UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(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, 2004

 

or

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

For the transition period from                    to                   

 

 

Each of the following classes or series of securities registered pursuant to Section 12(b) of the Act is registered on the New York Stock Exchange:

 

 

 

Securities registered pursuant to Section 12(g) of the 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 ý    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’ 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.  o

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 meets the conditions set forth in General Instruction 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) of Form 10-K.

Indicate by check mark whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

	Cinergy Corp.	Yes	ý	No	o
	The Cincinnati Gas & Electric Company	Yes	o	No	ý
	PSI Energy, Inc.	Yes	o	No	ý
	The Union Light, Heat and Power Company	Yes	o	No	ý

As of June 30, 2004, the aggregate market value of the common equity of Cinergy Corp. held by non-affiliates (shareholders who are not directors or executive officers) was $6.8 billion.  All of the common stock of The Cincinnati Gas & Electric Company and PSI Energy, Inc. is owned by Cinergy Corp., and all of the common stock of The Union Light, Heat and Power Company is owned by The Cincinnati Gas & Electric Company.  As of January 31, 2005, each registrant had the following shares of common stock outstanding:

 

Registrant		Description		Shares
Cinergy Corp.		Par value $.01 per share		191,404,406
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

 

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DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement of Cinergy Corp. and the Information Statement of PSI Energy, Inc. to be filed with the Securities and Exchange Commission in 2005 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.  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 registrants other than itself.

 

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CAUTIONARY STATEMENTS

 

In this report Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we”, “our”, or “us”.

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements are based on management’s beliefs and assumptions.  These forward-looking statements are identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similar expressions.

 

Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted.  Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

 

•                  Factors affecting operations, such as:

(1)          unanticipated weather conditions;

(2)          unscheduled generation outages;

(3)          unusual maintenance or repairs;

(4)          unanticipated changes in costs;

(5)          environmental incidents; and

(6)          electric transmission or gas pipeline system constraints.

 

•                  Legislative and regulatory initiatives and legal developments.

•                  Additional competition in electric or gas markets and continued industry consolidation.

•                  Financial or regulatory accounting principles including costs of compliance with existing and future environmental requirements.

•                  Changing market conditions and other factors related to physical energy and financial trading activities.

•                  The performance of projects undertaken by our non-regulated businesses and the success of efforts to invest in and develop new opportunities.

•                  Availability of, or cost of, capital.

•                  Employee workforce factors.

•                  Delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures.

•                  Costs and effects of legal and administrative proceedings, settlements, investigations, and claims.

We undertake no obligation to update the information contained herein.

 

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BUSINESS

PART I

ITEM 1.  BUSINESS

WEBSITE ACCESS TO REPORTS

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 material with, or furnish it to, the Securities and Exchange Commission (SEC).

 

ORGANIZATION

Cinergy Corp., a Delaware corporation organized in 1993, owns all outstanding common stock of The Cincinnati Gas & Electric Company (CG&E) and PSI Energy, Inc. (PSI), both of which are public utilities.  As a result of this ownership, we are considered a utility holding company.  Because we are a holding company with material utility subsidiaries operating in multiple states, we are registered with and are subject to regulation by the SEC under the Public Utility Holding Company Act of 1935, as amended.  Our other principal subsidiaries are Cinergy Services, Inc. (Services) and Cinergy Investments, Inc. (Investments).

 

CG&E, an Ohio corporation organized in 1837, is a combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through The Union Light, Heat and Power Company (ULH&P), in nearby areas of Kentucky.  CG&E is responsible for the majority of our power marketing and trading activity.  CG&E’s principal subsidiary, ULH&P, a Kentucky corporation organized in 1901, provides electric and gas service in northern Kentucky.

 

CG&E is in a market development period for residential customers and in the competitive retail electric market for non-residential customers, transitioning to deregulation of electric generation and a competitive retail electric service market in the state of Ohio.  Applicable legislation governing the transition period provides for a market development (frozen rate) period that began January 1, 2001, ended December 31, 2004 for non-residential customers and is scheduled to end December 31, 2005 for residential customers.  At the end of these market development periods, CG&E will not implement market rates, but rather a rate stabilization plan (RSP) approved by the Public Utilities Commission of Ohio (PUCO) that covers the period after the market development period through 2008.  The RSP, among other things, increases rates for environmental costs and capacity reserves and provides for a fuel and emission allowance tracker through 2008.  See “Electric Industry” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)” for the various filings that led to the PUCO’s approval of CG&E’s RSP, further details of the plan, and a discussion of key elements of Ohio deregulation.

