 61.6 61.4
Return on plans' assets
Actual (186.6) (75.6) (119.3)
Deferred gain 123.8 14.4 58.8
Net amortizations 2.8 2.9 2.3
Net periodic pension cost $ 27.6 $24.5 $ 21.7
CG&E and ULH&P
CG&E's and its subsidiaries' (including ULH&P's) pension cost for 1997, 1996,
and 1995 included the following components:
1997 1996 1995
(in millions)
Benefits earned during the period $ 10.5 $11.2 $ 9.8
Interest accrued on projected
benefit obligations 41.2 38.6 38.8
Return on plans' assets
Actual (108.3) (53.8) (71.9)
Deferred gain 71.2 17.2 34.0
Net amortizations 1.8 2.1 1.5
Net periodic pension cost $ 16.4 $15.3 $12.2
PSI
PSI's pension cost for 1997, 1996, and 1995 included the following components:
1997 1996 1995
(in millions)
Benefits earned during the period $ 9.3 $10.0 $ 8.7
Interest accrued on projected
benefit obligations 26.6 23.0 22.6
Return on plans' assets
Actual (78.3) (21.8) (47.4)
Deferred gain (loss) 52.6 (2.8) 24.8
Net amortizations 1.0 0.8 0.8
Net periodic pension cost $11.2 $ 9.2 $ 9.5
Cinergy, CG&E, PSI, and ULH&P
During 1996, CG&E and its subsidiaries (including ULH&P) recognized an
additional $31 million of accrued pension cost in accordance with Statement of
Financial Accounting Standards No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits
(Statement 88). Additionally, during 1996, PSI recognized an additional $30
million of accrued pension cost in accordance with Statement 88. These amounts
represent the costs associated with additional benefits extended in connection
with voluntary workforce reduction programs (see Note 1(l)).
1997 1996 1995
Actuarial Assumptions:
For determination of projected benefit
obligations
Discount rate 7.5% 8.0% 7.5%
Rate of increase in future compensation 4.5 5.0 4.5
For determination of pension cost
Rate of return on plans' assets
PSI 9.0 9.0 9.0
CG&E and subsidiaries 9.0 9.0 9.5
Cinergy
The following table reconciles the plans' funded status with amounts recorded in
the Consolidated Financial Statements of Cinergy. Under the provisions of
Statement of Financial Accounting Standards No. 87, Employers' Accounting for
Pensions (Statement 87), certain assets and obligations of the plans are
deferred and recognized in the Consolidated Financial Statements of Cinergy in
later years.
We provide certain health care and life insurance benefits to retired U.S. employees who have metand their eligible dependents. These benefits are subject to minimum age and service requirements and their eligible
dependents.requirements. The health care benefits include medical coverage, dental coverage, and prescription drugs and are subject to certain limitations, such as deductibles and co-payments. Prior to January 1, 1997, Neither CG&E and PSI employees
were covered under separate plans. Effective January 1, 1997, all Cinergy active
employees are eligible to receive essentially the same postretirement health
care benefits. Certain classes of employees, based on age, as well as all
retirees, have been grandfathered under benefit provisions in place prior to
January 1, 1997. Neither CG&E and its subsidiaries nor PSI currentlyULH&P pre-fund their obligations for these postretirement benefits; however, benefits. In 1999, PSI in connection
with the settlement which resulted in the February 1995 Order, agreed to begin
pre-funding. Implementation of began pre-funding is subject to the outcome of
negotiations with The Office of the Utility Consumer Counselor and approvalits obligations through a grantor trust as authorized by the IURC. Postretirement benefit cost for 1997, 1996,This trust, which consists of equity and 1995 includedfixed income securities, is not restricted to the following
components:
Cinergy
Health Life
Care Insurance Total
(in millions)
1997
Benefits earned during the period $ 3.0 $ .1 $ 3.1
Interest accrued on Accumulated Post-
retirement Benefit Obligation (APBO) 14.1 2.2 16.3
Net amortizationpayment of plan benefits and deferral .2 .1 .3
Amortization of transition obligations 4.7 .3 5.0
Net periodic postretirement benefit cost $22.0 $2.7 $24.7
1996
Benefits earned during the period $ 5.7 $ .1 $ 5.8
Interest accrued on APBO 16.5 2.2 18.7
Net amortization and deferral .3 - .3
Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $30.6 $2.6 $33.2
1995
Benefits earned during the period $ 4.4 $ .1 $ 4.5
Interest accrued on APBO 15.6 2.2 17.8
Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $28.1 $2.6 $30.7
CG&E and ULH&P
Health Life
Care Insurance Total
(in millions)
1997
Benefits earned during the period $1.4 $ .1 $ 1.5
Interest accrued on APBO 5.0 2.0 7.0
Net amortization and deferral .2 .1 .3
Amortization of transition obligation 1.5 .4 1.9
Net periodic postretirement benefit cost $8.1 $2.6 $10.7
1996
Benefits earned during the period $ .7 $ .1 $ .8
Interest accrued on APBO 4.9 2.0 6.9
Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $8.2 $2.5 $10.7
1995
Benefits earned during the period $ .4 $ .1 $ .5
Interest accrued on APBO 4.5 2.0 6.5
Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $7.5 $2.5 $10.0
PSI
Health Life
Care Insurance Total
(in millions)
1997
Benefits earned during the period $ 1.6 $ - $ 1.6
Interest accrued on APBO 9.1 .2 9.3
Amortization of transition obligation 3.2 (.1) 3.1
Net periodic postretirement benefit cost $13.9 $ .1 $14.0
1996
Benefits earned during the period $ 5.0 $ - $ 5.0
Interest accrued on APBO 11.6 .2 11.8
Net amortization and deferral .3 - .3
Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $22.4 $ .1 $22.5
1995
Benefits earned during the period $ 4.0 $ - $ 4.0
Interest accrued on APBO 11.1 .2 11.3
Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $20.6 $ .1 $20.7
Cinergy, CG&E, PSI, and ULH&P
The following table reconciles the APBO of the health care and life insurance
plans with amounts recorded in the Financial Statements. Under the provisions oftherefore, not considered plan assets under Statement of Financial Accounting Standards No. 106, Employers'Employers’ Accounting for Postretirement Benefits Other Than Pensions. At December 31, 2002 and 2001, trust assets were approximately $52 million and $53 million, respectively, and are reflected in Cinergy’s Balance Sheets as Other investments.
In addition, we sponsor non-qualified pension plans (plans that do not meet the criteria for tax benefits) that cover officers, certain obligationsother key employees, and non-employee directors. We began funding certain of these non-qualified plans through a rabbi trust in 1999. This trust, which consists of equity and fixed income securities, is not restricted to the payment of plan benefits and therefore, not considered plan assets under Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions. At December 31, 2002 and 2001, trust assets were approximately $8 million and are reflected in Cinergy’s Balance Sheets as Other investments.
In 2000 and 2002, Cinergy offered voluntary early retirement programs to certain individuals. In accordance with Statement of Financial Accounting Standards No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (Statement 88), Cinergy recognized an expense of $12.8 million and $39.1 million in 2000 and 2002, respectively.
164
Our benefit plans’ costs for the past three years included the following components:
|
| Qualified |
| Non-Qualified |
| Other |
| |||||||||||||||||||||
|
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| |||||||||
|
| (in millions) |
| |||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Service cost |
| $ | 27.3 |
| $ | 27.9 |
| $ | 27.4 |
| $ | 2.7 |
| $ | 2.1 |
| $ | 2.0 |
| $ | 3.5 |
| $ | 3.8 |
| $ | 3.4 |
|
Interest cost |
| 79.2 |
| 77.5 |
| 73.0 |
| 5.1 |
| 4.8 |
| 4.1 |
| 19.6 |
| 17.9 |
| 17.0 |
| |||||||||
Expected return on plans’ assets |
| (86.3 | ) | (81.9 | ) | (77.0 | ) | — |
| — |
| — |
| (0.3 | ) | — |
| — |
| |||||||||
Amortization of transition (asset) obligation |
| (1.3 | ) | (1.3 | ) | (1.3 | ) | 0.1 |
| 0.1 |
| 0.1 |
| 5.0 |
| 5.0 |
| 5.0 |
| |||||||||
Amortization of prior service cost |
| 6.2 |
| 4.6 |
| 4.5 |
| 0.9 |
| 1.1 |
| 1.1 |
| — |
| — |
| — |
| |||||||||
Recognized actuarial (gain) loss |
| (5.4 | ) | (3.2 | ) | (2.4 | ) | 0.8 |
| 0.6 |
| 0.1 |
| 1.1 |
| 0.1 |
| — |
| |||||||||
Voluntary early retirement costs (Statement 88) |
| 38.6 |
| — |
| 11.9 |
| 0.5 |
| — |
| 0.9 |
| — |
| — |
| — |
| |||||||||
Net periodic benefit cost |
| $ | 58.3 |
| $ | 23.6 |
| $ | 36.1 |
| $ | 10.1 |
| $ | 8.7 |
| $ | 8.3 |
| $ | 28.9 |
| $ | 26.8 |
| $ | 25.4 |
|
The net periodic benefit cost by registrant was as follows:
|
| Qualified |
| Non-Qualified |
| Other |
| |||||||||||||||||||||
|
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| |||||||||
|
| (in millions) |
| |||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Cinergy(1) |
| $ | 58.3 |
| $ | 23.6 |
| $ | 36.1 |
| $ | 10.1 |
| $ | 8.7 |
| $ | 8.3 |
| $ | 28.9 |
| $ | 26.8 |
| $ | 25.4 |
|
CG&E and subsidiaries |
| 7.2 |
| 1.9 |
| 5.3 |
| 1.1 |
| 1.7 |
| 1.3 |
| 7.2 |
| 6.9 |
| 8.8 |
| |||||||||
PSI |
| 12.2 |
| 7.5 |
| 9.4 |
| 0.6 |
| 0.7 |
| 0.7 |
| 15.3 |
| 13.5 |
| 12.9 |
| |||||||||
ULH&P |
| 1.7 |
| 0.3 |
| 0.5 |
| — |
| — |
| — |
| 0.4 |
| 0.4 |
| 0.4 |
| |||||||||
(1) The results of Cinergy also include amounts related to non-registrants.
165
The following table provides a reconciliation of the plans
are deferred and recognizedchanges in the Financial Statements in later years.
Cinergy
Health Life
Care Insurance Total
(in millions)
1997
Actuarial presentplans’ benefit obligations and fair value of benefits
Fully eligible active plan participants $ (9.9) $ (2.3) $ (12.2)
Other active plan participants (66.3) (1.1) (67.4)
Retirees and beneficiaries (113.6) (28.7) (142.3)
Projected APBO (189.8) (32.1) (221.9)
Unamortized transition obligations 70.7 .2 70.9
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 21.1 1.5 22.6
Accrued postretirement benefit obligations
atassets over the two-year period ended December 31, 1997 $ (98.0) $(30.4) $(128.4)
1996
Actuarial present value2002, and a statement of benefits
Fully eligible active plan participants $ (13.7) $ (1.6) $ (15.3)
Other active plan participants (49.8) (1.5) (51.3)
Retirees and beneficiaries (118.0) (26.4) (144.4)
Projected APBO (181.5) (29.5) (211.0)
Unamortized transition obligations 75.4 .4 75.8
Unrecognized net loss (gain) resulting from
experience different from that assumed
and effectsthe funded status as of changes in assumptions 19.5 (.5) 19.0
Accrued postretirement benefit obligations
at December 31 1996 $ (86.6) $(29.6) $(116.2)
Increasingof both years.
|
| Qualified |
| Non-Qualified |
| Other |
| ||||||||||||
|
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
| ||||||||||||||||
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Benefit obligation at beginning of period |
| $ | 1,083.5 |
| $ | 1,064.5 |
| $ | 70.9 |
| $ | 67.0 |
| $ | 270.4 |
| $ | 247.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Service cost |
| 27.3 |
| 27.9 |
| 2.7 |
| 2.1 |
| 3.5 |
| 3.8 |
| ||||||
Interest cost |
| 79.2 |
| 77.5 |
| 5.1 |
| 4.8 |
| 19.6 |
| 17.9 |
| ||||||
Amendments(1) |
| 43.3 |
| 18.0 |
| 4.5 |
| (1.8 | ) | (12.3 | ) | — |
| ||||||
Actuarial (gain) loss |
| 156.5 |
| (43.6 | ) | 20.6 |
| 4.3 |
| 80.2 |
| 17.9 |
| ||||||
Benefits paid |
| (74.9 | ) | (60.8 | ) | (6.0 | ) | (5.5 | ) | (18.2 | ) | (16.3 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Benefit obligation at end of period |
| 1,314.9 |
| 1,083.5 |
| 97.8 |
| 70.9 |
| 343.2 |
| 270.4 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fair value of plan assets at beginning of period |
| 875.4 |
| 1,043.6 |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Actual return on plan assets |
| (48.0 | ) | (108.1 | ) | — |
| — |
| — |
| — |
| ||||||
Employer contribution |
| 4.0 |
| 0.7 |
| 6.0 |
| 5.5 |
| 18.2 |
| 16.3 |
| ||||||
Benefits paid |
| (74.9 | ) | (60.8 | ) | (6.0 | ) | (5.5 | ) | (18.2 | ) | (16.3 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fair value of plan assets at end of period |
| 756.5 |
| 875.4 |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Funded status |
| (558.4 | ) | (208.1 | ) | (97.8 | ) | (70.9 | ) | (343.2 | ) | (270.4 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unrecognized prior service cost |
| 48.4 |
| 50.0 |
| 13.5 |
| 10.2 |
| — |
| — |
| ||||||
Unrecognized net actuarial (gain) loss |
| 196.2 |
| (100.1 | ) | 37.6 |
| 17.7 |
| 125.5 |
| 45.7 |
| ||||||
Unrecognized net transition (asset) obligation |
| (1.9 | ) | (3.2 | ) | 0.1 |
| 0.1 |
| 33.5 |
| 50.8 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Benefit cost at December 31 |
| $ | (315.7 | ) | $ | (261.4 | ) | $ | (46.6 | ) | $ | (42.9 | ) | $ | (184.2 | ) | $ | (173.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amounts recognized in balance sheets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accrued benefit liability |
| $ | (353.0 | ) | $ | (261.4 | ) | $ | (89.0 | ) | $ | (63.3 | ) | $ | (184.2 | ) | $ | (173.9 | ) |
Intangible asset |
| 32.6 |
| — |
| 13.6 |
| 10.3 |
| — |
| — |
| ||||||
Accumulated other comprehensive income (pre-tax) |
| 4.7 |
| — |
| 28.8 |
| 10.1 |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net recognized at end of period |
| $ | (315.7 | ) | $ | (261.4 | ) | $ | (46.6 | ) | $ | (42.9 | ) | $ | (184.2 | ) | $ | (173.9 | ) |
(1) For 2002, the amounts of $43.3 million and $4.5 million include $38.6 million and $.5 million, respectively of voluntary early retirement expenses in accordance with Statement 88, as previously discussed.
166
The following table provides the weighted average actuarial assumptions.
|
| Qualified |
| Non-Qualified |
| Other |
| |||||||||||||||||||||||||
|
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| |||||||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Actuarial assumptions: |
|
|
| |||||||||||||||||||||||||||||
Discount rate |
| 6.75 | % | 7.50 | % | 7.50 | % | 6.75 | % | 7.50 | % | 7.50 | % | 6.75 | % | 7.50 | % | 7.50 | % | |||||||||||||
Rate of future compensation increase |
| 4.00 |
| 4.00 |
| 4.50 |
| 4.00 |
| 4.00 |
| 4.50 |
| N/A |
| N/A |
| N/A |
| |||||||||||||
Rate of return on plans’ assets |
| 9.00 |
| 9.25 |
| 9.00 |
| N/A |
| N/A |
| N/A |
| N/A |
| 3.00 |
| N/A |
| |||||||||||||
For measurement purposes, we assumed a seven percent annual rate of increase in the per capita cost of covered health care benefits for 2002. It was assumed that the rate would decrease gradually to five percent in 2008 and remain at that level thereafter.
Assumed health care cost trend rate by one percentage pointrates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in each year
would increase the APBO by approximately $24 million for 1997 and $21 million
for 1996, and the aggregate of the service and interest cost components of the
postretirement benefit cost by approximately $2 million for 1997, $4 million for
1996, and $3 million for 1995.
CG&E and ULH&P
Health Life
Care Insurance Total
(in millions)
1997
Actuarial present value of benefits
Fully eligible active plan participants $ (5.3) $ (2.2) $ (7.5)
Other active plan participants (32.9) (.9) (33.8)
Retirees and beneficiaries (30.2) (25.8) (56.0)
Projected APBO (68.4) (28.9) (97.3)
Unamortized transition obligation 23.0 2.1 25.1
Unrecognized prior service cost - .2 .2
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 13.6 .7 14.3
Accrued postretirement benefit obligation
at December 31, 1997 $ (31.8) $(25.9) $ (57.7)
1996
Actuarial present value of benefits
Fully eligible active plan participants $ (10.8) $ (1.6) $ (12.4)
Other active plan participants (24.2) (1.3) (25.5)
Retirees and beneficiaries (28.7) (23.6) (52.3)
Projected APBO (63.7) (26.5) (90.2)
Unamortized transition obligation 24.5 2.5 27.0
Unrecognized prior service cost - .3 .3
Unrecognized net loss (gain) resulting from
experience different from that assumed
and effects of changes in assumptions 11.5 (1.4) 10.1
Accrued postretirement benefit obligation
at December 31, 1996 $ (27.7) $(25.1) $ (52.8)
Increasing the health care cost trend raterates would have the following effects:
|
| One-Percentage- |
| One-Percentage- |
| ||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
Effect on total of service and interest cost components |
| $ | 3.4 |
| $ | (2.9 | ) |
Effect on postretirement benefit obligation |
| 44.3 |
| (38.7 | ) | ||
During 2002, eligible Cinergy employees were offered the opportunity to make a one-time election, effective January 1, 2003, to either continue to have their pension benefit determined by one percentage pointthe current defined benefit pension formula or to have their benefit determined using a cash balance formula. Participants in each year
would increase the APBO by approximately $9 million and $7 million for 1997 and
1996 respectively, andcash balance plan may request a lump-sum cash payment based upon termination of their employment which may result in increased cash requirements from pension plan assets.
Since 85 percent of eligible employees chose to continue with the aggregatetraditional pension formula, we do not believe the cash balance features will have a material effect on our financial position or results of the service and interest cost components
of the postretirement benefit cost by approximately $1 million for 1997, 1996,
and 1995.
PSI
Health Life
Care Insurance Total
(in millions)
1997
Actuarial present value of benefits
Fully eligible active plan participants $ (4.6) $ (.1) $ (4.7)
Other active plan participants (33.4) (.2) (33.6)
Retirees and beneficiaries (83.4) (2.9) (86.3)
Projected APBO (121.4) (3.2) (124.6)
Unamortized transition obligation 47.7 (1.9) 45.8
Unrecognized prior service cost - (.2) (.2)
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 7.5 .7 8.2
Accrued postretirement benefit obligation
at December 31, 1997 $ (66.2) $ (4.6) $ (70.8)
1996
Actuarial present value of benefits
Fully eligible active plan participants $ (2.9) $ - $ (2.9)
Other active plan participants (25.6) (.2) (25.8)
Retirees and beneficiaries (89.3) (2.8) (92.1)
Projected APBO (117.8) (3.0) (120.8)
Unamortized transition obligation 50.9 (2.1) 48.8
Unrecognized prior service cost - (.3) (.3)
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 8.0 .9 8.9
Accrued postretirement benefit obligation
at December 31, 1996 $ (58.9) $ (4.5) $ (63.4)
Increasing the health care cost trend rate by one percentage point in each year
would increase the APBO by approximately $15 million and $14 million for 1997
and 1996, respectively, and the aggregate of the service and interest cost
components of the postretirement benefit cost for each of 1997, 1996, and 1995
by approximately $1 million, $3 million, and $2 million, respectively.
Cinergy, CG&E, PSI, and ULH&P
operations.
167
10.Income Taxes
The following assumptions were used to determinetable shows the APBO:
1997 1996 1995
Discount rate 7.5% 8.0% 7.5%
Health care cost trend rate,
gradually declining to 5%
CG&E 7.0-8.0% 7.0-9.0% 8.0-11.0%
PSI 7.0-8.0 7.0-9.0 8.0-10.0
Year ultimate trend rates achieved
CG&E 2004 2004 2002
PSI 2004 2004 2007
11. Income Taxes
Cinergy
Cinergy complies with the provisions of Statement 109. Statement 109 requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of existing differences between the financial reporting and tax
reporting bases of assets and liabilities.
The significant components of Cinergy'sCinergy’s, CG&E’s, and PSI’s net deferred income tax liability atliabilities as of December 31, 1997, and 1996, are as follows:
1997 1996
(in millions)
Deferred Income Tax Liability
Utility plant $1 076.8 $1 061.3
Unamortized costs31:
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| ||||||||||||
|
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| 2002 |
| 2001 |
| ||||||
|
| (in millions) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deferred Income Tax Liability |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Property, plant, and equipment |
| $ | 1,356.5 |
| $ | 1,172.0 |
| $ | 803.1 |
| $ | 708.0 |
| $ | 520.3 |
| $ | 453.2 |
|
Unamortized costs of reacquiring debt |
| 13.9 |
| 13.4 |
| 2.8 |
| 3.2 |
| 11.0 |
| 10.2 |
| ||||||
Deferred operating expenses and carrying costs |
| 4.4 |
| 10.3 |
| — |
| — |
| 4.4 |
| 10.3 |
| ||||||
Purchased power tracker |
| 11.6 |
| 9.7 |
| — |
| — |
| 11.6 |
| 9.7 |
| ||||||
RTC |
| 213.2 |
| 206.0 |
| 213.2 |
| 206.0 |
| — |
| — |
| ||||||
Net energy risk management assets |
| 8.8 |
| 12.2 |
| 1.0 |
| 8.4 |
| — |
| — |
| ||||||
Amounts due from customers-income taxes |
| 37.4 |
| 22.9 |
| 20.1 |
| 16.0 |
| 17.3 |
| 6.9 |
| ||||||
Gasification services agreement buyout costs |
| 89.8 |
| 92.3 |
| — |
| — |
| 89.8 |
| 92.3 |
| ||||||
Other |
| 45.2 |
| 48.2 |
| 10.9 |
| 8.7 |
| 1.2 |
| 2.3 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Deferred Income Tax Liability |
| 1,780.8 |
| 1,587.0 |
| 1,051.1 |
| 950.3 |
| 655.6 |
| 584.9 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deferred Income Tax Asset |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unamortized investment tax credits |
| 42.5 |
| 45.9 |
| 32.9 |
| 36.0 |
| 9.6 |
| 10.0 |
| ||||||
Accrued pension and other postretirement benefit costs |
| 196.3 |
| 162.4 |
| 107.5 |
| 96.6 |
| 60.1 |
| 47.2 |
| ||||||
Net energy risk management liabilities |
| — |
| — |
| — |
| — |
| 9.0 |
| 5.5 |
| ||||||
Rural Utilities Service obligation |
| 28.2 |
| 28.2 |
| — |
| — |
| 28.2 |
| 28.2 |
| ||||||
Other |
| 41.9 |
| 48.5 |
| 28.1 |
| 38.4 |
| 10.0 |
| 7.3 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Deferred Income Tax Asset |
| 308.9 |
| 285.0 |
| 168.5 |
| 171.0 |
| 116.9 |
| 98.2 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net Deferred Income Tax Liability |
| $ | 1,471.9 |
| $ | 1,302.0 |
| $ | 882.6 |
| $ | 779.3 |
| $ | 538.7 |
| $ | 486.7 |
|
(1) The results of reacquiring debt 24.4 23.2
Deferred operating expenses
and carrying costs 70.4 73.5
Amounts due from customers - income taxes 129.4 129.4
Deferred DSM costs 31.7 43.4
Investment in unconsolidated subsidiary 55.0 13.5
Other 47.9 41.3
Total deferred income tax liability 1 435.6 1 385.6
Deferred Income Tax Asset
Unamortized investment tax credits 60.5 63.9
Deferred fuel costs - 12.9
Accrued pension and other benefit costs 63.3 60.4
Other 63.3 102.1
Total deferred income tax asset 187.1 239.3
Net Deferred Income Tax Liability $1 248.5 $1 146.3
CG&E
CG&E and its subsidiaries comply with the provisions of Statement 109. Statement
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of existing differences between the financial reporting
and tax reporting bases of assets and liabilities.