 

PSI, an Indiana corporation organized in 1942, is a vertically integrated and regulated electric utility that provides service in north central, central, and southern Indiana.

 

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The following table presents further information related to the operations of our domestic utility companies, CG&E, PSI, and ULH&P (our utility operating companies):

 

		Principal Line(s) of Business		Major Cities Served		Approximate Population Served
CG&E and subsidiaries		•   Generation, transmission, distribution, and sale of electricity       •   Sale and/or transportation of natural gas •   Electric commodity marketing and trading operations		Cincinnati, OH Middletown, OH Covington, KY Florence, KY Newport, KY		2,064,000
PSI		•   Generation, transmission, distribution, and sale of electricity		Bloomington, IN Carmel, IN Columbus, IN Kokomo, IN Lafayette, IN New Albany, IN Terre Haute, IN		2,283,000
ULH&P(1)		•   Transmission, distribution, and sale of electricity   •   Sale and transportation of natural gas		Covington, KY Florence, KY Newport, KY		345,000

 

(1)   See “Generation — Fuel Supply and Emission Allowances” under the “Regulated” section for further discussion of the possible transfer of generation assets.

 

Services is a service company that provides our subsidiaries with a variety of centralized administrative, management, and support services.  Investments holds most of our non-regulated, energy-related businesses and investments, including natural gas marketing and trading operations (which are primarily conducted through Cinergy Marketing and Trading, LP (Marketing & Trading), one of its subsidiaries).

 

BUSINESS SEGMENTS

We conduct operations through our subsidiaries and manage our businesses through the following three reportable segments:

 

•                  Commercial Business Unit (Commercial);

•                  Regulated Business Unit (Regulated); and

•                  Power Technology and Infrastructure Services Business Unit (Power Technology and Infrastructure).

 

The following section describes the activities of our business segments as of December 31, 2004.

 

See Note 16 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for financial information by business segment.

 

Commercial

Commercial manages our wholesale generation and energy marketing and trading activities.  Commercial’s wholesale generation consists of CG&E’s electric generation in Ohio due to Ohio’s transition to deregulation of electric generation and a competitive retail service market.  See “Electric Industry” in “Item 7. MD&A” for further detail of key elements of Ohio deregulation.  Commercial also performs energy risk management activities, provides

 

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customized energy solutions and is responsible for all of our international operations.  See the “Market Risk Sensitive Instruments” section of “Item 7. MD&A” for information on risks associated with these activities.

 

Detail of Commercial’s operations can be found in the following sections:

 

•                  Generation — Fuel Supply and Emission Allowances — Describes Commercial’s generation capacity, sources of fuel, and its various cost recovery mechanisms;

•                  Trading Operations and Risk Management — Describes Commercial’s energy marketing and trading activities in the United States and Canada;

•                  Competition — Describes the key competitors to Commercial’s various business operations;

•                  Energy Services — Describes Commercial’s operations consulting services and its operation of a synthetic fuel production facility;

•                  International — Describes Commercial’s operations outside of the United States; and

•                  Revenue Data and Customer Base — Describes the primary revenue generators for the various business operations of Commercial.

 

Generation — Fuel Supply and Emission Allowances

As of December 31, 2004, the total winter electric capacity (including our portion of the total capacity for the jointly-owned plants) of Commercial’s domestic generating plants was 6,276 megawatts (MW).  Approximately 67 percent of this generation portfolio is coal-fired.  See “Item 2.  Properties” for further discussion of the generating facilities.

 

Each year CG&E purchases over 10 million tons of coal to generate electricity, primarily from mines located in Indiana, West Virginia, Ohio, Kentucky, Pennsylvania, Illinois, and Colorado.  The price of coal has increased dramatically in 2004 as compared to 2003.  Contributing to the rise in the price of coal are (1) increases in demand for electricity, (2) environmental regulation, and (3) decreases in the number of suppliers of coal from prior years.  To help mitigate the price fluctuation of coal, Cinergy has a general practice to procure a substantial portion of coal through fixed-price contracts of varying length.  We hold fixed-price contracts that will source a substantial portion of our expected 2005 coal requirements.  We evaluate the appropriate amount of contract coal and length of contracts based on market conditions, including pricing trends, volatility and supplier reliability.  See “Contractual Cash Obligations” in “Item 7. MD&A” for further detail on CG&E’s total commitment under fixed-price coal contracts.

 

Commercial has natural gas-fired peaking plants that have a capacity of 1,766 MW.  The fuel for these units is primarily obtained through the natural gas spot market as it is difficult to forecast the natural gas requirements for these plants.  For further information on the risk of purchasing natural gas, see the “Market Risk Sensitive Instruments” section of “Item 7. MD&A”.

 

A 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.

 

Commercial monitors alternative sources of coal and natural gas to assure a continuing availability of economical fuel supplies.  As such, it will maintain its practice of purchasing a portion of coal and natural gas requirements on the open market and will continue to investigate least-cost coal options to comply with new and existing environmental requirements.  Cinergy and CG&E believe that they can continue to obtain enough coal and natural gas to meet future needs.  However, future environmental requirements may significantly impact the availability and price of these fuels.

 

At times, Commercial purchases power to meet the energy needs of its customers.  Factors that could cause Commercial to purchase power for its customers include generating plant outages, extreme weather conditions, summer reliability, growth, and price.  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.

 

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Commercial emits sulfur dioxide (SO₂) and nitrogen oxides (NO_X) in the generation of electricity and maintains emission allowances to offset their emissions in order to comply with NO_X and SO₂ emission reduction requirements.  In 2004, the market prices of SO₂ allowances rose more than 200 percent from 2003.  Cinergy is continually evaluating market conditions and managing our overall cost structure through the addition of pollution control equipment, where economically feasible, and the use of emission allowance markets to help manage our emissions costs.

 

Under CG&E’s new RSP, retail fuel and emission allowance costs will be recovered through a cost tracking mechanism that recovers costs that exceed the amount originally included in the rates frozen in CG&E’s earlier transition plan.  CG&E will recover retail fuel and emission allowance costs consumed in serving retail load and collect a Provider of Last Resort charge from non-residential customers from 2005 through 2008 and from residential customers from 2006 through 2008.  See “Electric Industry” in “Item 7. MD&A” for further detail of CG&E’s RSP.

 

Trading Operations and Risk Management

Commercial’s energy marketing and trading activities principally consist of Marketing & Trading’s natural gas marketing and trading operations and CG&E’s power marketing and trading operations.  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 CG&E only.  Historically, such contracts were executed on behalf of CG&E and PSI jointly.

 

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 United States), natural gas, and other energy-related products, including coal and emission allowances.  Our natural gas domestic operations provide services that manage storage, transportation, gathering, and processing activities.  In addition, our domestic operations also market and trade natural gas and other energy-related products on the New York Mercantile Exchange.

 

Marketing & Trading’s natural gas marketing and trading operations also extend to Canada where natural gas marketing and management services are provided to producers and industrial customers.  Our Canadian operations also market and trade over-the-counter contracts.

 

See the “Market Risk Sensitive Instruments” section of “Item 7. MD&A” for information on risks associated with these activities.

 

Competition

 

Commercial competes for wholesale contracts for the purchase and sale of electricity and natural gas.  Commercial’s main competitors include public utilities, power and natural gas marketers and traders, and independent power producers.

 

Energy Services

Commercial, through Cinergy Solutions Holding Company, Inc., is an on-site energy solutions and utility services provider.  We provide utility systems construction, operation and maintenance of utility facilities, energy efficiencies and conservation consulting services, as well as cogeneration.  Cogeneration is the simultaneous production of two or more forms of useable energy from a single fuel source.

 

Commercial, through Cinergy Capital & Trading, Inc., owns a coal-based synthetic fuel production facility which converts coal feedstock into synthetic fuel for sale to a third party.  As of December 31, 2004, Cinergy has produced and sold approximately 7.8 million tons of synthetic fuel at this facility.  The synthetic fuel produced at this facility qualifies for tax credits (through 2007) in accordance with the Internal Revenue Code Section 29 if certain requirements are satisfied.  The three key requirements are that (a) the synthetic fuel differs significantly in chemical composition from the coal used to produce such synthetic fuel, (b) the fuel produced is sold to an unrelated entity

 

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and (c) the fuel was produced from a facility that was placed in service before July 1, 1998.  For further information on the tax credit qualifications see Note 11(c)(iv) of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data”.