The significant components of CG&E's net deferred income tax liability at
December 31, 1997, and 1996, are as follows:
1997 1996
(in millions)
Deferred Income Tax Liability
Utility plant $683.3 $671.6
Unamortized costs of reacquiring debt 11.1 11.2
Deferred operating expenses
and carrying costs 62.0 73.5
Amounts due from customers - income taxes 121.9 120.7
Deferred DSM costs 11.7 6.0
Other 43.9 40.9
Total deferred income tax liability 933.9 923.9
Deferred Income Tax Asset
Unamortized investment tax credits 41.7 43.9
Accrued pension and other benefit costs 39.2 31.4
Other 58.6 81.5
Total deferred income tax asset 139.5 156.8
Net Deferred Income Tax Liability $794.4 $767.1
PSI
PSI and its subsidiaries comply with the provisions of Statement 109. Statement
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of existing differences between the financial reporting
and tax reporting bases of assets and liabilities.
The significant components of PSI's net deferred income tax liability at
December 31, 1997, and 1996, are as follows:
We will participate in the filing offile a consolidated Federalfederal income tax return for the year ended December 31, 1997.2002. The current tax liability is allocated among the members of the Cinergy consolidated group, pursuant to a tax sharing agreement consistentfiled with Rule 45(c) ofthe SEC under the PUHCA.
A summary of Federal
168
The following table summarizes federal and state income taxes charged (credited) to income for Cinergy, CG&E, and the
allocationPSI:
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| |||||||||||||||||||||
|
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| |||||||||
|
| (in millions) |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Current Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Federal |
| $ | 13.3 |
| $ | 122.9 |
| $ | 187.3 |
| $ | 50.6 |
| $ | 135.1 |
| $ | 121.5 |
| $ | 71.1 |
| $ | 59.9 |
| $ | 84.4 |
|
State |
| (4.1 | ) | 9.3 |
| 16.9 |
| 0.6 |
| 7.6 |
| 1.6 |
| 9.7 |
| 4.6 |
| 10.8 |
| |||||||||
Total Current Income Taxes |
| 9.2 |
| 132.2 |
| 204.2 |
| 51.2 |
| 142.7 |
| 123.1 |
| 80.8 |
| 64.5 |
| 95.2 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Deferred Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Depreciation and other property, plant, and equipment-related items(2) |
| 172.2 |
| 42.7 |
| 26.1 |
| 73.6 |
| 23.3 |
| 19.0 |
| 79.6 |
| 10.7 |
| 7.1 |
| |||||||||
Pension and other benefit costs |
| (17.4 | ) | (11.8 | ) | (21.3 | ) | (4.7 | ) | (4.2 | ) | (7.5 | ) | (7.4 | ) | (7.6 | ) | (11.5 | ) | |||||||||
Deferred excise taxes |
| — |
| 14.5 |
| — |
| — |
| 14.5 |
| — |
| — |
| — |
| — |
| |||||||||
Unrealized energy risk management transactions |
| 9.0 |
| 44.0 |
| 10.9 |
| 2.2 |
| 23.9 |
| 5.6 |
| (2.8 | ) | 11.6 |
| 2.0 |
| |||||||||
Fuel costs |
| (22.7 | ) | 5.7 |
| 28.7 |
| 8.8 |
| (8.0 | ) | 26.7 |
| (31.5 | ) | 13.7 |
| 2.0 |
| |||||||||
Purchased power tracker |
| 1.5 |
| 8.5 |
| — |
| — |
| — |
| — |
| 1.5 |
| 8.5 |
| — |
| |||||||||
Gasification services agreement buyout costs |
| (2.6 | ) | (2.2 | ) | (0.1 | ) | — |
| — |
| — |
| (2.6 | ) | (2.2 | ) | (0.1 | ) | |||||||||
Other-net |
| (14.1 | ) | 16.1 |
| 11.0 |
| 8.3 |
| (4.8 | ) | (3.0 | ) | (7.5 | ) | 5.3 |
| (1.2 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total Deferred Federal Income Taxes |
| 125.9 |
| 117.5 |
| 55.3 |
| 88.2 |
| 44.7 |
| 40.8 |
| 29.3 |
| 40.0 |
| (1.7 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
State |
| 30.4 |
| 15.4 |
| 1.7 |
| 20.8 |
| 5.0 |
| 1.5 |
| 7.8 |
| 4.8 |
| (1.4 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total Deferred Income Taxes |
| 156.3 |
| 132.9 |
| 57.0 |
| 109.0 |
| 49.7 |
| 42.3 |
| 37.1 |
| 44.8 |
| (3.1 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Investment Tax Credits-Net |
| (8.2 | ) | (9.1 | ) | (9.6 | ) | (4.9 | ) | (5.9 | ) | (6.0 | ) | (3.2 | ) | (3.2 | ) | (3.6 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total Income Taxes |
| $ | 157.3 |
| $ | 256.0 |
| $ | 251.6 |
| $ | 155.3 |
| $ | 186.5 |
| $ | 159.4 |
| $ | 114.7 |
| $ | 106.1 |
| $ | 88.5 |
|
(1) The results of suchCinergy also include amounts is as follows:
Cinergy
1997 1996 1995
(in millions)
Current Income Taxes
Federal $133.3 $143.4 $175.3
State 12.1 7.5 10.4
Total current income taxes 145.4 150.9 185.7
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 26.7 61.6 53.8
DSM costs (8.5) (1.9) 12.0
Pension and other benefit costs .9 (28.2) (21.8)
Litigation settlement 1.8 26.2 -
Fuel costs 4.4 8.8 .3
Other items - net 49.5 (15.4) (7.5)
Total deferred Federal income taxes 74.8 51.1 36.8
State 2.4 6.5 1.7
Totalto non-registrants.
(2) The increase in deferred income taxes 77.2 57.6 38.5
Investment Tax Credits - Net (9.6) (9.8) (10.1)
Total Income Taxes $213.0 $198.7 $214.1
Allocated to:
Operatingfor depreciation and other property, plant, and equipment-related items includes a change in accounting method for tax purposes related to capitalized costs.
Internal Revenue Code Section 29 provides a tax credit (nonconventional fuel source credit) for qualified fuels produced and sold by a taxpayer to an unrelated person during the taxable year. The nonconventional fuel source credit reduced current federal income $248.9 $218.2 $221.4
Othertax expense $41.6 million and $1.1 million for 2002 and 2001, respectively.
Internal Revenue Code Section 45 provides a tax credit for electricity produced from certain renewable resources during the taxable year. The renewable resource credit reduced current federal income tax expense $4.1 million, $3.2 million, and expenses - net (35.9) (19.5) (7.3)
$213.0 $198.7 $214.1
CG&E
1997 1996 1995
(in millions)
Current Income Taxes
Federal $117.1 $115.5 $102.4
State 5.2 1.5 2.5
Total current$2.5 million for 2002, 2001, and 2000, respectively.
169
The following table presents a reconciliation of federal income taxes 122.3 117.0 104.9
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 13.6 36.6 33.9
DSM costs 7.5 .6 3.6
Pension and other benefit costs (2.8) (17.0) (10.7)
Fuel costs (5.5) 10.8 6.3
Other items - net 10.8 (8.1) (1.0)
Total deferred Federal income taxes 23.6 22.9 32.1
State (1.0) 2.2 .8
Total deferred income taxes 22.6 25.1 32.9
Investment Tax Credits - Net (6.2) (6.2) (6.0)
Total Income Taxes $138.7 $135.9 $131.8
Allocated to:
Operating income $172.0 $145.0 $136.4
Other income and expenses - net (33.3) (9.1) (4.6)
$138.7 $135.9 $131.8
PSI
1997 1996 1995
(in millions)
Current Income Taxes
Federal $35.5 $41.3 $71.4
State 6.8 6.0 7.5
Total current income taxes 42.3 47.3 78.9
Deferred Income Taxes
Federal
Depreciation and other electric utility
plant-related items 13.3 25.0 19.9
DSM costs (16.1) (2.5) 8.4
Pension and other benefit costs 3.7 (11.2) (11.1)
Litigation settlement 6.2 26.2 -
Fuel costs 9.9 (2.0) (6.0)
Coal contract buyout 5.5 - -
Destec payments 7.7 - -
Other items - net 5.6 (6.3) (3.0)
Total deferred Federal income taxes 35.8 29.2 8.2
State 3.3 4.3 1.1
Total deferred income taxes 39.1 33.5 9.3
Investment Tax Credits - Net (3.5) (3.6) (4.1)
Total Income Taxes $77.9 $77.2 $84.1
Allocated to:
Operating income $76.9 $73.2 $85.0
Other income and expenses - net 1.0 4.0 (.9)
$77.9 $77.2 $84.1
ULH&P
1997 1996 1995
(in thousands)
Current Income Taxes
Federal $11 607 $ 416 $5 955
State 3 002 (87) 1 324
Total current income taxes 14 609 329 7 279
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 847 1 506 1 382
Pension and other benefit costs - (277) (381)
Fuel costs (5 486) 6 111 (534)
Unamortized costs of reacquiring debt (122) 458 808
Other items - net 12 291 (556)
Total deferred Federal income taxes (4 749) 8 089 719
State
Depreciation and other utility plant-
related items 287 425 390
Fuel costs (1 404) 1 570 (137)
Other items - net 23 55 (35)
Total deferred state income taxes (1 094) 2 050 218
Total deferred income taxes (5 843) 10 139 937
Investment Tax Credits - Net (280) (282) (285)
Total Income Taxes $ 8 486 $10 186 $7 931
Allocated to:
Operating income $ 9 586 $ 9 834 $7 887
Other income and expenses - net (1 100) 352 44
$ 8 486 $10 186 $7 931
Cinergy, CG&E, PSI, and ULH&P
Federal income taxes, computed(which are calculated by applyingmultiplying the statutory Federalfederal income tax rate toby book income before extraordinary item and Federalfederal income tax, are reconciledtax) to Federalthe federal income tax expense reported in the Consolidated Statements of Income for Cinergy, CG&E, and PSI.
|
| Cinergy(1) |
| CG&E and subsidiaries |
| PSI |
| |||||||||||||||||||||
|
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| 2002 |
| 2001 |
| 2000 |
| |||||||||
|
| (in millions) |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Statutory federal income tax provision |
| $ | 184.8 |
| $ | 235.6 |
| $ | 221.3 |
| $ | 139.2 |
| $ | 175.2 |
| $ | 148.1 |
| $ | 109.0 |
| $ | 90.7 |
| $ | 75.1 |
|
Increases (reductions) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Amortization of investment tax credits |
| (8.2 | ) | (9.1 | ) | (9.6 | ) | (4.9 | ) | (5.9 | ) | (6.0 | ) | (3.2 | ) | (3.2 | ) | (3.6 | ) | |||||||||
Depreciation and other property, plant, and equipment-related differences |
| 0.2 |
| 3.2 |
| 17.7 |
| 1.0 |
| 2.6 |
| 14.0 |
| (0.8 | ) | 0.6 |
| 3.6 |
| |||||||||
Preferred dividend requirements of subsidiaries |
| 1.2 |
| 1.2 |
| 1.6 |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||
Income tax credits |
| (45.7 | ) | (4.3 | ) | (2.5 | ) | — |
| — |
| — |
| — |
| — |
| — |
| |||||||||
Foreign tax adjustments |
| 5.0 |
| (1.3 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||
Employee Stock Option Plan dividend |
| (3.0 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||
Other-net |
| (3.3 | ) | 6.0 |
| 4.5 |
| (1.4 | ) | 2.0 |
| 0.2 |
| (7.8 | ) | 8.6 |
| 4.0 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Federal Income Tax Expense |
| $ | 131.0 |
| $ | 231.3 |
| $ | 233.0 |
| $ | 133.9 |
| $ | 173.9 |
| $ | 156.3 |
| $ | 97.2 |
| $ | 96.7 |
| $ | 79.1 |
|
(1) The results of Cinergy CG&E, also include amounts related to non-registrants.
The following table shows the significant components of ULH&P’s net deferred income tax liability as of December 31, 2002 and PSI2001:
|
| ULH&P |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (in thousands) |
| ||||
Deferred Income Tax Liability |
|
|
|
|
| ||
Property, plant, and equipment |
| $ | 44,309 |
| $ | 34,218 |
|
Unamortized costs of reacquiring debt |
| 652 |
| 699 |
| ||
Amounts due from customers-income taxes |
| 2,194 |
| — |
| ||
Deferred fuel costs |
| — |
| — |
| ||
Other |
| 6,340 |
| 4,158 |
| ||
|
|
|
|
|
| ||
Total Deferred Income Tax Liability |
| 53,495 |
| 39,075 |
| ||
|
|
|
|
|
| ||
Deferred Income Tax Asset |
|
|
|
|
| ||
Unamortized investment tax credits |
| 1,309 |
| 1,035 |
| ||
Amounts due to customers-income taxes |
| — |
| 2,524 |
| ||
Deferred fuel costs |
| 1,987 |
| 520 |
| ||
Accrued pension and other postretirement benefit costs |
| 4,410 |
| 3,947 |
| ||
Other |
| 2,429 |
| 2,726 |
| ||
|
|
|
|
|
| ||
Total Deferred Income Tax Asset |
| 10,135 |
| 10,752 |
| ||
|
|
|
|
|
| ||
Net Deferred Income Tax Liability |
| $ | 43,360 |
| $ | 28,323 |
|
170
The following table summarizes federal and state income taxes charged (credited) to income for ULH&P:
|
| ULH&P |
| |||||||
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Current Income Taxes |
|
|
|
|
|
|
| |||
Federal |
| $ | 3,250 |
| $ | 23,109 |
| $ | 5,003 |
|
State |
| 5,984 |
| (2,293 | ) | (129 | ) | |||
Total Current Income Taxes |
| 9,234 |
| 20,816 |
| 4,874 |
| |||
|
|
|
|
|
|
|
| |||
Deferred Income Taxes |
|
|
|
|
|
|
| |||
Federal |
|
|
|
|
|
|
| |||
Depreciation and other property, plant, and equipment-related items |
| 2,797 |
| 1,042 |
| 1,059 |
| |||
Pension and other benefit costs |
| (309 | ) | (140 | ) | (605 | ) | |||
Fuel costs |
| (696 | ) | (7,338 | ) | 8,564 |
| |||
Unamortized costs of reacquiring debt |
| (70 | ) | (30 | ) | (30 | ) | |||
Service company allocations |
| — |
| 192 |
| 251 |
| |||
Other-net |
| 1,138 |
| 212 |
| (338 | ) | |||
|
|
|
|
|
|
|
| |||
Total Deferred Federal Income Taxes |
| 2,860 |
| (6,062 | ) | 8,901 |
| |||
|
|
|
|
|
|
|
| |||
Deferred State Income Taxes |
| 522 |
| (781 | ) | 303 |
| |||
|
|
|
|
|
|
|
| |||
Total Deferred Income Taxes |
| 3,382 |
| (6,843 | ) | 9,204 |
| |||
|
|
|
|
|
|
|
| |||
Investment Tax Credits-Net |
| (267 | ) | (274 | ) | (277 | ) | |||
|
|
|
|
|
|
|
| |||
Total Income Taxes |
| $ | 12,349 |
| $ | 13,699 |
| $ | 13,801 |
|
The following table presents a reconciliation of federal income taxes (which are calculated by multiplying the statutory federal income tax rate by book income before federal income tax) to the federal income tax expense reported in the Statements of Income of for ULH&P as follows:
Cinergy
1997 1996 1995
(in millions)
Statutory Federal income tax provision $196.4 $181.8 $192.2
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (9.6) (9.8) (10.1)
Depreciation.
|
| ULH&P |
| |||||||
|
| 2002 |
| 2001 |
| 2000 |
| |||
|
| (in thousands) |
| |||||||
|
|
|
|
|
|
|
| |||
Statutory federal income tax provision |
| $ | 6,298 |
| $ | 18,444 |
| $ | 13,391 |
|
Increases (reductions) in taxes resulting from: |
|
|
|
|
|
|
| |||
Amortization of investment tax credits |
| (267 | ) | (274 | ) | (277 | ) | |||
Depreciation and other property, plant, and equipment- related differences |
| (387 | ) | 23 |
| 830 |
| |||
Other-net |
| 199 |
| (1,420 | ) | (317 | ) | |||
|
|
|
|
|
|
|
| |||
Federal Income Tax Expense |
| $ | 5,843 |
| $ | 16,773 |
| $ | 13,627 |
|
171
11.Commitments and Contingencies
(a)Construction and Other Commitments
Forecasted construction and other utility plant-committed expenditures, including capitalized financing costs, for the year 2003 and for the five-year period 2003-2007 (in nominal dollars) are presented in the table below:
|
| 2003 |
| 2003-2007 |
| ||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
Cinergy(1) |
| $ | 759 |
| $ | 3,102 |
|
CG&E and subsidiaries |
| 326 |
| 1,477 |
| ||
PSI(2) |
| 367 |
| 1,369 |
| ||
ULH&P |
| 43 |
| 242 |
| ||
(1) The results of Cinergy also include amounts related differences 11.7 14.1 9.0
Preferred dividend requirementsto non-registrants.
(2) Excludes intercompany purchase of subsidiaries 4.4 8.5 10.8
Foreign tax adjustments (13.2) (11.1) -
Other - net 8.8 1.2 .1
Federal income tax expense $198.5 $184.7 $202.0
CG&E
1997 1996 1995
(in millions)
Statutory Federal income tax provision $130.8 $125.8 $127.6
Increases (Reductions)peaking plants from a non-regulated affiliate.
This forecast includes an estimate of expenditures in taxes resulting from:
Amortization of investment tax credits (6.2) (6.2) (6.0)
Depreciationaccordance with the companies’ plans regarding nitrogen oxide (NOX) emission control standards and other environmental compliance (excluding implementation of the tentative U.S. Environmental Protection Agency (EPA) Agreement), as discussed below.
(b)Guarantees
In the ordinary course of business, Cinergy enters into various agreements providing financial or performance assurances to third parties on behalf of certain unconsolidated subsidiaries and joint ventures. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to these entitieson a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish their intended commercial purposes. The guarantees have various termination dates, from short-term (less than one year) to open-ended.
In many cases, the maximum potential amount of an outstanding guarantee is an express term, set forth in the guarantee agreement, representing the maximum potential obligation of Cinergy under that guarantee (excluding, at times, certain legal fees to which a guaranty beneficiary may be entitled). In those cases where there is no maximum potential amount expressly set forth in the guarantee agreement, we calculate the maximum potential amount by considering the terms of the guaranteed transactions, to the extent such amount is estimable.
Cinergy has guaranteed the payment of $33 million as of December 31, 2002, for unconsolidated subsidiaries’ debt and for borrowings by individuals under the Director, Officer, and Key Employee Stock Purchase Program (see Note 2(d) for further information). Cinergy may be obligated to pay the debt’s principal and any related interest in the event of an unexcused breach of a guaranteed payment obligation by the unconsolidated subsidiary or an unexcused breach of guaranteed payment obligations by certain directors, officers, and key employees. The majority of these guarantees expire in three years.
172
Cinergy Corp. has also provided performance guarantees on behalf of certain unconsolidated subsidiaries and joint ventures. These guarantees support performance under various agreements and instruments (such as construction contracts, operations and maintenance agreements and energy service agreements). Cinergy Corp. may be liable in the event of an unexcused breach of a guaranteed performance obligation by an unconsolidated subsidiary. Cinergy Corp. has estimated its maximum potential amount to be $133 million under these guarantees as of December 31, 2002. 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, generally 15 to 20 years.
Cinergy has entered into contracts that include indemnification provisions as a routine part of its business activities. Examples of thesecontracts 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 beforeany payments would become due.In other cases (such as indemnifications for willful misconduct of employees in a joint venture), the maximum potential amount is not estimable given that the magnitude of any claims under those indemnifications would be a function of the extent of damages actually incurred, which is not practicable to estimate unless and until the event occurs. Cinergy has estimated the maximum potential amount, where estimable, to be $131 million under these indemnification provisions and considers the likelihood of making any material payments under these provisions to be remote. The termination period for the majority of matters covered under indemnification provisions in purchase and sale agreements generally ranges from two to seven years.
We believe the likelihood that Cinergy would be required to perform or otherwise incur any significant losses associated with any or all of the guarantees described in the preceding paragraphs is remote.
(c)Ozone Transport Rulemakings
In June 1997, the Ozone Transport Assessment Group, which consisted of 37 states, made a wide range of recommendations to the EPA to address the impact of ozone transport on serious non-attainment areas (geographic areas defined by the EPA as non-compliant with ozone standards) in the Northeast, Midwest, and South. Ozone transport refers to wind-blown movement of ozone and ozone-causing materials across city and state boundaries.
(i)NOX State Implementation Plan (SIP) Call
In October 1998, the EPA finalized its ozone transport rule, also known as the NOX SIP Call. It applied to 22 states in the eastern half of the U.S., including the three states in which our electric utilities operate, and proposed a model NOX emission allowance trading program. This rule recommended that states reduce NOX emissions primarily from industrial and utility plant-
related differences 9.8 11.7 9.0
Preferred dividends - - 6.2
Other - net .1 .9 (8.3)sources to a certain level by May 2003.