 

International

As of December 31, 2004, we had ownership interests in (1) generation assets located in three countries capable of producing approximately 150 MW of electricity and 700 MW equivalents of steam; and (2) approximately 1,200 miles of gas and electric transmission and distribution systems through jointly-owned investments in two countries, through which we serve approximately 8,500 transmission and distribution customers.  These assets serve retail and wholesale customers by providing utility services including generation of electricity and heat as well as the distribution of gas and electric commodities.

 

Revenue Data and Customer Base

Commercial primarily recognizes revenues from generation provided to customers in CG&E’s service territory who have not switched to an alternative generation supplier under Ohio’s electric deregulation market.  Because rates are frozen during the market development period in Ohio, the majority of these revenues are under a fixed-price tariff.  Under the Ohio customer choice program, CG&E’s retail customers may choose their electric supplier.  The percentage of customers switching to other electric suppliers and the related volume by customer class was as follows:

 

 

						MW Hours For the				Switching
		MW at December 31				Years Ended December 31				Percentage at December 31(1)
Revenue Class		2004		2003		2004		2003		2004		2003
Residential		75		92		334,224		283,477		4.07	%	5.17	%
Commercial		339		374		1,722,822		1,654,061		19.17	%	21.55	%
Industrial		226		295		1,376,210		1,591,345		17.89	%	23.60	%
Other Public Authorities		89		91		284,214		265,039		19.09	%	19.95	%
Total		729		852		3,717,470		3,793,922

 

(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 (see Regulated section for further information).  During the market development period, the reduction in revenues due to customer switching is mitigated by wholesale power sales from the freed-up generation capacity.  For further discussion on Ohio deregulation and the recently approved RSP see “Electric Industry” in “Item 7. MD&A”.

 

Commercial’s operating revenue is also derived by providing electricity at wholesale and trading electricity primarily in the midwest region of the United States.  In addition, Commercial provides and trades natural gas primarily to wholesale customers across the United States.  The majority of these customers are public utilities, power and natural gas marketers and traders, and independent power producers.

 

Energy services operating revenues are derived primarily by providing steam, electricity, and operation and maintenance services to large industrial customers. 

 

No single Commercial customer provides more than 10 percent of total operating revenues.

 

Regulated

Regulated consists of PSI’s regulated generation and transmission and distribution operations, and CG&E and its subsidiaries’ regulated electric and gas transmission and distribution systems.  Regulated plans, constructs, operates, and maintains Cinergy’s transmission and distribution systems and delivers gas and electric energy to consumers.  Regulated also earns revenues from wholesale customers primarily by these customers transmitting electric power

 

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through Cinergy’s transmission system.  These businesses are subject to cost of service rate making where rates to be charged to customers are based on prudently incurred costs over a test period plus a reasonable rate of return.  Regulated operated approximately 48,000 circuit miles (the total length in miles of separate circuits) of electric lines to provide regulated transmission and distribution service to approximately 1.5 million customers as of December 31, 2004.  Regulated operated approximately 9,226 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, 2004.  See “Item 2.  Properties” for a further discussion of the transmission and distribution systems owned by our utility operating companies.

 

Detail of Regulated’s operations can be found in the following sections:

 

•                  Generation - - Fuel Supply and Emission Allowances — Describes Regulated’s generation capacity, sources of fuel, and its various cost recovery mechanisms;

•                  Transmission and Distribution — Describes Regulated’s agreements with the regional utilities and regional transmission organization (RTO) that coordinate the planning and operation of generation and transmission facilities and the associated cost recovery mechanisms;

•                  Gas Supply — Describes Regulated’s responsibility to purchase and deliver natural gas to native load (the total requirements of a wholesale utility’s franchised retail market) customers and the mechanisms used to fulfill their responsibility; and

•                  Revenue Data and Customer Base — Describes the primary revenue generators for the various business operations of Regulated.

 

Generation - - Fuel Supply and Emission Allowances

As of December 31, 2004, the total winter electric capacity (including our portion of the total capacity for the jointly-owned plants) of Regulated’s generating plants was 7,055 MW.  Approximately 78 percent of this generation portfolio is coal-fired.  See “Item 2.  Properties” for a further discussion of the generating facilities.

 

Each year PSI purchases over 15 million tons of coal to generate electricity, primarily from mines located in Indiana, Pennsylvania, and Illinois.  The price of coal has increased dramatically in 2004 as compared to 2003.  The primary driving forces behind the increase in coal prices are (1) increases in demand for electricity, (2) environmental regulation, and (3) decreases in the number of suppliers of coal from prior years.  To help mitigate the price fluctuation of coal, Cinergy has a general practice to procure a substantial portion of coal through fixed-price contracts of varying length.  We hold fixed-price contracts that will source a substantial portion of our expected 2005 coal requirements.  We evaluate the appropriate amount of contract coal and length of contracts based on market conditions, including pricing trends, volatility and supplier reliability.  See “Contractual Cash Obligations” in “Item 7. MD&A” for further detail on PSI’s total commitment under fixed-price coal contracts.

 

Regulated has natural gas-fired peaking plants that have a capacity of 1,263 MW.  The fuel for these units is primarily obtained through the natural gas spot market as it is difficult to forecast the natural gas requirements for these plants.  For further information on the risk of purchasing natural gas see the “Market Risk Sensitive Instruments” section of “Item 7. MD&A”.

 

A 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.

 

At times, Regulated purchases power to meet the energy needs of its customers.  Factors that could cause Regulated to purchase power for its customers include generating plant outages, extreme weather conditions, summer reliability, growth, and price.  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.

 

ULH&P purchases energy from CG&E pursuant to a contract effective January 1, 2002, which was approved by the Federal Energy Regulatory Commission (FERC) and the Kentucky Public Service Commission (KPSC).  This five-year agreement is a negotiated fixed-rate contract with CG&E.

 

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The KPSC has conditionally approved a long-term electric supply plan for ULH&P that will replace the current contract with CG&E as previously discussed.  Under this new plan, CG&E will transfer ownership of approximately 1,100 MW of electric generating capacity to ULH&P.  The capacity is currently part of CG&E’s generating assets used to service ULH&P under a multi-year wholesale power supply contract as previously discussed.  ULH&P is currently seeking approval of the transaction from the SEC, wherein the Ohio Consumers Counsel has intervened in opposition, and the FERC.  The transfer, which will be paid for at net book value, will not affect current electric rates for ULH&P’s customers, as power will be provided under the same terms as under the current wholesale power contract with CG&E through December 31, 2006. Assuming receipt of regulatory approvals, we would anticipate the transfer to take place in the second quarter of 2005.

 

Cinergy is studying the feasibility of constructing a commercial integrated coal gasification combined cycle (IGCC) generating station to help meet increased demand over the next decade.  PSI would own all or part of the facility and operate it.  Cinergy will partner with Bechtel Corporation and General Electric Company to complete this study.  An IGCC plant turns coal to gas, removing most of the SO₂ and other emissions before the gas is used to fuel a combustion turbine generator.  The technology uses less water and has fewer emissions than a conventional coal-fired plant with currently required pollution control equipment.  Another benefit is the potential to remove mercury and carbon dioxide (CO₂) upstream of the combustion process at a lower cost than conventional plants.  If a decision is reached to move forward with constructing such a plant, PSI would seek approval from the Indiana Utility Regulatory Commission (IURC) to begin construction.  If approved, we would anticipate the IURC’s subsequent approval to include the assets in PSI’s rate base.

 

Regulated monitors alternative sources of coal and natural gas to assure a continuing availability of economical fuel supplies.  As such, it will maintain its practice of purchasing a portion of coal and natural gas requirements on the open market and will continue to investigate least-cost coal options to comply with new and existing environmental requirements.  Cinergy and PSI believe that they can continue to obtain enough coal and natural gas to meet future needs.  However, future environmental requirements may significantly impact the availability and price of these fuels.

 

PSI recovers retail and a portion of its wholesale fuel costs from customers on a dollar-for-dollar basis through a cost tracking recovery mechanism (commonly referred to as a fuel adjustment clause). In addition to the fuel adjustment clause, PSI utilizes a purchased power tracking mechanism approved by the IURC for the recovery of costs related to certain specified purchases of power necessary to meet native load peak demand requirements to the extent such costs are not recovered through the existing fuel adjustment clause.