173
Ohio, Indiana, a number of other states, and various industry groups (some of which we are a member), filed legal challenges to the NOX SIP Call with the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals). In August 2000, the Court of Appeals extended the deadline for NOX reductions to May 31, 2004. In June 2001, the Court of Appeals remanded portions of the NOX SIP Call to the EPA for reconsideration of how growth was factored into the state NOX budgets. On May 1, 2002, the EPA published, in the Federal income tax expense $134.5 $132.2 $128.5
PSI
1997 1996 1995
(in millions)
Statutory Federal income tax provision $ 70.0 $ 67.4 $ 77.5
Increases (Reductions)Register, a final rule reaffirming its growth factors and state NOX budgets, with additional explanation. The states of West Virginia and Illinois, along with various industry groups (some of which we are a member), have challenged the growth factors and state NOX budgets in taxes resulting from:
Amortizationan action filed in the Court of investment tax credits (3.5) (3.6) (4.1)
Other - net 1.3 3.1 2.1
Federal income tax expense $ 67.8 $ 66.9 $ 75.5
ULH&P
1997 1996 1995
(in thousands)
Statutory Federal income tax provision $6 823 $7 987 $6 496
Increases (Reductions)Appeals. It is unclear when the Court of Appeals will reach a decision in taxes resulting from:
Amortizationthis case, or whether this decision will result in an increase or decrease in the size of investment tax credits (280) (282) (285)
Depreciationthe NOX reduction requirement, or a deferral of the May 31, 2004 compliance deadline.
The states of Indiana and Kentucky developed final NOX SIP rules in response to the NOX SIP Call, through cap and trade programs, in June and July of 2001, respectively. On November 8, 2001, the EPA approved Indiana’s SIP rules, which became effective December 10, 2001. On April 11, 2002, the EPA proposed direct final approval of Kentucky’s rules and they became effective on June 10, 2002. The state of Ohio completed its NOX SIP rules in response to the NOX SIP Call on July 8, 2002, with an effective date of July 18, 2002. On January 16, 2003, the EPA proposed a direct final rule to approve Ohio’s SIP. The rule will be effective March 17, 2003, assuming no adverse comments are received. Cinergy’s current plans for compliance with the EPA’s NOX SIP Call would also satisfy compliance with Indiana’s, Kentucky’s, and Ohio’s SIP rules.
On September 25, 2000, Cinergy announced a plan for its subsidiaries, CG&E and PSI, to invest in pollution control equipment and other utility plant-
related differences 96 358 219
Other - net (61) 160 (41)
Federal income tax expense $6 578 $8 223 $6 389
12. Commitmentsmethods to reduce NOX emissions. This plan includes the following:
• complete installation of 9 selective catalytic reduction units at several different generating stations;
• install other pollution control technologies, including new computerized combustion controls, at all generating stations;
• make combustion improvements; and Contingencies
(a) Construction
• utilize the NOX allowance market to buy or sell NOX allowances as appropriate.
The current estimate for additional expenditures for this investment is approximately $275 million and is in addition to the $578 million already incurred to comply with this program.
(ii)Section 126 Petitions
In February 1998, several northeast states filed petitions seeking the EPA’s assistance in reducing ozone in the Eastern U.S. under Section 126 of the Clean Air Act (CAA). The EPA believes that Section 126 petitions allow a state to claim that sources in another state are contributing to its air quality problem and request that the EPA require the upwind sources to reduce their emissions.
174
In December 1999, the EPA granted four Section 126 petitions relating to NOX emissions. This ruling affected all of our Ohio and Kentucky facilities, as well as some of our Indiana facilities, and requires us to reduce our NOX emissions to a certain level by May 2003. In May 2001, the Court of Appeals substantially upheld a challenge to the Section 126 requirements, and remanded portions of the rule to the EPA for reconsideration of how growth was factored into the emission limitations. On August 24, 2001, the Court of Appeals temporarily suspended the Section 126 compliance deadline, pending the EPA’s reconsideration of growth factors. On May 1, 2002, the EPA issued a final rule extending the Section 126 rule compliance deadline to May 31, 2004, thus harmonizing the deadline with that for the NOX SIP Call.
The Section 126 rule will not apply, however, in states with approved SIPs under the NOX SIP Call, which include the states of Indiana and Kentucky. In addition, the EPA has issued a direct final rule approving Ohio’s SIP. As a result of these actions, we anticipate that the Section 126 rule will not affect any of our facilities.
(iii)State Ozone Plans
On November 15, 1999, the states of Indiana and Kentucky (along with Jefferson County, Kentucky) jointly filed an amendment to their attainment demonstration on how they intend to bring the Greater Louisville Area (including Floyd and Clark Counties in Indiana) into attainment with the one-hour ozone standard. The Greater Louisville Area has since attained the one-hour ozone standard, and on October 23, 2001, the EPA re-designated the area as being in attainment with that standard. Previous SIP amendments called for, among other things, statewide NOX reductions from utilities in Indiana, Kentucky, and surrounding states which are less stringent than the EPA’s NOX SIP Call. In lieu of continuing rulemakings for NOX emission reductions under this demonstration, the states completed more stringent NOX emission reduction regulations in response to the NOX SIP Call.
See (f) below for a discussion of the tentative EPA Agreement, the implementation of which could affect our strategy for compliance with the final NOX SIP Call.
(d)New Source Review (NSR)
The CAA’s NSR provisions require that a company obtain a pre-construction permit if it plans to build a new stationary source of pollution or make a major modification to an existing facility, unless the changes are exempt.
On November 3, 1999, the United States sued a number of holding companies and electric utilities, including Cinergy, CG&E, PSI, and ULH&P
PSI, in various U.S. District Courts (District Court). The Cinergy, currently forecastsCG&E, and PSI suit alleged violations of the aggregateCAA at two of our generating stations relating to NSR and New Source Performance Standards requirements. The suit sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at CG&E’s W.C. Beckjord Generating Station (Beckjord Station) and at PSI’s Cayuga Generating Station, and (2) civil penalties in amounts of up to $27,500 per day for each violation. Since that time, two amendments to the complaint have been filed by the United States, alleging additional violations of the CAA, including allegations involving different generating units. In addition, three northeast states and two environmental groups have intervened in the case.
On December 21, 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the parties in the litigation for a negotiated resolution of the CAA claims in the litigation. See (f) below for a discussion of the tentative EPA Agreement.
On October 4, 2002, the Indiana District Court issued a Revised Case Management Plan in Cinergy’s case that sets forth the dates by which various events in the litigation, such as discovery and the filing of dispositive motions, must be completed. Consistent with the plan, on October 9, 2002, the Indiana District Court set the case for trial by jury commencing on October 4, 2004.
At this time, it is not possible to predict whether a final agreement implementing the agreement in principle can be reached. The parties continue to negotiate. If the settlement is not completed, we intend to defend against the allegations vigorously in court. In such an event, it is not possible to determine the likelihood that the plaintiffs would prevail upon their claims or whether resolution of these matters would have a material effect on our financial position or results of operations.
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(e) Beckjord Station NOV
On November 30, 1999, the EPA filed an NOV against Cinergy and CG&E, alleging that emissions of particulate matter at the Beckjord Station exceeded the allowable limit. The allegations contained in this NOV were incorporated within the March 1, 2000 amended complaint, as discussed in (d) above. On June 22, 2000, the EPA issued an NOV and a finding of violation (FOV) alleging additional particulate emission violations at Beckjord Station. The NOV/FOV indicated the EPA may issue an administrative compliance order, issue an administrative penalty order, or bring a civil or criminal action.
See (f) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.
(f) EPA Agreement
On December 21, 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the United States, three northeast states, and two environmental groups for a negotiated resolution of CAA claims and other related matters brought against coal-fired power plants owned and operated by Cinergy’s operating subsidiaries. The complete resolution of these issues is contingent upon establishing a final agreement with the EPA and other parties. If a final agreement is reached with these parties, it would resolve past claims of alleged NSR violations as well as the Beckjord Station NOVs/FOV discussed previously under (d) and (e).
In addition, the intent of the tentative agreement is that we would be allowed to continue on-going activities to maintain reliability and availability without subjecting the plants to future litigation regarding federal NSR permitting requirements.
In return for resolution of claims regarding past maintenance activities, as well as future operational certainty, we have tentatively agreed to:
• shut down or repower with natural gas, nine small coal-fired boilers at three power plants beginning in 2004;
• build four additional sulfur dioxide (SO2) scrubbers, the first of which must be operational by December 31, 2007;
• upgrade existing particulate control systems;
• phase in the operation of NOX reduction technology year-round starting in 2004;
176
• reduce our existing Title IV SO2 cap by 35 percent in 2013;
• pay a civil penalty of $8.5 million to the U.S. government; and
• implement $21.5 million in environmental mitigation projects, including retiring 50,000 tons of SO2 allowances by 2005.
The estimated cost for these capital expenditures for its construction
program for the 1998 through 2002 periodis expected to be $1.7 billion. Ofapproximately $700 million through 2013. These capital expenditures are in addition to our previously announced commitment to install NOX controls as discussed in (c) above, but does include capital costs that Cinergy would expect to spend regardless of the settlement due to new environmental requirements expected in the second half of this decade.
Cinergy, CG&E, and PSI have accrued costs related to certain aspects of the tentative agreement. In reaching the tentative agreement, we did not admit any wrongdoing and remain free to continue our current maintenance practices, as well as implement future projects for improved reliability.
At this time, it is not possible to predict whether a final agreement implementing the agreement in principle can be reached. The parties continue to negotiate. If the settlement is not completed, we intend to defend against the allegations, discussed in (d) and (e) above, vigorously in court. In such an event, it is not possible to determine the likelihood that the plaintiffs would prevail upon their claims or whether resolution of these projected
expenditures, approximately $866 million relates to CG&E and its subsidiaries,
including $137 million for ULH&P, and $858 million relates to PSI.
(b) matters would have a material effect on our financial position or results of operations.
(g)Manufactured Gas Plant (MGP) Sites
Cinergy, CG&E, PSI, and ULH&P
(i) General
Prior to the 1950s, gas was produced at MGP sites through a process that involved the heating of coal and/or oil. The gas produced from this process was sold for residential, commercial, and industrial uses.
Cinergy and PSI
(ii) PSI
Coal tar residues, related hydrocarbons, and various metals associated with MGP sites have been found at former MGP sites in Indiana, including at least 21 MGP sites which PSI or its predecessors previously owned. PSI acquired four of the sites from NIPSCO in 1931. At the same time, PSI sold NIPSCO the sites located in Goshen and Warsaw, Indiana. In 1945, PSI sold 19 of these sites (including the four sites it acquired from NIPSCO) to Indiana Gas and Water Company, Inc. (nowthe predecessor of the Indiana Gas Company, Inc. (IGC)), including. IGC later sold the Shelbyville and Lafayette sites
(discussed below). PSI or its predecessors acquired seven of the 21 MGP sites
from Northern Indiana Public Service Company (NIPSCO), five of which were among
the 19 sites PSI sold to IGC. The other two sites acquired from NIPSCO aresite located in Goshen (discussed below) and Warsaw, Indiana.
PSI has received claims from Rochester, Indiana to NIPSCO.
IGC and NIPSCO have both made claims against PSI alleging that PSI is a Potentially Responsible Party (PRP)with respect to the 21 MGP sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) with respect to the 21 MGP sites, and
therefore. The claims further asserted that PSI was legally responsible for the costs of investigating and remediating thesethe sites.
The Shelbyville MGP site has been the subject of an investigation and cleanup
enforcement action by the Indiana Department of Environmental Management (IDEM)
against IGC and PSI. Pursuant to an agreement, PSI and IGC have conducted
investigation and remediation activities at the Shelbyville site and are sharing
the costs of these activities. In 1997, PSI and IGC submitted a proposed agreed
order to IDEM relative to the Shelbyville site, which, if accepted by IDEM, will
result in a determination of whether the activities previously undertaken at the
site are sufficient to adequately protect human health and the environment.
Based upon environmental investigations and remediation completed to date, PSI
believes that any further investigation and remediation required for this site
will not have a material adverse effect on its financial condition or results of
operations.
In 1992, the IDEM issued an order to IGC, naming IGC as a PRP as defined in the
CERCLA, which requires investigation and remediation of the Lafayette MGP site.
IGC entered into an agreed order with the IDEM for the removal of MGP
contamination at that site. In August 1997, NIPSCO filed suit against PSI in the United States District
Court for the Northern Districtfederal court, claiming recovery (pursuant to CERCLA) of Indiana, South Bend Division, claiming,
pursuant to CERCLA, recovery from PSI of NIPSCO'sNIPSCO’s past and future costs of investigating and remediating MGP relatedMGP-related contamination at the Goshen, Indiana MGP site.
In November 1998, NIPSCO, alleged that it has already incurred about $400,000 in response costs at
the siteIGC, and that remediation of the site will cost about $2.7 million. PSI
denied entered into a Site Participation and Cost Sharing Agreement (Agreement). This Agreement allocated CERCLA liability in its answer to the complaint. The parties are currently
engaged in the discovery process and the case has not yet been scheduled for
trial.
Also, in August 1997, PSI reached an agreement with IGC settling IGC's claims
that PSI contribute to IGC's response costs related to 13 of the 19 MGP sites
conveyed by PSI to IGC in 1945. This agreement requires PSI and IGC to share past and future response costs equally (50%/50%) at seven MGP sites in Indiana among the 13 sites. Further, the
parties must jointly approve future managementthree companies. As a result of the Agreement, NIPSCO’s lawsuit against PSI was dismissed. Similar agreements were reached between IGC and PSI that allocate CERCLA liability at 14 MGP sites with which NIPSCO was not involved. These agreements concluded all CERCLA and similar claims between the decisionsthree companies related to spend additional funds.MGP sites. The settlement does not addressparties continue to investigate and remediate the five sites, PSI
acquired from NIPSCOas appropriate, under the agreements and subsequently sold to IGC (includingapplicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of the Lafayette
site).
sites.
PSI has placed notified its insurance carriers on notice of IGC's, NIPSCO's, and IDEM's
claims.
In May 1995, the IURC denied IGC's request for recovery of costs incurred in
complying with Federal, state, and local environmental regulationsclaims related to MGP sites raised by IGC, NIPSCO, and IDEM. In April 1998, PSI filed suit in which IGC has an interest, including sites acquired from PSI. IGC
appealed this decision, which IGC contendedHendricks County Circuit Court 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, or (2) pay PSI’s costs of defense and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. The lawsuit was contrarymoved to decisions made by
other state utility commissionsthe Hendricks County Superior Court (Superior Court) in July 1998. The trial court issued a variety of rulings with respect to this issue. In January 1997,the claims and defenses in the litigation. PSI has appealed certain adverse rulings to the Indiana Court of Appeals (CourtAppeals. At the present time, PSI cannot predict the outcome of Appeals) affirmedthis litigation, including the IURC's decision denying
IGC's request for recoveryoutcome of MGP costs. IGC petitionedthe appeals to the Indiana Supreme
Court to review the Court of Appeals decision. In August 1997,Appeals.
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PSI and CG&E, including its utility subsidiaries, have accrued costs for the Indiana
Supreme Court denied transfersites related to investigation, remediation, and groundwater monitoring to the extent such costs are probable and can be reasonably estimated. PSI and CG&E, including its utility subsidiaries, do not believe they can provide an estimate of this case. Accordingly, the IURC's decision
denying rate recoveryreasonably possible total remediation costs for any site before a remedial investigation/feasibility study is performed. To the extent remediation is necessary, the timing of the remediation activities impacts the cost of remediation. Therefore, PSI and CG&E, including its utility subsidiaries, currently cannot determine the total costs that may be incurred in connection with remediation of all sites, to the extent that remediation is required. Until investigation and remediation activities have been completed on these sites, and the extent of insurance coverage for these costs, if any, is determined, we are unable to reasonably estimate the total costs and impact on our financial position or results of operations.
(h) Asbestos Claims Litigation
CG&E and PSI have been named in lawsuits related to Asbestos at their electric generating stations. In these lawsuits, plaintiffs claim to have been exposed to Asbestos containing products in the course of their work at the CG&E and PSI generating stations. The plaintiffs further claim that as the property owner of the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any Asbestos exposure. A majority of the lawsuits to date have been brought against PSI. The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.
One specific case filed against PSI has been tried to verdict. Following a 10 week trial of the case entitled William Lee Roberts, Jr. and Beverly Roberts v. AC&S, Inc., et al., PSI Energy, Inc., Marion Superior Court 2, on May 24, 2002, the jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and for PSI on punitive damages. PSI is appealing the judgment in this case. The total damages were immaterial to PSI’s financial position and results of operations. However, future verdicts in any of the pending lawsuits could be material. At this time, CG&E and PSI are not able to predict the ultimate outcome of these lawsuits or the impact on CG&E’s and PSI’s financial position or results of operations.
(i) Gas Customer Choice
In January 2000, Investments sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing business as The Energy Cooperative (Energy Cooperative). In February 2001, Cinergy, CG&E, and Resources were named as defendants in
178
three class action lawsuits brought by IGC remains intact. Thecustomers relating to Energy Cooperative’s removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers.
Subsequently, these class action suits were amended and consolidated into one suit. CG&E has been dismissed as a defendant in the consolidated suit. In March 2001, Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and Resources. This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources. This lawsuit is pending in the Licking County Common Pleas Court. Trial is anticipated to occur in late 2003 or early 2004. In October 2001, Cinergy, CG&E, and Investments initiated litigation against the Energy Cooperative requesting indemnification by the Energy Cooperative for the claims asserted by former customers in the class action litigation. This customer litigation is pending in the Hamilton County Common Pleas Court. A trial date has not been set. We intend to vigorously defend these lawsuits. At the present time, we cannot predict the outcome of these suits.
(j) PSI Fuel Adjustment Charge
PSI defers fuel costs that are recoverable in future periods subject to IURC granted
PSI's motion establishingapproval under a sub-docket to PSI's last retail rate proceeding, in
whichfuel recovery mechanism. In June 2001, the IURC issued an order in September 1996,a PSI fuel recovery proceeding, disallowing approximately $14 million of deferred costs. On June 26, 2001, PSI formally requested that the IURC reconsider its disallowance decision. In August 2001, the IURC indicated that it would reconsider its decision. In August 2002, the IURC issued its final ruling allowing PSI to consider its request for
ratefully recover the $14 million.
In June 2001, PSI filed a petition with the IURC requesting authority to recover $16 million in under billed deferred fuel costs incurred from March 2001 through May 2001. The IURC approved recovery of any MGP site-relatedthese costs it subject to refund pending the findings of an investigative sub-docket. The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed deferred fuel costs. A hearing was held in July 2002, and we anticipate a decision in the first quarter of 2003.
(k) PSI Retail Rate Case
In December 2002, PSI filed a petition with the IURC seeking approval of a base retail electric rate increase. PSI’s proposed increase reflects an average increase of approximately 16 to 19 percent over PSI’s current retail electric rates. If approved by regulators, PSI estimates the rate request will become effective in early 2004. PSI plans to file initial testimony in this case in March 2003. An IURC decision is expected in the first quarter of 2004.
(l) Construction Work in Progress (CWIP) Ratemaking Treatment for NOX Equipment
During the third quarter of 2001, PSI filed an application with the IURC requesting CWIP ratemaking treatment for costs related to NOX equipment currently being installed at certain PSI generation facilities. CWIP ratemaking treatment allows for the recovery of carrying costs on the equipment during the construction period. PSI filed its case-in-chief testimony in January 2002. In July 2002, the IURC approved the application allowing PSI to commence CWIP ratemaking treatment for its NOX equipment investments made through December 31, 2001.
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Initially this rate adjustment will result in approximately a one percent increase in customer rates. Under the IURC’s CWIP rules, PSI may incur. update its CWIP tracker at six-month intervals. The IURC’s July order also authorized PSI to defer, for subsequent recovery, post-in-service depreciation and to continue the accrual for AFUDC. Pursuant to Statement of Financial Accounting Standards No. 92, Regulated Enterprises-Accounting for Phase-in Plans, the equity component of AFUDC will not be deferred for financial reporting.
In October 2002, PSI filed its first six-month CWIP tracker update with the IURC requesting approximately $11 million of additional revenue associated with investments made January 1, 2002, through June 30, 2002, for NOX emission reduction equipment. The IURC authorized the recovery of these incremental expenditures in an order issued on January 29, 2003. The cumulative annual revenue to be recovered under this tracker is $28 million.
(m)Purchased Power Tracker
In May 1999, PSI is unablefiled a petition with the IURC seeking approval of a Tracker. This request was designed to predictprovide for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not recovered through the existing fuel adjustment clause.
A hearing was held before the IURC in February 2001, to whichdetermine whether it will be able was appropriate for PSI to recovercontinue the Tracker for future periods. In April 2001, a favorable order was received extending the Tracker for two years, through rates any MGP
site investigation and remediation costs ultimately incurred.
the summer of 2002. PSI continues is authorized to gather information pertaining to eachseek recovery of these MGP sites,
including90 percent of its purchased power expenses through the 13 sites which are the subjectTracker (net of the agreement with IGCdisplaced energy portion recovered through the fuel recovery process and the
Goshen site which is the subject of NIPSCO's complaint. Reserves recorded, based
on information currently available, are not material to Cinergy's financial
condition or results of operations. However, as further investigation and
remediation activities are undertaken at these sites, the potential liability
for MGP sites could be material to Cinergy's financial condition or results of
operations.
Cinergy, CG&E, and ULH&P
(iii) CG&E and its Utility Subsidiaries Lawrenceburg, a wholly-owned
subsidiary of CG&E, also has a MGP site. In May 1995, Lawrenceburg and the IDEM
reached an agreement to include the Lawrenceburg MGP site in the IDEM's
voluntary cleanup program. Lawrenceburg implemented a remediation plan, and, on
September 20, 1996, received a certificate of completion on the cleanup from the
IDEM. The total costs incurred for the cleanup program were approximately
$273,000.
CG&E and its utility subsidiaries are aware of other potential sites where MGP
activities may have occurred at some time in the past. None of these sites is
known to present a risk to the environment. CG&E and its utility subsidiaries
have undertaken preliminary site assessments to obtain more information about
somenet of the other potential MGP sites.
Cinergy and CG&E
(c) United Scrap Lead Site
The United States Environmental Protection Agency (EPA) alleges that CG&E ismitigation credit portion), with the remaining 10 percent deferred for subsequent recovery in PSI’s nextgeneral rate case. In March 2002, PSI filed a PRP underpetition with the CERCLA liable for cleanupIURC seeking approval to extend the Tracker process beyond the summer of the United Scrap Lead site in Troy,
Ohio. CG&E2002. A hearing was one of approximately 200 companies so named. CG&E believes it is
not a PRP and should not be responsible for cleanup of the site. Under the
CERCLA, CG&E could be jointly and severally liable for costs incurred in
cleaning up the site, estimated by the EPA to be $27 million, of which CG&E
estimates its portion to be immaterial to its financial condition or results of
operations. Inheld on January 1998, CG&E executed a de minimis settlement agreement,
which if accepted by the Federal District Court will resolve CG&E's potential
liability for the site. Action on the proposed settlement is expected by the end
of 1998.