 

Regulated emits SO₂ and NO_X in the generation of electricity and maintains emission allowances to offset their emissions in order to comply with NO_X and SO₂ emission reduction requirements.  In 2004, the market prices of SO₂ allowances rose more than 200 percent from 2003.  PSI utilizes a cost tracking mechanism as approved by the IURC allowing it to recover substantially all of its emission allowance costs from its customers.  Cinergy is continually evaluating market conditions and managing our overall cost structure through the addition of pollution control equipment, where economically feasible, and the use of emission allowance markets to help manage our emissions costs.

 

Transmission and Distribution

Cinergy (through our utility operating companies) and other non-affiliated utilities in a nine-state region are parties to the East Central Area Reliability Coordination (ECAR) Agreement.  Through the ECAR Agreement, ECAR supports the planning and operation of generation and transmission facilities, which provides for reliability of regional bulk power supply.

 

Cinergy (through our utility operating companies) is also a member of the Midwest Independent Transmission System Operator, Inc. (Midwest ISO), a RTO established in 1998 as a non-profit organization which maintains functional control over the combined transmission systems of its members.

 

The Midwest ISO is the provider for transmission service requested on the transmission facilities under its tariff.  It is responsible for the reliable operation of those transmission facilities and the regional planning of new

 

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transmission facilities.  The Midwest ISO also will administer energy markets utilizing Locational Marginal Pricing (i.e., the energy price for the next MW may vary throughout the Midwest ISO market based on transmission congestion and energy losses) as the methodology for relieving congestion on the transmission facilities under its functional control.  ECAR will maintain the responsibility for establishing the level of operating reserves for those utilities participating in the ECAR Agreement and the operation of the Automatic Reserve Sharing system upon the Midwest ISO’s implementation of its Energy Markets Tariff.  See “Electric Industry” in “Item 7. MD&A” for further detail regarding the Midwest ISO energy markets.

 

Transmission and Distribution Cost Recovery

Transmission cost recovery mechanisms will be established under CG&E’s new RSP to, among other things, permit CG&E to recover Midwest ISO charges.  CG&E also plans to file a distribution rate case to recover certain distribution costs with rates to become effective January 1, 2006 and has deferred certain costs in 2004 and will defer costs in 2005 pursuant to its RSP.  See “Electric Industry” in “Item 7. MD&A” for further detail of CG&E’s RSP.

 

PSI has received IURC approval for the recovery of Midwest ISO costs and is currently seeking IURC approval that would further define the mechanisms for recovery of such costs.

 

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Transmission System Interconnections

The following map illustrates the interconnections between our electric systems and other electric systems.

 

 

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Gas Supply

Regulated is responsible for the purchase and the subsequent delivery of natural gas to native load customers.  Regulated’s natural gas procurement strategy is to buy firm natural gas supplies (natural gas intended to be available at all times) and firm interstate pipeline transportation capacity during the winter season (November through March) and during the non-heating season (April through October) through a combination of firm supply and transportation capacity along with spot supply and interruptible transportation capacity.  This strategy allows Regulated to assure reliable natural gas supply for its high priority (non-curtailable) firm customers during peak winter conditions and provides Regulated the flexibility to reduce its contract commitments if firm customers choose alternate gas suppliers under Regulated’s customer choice/gas transportation programs.  In 2004, firm supply purchase commitment agreements provided approximately 63 percent of 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 changing weather conditions.

 

Regulated manages natural gas procurement-price volatility mitigation programs for CG&E and ULH&P.  These programs pre-arrange between 20-75 percent of winter heating season base load gas requirements and up to 50 percent of summer season base load requirements.  CG&E and ULH&P use primarily fixed-price forward contracts and contracts with a ceiling and floor on the price.  As of December 31, 2004, CG&E and ULH&P, combined, had hedged approximately 60 percent of their winter 2004/2005 base load requirements.  See the “Gas Industry” section of “Item 7. MD&A” 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 majority of the gas supply comes from the Gulf of Mexico coastal areas of Texas and Louisiana.

 

Revenue Data and Customer Base

Regulated’s generation revenue is derived from the fulfillment of its native load requirements.  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:

 

		Operating Revenues
Registrant		2004				2003				2002
		Electric		Gas		Electric		Gas		Electric		Gas
Cinergy		76	%	24	%	76	%	24	%	81	%	19	%
CG&E and subsidiaries		45		55		46		54		56		44
PSI		100		—		100		—		100		—
ULH&P		65		35		67		33		74		26

 

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 retail customer provides more than 10 percent of total operating revenues (electric or gas) for Regulated.