Cinergy, CG&E, and PSI
(d) Enertech Associates, Inc. (Enertech) Litigation
In October 1995, a suit was filed in the Federal District Court for the Southern
District of Ohio by three former employees of Enertech, formerly named Power
International, Inc., a subsidiary of Investments, naming as defendants Enertech,
Cinergy, Investments, CG&E, PSI, James E. Rogers, and William J. Grealis. (Mr.
Rogers and/or Mr. Grealis are officers and/or directors of the foregoing
companies.) The lawsuit, which stems from the termination of employment of the
three former employees, alleges that they entered into employment contracts with
Enertech based on the opportunity to participate in potential profits from
future investments in energy projects in central and eastern Europe. The suit
alleges causes of action based upon, among other theories, breach of contract
related to the events surrounding the termination of their employment and fraud
and misrepresentation related to the level of financial support for future
projects. The suit alleges compensatory damages of $154 million based upon
assumed future success of potential future investments and punitive damages of
three times that amount. All defendants are vigorously defending against the
charges based upon meritorious defenses. Cinergy is currently unable to16, 2003. We cannot predict the outcome of this litigation.
Cinergyproceeding at this time.
In June 2002, PSI also filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2002 purchased power costs. A hearing on this matter is scheduled for the first quarter of 2003.
(n)CG&E Gas Rate Case
In the third quarter of 2001, CG&E filed a retail gas rate case with the PUCO seeking to increase base rates for natural gas distribution service and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $716 million over the next 10 years. CG&E entered into a settlement agreement with most of the parties and a hearing on this matter was held in April 2002. An order was issued in May 2002, in which the PUCO approved the settlement agreement and authorized a base rate increase of approximately $15 million, or 3.3 percent overall, to be effective on May 30, 2002. In addition, the PUCO authorized CG&E to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program, subject to certain rate caps that increase in amount annually through May 2007, through the effective date of new rates in CG&E’s next retail gas rate case. The
180
PUCO’s order was not appealed. In the fourth quarter of 2002, CG&E filed an application to increase its rates under the tracking mechanism by approximately $8 million or 2.4 percent. The PUCO is investigating the application and CG&E expects that the increase will become effective in May 2003.
(o)ULH&P Gas Rate Case
In the second quarter of 2001, ULH&P filed a retail gas rate case with the KPSC seeking to increase base rates for natural gas distribution services and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $112 million over the next 10 years. A hearing on this matter was held in November 2001 and an order was issued in January 2002. In the order, the KPSC authorized a base rate increase of $2.7 million, or 2.8 percent overall, to be effective on January 31, 2002. In addition, the KPSC authorized ULH&P to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program for an initial period of three years, with the possibility of renewal for the full 10 years. Per the terms of the order, the tracking mechanism will be set annually. The first filing was made in March 2002 and was approved by the KPSC in an order issued in August 2002. ULH&P filed an application for a certificate for public convenience and necessity with the KPSC in November 2002, to do cast iron and bare steel main replacement work in 2003 at an estimated cost of $14.1 million. The Kentucky Attorney General (Attorney General) has appealed the KPSC’s approval of the tracking mechanism to the Franklin Circuit Court (Court) and has also appealed the KPSC’s August 2002 order approving the new tracking mechanism rates. The KPSC’s August 2002 order requires ULH&P to maintain records of the revenues collected under the tracking mechanism to enable ULH&P to refund such revenues, in case the Attorney General’s appeal is upheld and the KPSC orders a refund. Amounts collected to date under this tracking mechanism are not material. ULH&P filed an application for rehearing with the KPSC in September 2002, in which ULH&P requested that the KPSC eliminate this requirement. In October 2002, the KPSC issued an order granting ULH&P’s application for rehearing in part. The KPSC’s order clarified that ULH&P must maintain its records of the revenues collected under the tracking mechanism in case a refund is ordered at a later date; however, the KPSC’s order stated that it will not address the issue of whether to order a refund unless the Court rules that the KPSC lacked the requisite authority to approve the tracking mechanism. As a result, ULH&P will not record these revenues as subject to refund unless the Court so rules. At the present time, ULH&P cannot predict the outcome of this litigation.
(p) Contract Disputes
Cinergy, through a subsidiary of Investments, is currently involved in negotiations to resolve a customer billing dispute. The primary issue of contention between the parties relates to the determinants used in calculating the monthly charge billed for electricity. Cinergy has reserved for a portion of the amount billed based on our current estimate of net realizable value.
Cinergy, through a subsidiary of Capital & Trading, is involved in a billing dispute with respect to billings for the supply of wholesale natural gas to a customer. This dispute, if not satisfactorily resolved by the parties, is subject to arbitration. Cinergy has reserved for a portion of the amount billed based on the current estimate of net realizable value.
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Although we cannot predict the outcome of these matters, we believe the ultimate impact on Cinergy’s financial position and results of operations, beyond amounts reserved, will not be material.
12. Jointly-Owned Plant
CG&E, CSP, and DP&L jointly own electric generating units and related transmission facilities. PSI
(e) is a joint-owner of Gibson Station Unit No. 5 with Wabash Valley Power Association, Inc. (WVPA)
In February 1989, PSI and WVPA entered into a settlement agreement to resolve
all claims related to Marble Hill, a nuclear project canceled in 1984.
Implementation of the settlement was contingent upon a number of events,
including the conclusion of WVPA's bankruptcy proceeding, negotiation of certain
terms and conditions with WVPA, the Rural Utilities Service (RUS), and the
National Rural Utilities Cooperative Finance Corporation (CFC), and certain
regulatory approvals. In December 1996, following the resolution of issues
associated with WVPA's bankruptcy proceeding, PSI, on behalf of itself and its
officers, paid $80 million on behalf of WVPA to the RUS and the CFC. The $80
million obligation, net of insurance proceeds, other credits, and applicable
income tax effects, was charged to income in 1988. In January 1997, an order
dismissing the WVPA litigation against PSI and its officers with prejudice was
entered by the United States District Court for the Southern District of
Indiana. Negotiations among PSI, WVPA, the RUS, and the CFC continue regarding
certain additional terms and conditions of the settlement agreement. Based on
the current status of negotiations, the Company believes it has adequately
reserved for any loss that would be material to its financial condition or
results of operations. However, the Company cannot currently predict the outcome
of these negotiations. Depending of the form of the final negotiated terms and
conditions and the form of any regulatory approvals, the Company could be
required to recognize additional losses of up to $90 million for accounting
purposes. The recognition of this loss is not expected to have an immediate
impact on Cinergy's cash flow. The Company believes that negotiations could be
concluded and the final terms and conditions determined during 1998.
Cinergy, CG&E, and ULH&P
(f) Potential Divestiture of Gas Operations
Under the PUHCA, the divestiture of CG&E's gas operations may be required. The
key question under the relevant PUHCA standards is the amount of increased
operating costs, if any, that would result from the gas operations being
divested and operated on a stand-alone basis.
In its order approving the merger, the SEC reserved judgment over Cinergy's
ownership of CG&E's gas operations for three years, at the end of which period
Cinergy would be required to address the matter. In February 1998, Cinergy made
a filing with the SEC setting forth its rationale for retention of the gas
operations. The filing includes, among other things, a study showing that, if
divested and operated on a stand-alone basis, the gas operations would bear
significant increased operating costs, greater than those cited by the SEC in
two 1997 cases permitting electric registered holding companies to acquire and
retain gas properties. For these and other reasons stated in Cinergy's filing,
Cinergy believes its retention of CG&E's gas properties meets all relevant
standards under the PUHCA.
Cinergy, CG&E, and PSI
13. Jointly Owned Plant
PSI is a joint owner of Gibson Unit 5 with WVPA and the Indiana Municipal Power Agency (IMPA). Additionally, PSI is a co-ownerjoint-owner with WVPA and IMPA of certain transmission property and local facilities. These facilities constitute part of the integrated transmission and distribution systems, which are operated and maintained by PSI. CG&E, Columbus Southern Power Company, andPSI. The Dayton Power
and Light Company have constructed electric generating units and related
transmission facilities on varying common ownership bases. The Consolidated Statements of Income reflect PSI'sCG&E’s and CG&E'sPSI’s portions of all operating costs associated with the commonly ownedjointly-owned facilities.
PSI's
As of December 31, 2002, CG&E’s and CG&E'sPSI’s investments in jointly ownedjointly-owned plant areor facilities were as follows:
1997
Utility Plant Accumulated Construction
Share in Service Depreciation Work in Progress
(dollars in millions)
PSI
Production
Gibson (Unit 5) 50.05% $ 205 $ 97 $ 1
Transmission and local
facilities 94.28 1 918 673 32
CG&E
Production
Miami Fort Station
(Units 7 and 8) 64 208 117 4
W.C. Beckjord Station
(Unit 6) 37.5 41 25 1
J.M. Stuart Station 39 273 121 1
Conesville Station
(Unit 4) 40 72 37 2
Zimmer 46.5 1 216 239 5
East Bend Station 69 330 164 2
Killen Station 33 187 85 -
Transmission Various 63 31 1
14.
(in millions)
|
| Ownership |
| Property, |
| Accumulated |
| Construction |
|
CG&E |
|
|
|
|
|
|
|
|
|
Production: |
|
|
|
|
|
|
|
|
|
Miami Fort Station (Units 7 and 8) |
| 64.00 | % | $288 |
| $135 |
| $34 |
|
Beckjord Station (Unit 6) |
| 37.50 |
| 46 |
| 30 |
| — |
|
Stuart Station(1) |
| 39.00 |
| 298 |
| 157 |
| 67 |
|
Conesville Station (Unit 4)(1) |
| 40.00 |
| 77 |
| 48 |
| — |
|
Zimmer Station |
| 46.50 |
| 1,239 |
| 402 |
| 23 |
|
East Bend Station |
| 69.00 |
| 398 |
| 200 |
| — |
|
Killen Station(1) |
| 33.00 |
| 187 |
| 110 |
| 17 |
|
Transmission |
| Various |
| 85 |
| 38 |
| — |
|
|
|
|
|
|
|
|
|
|
|
PSI |
|
|
|
|
|
|
|
|
|
Production: |
|
|
|
|
|
|
|
|
|
Gibson Station (Unit 5) |
| 50.05 |
| 215 |
| 119 |
| 14 |
|
Transmission and local facilities |
| 94.37 |
| 2 |
| 1 |
| — |
|
(1) Station is not operated by CG&E.
182
13. Quarterly Financial Data (unaudited)
|
| First |
| Second |
| Third |
| Fourth |
| Total |
| |||||
|
| (in millions, except per share amounts) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy(1) |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2002 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Revenues(2) |
| $ | 2,192 |
| $ | 2,471 |
| $ | 3,880 |
| $ | 3,417 |
| $ | 11,960 |
|
Operating Income |
| 213 |
| 137 |
| 239 |
| 215 |
| 804 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| 96 |
| 45 |
| 131 |
| 125 |
| 397 |
| |||||
Discontinued operations, net of tax(3) |
| — |
| — |
| — |
| (25 | ) | (25 | ) | |||||
Cumulative effect of a change in accounting principle, net of tax(4) |
| (11 | ) | — |
| — |
| — |
| (11 | ) | |||||
Net Income |
| $ | 85 |
| $ | 45 |
| $ | 131 |
| $ | 100 |
| $ | 361 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
EPS |
|
|
|
|
|
|
|
|
|
|
| |||||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| 0.58 |
| 0.27 |
| 0.78 |
| 0.74 |
| 2.37 |
| |||||
Discontinued operations, net of tax(3) |
| — |
| — |
| — |
| (0.15 | ) | (0.15 | ) | |||||
Cumulative effect of a change in accounting principle, net of tax(4) |
| (0.06 | ) | — |
| — |
| — |
| (0.06 | ) | |||||
Net Income |
| $ | 0.52 |
| $ | 0.27 |
| $ | 0.78 |
| $ | 0.59 |
| $ | 2.16 |
|
EPS - assuming dilution |
|
|
|
|
|
|
|
|
|
|
| |||||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| 0.58 |
| 0.26 |
| 0.77 |
| 0.73 |
| 2.34 |
| |||||
Discontinued operations, net of tax(3) |
| — |
| — |
| — |
| (0.15 | ) | (0.15 | ) | |||||
Cumulative effect of a change in accounting principle, net of tax(4) |
| (0.06 | ) | — |
| — |
| — |
| (0.06 | ) | |||||
Net Income |
| $ | 0.52 |
| $ | 0.26 |
| $ | 0.77 |
| $ | 0.58 |
| $ | 2.13 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2001 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Revenues(2) |
| $ | 3,715 |
| $ | 3,654 |
| $ | 3,340 |
| $ | 2,288 |
| $ | 12,997 |
|
Operating Income |
| 249 |
| 178 |
| 278 |
| 239 |
| 944 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income before discontinued operations |
| 121 |
| 82 |
| 130 |
| 126 |
| 459 |
| |||||
Discontinued operations, net of tax(3) |
| (1 | ) | 1 |
| (2 | ) | (15 | ) | (17 | ) | |||||
Net Income |
| $ | 120 |
| $ | 83 |
| $ | 128 |
| $ | 111 |
| $ | 442 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
EPS |
|
|
|
|
|
|
|
|
|
|
| |||||
Income before discontinued operations |
| 0.76 |
| 0.50 |
| 0.82 |
| 0.80 |
| 2.88 |
| |||||
Discontinued operations, net of tax(3) |
| — |
| 0.01 |
| (0.01 | ) | (0.10 | ) | (0.10 | ) | |||||
Net Income |
| $ | 0.76 |
| $ | 0.51 |
| $ | 0.81 |
| $ | 0.70 |
| $ | 2.78 |
|
EPS - assuming dilution |
|
|
|
|
|
|
|
|
|
|
| |||||
Income before discontinued operations |
| 0.75 |
| 0.50 |
| 0.81 |
| 0.79 |
| 2.85 |
| |||||
Discontinued operations, net of tax(3) |
| — |
| 0.01 |
| (0.01 | ) | (0.10 | ) | (0.10 | ) | |||||
Net Income |
| $ | 0.75 |
| $ | 0.51 |
| $ | 0.80 |
| $ | 0.69 |
| $ | 2.75 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E and subsidiaries |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2002 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Revenues(2) |
| $ | 815 |
| $ | 922 |
| $ | 1,789 |
| $ | 1,425 |
| $ | 4,951 |
|
Operating Income |
| 155 |
| 101 |
| 135 |
| 114 |
| 505 |
| |||||
Net Income |
| 78 |
| 53 |
| 72 |
| 61 |
| 264 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2001 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Revenues(2) |
| $ | 1,267 |
| $ | 1,282 |
| $ | 1,329 |
| $ | 874 |
| $ | 4,752 |
|
Operating Income |
| 154 |
| 98 |
| 166 |
| 194 |
| 612 |
| |||||
Net Income |
| 82 |
| 49 |
| 89 |
| 107 |
| 327 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2002 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Revenues(2) |
| $ | 630 |
| $ | 467 |
| $ | 777 |
| $ | 485 |
| $ | 2,359 |
|
Operating Income |
| 74 |
| 52 |
| 120 |
| 136 |
| 382 |
| |||||
Net Income |
| 38 |
| 30 |
| 68 |
| 78 |
| 214 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
2001 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Revenues(2) |
| $ | 925 |
| $ | 1,189 |
| $ | 1,267 |
| $ | 727 |
| $ | 4,108 |
|
Operating Income |
| 85 |
| 66 |
| 110 |
| 69 |
| 330 |
| |||||
Net Income |
| 41 |
| 34 |
| 57 |
| 30 |
| 162 |
| |||||
(1) The results of Cinergy
Basic Diluted
Earnings Earnings
Operating Operating Net (Loss) (Loss)
Quarter Ended Revenues Income Income(Loss) Per Share Per Share
(in millions, except per share amounts)
1997
March 31 $1 030 $152 $114 $ .72 $ .71
June 30 865 105 55 .35 .35
September 30 1 355 140 (27)(a) (.16)(a) (.17)(a)
December 31 1 103 142 111 .70 .70
Total $4 353 $539 $253 (a) $1.61 (a) $1.59 (a)
1996
March 31 $ 884 $169 $110 $ .70 $ .69
June 30 717 113 56(b) .35(b) .35 (b)
September 30 766 150 98 .51(c) .51 (c)
December 31 876 126 71(b) .44(b) .44 (b)
Total $3 243 $558 $335(b) $2.00(b)(c) $1.99 (b)(c)
(a) For a discussion of the windfall profits tax levied against Midlands, which
was recorded in the third quarter as an extraordinary item, see Note 17.
Net income, basic earnings per share and diluted earnings per share during
the third quarter of 1997, before the extraordinary item, were $83 million,
$.53, and $.52, respectively. Total net income, basic earnings per share,
and diluted earnings per share for 1997, before the extraordinary item,
were $363 million, $2.30, and $2.28, respectively.
(b) In 1996, Cinergy recognized charges to earnings of approximately $55
million ($38 million, net of taxes or $.24 per share, basic and diluted)
primarily for charges related to voluntary early retirement and severance
programs and disallowances associated with the PUCO's December 1996 Order
in CG&E's gas rate proceeding. Of these charges, approximately $11 million,
net of taxes or $.07 per share (basic and diluted), was recognized in the
second quarter, and approximately $27 million, net of taxes or $.17 per
share (basic and diluted), was recognized in the fourth quarter. Of the
total $55 million charge, $41 million is reflected in "Operating Expenses -
Other operation" and $14 million is reflected in "Other Income and Expenses
- Net."
(c) In the third quarter of 1996, Cinergy incurred costs of $18 million or $.12
per share (basic and diluted), related to the reacquisition of 90% of
CG&E's preferred stock through a tender offer. (See Note 3(b).)
CG&E
also include amounts related to non-registrants.
(2) EITF 02-3 will require that all gains and losses on energy trading derivatives be presented on a net basis beginning January 1, 2003. This will result in substantial reductions in reported Operating Revenues, Fuel and purchased and exchanged power expense, and Gas purchased expense. However, Operating Income and Net Quarter Ended Revenues Income Income
(in millions)
1997
March 31 $ 614 $ 99 $ 68
June 30 487 65 37
September 30 712 78 52
December 31 639 86 82
Total $2 452 $328 $239
1996
March 31 $ 575 $120 $ 92
June 30 437 69(a) 39(a)
September 30 431 90 62
December 31 533 73(a) 34(a)
Total $1 976 $352 $227
(a) In 1996, CG&E will not be affected by this change. For further information on EITF 02-3 see Note 1(q)(i).
(3) See Note 15 for further explanation.
(4) Upon implementation of Statement 142, Cinergy recognized charges to earningsa non-cash impairment charge of approximately $50 million
($35$11 million, net of taxes) primarilytax, for chargesgoodwill related to voluntary
early retirement and severance programs and disallowances associated with
the PUCO's December 1996 Ordercertain international assets. See Note 14 for further information.
183
14. Effects of a Change in CG&E's gas rate proceeding. Of these
charges, approximately $10 million, net of taxes, was recognized in the
second quarter, and approximately $25 million, net of taxes, was recognizedAccounting Principle
Cinergy finalized its transition goodwill impairment test, as required by Statement 142, in the fourth quarter. Of the total $50quarter of 2002 and recognized a non-cash impairment charge of $11 million charge, $36 million(net of tax) for goodwill related to certain of our international assets. This amount is reflected in "Operating Expenses - Other operation" and $14 million isCinergy Corp.’s Statements of Income as a Cumulative effect of a change in accounting principle. While Statement 142 did not require the initial transition impairment test to be completed until December 31, 2002, it does require any transition impairment charge to be reflected as of January 1, 2002. The condensed financial results below revise previously reported results of Cinergy Corp. as filed in "Other Income and Expenses - Net."
PSI
Operating Operating Net
Quarter Ended Revenues Income Income
(in millions)
1997the Form 10-Q for the quarter ended March 31, $ 424 $ 54 $ 33
June 30 390 41 23
September 30 651 61 412002, to reflect the impairment charge as of January 1, 2002.
|
| Year to Date |
| ||||
|
| Net Income |
| EPS(1) |
| ||
|
| (in millions, except for EPS) |
| ||||
|
| (unaudited) |
| ||||
Reported results |
| $ | 96 |
| $ | 0.58 |
|
Cumulative effect of a change in accounting principle |
| (11 | ) | (0.06 | ) | ||
Revised results |
| $ | 85 |
| $ | 0.52 |
|
(1) Represents EPS and EPS - assuming dilution.
15.Monetization of Non-Core Investments
During 2002, Cinergy began taking steps to monetize certain non-core investments, including renewable and international investments within the Energy Merchant business unit. During the second half of the year, Cinergy either sold or initiated plans to dispose of generation and electric and gas distribution operations in the Czech Republic, Estonia, and South Africa. Cinergy also sold investments, which were accounted for under the equity method, in renewable investments located in Spain and California. In total, Cinergy disposed of approximately $125 million of investments at a net loss of $7 million in 2002. Included in this net loss were cumulative foreign currency translation losses of approximately $4 million.
GAAP requires different accounting treatment for investment disposals involving entities which are consolidated and entities which are accounted for under the equity method. The consolidated entities have been presented as Discontinued operations, net of tax in Cinergy’s accompanying financial statements, and prior year financial statements have been reclassified to account for these entities as such. The disposal of the entities accounted for using the equity method are not allowed to be presented as discontinued operations. A gain of approximately $17 million on the sale of these entities is included in Miscellaneous-Net in Cinergy’s Statements of Income.
184
The table below reflects the assets and liabilities of the investments accounted for as discontinued operations as of December 31, 493 55 35
Total $1 958 $211 $132
1996
March 31 $ 328 $ 50 $ 27
June 30 290 44(a) 25(a)
September 30 348 61 43
December 31 366 51(a) 31(a)
Total $1 332 $206 $126
(a) In 1996, PSI recognized charges2002 and 2001, and the results of operations and the loss on disposal for the years then ended.
|
| December 31 |
| ||||
|
| 2002 |
| 2001 |
| ||
|
| (in millions) |
| ||||
|
|
|
|
|
| ||
Revenues(1) |
| $ | 30 |
| $ | 38 |
|
|
|
|
|
|
| ||
Loss on Discontinued Operations |
|
|
|
|
| ||
Loss on operations |
| $ | 1 |
| $ | 17 |
|
Loss on disposal(2) |
| 24 |
| — |
| ||
|
|
|
|
|
| ||
Total Loss on Discontinued Operations |
| $ | 25 |
| $ | 17 |
|
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Current assets |
| $ | — |
| $ | 8 |
|
Property, plant, and equipment-net |
| — |
| 45 |
| ||
Other assets |
| 1 |
| 9 |
| ||
|
|
|
|
|
| ||
Total Assets |
| $ | 1 |
| $ | 62 |
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Current liabilities |
| $ | 2 |
| $ | 16 |
|
|
|
|
|
|
| ||
Total Liabilities |
| $ | 2 |
| $ | 16 |
|
(1) Presented for informational purposes only. All results of operations are reported net in our Statements of Income.