 

Power Technology and Infrastructure

Power Technology and Infrastructure primarily manages Cinergy Ventures, LLC (Ventures), Cinergy’s venture capital subsidiary.  Ventures identifies, invests in, and integrates new energy technologies into Cinergy’s existing businesses, focused primarily on operational efficiencies and clean energy technologies.  In addition, Power

 

15

 

Technology and Infrastructure manages our investments in other energy infrastructure and telecommunication service providers.

 

In March 2004, Cinergy announced that it would begin offering broadband over power line (BPL) services in the Cincinnati, Ohio area.  BPL utilizes the low and medium voltage distribution lines of Cinergy to transmit high speed data and other digital information to and from the internet via home electrical outlets and can be used for monitoring utility infrastructure.  These services are being offered through joint ventures created by Ventures and Current Communications Group LLC, marketing to Cinergy service territory and municipal and co-op utilities throughout the United States.  Ventures has invested approximately $18 million to date.

 

EMPLOYEES  

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), and various international union organizations.

 

The following table indicates the number of employees by classification at January 31, 2005:

 

Classification		CG&E(4)		PSI		ULH&P		Cinergy(5)
IBEW(1)		1,018		1,218		60		2,546
USWA(2)		280		—		79		398
UWUA(3)		387		—		58		768
Various Union Organizations		—		—		—		355
Non-Bargaining		198		354		19		3,775
		1,883		1,572		216		7,842

 

(1)   IBEW #1347 contract will expire on April 1, 2006, IBEW #1393 contract will expire on May 1, 2005, and IBEW #352 contract expired on February 5, 2005 and was replaced with a new contract set to expire on February 5, 2008.

(2)   USWA #12049 and #5541-06 contracts will expire on May 15, 2007.

(3)   Contract will expire on March 31, 2005.

(4)   CG&E and subsidiaries excluding ULH&P.

(5)   Includes 3,154 Services’ employees who provide services to our operating utilities and other non-regulated companies.

 

ENVIRONMENTAL MATTERS

Cinergy is currently affected by several different issues which involve compliance with federal and state regulations regarding the protection of the environment including, but not limited to, reductions in mercury, NO_X, and SO₂ emissions.  Cinergy is able to recover certain costs of this environmental compliance equipment through various trackers set up with Cinergy’s respective state regulatory agencies.  See the “Environmental Issues” section in “Item 7. MD&A” for a discussion of these environmental issues and the estimated capital expenditures.

 

FUTURE EXPECTATIONS/TRENDS

See the information appearing under the same caption in “Item 7. MD&A” for the following discussions:

 

•                  Regulatory Outlook and Significant Rate Developments;

•                  FERC and Midwest ISO;

•                  Gas Industry; and

•                  Other Matters.

 

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PROPERTIES

 

ITEM 2.  PROPERTIES

COMMERCIAL BUSINESS UNIT (COMMERCIAL)

Electric

Domestic Power Generation

Commercial’s domestic power generating stations’ total winter electric capacity, reflected in megawatts (MW), as of December 31, 2004, are shown in the table that follows.  Commercial’s electric generating plants are primarily located in Ohio and Kentucky and are wholly-owned or jointly-owned facilities.

 

						Natural
				Coal		Gas		Oil		Total
Commercial(1)		Stations		MW		MW		MW		MW
The Cincinnati Gas & Electric Company (CG&E)		9		4,186		736		324		5,246
Cinergy Investments, Inc. (Investments)(2)		2		—		1,030		—		1,030
Total		11		4,186		1,766		324		6,276

 

(1)   This table includes only our portion of the total capacity for the jointly-owned plants.

(2)   Represents natural gas peaking plants located in Tennessee and Mississippi, owned by Investments, that sell electricity on the wholesale market.

 

During 2004, Commercial’s electric generating plants, including those that we own but do not operate, performed reliably, as evidenced by our annual capacity factor of 68 percent and a utilization factor of 83 percent (excluding natural gas and fuel oil peaking stations) and an equivalent availability factor of 84 percent.  A capacity factor is a percentage that indicates how much of a power plant’s capacity is used over time.  A utilization factor is a percentage that indicates how much of a power plant’s capacity is used while being available.  An equivalent availability factor is a percentage that indicates how much of a unit is available to generate compared to its potential maximum generation.

 

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Below is a geographical map showing the locations of Commercial’s generation plants.