(2) Approximately $17 million of this amount represents a write-down to earningsfair value, less cost to sell, on assets classified as held for sale. The remainder represents actual losses on completed sales. Included in the loss on disposal are cumulative foreign currency translation losses of approximately $5 million ($3
million, net$4 million.
The losses included in discontinued operations primarily pertain to two investments. In one case, the primary customer of taxes) primarilya combined heat and power plant filed for charges related to voluntary early
retirement and severance programs. Of these charges, approximately $1
million, net of taxes, was recognizedbankruptcy resulting in a significant reduction in future expected revenues from the investment. In the second quarter,case, the retail market of a gas distribution business did not develop as expected, and approximately $2 million, netwe have elected to exit the business rather than invest the additional capital which would be required to reach a sustainable level of taxes, was recognized in the fourth
quarter. The $5 million charge is reflected in "Operating Expenses - Other
operation."
15.market penetration.
16. Financial Information by Business Segment
Cinergy
Operating Provision
Operating Operating Income for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in millions)
1997
Electric $3 862 $505 $229 $266 $247
Gas 491 34 20 23 44
Total $4 353 $539 $249 $289 $291
1996
Electric $2 769 $520 $204 $260 $276
Gas 474 38 14 23 32
Total $3 243 $558 $218 $283 $308
1995
Electric $2 612 $548 $209 $258 $286
Gas 411 39 12 22 36
Total $3 023 $587 $221 $280 $322
We conduct operations through our subsidiaries and manage through the following three business units:
• Energy Merchant;
• Regulated Businesses; and
• Power Technology.
185
The following section describes the activities of our business units as of December 31, 1997 1996 1995
(in millions)
Property, Plant,2002.
Energy Merchant manages wholesale generation and Equipment - net
Electric $5 724 $5 737 $5 718
Gas 573 553 532
6 297 6 290 6 250
Other Corporate Assets 2 561 2 435 1 853
Total Assets $8 858 $8 725 $8 103
For a discussionenergy marketing and trading of energy commodities. Energy Merchant operates and maintains our regulated and non-regulated electric generating plants, including some of our jointly-owned plants. Energy Merchant is also responsible for our international operations and performs the potential divestiturefollowing activities:
• energy risk management;
• proprietary arbitrage activities; and
• customized energy solutions.
Regulated Businesses consists of CG&E'sPSI’s regulated, integrated utility operations, and Cinergy’s other regulated electric and gas operations, see Note
12(f).
CG&E
Operating
Operating Operating Income Provisiontransmission and distribution systems. Regulated Businesses plans, constructs, operates, and maintains Cinergy’s transmission and distribution systems and delivers gas and electric energy to consumers. Regulated Businesses also earns revenues from wholesale customers primarily by transmitting electric power through Cinergy’s transmission system.
Power Technology primarily manages the development, marketing, and sales of our non-regulated retail energy and energy-related businesses. This is accomplished through various subsidiaries and joint ventures. Power Technology also manages Cinergy Ventures, LLC (Ventures), Cinergy’s venture capital subsidiary. Ventures invests in emerging energy technologies that can benefit future Cinergy business development activities.
Following are the financial results by business unit. Certain amounts for Construction
Year Ended Revenues(1) Income Taxes Depreciation Expenditures
(in millions)
1997
Electric $1 956 $290 $152 $140 $105
Gas 496 38 20 23 44
Total $2 452 $328 $172 $163 $149
1996
Electric $1 502 $314 $131 $138 $109
Gas 474 38 14 23 32
Total $1 976 $352 $145 $161 $141
1995
Electric $1 437 $321 $124 $137 $101
Gas 411 39 12 22 36
Total $1 848 $360 $136 $159 $137
December 31
1997 1996 1995
(in millions)
Property, Plant, and Equipment - net
Electric $3 171 $3 205 $3 244
Gas 573 553 532
3 744 3 758 3 776
Other Corporate Assets 1 170 1 086 1 305
Total Assets $4 914 $4 844 $5 081
For a discussion of the potential divestiture of CG&E's, including ULH&P's, gas
operations, see Note 12(f).
ULH&P
Operating
Operating Operating Income Provision for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in thousands)
1997
Electric $192 774 $10 427 $6 549 $ 7 193 $14 115
Gas 78 848 8 008 3 037 5 176 9 448
Total $271 622 $18 435 $9 586 $12 369 $23 563
1996
Electric $190 900 $12 558 $5 644 $ 6 935 $ 9 571
Gas 76 868 8 476 4 190 4 974 9 073
Total $267 768 $21 034 $9 834 $11 909 $18 644
1995
Electric $187 180 $11 425 $4 500 $ 6 679 $10 909
Gas 70 288 8 405 3 387 4 759 8 063
Total $257 468 $19 830 $7 887 $11 438 $18 972
December 31
1997 1996 1995
(in thousands)
Property, Plant, and Equipment - net
Electric $147 869 $142 490 $138 482
Gas 111 615 106 791 104 749
259 484 249 281 243 231
Other Corporate Assets 32 106 40 272 54 911
Total Assets $291 590 $289 553 $298 142
For a discussion of the potential divestiture of ULH&P's gas operations, see
Note 12(f).
Cinergy
16. Earnings Per Share
Effective December 31, 1997, Cinergy adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share (Statement 128).
Statement 128 replaces the calculation of primary and fully diluted earnings per
share under previous accounting standards with basic and diluted earnings per
share amounts. Previously reported earnings per share amountsprior years have been restated to complyreflect segment restructuring, which includes the consolidation of all of our international operations into Energy Merchant. This restructuring became effective January 1, 2002.
186
Financial results by business unit for the years ended December 31, 2002, 2001, and 2000, are as indicated below:
Business Units
|
| 2002 |
| |||||||||||||||||||
|
| Cinergy Business Units |
|
|
|
|
|
|
| |||||||||||||
|
| Energy |
| Regulated |
| Power |
| Total |
| All Other(1) |
| Reconciling |
| Consolidated |
| |||||||
|
| (in millions) |
| |||||||||||||||||||
Operating revenues - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
External customers(3) |
| $ | 9,283 |
| $ | 2,640 |
| $ | 37 |
| $ | 11,960 |
| $ | — |
| $ | — |
| $ | 11,960 |
|
Intersegment revenues(4) |
| 160 |
| — |
| — |
| 160 |
| — |
| (160 | ) | — |
| |||||||
Cost of sales - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fuel and purchased and exchanged power |
| 4,054 |
| 458 |
| — |
| 4,512 |
| — |
| — |
| 4,512 |
| |||||||
Gas purchased |
| 4,436 |
| 233 |
| — |
| 4,669 |
| — |
| — |
| 4,669 |
| |||||||
Depreciation(5) |
| 158 |
| 249 |
| 7 |
| 414 |
| — |
| — |
| 414 |
| |||||||
Equity in earnings (losses) of unconsolidated subsidiaries |
| 20 |
| 5 |
| (10 | ) | 15 |
| — |
| — |
| 15 |
| |||||||
Interest(6) |
| 103 |
| 133 |
| 14 |
| 250 |
| — |
| — |
| 250 |
| |||||||
Income taxes |
| 21 | (7) | 151 |
| (15 | ) | 157 |
| — |
| — |
| 157 |
| |||||||
Discontinued operations, net of tax(8) |
| (25 | ) | — |
| — |
| (25 | ) | — |
| — |
| (25 | ) | |||||||
Cumulative effect of a change in accounting principle, net of tax(9) |
| (11 | ) | — |
| — |
| (11 | ) | — |
| — |
| (11 | ) | |||||||
Segment profit (loss)(10) |
| 126 |
| 270 |
| (35 | ) | 361 |
| — |
| — |
| 361 |
| |||||||
Total segment assets |
| 5,703 |
| 7,284 |
| 227 |
| 13,214 |
| 93 |
| — |
| 13,307 |
| |||||||
Investments in unconsolidated subsidiaries |
| 337 |
| 10 |
| 70 |
| 417 |
| — |
| — |
| 417 |
| |||||||
Total expenditures for long-lived assets |
| 188 |
| 681 |
| 1 |
| 870 |
| — |
| — |
| 870 |
| |||||||
(1) | The All Other category represents miscellaneous corporate items, which are not allocated to business units for purposes of segment performance measurement. |
(2) | The Reconciling Eliminations category eliminates the intersegment revenues and expenses of Energy Merchant. |
(3) | The decrease in 2002, as compared to 2001, is primarily due to the decrease in the average price realized on wholesale commodity transactions. |
(4) | In connection with deregulation in Ohio, beginning in 2001, certain revenues, which were previously recorded through intersegment transfer pricing, are now directly recorded to the business segment. |
(5) | The components of Depreciation include depreciation of fixed assets and amortization of intangible assets. |
(6) | Interest income is deemed immaterial. |
(7) | The decrease in 2002, as compared to 2001, in part reflects the effect of tax credits associated with production of synthetic fuel beginning in July 2002. |
(8) | For further information, see Note 15. |
(9) | Upon implementation of Statement 142, Cinergy recognized a non-cash impairment charge of $11 million, net of tax, for goodwill related to certain international assets. See Note 14 for further information. |
(10) | Management utilizes Segment profit (loss), after taxes, to evaluate segment performance. |
187
|
| 2001 |
| |||||||||||||||||||
|
| Cinergy Business Units |
|
|
|
|
|
|
| |||||||||||||
|
| Energy |
| Regulated |
| Power |
| Total |
| All Other(1) |
| Reconciling |
| Consolidated |
| |||||||
|
| (in millions) |
| |||||||||||||||||||
Operating revenues - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
External customers(3) |
| $ | 10,245 |
| $ | 2,703 |
| $ | 49 |
| $ | 12,997 |
| $ | — |
| $ | — |
| $ | 12,997 |
|
Intersegment revenues(4) |
| 144 |
| — |
| — |
| 144 |
| — |
| (144 | ) | — |
| |||||||
Cost of sales - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fuel and purchased and exchanged power |
| 5,537 |
| 469 |
| — |
| 6,006 |
| — |
| — |
| 6,006 |
| |||||||
Gas purchased |
| 4,035 |
| 397 |
| — |
| 4,432 |
| — |
| — |
| 4,432 |
| |||||||
Depreciation(5) |
| 135 |
| 236 |
| 3 |
| 374 |
| — |
| — |
| 374 |
| |||||||
Equity in earnings (losses) of unconsolidated subsidiaries |
| 9 |
| — |
| (8 | ) | 1 |
| — |
| — |
| 1 |
| |||||||
Interest(6) |
| 110 |
| 142 |
| 14 |
| 266 |
| — |
| — |
| 266 |
| |||||||
Income taxes |
| 96 |
| 169 |
| (9 | ) | 256 |
| — |
| — |
| 256 |
| |||||||
Discontinued operations, net of tax(7) |
| (17 | ) | — |
| — |
| (17 | ) | — |
| — |
| (17 | ) | |||||||
Segment profit (loss)(8) |
| 195 |
| 266 |
| (19 | ) | 442 |
| — |
| — |
| 442 |
| |||||||
Total segment assets |
| 4,957 |
| 7,084 |
| 213 |
| 12,254 |
| 46 |
| — |
| 12,300 |
| |||||||
Investments in unconsolidated subsidiaries |
| 256 |
| — |
| 76 |
| 332 |
| — |
| — |
| 332 |
| |||||||
Total expenditures for long-lived assets |
| 764 |
| 633 |
| — |
| 1,397 |
| — |
| — |
| 1,397 |
| |||||||
(1) The All Other category represents miscellaneous corporate items, which are not allocated to business units for purposes of segment performance measurement.
(2) The Reconciling Eliminations category eliminates the intersegment revenues and expenses of Energy Merchant.
(3) The increase in 2001, as compared to 2000, is primarily due to the increase in volumes and average price realized on wholesale commodity transactions.
(4) In connection with deregulation in Ohio, beginning in 2001, certain revenues, which were previously recorded through intersegment transfer pricing, are now directly recorded to the provisionsbusiness segment.
(5) The components of Statement 128.Depreciation include depreciation of fixed assets and amortization of intangible assets.
(6) Interest income is deemed immaterial.
(7) For further information, see Note 15.
(8) Management utilizes Segment profit (loss), after taxes, to evaluate segment performance.
188
|
| 2000 |
| |||||||||||||||||||
|
| Cinergy Business Units |
|
|
|
|
|
|
| |||||||||||||
|
| Energy |
| Regulated |
| Power |
| Total |
| All Other(1) |
| Reconciling |
| Consolidated |
| |||||||
|
| (in millions) |
| |||||||||||||||||||
Operating revenues - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
External customers |
| $ | 4,974 |
| $ | 3,347 |
| $ | 76 |
| $ | 8,397 |
| $ | — |
| $ | — |
| $ | 8,397 |
|
Intersegment revenues |
| 1,021 |
| — |
| — |
| 1,021 |
| — |
| (1,021 | ) | — |
| |||||||
Cost of sales - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fuel and purchased and exchanged power |
| 2,725 |
| 414 |
| — |
| 3,139 |
| — |
| — |
| 3,139 |
| |||||||
Gas purchased |
| 2,402 |
| 267 |
| 6 |
| 2,675 |
| — |
| — |
| 2,675 |
| |||||||
Depreciation(3) |
| 119 |
| 220 |
| 3 |
| 342 |
| — |
| — |
| 342 |
| |||||||
Equity in earnings (losses) of unconsolidated subsidiaries |
| 7 |
| — |
| (1 | ) | 6 |
| — |
| — |
| 6 |
| |||||||
Interest(4) |
| 82 |
| 133 |
| 9 |
| 224 |
| — |
| — |
| 224 |
| |||||||
Income taxes |
| 93 |
| 166 |
| (7 | ) | 252 |
| — |
| — |
| 252 |
| |||||||
Discontinued operations, net of tax(5) |
| (1 | ) | — |
| — |
| (1 | ) | — |
| — |
| (1 | ) | |||||||
Segment profit (loss)(6) |
| 157 |
| 255 |
| (13 | ) | 399 |
| — |
| — |
| 399 |
| |||||||
Total segment assets |
| 5,995 |
| 6,116 |
| 177 |
| 12,288 |
| 42 |
| — |
| 12,330 |
| |||||||
Investments in unconsolidated subsidiaries |
| 488 |
| — |
| 52 |
| 540 |
| — |
| — |
| 540 |
| |||||||
Total expenditures for long-lived assets |
| 138 |
| 397 |
| — |
| 535 |
| 3 |
| — |
| 538 |
| |||||||
(1) The after-tax earnings per share impactAll Other category represents miscellaneous corporate items, which are not allocated to business units for purposes of segment performance measurement.
(2) The Reconciling Eliminations category eliminates the extraordinary item - equity shareintersegment revenues and expenses of windfall profits tax Energy Merchant.
(3) The components of Depreciation include depreciation of fixed assets and amortization of intangible assets.
(4) Interest income is deemed immaterial.
(5) For further information, see Note 15.
(6) Management utilizes Segment profit (loss), after taxes, to evaluate segment performance.
189
Products and Services
(in 1997 was $.69 for both basic and diluted earnings per
share.
Presented below is amillions)
|
| Revenues |
| ||||||||||||||||||||||
|
| Utility |
| Energy Marketing and Trading |
|
|
|
|
| ||||||||||||||||
Year |
| Electric |
| Gas |
| Total |
| Electric |
| Gas |
| Total |
| Other |
| Consolidated |
| ||||||||
2002 |
| $ | 2,197 |
| $ | 436 |
| $ | 2,633 |
| $ | 4,715 |
| $ | 4,481 |
| $ | 9,196 |
| $ | 131 |
| $ | 11,960 |
|
2001 |
| 2,101 |
| 595 |
| 2,696 |
| 6,154 |
| 4,068 |
| 10,222 |
| 79 |
| 12,997 |
| ||||||||
2000 |
| 2,851 |
| 497 |
| 3,348 |
| 2,508 |
| 2,445 |
| 4,953 |
| 96 |
| 8,397 |
| ||||||||
Geographic Areas
Revenues
(in millions)
Year |
| Domestic |
| International |
| Consolidated |
| |||
2002 |
| $ | 11,846 |
| $ | 114 |
| $ | 11,960 |
|
2001 |
| 12,860 |
| 137 |
| 12,997 |
| |||
2000 |
| 8,337 |
| 60 |
| 8,397 |
| |||
Long-Lived Assets
(in millions)
Year |
| Domestic |
| International |
| Consolidated |
| |||
2002 |
| $ | 10,276 |
| $ | 393 |
| $ | 10,669 |
|
2001 |
| 9,682 |
| 428 |
| 10,110 |
| |||
2000 |
| 8,267 |
| 290 |
| 8,557 |
| |||
190
17. Earnings Per Common Share
A reconciliation of earnings per common share (basic EPS) and
earnings per common shareEPS to EPS - assuming dilution (diluted EPS).
|
| Income |
| Shares |
| EPS |
| ||
|
| (in thousands, except per share amounts) |
| ||||||
Year ended December 31, 2002 |
|
|
|
|
|
|
| ||
EPS: |
|
|
|
|
|
|
| ||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| $ | 396,903 |
|
|
| $ | 2.37 |
|
Discontinued operations, net of tax |
| (25,428 | ) |
|
| (0.15 | ) | ||
Cumulative effect of a change in accounting principle, net of tax |
| (10,899 | ) |
|
| (0.06 | ) | ||
Net income |
| $ | 360,576 |
| 167,047 |
| $ | 2.16 |
|
|
|
|
|
|
|
|
| ||
Effect of dilutive securities: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 899 |
|
|
| ||
Employee Stock Purchase and Savings Plan |
|
|
| 3 |
|
|
| ||
Directors’ compensation plans |
|
|
| 169 |
|
|
| ||
Contingently issuable common stock |
|
|
| 934 |
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS - assuming dilution: |
|
|
|
|
|
|
| ||
Net income plus assumed conversions |
| $ | 360,576 |
| 169,052 |
| $ | 2.13 |
|
|
|
|
|
|
|
|
| ||
Year ended December 31, 2001 |
|
|
|
|
|
|
| ||
EPS: |
|
|
|
|
|
|
| ||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| $ | 458,826 |
|
|
| $ | 2.88 |
|
Discontinued operations, net of tax |
| (16,547 | ) |
|
| (0.10 | ) | ||
Net income |
| $ | 442,279 |
| 159,110 |
| $ | 2.78 |
|
|
|
|
|
|
|
|
| ||
Effect of dilutive securities: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 975 |
|
|
| ||
Directors’ compensation plans |
|
|
| 152 |
|
|
| ||
Contingently issuable common stock |
|
|
| 810 |
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS - assuming dilution: |
|
|
|
|
|
|
| ||
Net income plus assumed conversions |
| $ | 442,279 |
| 161,047 |
| $ | 2.75 |
|
|
|
|
|
|
|
|
| ||
Year ended December 31, 2000 |
|
|
|
|
|
|
| ||
EPS: |
|
|
|
|
|
|
| ||
Income before discontinued operations and cumulative effect of a change in accounting principle |
| $ | 400,535 |
|
|
| $ | 2.52 |
|
Discontinued operations, net of tax |
| (1,069 | ) |
|
| (0.01 | ) | ||
Net income |
| $ | 399,466 |
| 158,938 |
| $ | 2.51 |
|
|
|
|
|
|
|
|
| ||
Effect of dilutive securities: |
|
|
|
|
|
|
| ||
Common stock options |
|
|
| 491 |
|
|
| ||
Directors’ compensation plans |
|
|
| 177 |
|
|
| ||
Contingently issuable common stock |
|
|
| 262 |
|
|
| ||
|
|
|
|
|
|
|
| ||
EPS - assuming dilution: |
|
|
|
|
|
|
| ||
Net income plus assumed conversions |
| $ | 399,466 |
| 159,868 |
| $ | 2.50 |
|
191
Options to purchase shares of common stock that wereare excluded from the calculation of EPS--assumingEPS - assuming dilution becausewhen the exercise prices of these options wereare greater than the average market price of the common shares during the yearperiod. For the years 2002, 2001, and 2000, approximately 3 million, 2.1 million, and 1.9 million shares, respectively, were excluded from the EPS - assuming dilution calculation.
Also excluded from the EPS - assuming dilution calculation for the years ended December 31, 2002 and 2001, are summarized below:
Average
Exercise
Year Shares Price
1997 22 300 $35.25
1996 45 000 31.56
1995 215 000 28.81
up to 10.8 million shares issuable pursuant to the stock purchase contracts associated with the preferred trust securities issued by Cinergy 17. Extraordinary ItemCorp. in December 2001. These stock purchase contracts would impact EPS - Equity Shareassuming dilution only to the extent that Cinergy’s average stock price were to exceed $34.40 per share, which is the maximum price payable by the holders of Windfall Profits Tax
Inthe stock purchase contracts, during any period for which earnings per share are presented. As discussed in Note 2(e), the number of shares issued pursuant to the stock purchase contracts is contingent upon the market price of Cinergy Corp. stock in February 2005 and could range between 9.2 and 10.8 million shares.
18. Ohio Deregulation
On July 6, 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill), beginning the transition to electric deregulation and customer choice for the state of Ohio. The Electric Restructuring Bill created a competitive electric retail service market effective January 1, 2001. The legislation provided for a market development period that began January 1, 2001, and ends no later than December 31, 2005.
On May 1997, general elections were held8, 2000, CG&E reached a stipulated agreement with the PUCO staff and various other interested parties with respect to its proposal to implement electric customer choice in Great Britain which resultedOhio effective January 1, 2001. On August 31, 2000, the PUCO approved CG&E’s stipulation agreement. The major features of the agreement include:
• Residential customer rates are frozen through December 31, 2005;
• Residential customers received a five-percent reduction in the Labour Party gaining controlgeneration portion of their electric rates, effective January 1, 2001;
•CG&E will provide $4 million from 2001 to 2005 in support of energy efficiency and weatherization services for low income customers;
•CG&E will provide shopping credits to switching customers;
• The creation of a RTC designed to recover CG&E’s regulatory assets and other transition costs over a ten-year period;
• Authority for CG&E to transfer its generation assets to one or more, non-regulated affiliates to provide flexibility to manage its generation asset portfolio in a manner that enhances opportunities in a competitive marketplace;
• Authority for CG&E to apply the proceeds of transition cost recovery to costs incurred during the transition period, including implementation costs and purchased power costs that may be incurred by CG&E to maintain an operating reserve margin sufficient to provide reliable service to its customers;
192
• Authority for CG&E to adjust the amortization of its regulatory assets and other transition costs to reflect the effects of any shopping incentives provided to customers; and
•CG&E will provide standard offer default supplier service (i.e., CG&E will be the supplier of last resort, so that no customer will be without an electric supplier).
Subsequent to the PUCO’s approval of CG&E’s stipulation agreement, two parties filed applications for rehearing with the PUCO. In October 2000, the PUCO denied these applications. One of the government.parties appealed to the Ohio Supreme Court in the fourth quarter of 2000 and CG&E subsequently intervened in that case. In July 1997,April 2002, the Labour
Government announcedOhio Supreme Court affirmed the PUCO’s stipulated agreement with CG&E with respect to implementing electric customer choice. The Ohio Supreme Court ruling leaves CG&E’s transition plan entirely intact.
Under CG&E’s transition plan, retail customers continue to receive transportation services from CG&E, but may purchase electricity from another supplier. Retail customers that purchase electricity from another supplier receive shopping credits from CG&E. The shopping credits generally reflect the costs of electric generation included in CG&E’s frozen rates. However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher than CG&E’s electric generation costs in order to stimulate the development of the competitive retail electric service market.
CG&E recovers its regulatory assets and other transition costs through a windfall profits taxRTC paid by all retail customers. As the RTC is collected from customers, CG&E amortizes the deferred balance of regulatory assets and other transition costs. A portion of the RTC collected from customers is recognized currently as a return on the deferred balance of regulatory assets and other transition costs and as reimbursement for the difference in the shopping credits provided to customers and the wholesale revenues from switched generation. The ability of CG&E to recover its regulatory assets and other transition costs is dependent on several factors, including, but not limited to, the level of CG&E’s electric sales, prices in the wholesale power markets, and the amount of customers switching to other electric suppliers.
On January 10, 2003, CG&E filed an application with the PUCO for approval of a methodology to establish how market-based rates for non-residential customers will be levied againstdetermined when the market development period ends. In the filing, CG&E seeks to establish a limited
number of British companies, including Midlands, which had previously been ownedmarket-based standard service offer rate for non-residential customers that do not switch suppliers and operateda process for establishing the competitively-bid generation service option required by the government. The tax, which was enacted into law duringElectric Restructuring Bill. As of December 31, 2002, more than 20 percent of the third quarterload in each of 1997, was intendedCG&E’s non-residential customer classes has switched to other electric suppliers. Under its transition plan, CG&E may end the market development period for those classes of customers once 20 percent switching has been achieved; however, PUCO approval of the standard service offer rate and competitive bidding process is required before the market development period can be a recoveryended. CG&E is not requesting to end the market development period for non-residential customers at this time. CG&E is unable to predict the outcome of funds bythis proceeding.
In its transition plan, CG&E proposed to transfer its generating stations and their related assets and obligations to an Exempt Wholesale Generator (EWG) affiliate, subject to receipt of FERC, SEC, and applicable third-party approvals and consents.
193
To facilitate this transfer, the government
duegeneration assets of CG&E, as of August 2000, were released from the first mortgage indenture lien allowing them to move unencumbered to the undervaluing of the companiesEWG affiliate. Generation assets added after August 2000 remain subject to the tax when they were
privatized by the government via public stock offerings several years ago.
Cinergy's sharelien of the tax to be paid by Midlands in two equal installments, due
December 1, 1997 and 1998, is approximately 67 million pounds sterling ($109
million or $.69 per share, basic and diluted). Midlands borrowed the funds to
finance the first installment. Cinergy expects Midlands will borrow funds as
necessary to pay the final installment. As Cinergy's management believes this
charge to be unusual in nature, and does not expect such a charge to recur, the
tax was recorded as an extraordinary item in Cinergy's Consolidated Statement of
Income during the third quarter of 1997. No related tax benefit was recorded for
the charge as the windfall profits tax is not deductible for corporate income
tax purposes in the UK, and Cinergy expects that benefits, if any, derived for
US Federal income taxes will not be significant.
18. Subsequent Events (Unaudited)
ULH&P
(a) Redemption of 8% Series First Mortgage Bonds On March 24, 1998, ULH&P
announced its intention to redeem on April 23, 1998, $6.3 million principal
amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at a
redemption price of 100.85% through the M&R Fund Provision of ULH&P'sCG&E’s first mortgage bond indenture. Additionally,indenture and would require release at some future date prior to being transferred. A FERC order, that was effective April 2002, allowed Cinergy to jointly dispatch the regulated generating assets of PSI in conjunction with the deregulated generating assets of CG&E. FERC has also authorized the transfer of the CG&E generating assets to a non-regulated affiliate. However, Cinergy has determined that it can realize the benefits of the new joint dispatch agreement without transferring CG&E’s generation assets to an EWG affiliate, and therefore Cinergy does not plan to transfer CG&E’s generation assets to a non-regulated affiliate in the foreseeable future.
194
19. Comprehensive Income
The elements of Comprehensive income and their related tax effects for the years ended December 31, 2002, 2001, and 2000 are as follows:
|
| Comprehensive Income |
| |||||||||||||||||||||||||
|
| 2002 |
| 2001 |
| 2000 |
| |||||||||||||||||||||
|
| Before-tax |
| Tax |
| Net-of-Tax |
| Before-tax |
| Tax |
| Net-of-Tax |
| Before-tax |
| Tax |
| Net-of-Tax |
| |||||||||
|
|
|
|
|
|
|
| (dollars in thousands) |
|
|
|
|
|
|
| |||||||||||||
Cinergy(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net income |
| $ | 518,840 |
| $ | (158,264 | ) | $ | 360,576 |
| $ | 697,785 |
| $ | (255,506 | ) | $ | 442,279 |
| $ | 651,023 |
| $ | (251,557 | ) | $ | 399,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Foreign currency translation adjustment |
| 35,574 |
| (14,034 | ) | 21,540 |
| 4,996 |
| (3,355 | ) | 1,641 |
| 721 |
| 1,353 |
| 2,074 |
| |||||||||
Reclassification adjustments |
| 4,377 |
| — |
| 4,377 |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||
Total foreign currency translation adjustment |
| 39,951 |
| (14,034 | ) | 25,917 |
| 4,996 |
| (3,355 | ) | 1,641 |
| 721 |
| 1,353 |
| 2,074 |
| |||||||||
Minimum pension liability adjustment |
| (23,031 | ) | 9,268 |
| (13,763 | ) | (2,636 | ) | 1,081 |
| (1,555 | ) | (1,852 | ) | 753 |
| (1,099 | ) | |||||||||
Unrealized gain (loss) on investment trusts |
| (8,637 | ) | 3,360 |
| (5,277 | ) | (1,345 | ) | 504 |
| (841 | ) | (2,778 | ) | 649 |
| (2,129 | ) | |||||||||
Cumulative effect of change in accounting principle |
| — |
| — |
| — |
| (4,026 | ) | 1,526 |
| (2,500 | ) | — |
| — |
| — |
| |||||||||
Cash flow hedges |
| (32,663 | ) | 12,915 |
| (19,748 | ) | (4,477 | ) | 1,698 |
| (2,779 | ) | — |
| — |
| — |
| |||||||||
Total other comprehensive income (loss) |
| (24,380 | ) | 11,509 |
| (12,871 | ) | (7,488 | ) | 1,454 |
| (6,034 | ) | (3,909 | ) | 2,755 |
| (1,154 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total comprehensive income |
| $ | 494,460 |
| $ | (146,755 | ) | $ | 347,705 |
| $ | 690,297 |
| $ | (254,052 | ) | $ | 436,245 |
| $ | 647,114 |
| $ | (248,802 | ) | $ | 398,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
CG&E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net income |
| $ | 419,037 |
| $ | (155,341 | ) | $ | 263,696 |
| $ | 513,181 |
| $ | (186,527 | ) | $ | 326,654 |
| $ | 426,218 |
| $ | (159,398 | ) | $ | 266,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Minimum pension liability adjustment |
| (1,423 | ) | 551 |
| (872 | ) | 106 |
| 28 |
| 134 |
| (43 | ) | 15 |
| (28 | ) | |||||||||
Unrealized gain (loss) on investment trusts |
| (745 | ) | 283 |
| (462 | ) | 743 |
| (282 | ) | 461 |
| — |
| — |
| — |
| |||||||||
Cumulative effect of change in accounting principle |
| — |
| — |
| — |
| (4,026 | ) | 1,526 |
| (2,500 | ) | — |
| — |
| — |
| |||||||||
Cash flow hedges |
| (30,960 | ) | 12,226 |
| (18,734 | ) | (4,477 | ) | 1,698 |
| (2,779 | ) | — |
| — |
| — |
| |||||||||
Total other comprehensive income (loss) |
| (33,128 | ) | 13,060 |
| (20,068 | ) | (7,654 | ) | 2,970 |
| (4,684 | ) | (43 | ) | 15 |
| (28 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total comprehensive income |
| $ | 385,909 |
| $ | (142,281 | ) | $ | 243,628 |
| $ | 505,527 |
| $ | (183,557 | ) | $ | 321,970 |
| $ | 426,175 |
| $ | (159,383 | ) | $ | 266,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net income |
| $ | 328,958 |
| $ | (114,709 | ) | $ | 214,249 |
| $ | 268,419 |
| $ | (106,086 | ) | $ | 162,333 |
| $ | 223,945 |
| $ | (88,547 | ) | $ | 135,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Minimum pension liability adjustment |
| (3,534 | ) | 1,396 |
| (2,138 | ) | (76 | ) | 27 |
| (49 | ) | (76 | ) | 29 |
| (47 | ) | |||||||||
Unrealized gain (loss) on investment trusts |
| (7,179 | ) | 2,793 |
| (4,386 | ) | (1,537 | ) | 511 |
| (1,026 | ) | (2,419 | ) | 555 |
| (1,864 | ) | |||||||||
Total other comprehensive income (loss) |
| (10,713 | ) | 4,189 |
| (6,524 | ) | (1,613 | ) | 538 |
| (1,075 | ) | (2,495 | ) | 584 |
| (1,911 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total comprehensive income |
| $ | 318,245 |
| $ | (110,520 | ) | $ | 207,725 |
| $ | 266,806 |
| $ | (105,548 | ) | $ | 161,258 |
| $ | 221,450 |
| $ | (87,963 | ) | $ | 133,487 |
|
(1) The results of Cinergy also include amounts related to non-registrants. Individual amounts for ULH&P are immaterial.
195
The after-tax components of Accumulated other comprehensive income (loss) as of December 31, 2002, 2001, and 2000 are as follows:
|
| Accumulated Other Comprehensive Income (Loss) Classification |
| |||||||||||||
|
| Foreign |
| Minimum |
| Unrealized |
| Cash Flow |
| Total Other |
| |||||
|
| (dollars in thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cinergy(1) |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 1999 |
| $ | (8,146 | ) | $ | (3,681 | ) | $ | 2,086 |
| $ | — |
| $ | (9,741 | ) |
Current-period change |
| 2,074 |
| (1,099 | ) | (2,129 | ) | — |
| (1,154 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2000 |
| $ | (6,072 | ) | $ | (4,780 | ) | $ | (43 | ) | $ | — |
| $ | (10,895 | ) |
Cumulative effect of change in accounting principle |
| — |
| — |
| — |
| (2,500 | ) | (2,500 | ) | |||||
Current-period change |
| 1,641 |
| (1,555 | ) | (841 | ) | (2,779 | ) | (3,534 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2001 |
| $ | (4,431 | ) | $ | (6,335 | ) | $ | (884 | ) | $ | (5,279 | ) | $ | (16,929 | ) |
Current-period change |
| 25,917 |
| (13,763 | ) | (5,277 | ) | (19,748 | ) | (12,871 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2002 |
| $ | 21,486 |
| $ | (20,098 | ) | $ | (6,161 | ) | $ | (25,027 | ) | $ | (29,800 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
CG&E |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 1999 |
| $ | — |
| $ | (966 | ) | $ | — |
| $ | — |
| $ | (966 | ) |
Current-period change |
| — |
| (28 | ) | — |
| — |
| (28 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2000 |
| $ | — |
| $ | (994 | ) | $ | — |
| $ | — |
| $ | (994 | ) |
Cumulative effect of change in accounting principle |
| — |
| — |
| — |
| (2,500 | ) | (2,500 | ) | |||||
Current-period change |
| — |
| 134 |
| 461 |
| (2,779 | ) | (2,184 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2001 |
| $ | — |
| $ | (860 | ) | $ | 461 |
| $ | (5,279 | ) | $ | (5,678 | ) |
Current-period change |
| — |
| (872 | ) | (462 | ) | (18,734 | ) | (20,068 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2002 |
| $ | — |
| $ | (1,732 | ) | $ | (1 | ) | $ | (24,013 | ) | $ | (25,746 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
PSI |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 1999 |
| $ | — |
| $ | (658 | ) | $ | 2,049 |
| $ | — |
| $ | 1,391 |
|
Current-period change |
| — |
| (47 | ) | (1,864 | ) | — |
| (1,911 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2000 |
| $ | — |
| $ | (705 | ) | $ | 185 |
| $ | — |
| $ | (520 | ) |
Current-period change |
| — |
| (49 | ) | (1,026 | ) | — |
| (1,075 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2001 |
| $ | — |
| $ | (754 | ) | $ | (841 | ) | $ | — |
| $ | (1,595 | ) |
Current-period change |
| — |
| (2,138 | ) | (4,386 | ) | — |
| (6,524 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2002 |
| $ | — |
| $ | (2,892 | ) | $ | (5,227 | ) | $ | — |
| $ | (8,119 | ) |
(1) The results of Cinergy also include amounts related to non-registrants. Individual amounts for ULH&P are immaterial.
196
20. Subsequent Events
(a)Sale of Common Stock
On January 15, 2003, Cinergy Corp. filed a registration statement with respect to the issuance of common stock, preferred stock, and other securities with an aggregate amount of $750 million. On February 5, 2003, Cinergy sold 5.7 million shares of common stock of Cinergy Corp. with net proceeds of approximately $175 million under this registration statement. The net proceeds from the transaction will be used to reduce short-term debt of Cinergy Corp. and for other general corporate purposes.
(b) Transfer of Generating Assets
On February 4, 2003, the FERC issued an order under Section 203 of the Federal Power Act authorizing PSI’s proposed acquisition of the Henry County, Indiana, and Butler County, Ohio, gas-fired peaking power plants from two non-regulated affiliates. This action was the final regulatory approval needed for the transfer, which occurred on February 5, 2003. In December 2002, the IURC approved a settlement agreement among PSI, the Indiana Office of the Utility Consumer Counselor, and the IURC Testimonial Staff authorizing PSI’s purchase of the plants.
197
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Disclosure with respect to this Item, for each of the registrants, has been previously provided on the same date, ULH&P announced its
intention to redeemForm 8-K dated April 30, 2002 and as amended on April 24, 1998, the remaining $3.7 million principal
amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at a
redemption price of 101.73%.
PSI
(b) Issuance of 7.25% JUnior Maturing Principal Securities (JUMPS) On March 19,
1998, PSI issued $100 million principal amount of its 7.25% JUMPS. The JUMPS
will mature on MarchMay 15, 2028. Proceeds from the sale were used to repay
short-term indebtedness incurred in connection with the redemption on March 1,
1998, of all outstanding shares of PSI's 7.44% Series Cumulative Preferred Stock
at a redemption price of $25 per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Cinergy, CG&E, PSI, and ULH&P
None.
2002.
198
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANTS
Board of Directors
Cinergy
Reference is made to
BOARD OF DIRECTORS
Information regarding Cinergy Corp.'s, a Delaware corporation (Cinergy or
Company), 1998’s directors is incorporated by reference from its definitive Proxy Statement with respect to identificationfor the 2003 Annual Meeting of directors and
their current principal occupations.
CG&E
Shareholders.
The directors of The Cincinnati Gas & Electric Company (CG&E)(CG&E) at January 31, 2003, are as follows:
•R. Foster Duncan - Mr. Duncan, age 48, is Executive Vice President and Chief Financial Officer of CG&E, a position he has held since February 28,
1998, included:
Jackson H. Randolph2001. He has served as director of CG&E since April 2001. His current term as director expires April 21, 2003.
•James E. Rogers - Mr. Randolph,Rogers, age 67,55, is Chairman of the Board and Chief Executive Officer of CG&E.&E. He has served as a director of CG&E since 1983, and his1994. His current term as director expires April 21, 1998.
2003.
•James E. RogersL. Turner - Mr. Rogers,Turner, age 50,43, is Vice Chairman and Chief Executive OfficerPresident of CG&E.&E, a position he has held since July 2000. He has served as a director of CG&E since 1994, and his from February 15, 1999 to April 30, 2001, at which time Mr. William J. Grealis was elected as successor-director to Mr. Turner. Mr. Turner was re-elected, effective October 1, 2001, as successor-director to Mr. Grealis. Mr. Turner’s current term as director expires April 21, 1998.
William J. Grealis Mr. Grealis, age 52,2003.
Additional information on each of the directors of CG&E is President of CG&E. He has served as a
director of CG&E since 1995, and his current term expires April 21, 1998.
PSI
Reference is made topresented in the following “Executive Officers” section.
Information regarding PSI Energy, Inc.'s (PSI) 1998’s (PSI) directors is incorporated by reference from PSI’s 2003 Information Statement with
respectStatement.
EXECUTIVE OFFICERS
The names of the executive officers of each registrant and the positions they hold, held, or have been elected to identification(as of directorsJanuary 31, 2003), their ages (as of December 31, 2002), and their current principal occupations.
ULH&P
Omitted pursuant to Instruction I(2)(c).
Executive Officers
Cinergy, CG&E, and PSI
The informationbusiness experience during the past five years is included in Part I of this report on pages 18 through 20 under
the caption "Executive Officers of the Registrants" is referenced in reliance
upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K.
ULH&P
Omitted pursuant to Instruction I(2)(c).
Positions and Length of Service | |||||||||
Name | Age | Cinergy Corp. | CG&E | PSI | |||||
Wendy L. Aumiller | 50 | Treasurer | Treasurer | Treasurer | |||||
199
Positions and Length of Service | |||||||||
Name | Age | Cinergy Corp. | CG&E | PSI | |||||
John Bryant(1) | 56 | Vice President | |||||||
Michael J. Cyrus(2) | 47 | Executive Vice President | Executive VicePresident | Executive Vice President | |||||
R. Foster Duncan(3) | 48 | Executive Vice President and Chief Financial Officer | Executive Vice President and Chief Financial Officer | Executive Vice President and Chief Financial Officer | |||||
Douglas F. Esamann | 45 | Vice President and Chief Financial Officer, Energy Merchant Business Unit | President | ||||||
Gregory C. Ficke | 50 | Vice President and Chief Information Officer, Regulated Businesses Business Unit | President | ||||||
Bennett L. Gaines(4) | 49 | Vice President and Chief Technology Officer | |||||||
200
Positions and Length of Service | |||||||||
Name | Age | Cinergy Corp. | CG&E | PSI | |||||
William J. Grealis(5) | 57 | Executive Vice President | Executive Vice President | Executive Vice President | |||||
J. Joseph Hale, Jr.(6) | 53 | Vice President | Vice President | Vice President | |||||
M. Stephen Harkness(7) | 54 | Vice President | |||||||
Julia S. Janson | 38 | Secretary | Secretary | Secretary | |||||
Marc E. Manly(8) | 50 | Executive Vice President and Chief Legal Officer | Executive Vice President and Chief Legal Officer | Executive Vice President and Chief Legal Officer | |||||
Theodore R. Murphy II(9) | 45 | Senior Vice President and Chief Risk Officer | Senior Vice President and Chief Risk Officer | Senior Vice President and Chief Risk Officer | |||||
Frederick J. Newton III(10) | 47 | Executive Vice President and Chief Administrative Officer | Executive Vice President and Chief Administrative Officer | Executive Vice President and Chief Administrative Officer | |||||
Ronald R. Reising(11) | 42 | Vice President | Vice President | Vice President | |||||
Bernard F. Roberts | 50 | Vice President and Comptroller | Vice President and Comptroller | Vice President and Comptroller | |||||
James E. Rogers | 55 | Chairman of the Board | Chairman of the Board | Chairman of the Board | |||||
201
Positions and Length of Service | |||||||||
Name | Age | Cinergy Corp. | CG&E | PSI | |||||
James L. Turner(12) | 43 | Executive Vice President | Vice President | Vice President | |||||
Timothy J. Verhagen(13) | 56 | Vice President | |||||||
None of the officers are related in any manner. Our executive officers hold the offices set opposite their names until the next annual meeting of the Board of Directors and until their successors have been elected and qualified. | |
(1) | Mr. Bryant also serves as the President of Cinergy Global Resources, Inc. (Global Resources) and Cinergy Global Power, Inc., and as the Managing Director of Cinergy Global Power Services Limited, Cinergy’s (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) international project development subsidiary from 1997 to present. Previously, he served as the Executive Generation Director of Midlands Electricity plc (Midlands; a non-affiliate of Cinergy) from 1996 to 1997, and Generation Director of Midlands from 1992 to 1996. |
(2) | Prior to joining Cinergy, Mr. Cyrus was Senior Vice President of Trading and Operations with Electric Clearinghouse, Inc. (a non-affiliate of Cinergy), the power subsidiary of Natural Gas Clearinghouse (NGC; a non-affiliate of Cinergy) in Houston, Texas, a position he had held since 1997. Prior to that, Mr. Cyrus was President of NGC Canada and Executive Vice President of Novagas Clearinghouse, Ltd. Previously, Mr. Cyrus held various executive positions involving energy trading, marketing, and risk management with NGC since 1993. |
(3) | Prior to joining Cinergy, Mr. Duncan was Executive Vice President and Chief Financial Officer of LG&E Energy Corp. (LG&E) (a non-affiliate of Cinergy) in Louisville, Kentucky since December 1998. Prior to that, he was Executive Vice President of Planning and Corporate Development at LG&E from January 1998 to December 1998. Prior to joining LG&E, in January 1998, he was Vice President and Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold (non-affiliates of Cinergy), global natural resource companies headquartered in New Orleans, Louisiana since May 1994. |
(4) | Prior to joining Cinergy, Mr. Gaines was Managing Director, Business Services, at Powergen plc. for the United Kingdom operations since 2001. Prior to that, he was Corporate Director, Supply Chain and Operating Service at LG&E in Louisville, Kentucky from 2000 to 2001. Prior to joining LG&E, Mr. Gaines was Corporate Director, Strategic Sourcing and eCommerce at Electronic Data Systems Corporation from 1998 to 2000 in Dallas, Texas. Prior to that, from 1994-1998, he worked for McKesson Corporation as Vice President of Customer Operations in Dallas, Texas. |
(5) | Mr. Grealis served as President of Cinergy Investments, Inc. from 1995 to March 1999. Mr. Grealis also served as President of the former Energy Services Business Unit from 1996 to May 1997. |
(6) | Since 1992, Mr. Hale has served as President of Cinergy Foundation, Inc., a Cinergy affiliate that is organized and operated exclusively for charitable purposes. |
(7) | Mr. Harkness also serves as Chief Operating and Chief Financial Officer of the Energy Merchant Business Unit. |
(8) | Prior to joining Cinergy, Mr. Manly was Managing Director, Law and Governmental Affairs, General Counsel and Corporate Secretary of NewPower Holdings, Inc. (a non-affiliate of Cinergy) from April 2000 to August 2002. Prior to that, he was Vice President, Chief Counsel for AT&T Consumer Services Group (a non-affiliate of Cinergy) from January 1995 to April 2000. On June 11, 2002, NewPower Holdings, Inc. and its affiliates, TNPC Holdings, Inc. and the NewPower Company, filed a petition for relief under Chapter 11 of The United States Bankruptcy Code. |
202
(9) | Prior to joining Cinergy, Mr. Murphy was Vice President and Chief Risk Officer of Enron Europe, Ltd. (a non-affiliate of Cinergy) from January 2001 to July 2002. Prior to that, he was Vice President of Market Risk of Enron Corporation (a non-affiliate of Cinergy) from March 1997 to December 2000. |
(10) | Prior to joining Cinergy, Mr. Newton was Senior Vice President, Chief Administrative Officer of LG&E (a non-affiliate of Cinergy) from January 1999 to May 2002. Prior to that, he was Senior Vice President, Human Resources and Administration of LG&E from May 1998 to January 1999. Prior to joining LG&E, he was Senior Vice President, Human Resources of Venator Group Inc.’s (a non-affiliate of Cinergy) Champs Sports Division from August 1997 to April 1998. |
(11) | Prior to joining Cinergy, Mr. Reising was Chief Financial Officer of Focal Communications Corporation (a non-affiliate of Cinergy) from February 2001 to January 2002. Prior to that, he was Chief Financial Officer of Derivon (a non-affiliate of Cinergy) from May 2000 to February 2001. Prior to that, he was Chief Financial Officer of Bell Canada (a non-affiliate of Cinergy) from May 1999 to May 2000. Prior to that, he was Chief Financial Officer of Matav (a non-affiliate of Cinergy) from January 1997 to May 1999. On December 19, 2002, Focal Communications filed a petition for relief under Chapter 11 of The United States Bankruptcy Code. |
(12) | In March 1997, Mr. Turner was appointed Vice President of Cinergy Services, Inc., (Services) having responsibility for the coordination of transition issues across all corporate subsidiaries in the move for full customer choice. Beginning in April 1998 until January 2000, Mr. Turner had full responsibility for Cinergy’s Government and Regulatory Affairs Department. Mr. Turner served as Vice President of Customer Services from January 2000 until July 2000. |
(13) | Prior to joining Cinergy, Mr. Verhagen served as Senior Vice President, Human Resources and Administration of United Dominion Industries Ltd. (United Dominion; a non-affiliate of Cinergy), a diversified manufacturer of industrial test equipment in Charlotte, North Carolina, from 1998 to 2000. From 1993 to 1998 he served as Vice President, Human Resources of United Dominion. |
203
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item for Cinergy ReferenceCorp. and CG&E is made to Cinergy's 1998incorporated by reference from Cinergy Corp.’s definitive Proxy Statement with respect to executive
compensation.
CG&E
Reference is made to Cinergy's 1998 Proxy Statement with respect to executive
compensation, except as to information pertaining tofor the compensation of
directors and to the performance graph, which information is set forth below.
Compensation of Directors
Directors who are not employees (non-employee directors) receive an annual
retainer fee of $8,000 plus a fee of $1,000 for each CG&E board of directors'
meeting attended; however, any non-employee director of CG&E who also serves as
a non-employee director of Cinergy or any of its affiliates shall neither
receive such annual retainer fee, nor any compensation for attendance at any
CG&E board meeting that is held concurrently or consecutively with a meeting2003 Annual Meeting of the board ofShareholders.
All CG&E directors of Cinergy. Directors whocurrently are also employees of Cinergy Corp.or any of its subsidiaries (Messrs. Randolph, Rogers,CG&E, and Grealis) will receive no remunerationcompensation for their services as directors.
Under Cinergy's Directors' Deferred Compensation Plan, each non-employee
director of Cinergy or any of its subsidiaries may defer fees and have them
accrued either
Information in cash or in units representing shares of Cinergy common stock.
If deferred in such units, the stock will be distributedresponse to the director at the
time of retirementthis item for PSI is incorporated by reference from the appropriate board. Amounts deferred in cash will be
paid at the same time.
Under Cinergy's Retirement Plan for Directors, non-employee directors with five
or more years of service will receive annual retirement compensation in an
amount equal to the annual Cinergy board retainer fee in effect at the time of
termination of service as a director, plus the product of the fee paid for
attendance at a Cinergy board meeting multiplied by five. Retirement
compensation is paid for as many years as the director served on the Cinergy
board. This plan covers non-employee directors serving on the boards of
directors of Cinergy, Services, CG&E, or PSI. Prior service by non-employee
directors of CG&E, PSI, or Resources is credited under this plan.
Performance Graph
The following line graph compares the cumulative total shareholder return of the
common stock of CG&E with the cumulative total returns during the same time
period of the Standard & Poor's (S&P) Electric Utilities Index and the S&P 500
Stock Index. The graph tracks performance from January 1, 1993, through October
24, 1994, the final trading date of CG&E's common stock. The graph assumes a
$100 investment on January 1, 1993, and reinvestment of all dividends.
Omitted is a line graph illustrating the following data.
1/1/93 1/1/94 10/24/94
CG&E Common Stock $100.00 $117.80 $103.70
S&P Electric Utilities Index $100.00 $112.60 $ 93.00
S&P 500 Stock Index $100.00 $110.10 $111.10
PSI
Reference is made to PSI's 1998PSI’s 2003 Information Statement with respect to executive
compensation.
ULH&P
Omitted pursuant to Instruction I(2)(c).
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information in response to this item for Cinergy ReferenceCorp. is made to Cinergy's 1998incorporated by reference from its definitive Proxy Statement with respect to security
ownershipfor the 2003 Annual Meeting of certain beneficial owners and management.
CG&E
Shareholders.
Cinergy Corp. owns all the outstanding shares of common stock of CG&E.&E, CG&E’s only voting security. Pursuant to Section 13(d) of the Securities Exchange Act of 1934 (Exchange Act), a beneficial owner of a security is any person who directly or indirectly has or shares voting or investment power over such security. No person or group is known by the management of CG&E to be the beneficial owner of more than 5%5 percent of any series of CG&E's&E’s class of cumulative preferred stock as of December 31, 1997.
2002.
CG&E's&E’s directors and executive officers did not beneficially own shares of any series of the class of CG&E's&E’s cumulative preferred stock as of DecemberJanuary 31, 1997.2003. The beneficial ownership of Cinergy'sCinergy Corp. common stock held by each director and named executive officer of CG&Eas of DecemberJanuary 31, 1997,2003, is set forth in the following table.
Amount and Nature
Name of Beneficial Owner(1) of Beneficial Ownership (2)
William J. Grealis 86,313 shares
J. Wayne Leonard 140,961 shares
Jackson H. Randolph 152,426 shares
James E. Rogers 339,254 shares
Larry E. Thomas 130,366 shares
All directors and executive 1,050,910 shares (2)
officers as a group (representing 0.67% of the class)
(1) No individual listed beneficially owned moretable:
Name of Beneficial Owner | Amount and Nature of | Percent of | |||
Michael J. Cyrus | 296,419 shares | * | |||
R. Foster Duncan | 84,993 shares | * | |||
William J. Grealis | 381,143 shares | * | |||
James E. Rogers | 1,572,308 shares | * | |||
James L. Turner | 64,795 shares | * | |||
All directors and executive officers as a group (15 persons) | 2,621,204 shares | 1.55 | % |
* Less than 0.215% of the
outstanding shares of Cinergy common stock.
(2)1%
(1) Includes shares which there is a right to acquire within 60 days pursuant to the exercise of stock options in the following amounts: Mr. Cyrus - 191,100; Mr. Duncan - 80,000; Mr. Grealis - 55,887; Mr. Leonard - 97,611; Mr. Randolph - 50,000;226,731; Mr. Rogers - 145,629;1,170,135; Mr. ThomasTurner - 74,104;47,300; and all directors and executive officers as a group - 497,698.
1,856,784.
Information in response to this item for PSI
Reference is madeincorporated by reference from its 2003 Information Statement.
204
The following table reflects Cinergy’s equity compensation plan information as of December 31, 2002:
Equity Compensation Plan Information
Plan Category |
| Number of securities to |
| Weighted-average |
| Number of securities |
| |
|
|
|
|
|
|
|
| |
Equity compensation plans approved by security holders |
|
|
|
|
|
|
| |
Cinergy Corp. 1996 Long-Term Incentive Plan |
| 7,417,726 |
| $ | 29.13 |
| 5,685,385 |
|
Cinergy Corp. Retirement Plan for Directors |
| — |
| N/A |
| 175,000 |
| |
Cinergy Corp. Directors’ Equity Compensation Plan |
| — |
| N/A |
| 75,000 |
| |
Cinergy Corp. Directors’ Deferred Compensation Plan |
| — |
| N/A |
| 200,000 |
| |
Cinergy Corp. Stock Option Plan |
| 1,443,534 |
| $ | 28.75 |
| 1,318,500 |
|
Cinergy Corp. Performance Shares Plan |
| — |
| N/A |
| 736,751 |
| |
|
|
|
|
|
|
|
| |
Equity compensation plans not approved by security holders |
|
|
|
|
|
|
| |
Cinergy Corp. Employee Stock Purchase Savings Plan |
| 218,170 |
| $ | 32.78 |
| 1,651,420 |
|
Cinergy Corp. UK Sharesave Scheme |
| 6,012 |
| 24.66 |
| 59,989 |
| |
Cinergy Corp. 401(k) Excess Plan |
| N/A |
| N/A |
| 52,825 |
| |
Director, Officer and Key Employee Stock Purchase Program |
| N/A |
| N/A |
| — |
| |
Cinergy Corp. 2001 Long-Term Incentive Compensation Sub-Scheme |
| 1,250 |
| $ | 33.61 |
| 6,998,750 |
|
The following information describes the equity compensation plans that have not been approved by shareholders.
Cinergy Corp. Employee Stock Purchase and Savings Plan
The Cinergy Corp. Employee Stock Purchase and Savings Plan allows essentially all full-time, regular employees to PSI's 1998 Information Statementpurchase shares of common stock pursuant to a stock option feature. Under the Employee Stock Purchase and Savings Plan, after-tax funds are withheld from a participant’s compensation during a 26-month offering period and are deposited in an interest-bearing account. At the end of the offering period, participants may apply amounts deposited in the account, plus interest, toward the purchase of shares of common stock. The purchase price is equal to 95 percent of the fair market value of a share of common stock on the first date of the offering period. Any funds not applied toward the purchase of shares are returned to the participant. A participant may elect to terminate participation in the plan at any time. Participation also will terminate if the participant’s employment ceases. Upon termination of participation, all funds, including interest, are returned to the participant without penalty. The sixth (current) offering period began May 1, 2001, and ends June 30, 2003. The purchase price for all shares under this offering is $32.78.
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UK Sharesave Scheme
The UK Sharesave Scheme allows essentially all full-time, regular UK employees working a minimum of 25 hours per week to purchase shares of common stock pursuant to a stock option feature. Under the UK Sharesave Scheme, after-tax funds are withheld from a participant’s compensation during a 36-month or 60-month offering period, at the election of the participants, and are deposited in an account. At the end of the offering period, participants may apply amounts deposited in the account toward the purchase of shares of common stock. The purchase price cannot be less than 80 percent of the average market price at date of grant or shortly prior to the grant. Any funds not applied toward the purchase of shares are returned to the participant. A participant may elect to terminate participation in the plan at any time. Participation also will terminate if the participant’s employment ceases. Upon termination of participation, all funds are returned to the participant without penalty although, in certain specified circumstances, options may be exercised early on a pro-rata basis.
Cinergy Corp. 401(k) Excess Plan
The Cinergy Corp. 401(k) Excess Plan provides a select group of key senior management employees with respectthe opportunity to securitydefer on a pre-tax basis a portion of their annual base salary in excess of the amount that can be deferred pursuant to current law under Cinergy Corp.’s qualified 401(k) plan. The plan also provides for certain Company contributions. Amounts contributed to the plan are credited to a bookkeeping account established for each participant. Each such account is credited with earnings, gains and losses based on the performance of investment funds selected by the participants in a manner similar to Cinergy Corp.’s qualified 401(k) plan. One available investment fund credits amounts to participant accounts based on the performance of Cinergy Corp. common stock. A participant’s account is generally distributed following his or her termination of employment in a single lump sum or in annual installments over a period of up to 10 years.
Director, Officer and Key Employee Stock Purchase Program
In December 1999, Cinergy Corp. adopted the Director, Officer, and Key Employee Stock Purchase Program (Stock Purchase Program). The purpose of the Stock Purchase Program is to facilitate the purchase and ownership of Cinergy Corp.’s common stock by its directors, officers, and key employees, thereby further aligning their interests with those of its shareholders. In February 2000, Cinergy Corp. purchased approximately 1.6 million shares of common stock on behalf of the participants at an average price of $24.82 per share. Participants had the option of financing the purchases through a five-year credit facility arranged by Cinergy Corp. with a bank. Each participant is obligated to repay the bank any loan principal, interest, and prepayment fees, and each has assigned his or her dividend rights on the purchased shares to the bank to be applied to interest payments as due on the loan. Cinergy Services, Inc., and in part, Cinergy Corp., have guaranteed repayment to the bank of 100 percent of each participant’s loan obligations and the associated interest, and each participant has agreed to indemnify the guarantor for any payments made by it under the guaranty on the participant’s behalf. A participant’s obligations to the bank are unsecured and no restrictions are placed on the participant’s ability to sell, pledge, or otherwise encumber or dispose of his or her purchased shares.
Cinergy Corp. 2001 Long-Term Incentive Compensation Sub-Scheme
The Cinergy Corp. 2001 Long-Term Incentive Compensation Sub-Scheme was adopted in 2001. The purpose of this plan was to allow certain beneficial ownersUnited Kingdom (UK) employees to receive similar benefits as provided under the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan while taking into consideration the unique issues of the UK taxation laws. Under this plan, the eligible employees may be granted incentive and management.
ULH&P
Omitted pursuantnon-qualified stock options. These stock options are granted to Instruction I(2)(c).
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 either three or five years. The vesting period begins on the grant date and all options expire within 10 years from that date.
206
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this item for Cinergy Corp. and CG&E is incorporated by reference from Cinergy Corp.’s definitive Proxy Statement for the 2003 Annual Meeting of Shareholders.
Information in response to this item for PSI is incorporated by reference from PSI’s 2003 Information Statement.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure controls and PSI
None.
ULH&P
Omitted pursuantprocedures are our controls and other procedures that are designed to Instruction I(2)(c).
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and, based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC’s rules and forms.
There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.
207
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
Cinergy, CG&E, PSI, and ULH&P
FINANCIAL STATEMENTS AND SCHEDULES
Refer to the page captioned "Index“Index to Financial Statements and Financial Statement Schedules", pages 53 and 54 of this report,Schedules” for an index of the financial statements and financial statement schedules included in this report.
(b) Reports on Form 8-K.
Cinergy, CG&E, PSI, and ULH&P
REPORTS ON FORM 8-K
None
(c) Exhibits.
Copies of the
EXHIBITS
The documents listed below which are identified with an asterisk (*)being filed or have heretoforepreviously been filed with the Securitieson behalf of Cinergy Corp., CG&E, PSI, and Exchange Commission (SEC)The Union Light, Heat and Power Company (ULH&P) and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified with a pound sign (#) are beingas previously filed herewith by the registrant identified in
the exhibit discussion below and are incorporated herein by reference with
respect to any other designated registrant. Exhibits not so identified are filed herewith:
Exhibit
Designation Nature of Exhibit
Cinergy
3-a *Certificate of Incorporation of Cinergy
Corp., a Delaware corporation (Cinergy or
Company). (Exhibit to Cinergy's 1993 Form
10-K in File No. 1-11377.)
3-b By-laws of Cinergy as amended December 18,
1997.
CG&E
3-c *Amended Articles of Incorporation of The Cincinnati
Gas & Electric Company (CG&E) effective October 23,
1996. (Exhibit to CG&E's September 30, 1996, Form 10-Q
in File No. 1-1232.)
3-d *Regulations of CG&E as amended, April 25, 1996.
(Exhibit to CG&E's
Exhibit | Registrant(s)(1) | Nature of Exhibit | Previously Filed as | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Articles of Incorporation /By-laws | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3-a | Cinergy Corp. | Certificate of Incorporation of Cinergy Corp., a Delaware corporation, as amended May 10, 2001. | Cinergy Corp. March 31, 2001, Form 10-Q | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3-b | Cinergy Corp. | By-Laws of Cinergy Corp., as amended on May 2, 2002. | Cinergy Corp. March 31, 2002, Form 10-Q | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3-c | CG&E | Amended Articles of Incorporation of CG&E effective October 23, 1996. | CG&E September 30, 1996, Form 10-Q | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3-d | CG&E | Regulations of CG&E, as amended, April 25, 1996. | CG&E March 31, 1996, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3-e | PSI | Amended Articles of Consolidation of PSI, as amended April 20, 1995. | PSI June 30, 1995, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3-f | PSI | Amendment to Article D of the Amended Articles of Consolidation of PSI, effective July 10, 1997. | Cinergy Corp. 1997 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3-g | PSI | By-Laws of PSI, as amended to December 17, 1996. | PSI March 3-h ULH&P Restated Articles of Incorporation made effective May 7, 1976. ULH&P Form 8-K, May 1976 3-i ULH&P By-Laws of ULH&P, as amended on May 26, 1999. 3-j ULH&P Amendment to Restated Articles of Incorporation of ULH&P (Article Third) and Amendment to the By-Laws of ULH&P (Article 1), both effective July 24, 1997. Cinergy Corp. 1997 Form 10-K Instruments defining the 4-a Cinergy Corp. Original Indenture (First Mortgage Bonds) dated September 1, 1939, between PSI and The First National Bank of Chicago, as Trustee, and LaSalle National Bank, as Successor Trustee. Exhibit A-Part 3 in File No. 70-258 Supplemental Indenture dated March 30, 1984 208 Exhibit Registrant(s)(1) Nature of Exhibit Previously Filed as 4-b Cinergy Corp. Twenty-fifth Supplemental Indenture between PSI and The First National Bank of Chicago dated September 1, 1978. File No. 2-62543 4-c Cinergy Corp. Thirty-fifth Supplemental Indenture between PSI and The First National Bank of Chicago dated March 30, 1984. PSI 1984 Form 10-K 4-d Cinergy Corp. Forty-second Supplemental Indenture between PSI and LaSalle National Bank dated August 1, 1988. PSI 1988 Form 10-K 4-e Cinergy Corp. Forty-fourth Supplemental Indenture between PSI and LaSalle National Bank dated March 15, 1990. PSI 1990 Form 10-K 4-f Cinergy Corp. Forty-fifth Supplemental Indenture between PSI and LaSalle National Bank dated March 15, 1990. PSI 1990 Form 10-K 4-g Cinergy Corp. Forty-sixth Supplemental Indenture between PSI and LaSalle National Bank dated June 1, 1990. PSI 1991 Form 10-K 4-h Cinergy Corp. Forty-seventh Supplemental Indenture between PSI and LaSalle National Bank dated July 15, 1991. PSI 1991 Form 10-K 4-i Cinergy Corp. Forty-eighth Supplemental Indenture between PSI and LaSalle National Bank dated July 15, 1992. PSI 1992 Form 10-K 4-j Cinergy Corp. Forty-ninth Supplemental Indenture between PSI and LaSalle National Bank dated February 15, 1993. PSI 1992 Form 10-K 4-k Cinergy Corp. Fiftieth Supplemental Indenture between PSI and LaSalle National Bank dated February 15, 1993. PSI 1992 Form 10-K 4-l Cinergy Corp. Fifty-first Supplemental Indenture between PSI and LaSalle National Bank dated February 1, 1994. PSI 1993 Form 10-K 4-m Cinergy Corp. Fifty-second Supplemental Indenture between PSI and LaSalle National Bank, as Trustee, dated as of April 30, 1999. PSI March 31, 1999, Form 4-n Cinergy Corp. Fifty-third Supplemental Indenture between PSI and LaSalle National Bank dated June 15, 2001. Cinergy Corp. June 30, 2001, Form 10-Q 4-o Cinergy Corp. Indenture (Secured Medium-term Notes, Series A), dated July 15, 1991, between PSI and LaSalle National Bank, as Trustee. PSI Form 10-K/A, 4-p Cinergy Corp. Indenture (Secured Medium-term Notes, Series B), dated July 15, 1992, between PSI and LaSalle National Bank, as Trustee. PSI Form 10-K/A, Amendment No. 2, dated July 15, 1993 4-q Cinergy Corp. Loan Agreement between PSI and the City of Princeton, Indiana dated as of November 7, 1996. PSI September 30, 1996, Form 10-Q 4-r Cinergy Corp. Loan Agreement between PSI and the City of Princeton, Indiana dated as of February 1, 1997. Cinergy Corp. 1996 Form 4-s Cinergy Corp. Indenture dated November 15, 1996, between PSI and The Fifth Third Bank, as Trustee. Cinergy Corp. 1996 Form 4-t Cinergy Corp. First Supplemental Indenture dated November 15, 1996, between PSI and The Fifth Third Bank, as Trustee. Cinergy Corp. 1996 Form 4-u Cinergy Corp. Third Supplemental Indenture dated as of March 15, 1998, between PSI and The Fifth Third Bank, as Trustee. Cinergy Corp. 1997 Form 4-v Cinergy Corp. Fourth Supplemental Indenture dated as of August 5, 1998, between PSI and The Fifth Third Bank, as Trustee. PSI June 30, 1998, Form 10-Q 4-w Cinergy Corp. Fifth Supplemental Indenture dated as of December 15, 1998, between PSI and The Fifth Third Bank, as Trustee. PSI 1998 Form 10-K 4-x Cinergy Corp. Sixth Supplemental Indenture dated as of April 30, 1999, between PSI and Fifth Third Bank, as Trustee. PSI March 31, 1999, Form 4-y Cinergy Corp. Seventh Supplemental Indenture dated as of October 20, 1999, between PSI and Fifth Third Bank, as Trustee. PSI September 30, 1999, Form 10-Q 4-z Cinergy Corp. Unsecured Promissory Note dated October 14, 1998, between PSI and the Rural Utilities Service. PSI 1998 Form 10-K 4-aa Cinergy Corp. Loan Agreement between PSI and the Indiana Development Finance Authority dated as of July 15, 1998. PSI June 30, 1998, Form 10-Q 4-bb Cinergy Corp. Loan Agreement between PSI and the Indiana Development Finance Authority dated as of May 1, 2000. PSI June 30, 2000, Form 10-Q 4-cc Cinergy Corp. Original Indenture (First Mortgage Bonds) between CG&E and The Bank of New York (as Trustee) dated as of August 1, 1936. CG&E Registration Statement No. 2-2374 4-dd Cinergy Corp. Fourteenth Supplemental Indenture between CG&E and The Bank of New York dated as of November 2, 1972. CG&E Registration Statement No. 2-60961 4-ee Cinergy Corp. Thirty-third Supplemental Indenture between CG&E and The Bank of New York dated as of September 1, 1992. CG&E Registration Statement No. 33-53578 4-ff Cinergy Corp. Thirty-fourth Supplemental Indenture between CG&E and The Bank of New York dated as of October 1, 1993. CG&E September 30, 1993, Form 10-Q 209 Exhibit Registrant(s)(1) Nature of Exhibit Previously Filed as 4-gg Cinergy Corp. Thirty-fifth Supplemental Indenture between CG&E and The Bank of New York dated as of January 1, 1994. CG&E Registration Statement No. 33-52335 4-hh Cinergy Corp. Thirty-sixth Supplemental Indenture between CG&E and The Bank of New York dated as of February 15, 1994. CG&E Registration Statement No. 33-52335 4-ii Cinergy Corp. Thirty-seventh Supplemental Indenture between CG&E and The Bank of New York dated as of October 14, 1996. Cinergy Corp. 1996 Form 4-jj Cinergy Corp. Thirty-eighth Supplemental Indenture between CG&E and The Bank of New York dated as of February 1, 2001. Cinergy Corp. March 31, 2001, Form 10-Q 4-kk Cinergy Corp. Loan Agreement between CG&E and the County of Boone, Kentucky dated as of February 1, 1985. CG&E 1984 Form 10-K 4-ll Cinergy Corp. Repayment Agreement between CG&E and The Dayton Power and Light Company dated as of December 23, 1992. CG&E 1992 Form 10-K 4-mm Cinergy Corp. Loan Agreement between CG&E and the County of Boone, Kentucky dated as of January 1, 1994. CG&E 1993 Form 10-K 4-nn Cinergy Corp. Loan Agreement between CG&E and the State of Ohio Air Quality Development Authority dated as of December 1, 1985. CG&E 1985 Form 10-K 4-oo Cinergy Corp. Loan Agreement between CG&E and the State of Ohio Air Quality Development Authority dated as of September 13, 1995. CG&E September 30, 1995, Form 10-Q 4-pp Cinergy Corp. Loan Agreement between CG&E and the State of Ohio Water Development Authority dated as of January 1, 1994. CG&E 1993 Form 10-K 4-qq Cinergy Corp. Loan Agreement between CG&E and the State of Ohio Air Quality Development Authority dated as of January 1, 1994. CG&E 1993 Form 10-K 4-rr CG&E Loan Agreement between CG&E and the State of Ohio Air Quality Development Authority dated August 1, 2001. Cinergy Corp. September 30, 2001, Form 10-Q 4-ss Cinergy Corp. Original Indenture (Unsecured Debt Securities) between CG&E and The Fifth Third Bank dated as of May 15, 1995. CG&E Form 8-A dated July 24, 1995 4-tt Cinergy Corp. First Supplemental Indenture between CG&E and The Fifth Third Bank dated as of June 1, 1995. CG&E June 30, 1995, Form 10-Q 4-uu Cinergy Corp. Second Supplemental Indenture between CG&E and The Fifth Third Bank dated as of June 30, 1995. CG&E Form 8-A dated July 24, 1995 4-vv Cinergy Corp. Third Supplemental Indenture between CG&E and The Fifth Third Bank dated as of October 9, 1997. CG&E September 30, 1997, Form 10-Q 4-ww Cinergy Corp. Fourth Supplemental Indenture between CG&E and The Fifth Third Bank dated as of April 1, 1998. CG&E March 31, 1998, Form 10-Q 4-xx Cinergy Corp. Fifth Supplemental Indenture between CG&E and The Fifth Third Bank dated as of June 9, 1998. CG&E June 30, 1998, Form 10-Q 4-yy Cinergy Corp. Original Indenture (First Mortgage Bonds) between ULH&P and The Bank of New York dated as of February 1, 1949. ULH&P Registration Statement No. 2-7793 4-zz Cinergy Corp. Fifth Supplemental Indenture between ULH&P and The Bank of New York dated as of January 1, 1967. CG&E Registration Statement No. 2-60961 4-aaa Cinergy Corp. Thirteenth Supplemental Indenture between ULH&P and The Bank of New York dated as of August 1, 1992. ULH&P 1992 Form 10-K 4-bbb Cinergy Corp. Original Indenture (Unsecured Debt Securities) between ULH&P and The Fifth Third Bank dated as of July 1, 1995. ULH&P June 30, 1995, Form 10-Q 4-ccc Cinergy Corp. First Supplemental Indenture between ULH&P and The Fifth Third Bank dated as of July 15, 1995. ULH&P June 30, 1995, Form 10-Q 4-ddd Cinergy Corp. Second Supplemental Indenture between ULH&P and The Fifth Third Bank dated as of April 30, 1998. ULH&P March 31, 1998, Form 10-Q 4-eee Cinergy Corp. Third Supplemental Indenture between ULH&P and The Fifth Third Bank dated as of December 8, 1998. ULH&P 1998 Form 10-K 4-fff Cinergy Corp. Fourth Supplemental Indenture between ULH&P and The Fifth Third Bank, as Trustee, dated as of September 17, 1999. ULH&P September 30, 1999, Form 10-Q 4-ggg Cinergy Corp. Base Indenture dated as of October 15, 1998, between Global Resources and The Fifth Third Bank, as Trustee. Cinergy Corp. September 30, 1998, Form 10-Q 210 Exhibit Registrant(s)(1) Nature of Exhibit Previously Filed as 4-hhh Cinergy Corp. First Supplemental Indenture dated as of October 15, 1998, between Global Resources and The Fifth Third Bank, as Trustee. Cinergy Corp. September 30, 1998, Form 10-Q 4-iii Cinergy Corp. Indenture dated as of December 16, 1998, between Cinergy Corp. and The Fifth Third Bank. Cinergy Corp. 1998 Form 4-jjj Cinergy Corp. Indenture between Cinergy Corp. and The Fifth Third Bank, as Trustee, dated as of April 15, 1999. Cinergy Corp. March 31, 1999, Form 10-Q 4-kkk Cinergy Corp. Indenture between Cinergy Corp. and The Fifth Third Bank, as Trustee, dated September 12, 2001. Cinergy Corp. September 30, 2001, Form 10-Q 4-lll Cinergy Corp. First Supplemental Indenture between Cinergy Corp. and The Fifth Third Bank, as Trustee, dated September 12, 2001. Cinergy Corp. September 30, 2001, Form 10-Q 4-mmm Cinergy Corp. Second Supplemental Indenture, dated December 18, 2001, between Cinergy Corp. and The Fifth Third Bank, as Trustee. Cinergy Corp. Form 8-K, December 19, 2001 4-nnn Cinergy Corp. Rights Agreement between Cinergy Corp. and The Fifth Third Bank, as Rights Agent, dated October 16, 2000. Cinergy Corp. Registration Statement on Form 8-A dated October 16, 2000 4-ooo Cinergy Corp. Purchase Contract Agreement, dated December 18, 2001, between Cinergy Corp. and The Bank of New York, as Purchase Contract Agent. Cinergy Corp. Form 8-K, December 19, 2001 4-ppp Cinergy Corp. Pledge Agreement, dated December 18, 2001, among Cinergy Corp., JP Morgan Chase Bank, as Collateral Agent, Custodial Agent and Securities Intermediary, and The Bank of New York, as Purchase Contract Agent. Cinergy Corp. Form 8-K, December 19, 2001 4-qqq Cinergy Corp. Thirty-ninth Supplemental Indenture dated as of September 1, 2002, between CG&E and The Bank of New York, as Trustee. Cinergy Corp. September 30, 2002, Form 10-Q 4-rrr Cinergy Corp. Fifty-fourth Supplemental Indenture dated as of September 1, 2002, between PSI and LaSalle Bank National Association, as Trustee. Cinergy Corp. September 30, 2002, Form 10-Q 4-sss Cinergy Corp. Sixth Supplemental Indenture between CG&E and Fifth Third Bank dated as of September 15, 2002. Cinergy Corp. September 30, 2002, Form 10-Q 4-ttt Cinergy Corp. Loan Agreement between PSI and the Indiana Development Finance Authority dated as of September 1, 2002. Cinergy Corp. September 30, 2002, Form 10-Q 4-uuu Cinergy Corp. PSI Loan Agreement between PSI and the Indiana Development Finance Authority dated as of September 1, 2002. Cinergy Corp. September 30, 2002, Form 10-Q 4-vvv Cinergy Corp. CG&E Loan Agreement between CG&E and the Ohio Air Quality Development Authority dated as of September 1, 2002. Cinergy Corp. September 30, 2002, Form 10-Q 4-www Cinergy Corp. First Amendment to Rights Agreement, dated August 28, 2002, effective September 16, 2002, between Cinergy Corp. and The Fifth Third Bank, as Rights Agent. Cinergy Corp. Form Material 10-a Cinergy Corp. CG&E Amended and Restated Employment Agreement dated October 24, 1994, among CG&E, Cinergy Corp., PSI Resources, Inc., and PSI, and Jackson H. Randolph. Cinergy Corp. 1994 Form 10-b Cinergy Corp. CG&E Amended and Restated Employment Agreement dated December 30, 1999, among Services, CG&E, and PSI, and James E. Rogers. Cinergy Corp. 1999 Form 10-c Cinergy Corp. CG&E Amended and Restated Employment Agreement dated October 11, 2002, among Cinergy Corp., Services, CG&E, and PSI, and William J. Grealis. 10-d Cinergy Corp. CG&E Amended and Restated Employment Agreement dated October 1, 2002, among Cinergy Corp., Services, CG&E, and PSI, and Donald B. Ingle, Jr. 10-e Cinergy Corp. Amended and Restated Employment Agreement dated September 12, 2002, among Cinergy Corp., Services, CG&E, and PSI, and Michael J. Cyrus. 10-f Cinergy Corp. Amended and Restated Employment Agreement dated September 24, 2002, among Cinergy Corp., Services, CG&E, and PSI, and James L. Turner. 10-g Cinergy Corp. Amended and Restated Employment Agreement dated January 1, 2002, among Cinergy Corp., Services, CG&E, and PSI, and R. Foster Duncan. 10-h Cinergy Corp. Employment Agreement dated May 15, 2001, among Cinergy Corp. and CG&E, and J. Joseph Hale, Jr. Cinergy Corp. June 30, 2001, Form 10-Q 211 Exhibit Registrant(s)(1) Nature of Exhibit Previously Filed as 10-i Cinergy Corp. Employment Agreement dated May 15, 2001, between Cinergy Corp. and M. Stephen Harkness. Cinergy Corp. June 30, 2001, Form 10-Q 10-j Cinergy Corp. Employment Agreement dated May 15, 2001, among Cinergy Corp., CG&E, and PSI, and Bernard F. Roberts. Cinergy Corp. June 30, 2001, Form 10-Q 10-k Cinergy Corp. Amended and Restated Separation and Retirement Agreement and Waiver and Release of Liability dated February 15, 2002, between Cinergy Corp., and Larry E. Thomas. Cinergy Corp. 2001 Form 10-l Cinergy Corp. Separation and Retirement Agreement and Waiver and Release of Liability dated October 8, 2002 between Cinergy Corp. and Donald B. Ingle, Jr. 10-m Cinergy Corp. Deferred Compensation Agreement, effective as of January 1, 1992, between PSI and James E. Rogers. PSI Form 10-K/A, Amendment No. 1, dated April 29, 1993 10-n Cinergy Corp. Split Dollar Life Insurance Agreement, effective as of January 1, 1992, between PSI and James E. Rogers. PSI Form 10-K/A, Amendment No. 1, dated April 29, 1993 10-o Cinergy Corp. First Amendment to PSI Form 10-K/A, Amendment No. 1, dated April 29, 1993 10-p Cinergy Corp. Deferred Compensation Agreement between CG&E and Jackson H. Randolph dated January 1, 1992. CG&E 1992 Form 10-K 10-q Cinergy Corp. Split Dollar Insurance Agreement, effective as of Cinergy Corp. 1994 Form 10-r Cinergy Corp. Amended and Restated Supplemental Retirement Income Agreement between CG&E and Jackson H. Randolph dated January 1, 1995. Cinergy Corp. 1995 Form 10-s Cinergy Corp. Amended and Restated Supplemental Executive Retirement Income Agreement between CG&E and certain executive officers. Cinergy Corp. 1997 Form 10-t Cinergy Corp. Cinergy Corp. Supplemental Executive Retirement Plan amended and restated effective January 1, 1999, adopted October 15, 1998. Cinergy Corp. 1999 Form 10-u Cinergy Corp. 1997 Amendments to Various Compensation and Benefit Plans of Cinergy Corp. 1997 Form 10-v Cinergy Corp. Cinergy Corp. Stock Option Plan, adopted October 18, 1994, effective October 24, 1994. Cinergy Corp. Form S-8, filed October 19, 1994 10-w Cinergy Corp. Amendment to Cinergy Corp. Stock Option Plan, amended October 22, 1996, effective November 1, 1996. Cinergy Corp. September 30, 1996, Form 10-Q 10-x Cinergy Corp. Amended and Restated Cinergy Corp. Annual Incentive Plan, effective January 25, 2002. Cinergy Corp. 2001 Form 10-y Cinergy Corp. Cinergy Corp. Employee Stock Purchase and Savings Plan, adopted October 18, 1994, effective October 24, 1994. Cinergy Corp. Form S-8, filed October 19, 1994 10-z Cinergy Corp. Amendment to Cinergy Corp. Employee Stock Purchase and Savings Plan, adopted April 26, 1996, effective January 1, 1996. Cinergy Corp. June 30, 1996, Form 10-Q 10-aa Cinergy Corp. Amendment to Cinergy Corp. Employee Stock Purchase and Savings Plan, adopted October 22, 1996, effective November 1, 1996. Cinergy Corp. September 30, 1996, Form 10-Q 10-bb Cinergy Corp. Cinergy Corp.UK Sharesave Scheme, adopted and effective December 16, 1999. Cinergy Corp. 1999 Form 10-cc Cinergy Corp. Cinergy Corp. Directors’ Deferred Compensation Plan, adopted October 18, 1994, effective October 24, 1994. Cinergy Corp. Form S-8, filed October 19, 1994 10-dd Cinergy Corp. Amendment to Cinergy Corp. Directors’ Deferred Compensation Plan, adopted October 22, 1996. Cinergy Corp. September 30, 1996, Form 10-Q 10-ee Cinergy Corp. Cinergy Corp. Retirement Plan for Cinergy Corp. Schedule 14A Definitive Proxy Statement filed March 12, 1999 10-ff Cinergy Corp. Cinergy Corp. Directors’ Equity Compensation Plan adopted October 15, 1998, effective January 1, 1999. Cinergy Corp. Schedule 14ADefinitive Proxy Statement filed March 12, 1999 10-gg Cinergy Corp. Cinergy Corp. Executive Supplemental Life Insurance Program adopted October 18, 1994, effective October 24, 1994, consisting of Defined Benefit Deferred Compensation Agreement, Executive Supplemental Life Insurance Program Split Dollar Agreement I, and Executive Supplemental Life Insurance Program Split Dollar Agreement II. Cinergy Corp. 1994 Form 10-hh Cinergy Corp. Amended and Restated Cinergy Corp. 1996 Long-term Incentive Compensation Plan, effective January 25, 2002. Cinergy Corp. 2001 Form 212 Exhibit Registrant(s)(1) Nature of Exhibit Previously Filed as 10-ii Cinergy Corp. Cinergy Corp. 401(k) Excess Plan, effective January 1, 1997, Cinergy Corp. 1996 Form 10-jj Cinergy Corp. Amendment to Cinergy Corp. 401(k) Excess Plan, adopted January 24, 2002, effective January 1, 2002. Cinergy Corp. Form S-8, filed January 31, 2002 10-kk Cinergy Corp. Amendment to Cinergy Corp. 401(k) Excess Plan, adopted December 18, 10-ll Cinergy Corp. Cinergy Corp. Nonqualified Deferred Incentive Compensation Plan, effective January 1, 1997, adopted December 17, 1996. Cinergy Corp. 1996 10-mm Cinergy Corp. Amendment to Cinergy Corp. Nonqualified Deferred Incentive Compensation Plan, adopted December 18, 2002, effective January 1, 2002. 10-nn Cinergy Corp. Cinergy Corp. Director, Officer and Key Employee Stock Purchase Program, effective January 7, 2000, adopted December 10, 1999. Cinergy Corp. 1999 Form 10-oo Cinergy Corp. Cinergy Corp. Non-Union Employees’ Pension Plan adopted December 18, 2002, amended and restated effective January 1, 2003. 10-pp Cinergy Corp. Cinergy Corp. Non-Union Employees’ Severance Opportunity Plan as amended and restated effective June 1, 2001, adopted May 30, 2001. Cinergy Corp. June 30, 2001, Form 10-Q 10-qq Cinergy Corp. Amendment to the Cinergy Corp. March 31, 2002, Form 10-Q 10-rr Cinergy Corp. Second Amendment to the Amended and Restated Separation and Retirement Agreement and Waiver and Release of Liability, between Cinergy Corp. and Larry E. Thomas. Cinergy Corp. June 30, 2002, Form 10-Q 10-ss Cinergy Corp. Amended and Restated Cinergy Corp. Non-Union Employees’ 401(k) Plan, adopted December 18, 2002, effective January 1, 2003. Subsidiaries of the 21 Cinergy Corp. Subsidiaries of Cinergy Corp., CG&E, and PSI Consent of 23 Cinergy Corp. Independent Auditors' Consent Power of 24 Cinergy Corp. Power of Attorney (1) Regulation S-K 229.10(d) requires Registrants to Cinergy Corp. in CG&E in file number 1-1232 PSI in file number 1-3543 ULH&P in file number 2-7793 Each registrant hereby undertakes to furnish to 213 CINERGY CORP. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (in thousands) Col. A Col. B Col. C Col. D Col. E Description Balance at Additions Deductions Balance at Charged to Charged For Purposes Other Accumulated Provisions Deducted from Applicable Assets Allowance for Doubtful Accounts 2002 $ 34,110 $ 7,883 $ 9,270 $ 34,867 $ 22 $ 16,374 2001 $ 29,951 $ 39,693 $ 5,254 $ 40,788 $ — $ 34,110 2000 $ 26,811 $ 22,746 $ 4,486 $ 24,092 $ — $ 29,951 214 THE CINCINNATI GAS & ELECTRIC COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (in thousands) Col. A Col. B Col. C Col. D Col. E Description Balance at Additions Deductions Balance at Charged to Charged For Purposes Other Accumulated Provisions Deducted from Applicable Assets Allowance for Doubtful Accounts 2002 $ 25,874 $ 2,029 $ 6,096 $ 28,057 $ — $ 5,942 2001 $ 19,044 $ 30,166 $ 4,089 $ 27,425 $ — $ 25,874 2000 $ 16,740 $ 14,056 $ 4,486 $ 16,238 $ — $ 19,044 215 PSI ENERGY, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (in thousands) Col. A Col. B Col. C Col. D Col. E Description Balance at Additions Deductions Balance at Charged to Charged For Purposes Other Accumulated Provisions Deducted from Applicable Assets Allowance for Doubtful Accounts 2002 $ 6,773 $ 2,310 $ 3,174 $ 6,579 $ 22 $ 5,656 2001 $ 9,317 $ 8,339 $ 1,165 $ 12,048 $ — $ 6,773 2000 $ 9,934 $ 7,088 $ — $ 7,705 $ — $ 9,317 216 THE UNION LIGHT, HEAT AND POWER COMPANY SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 2002 (in thousands) Col. A Col. B Col. C Col. D Col. E Description Balance at Additions Deductions Balance at Charged to Charged For Purposes Other Accumulated Provisions Deducted from Applicable Assets Allowance for Doubtful Accounts 2002 $ 1,196 $ 392 $ 2,383 $ 3,887 $ — $ 84 2001 $ 1,492 $ 3,050 $ 4 $ 3,350 $ — $ 1,196 2000 $ 1,513 $ 2,555 $ 746 $ 3,322 $ — $ 1,492 217 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company CINERGY CORP. Date: February 27, 2003 By /s/ James E. Rogers James E. Rogers Chief Executive Officer 218 Pursuant to the requirements of the Signature Title Date Cinergy Corp. Phillip R. Cox* Director of Cinergy Corp. George C. Juilfs* Director of Cinergy Corp. Thomas E. Petry* Director of Cinergy Corp. Mary L. Schapiro* Director of Cinergy Corp. John J. Schiff, Jr.* Director of Cinergy Corp. Philip R. Sharp* Director of Cinergy Corp. Dudley S. Taft* Director of Cinergy Corp. Cinergy Corp. and PSI Michael G. Browning* Director of Cinergy Corp. CG&E and ULH&P James L. Turner* Vice President and Director of PSI Douglas F. Esamann* Director of PSI Cinergy Corp., CG&E, PSI, and ULH&P /s/ James E. Rogers Chairman, Chief Executive Officer, February 27, 2003 James E. Rogers and Director of Cinergy Corp., /s/ R. Foster Duncan Executive Vice President and Chief February 27, 2003 R. Foster Duncan Financial Officer of Cinergy Corp., /s/ Bernard F. Roberts Vice President and Comptroller of February 27, 2003 Bernard F. Roberts Cinergy Corp., CG&E, PSI, and 219 * The undersigned, by signing his name hereto, does hereby execute this Form 10-K on behalf of the officers and /s/ James E. Rogers James E. Rogers February 27, 2003 /s/ R. Foster Duncan R. Foster Duncan February 27, 2003 220 I, James E. Rogers, 1. I have reviewed this annual report on Form 10-K of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this annual report; 4. The registrants’ other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrants and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrants’ disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrants’ other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants’ ability to record, process, summarize and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal controls; and 6. The registrants’ other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of Date: February 27, 2003 /s/ James E. Rogers Chief Executive Officer 221 I, R. Foster Duncan, certify that: 1. I have reviewed this annual report on Form 10-K of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this annual report; 4. The registrants’ other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrants and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrants’ disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrants’ other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants’ ability to record, process, summarize and report financial data and have identified for the registrants’ auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal controls; and 6. The registrants’ other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 27, 2003 /s/ R. Foster Duncan Chief Financial Officer 222 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||