 

 

 

(1)   Commercial’s generation plant not included in the map is located in Caledonia, Mississippi.

 

Cogeneration

As of December 31, 2004, Cinergy had ownership interests in and/or operated 27 domestic cogeneration facilities capable of producing 5,357 MW of electricity, 4,303 MW equivalents of steam and 236 MW equivalents of chilled water.  Cogeneration is the simultaneous production of two or more forms of useable energy from a single fuel source.  During 2005, Cinergy anticipates completion of an expansion at one of our existing cogeneration facilities, which is expected to provide an additional 70 MW equivalents of steam and 42 MW equivalents of chilled water.

 

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Synthetic Fuel

Cinergy Capital & Trading, Inc. owns a coal-based synthetic fuel production facility, which converts coal into synthetic fuel for sale to a third party.  See “Synthetic Fuel Production” in “Item 7. MD&A” for additional information regarding this business initiative.

 

International

As of December 31, 2004, we had ownership interests in (1) generation assets located in three countries capable of producing approximately 150 MW of electricity and 700 MW equivalents of steam; and (2) approximately 1,200 miles of gas and electric transmission and distribution systems through jointly-owned investments in two countries, through which we serve approximately 8,500 transmission and distribution customers.  These assets serve retail and wholesale customers by providing utility services including generation of electricity and heat as well as the distribution of gas and electric commodities.

 

REGULATED BUSINESS UNIT (REGULATED)

Electric

Domestic Power Generation

Regulated’s domestic power generating stations’ total winter electric capacity, reflected in MW, as of December 31, 2004, are shown in the table that follows.  The electric generating plants are located in Indiana and Ohio and are wholly-owned or jointly-owned facilities.

 

Natural

Coal

Gas

Oil

Hydro

Total

Regulated(1)

Stations

MW

MW

MW

MW

MW

PSI

11

5,488

1,263

259

45

7,055

 

(1)   This table includes only our portion of the total capacity for the jointly-owned plants.

 

During 2004, Regulated’s electric generating plants, including those that we own but do not operate, performed reliably, as evidenced by our annual capacity factor of 74 percent and a utilization factor of 85 percent (excluding natural gas and fuel oil peaking stations) and an equivalent availability factor of 89 percent.  A capacity factor is a percentage that indicates how much of a power plant’s capacity is used over time.  A utilization factor is a percentage that indicates how much of a power plant’s capacity is used while being available.  An equivalent availability factor is a percentage that indicates how much of a unit is available to generate compared to its potential maximum generation.

 

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Below is a geographical map showing the locations of Regulated’s generation plants.

 

 

 

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Transmission and Distribution

Relevant information for our utility operating companies’ electric transmission and distribution systems located in Ohio, Kentucky, and Indiana is as follows:

 

		Electric		Electric		Substation
		Transmission		Distribution		Combined
Registrant		Systems		Systems		Capacity
		(circuit miles)		(circuit miles)		(kilovolt-amperes)(1)
CG&E and subsidiaries
CG&E		1,561		16,743		21,121,288
The Union Light, Heat and Power Company (ULH&P)		106		2,883		1,419,878
Other subsidiaries		40		—		—
Total CG&E and subsidiaries		1,707		19,626		22,541,166
PSI Energy, Inc. (PSI)		5,354		20,917		30,569,289
Total		7,061		40,543		53,110,455

 

(1)   Kilovolt-amperes (1,000 volt-amperes) are a broad measure of our substation transformer capacity.

 

At the end of 2004, our utility operating companies’ electric systems were interconnected with 14 other utilities.  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 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.  The Midwest Independent Transmission System Operator, Inc. (Midwest ISO) holds functional control of Regulated’s transmission systems.

 

Gas

As of December 31, 2004, the natural gas transmission and distribution systems of Cinergy and CG&E and its subsidiaries had approximately 9,226 miles of mains and service lines located in southwestern Ohio and northern Kentucky.  Cinergy and 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 18.7 million gallons belongs to CG&E, including 7.5 million gallons belonging to ULH&P).  As of December 31, 2004, Cinergy had 16.6 million gallons of liquid propane in storage (of which 14.4 million gallons belongs to CG&E, including 5.8 million gallons belonging 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.

 

PEAK LOAD

In July 2004, we experienced peak loads for the year of 10,911 MW, 4,998 MW, and 6,000 MW for Cinergy, CG&E, and PSI, respectively.  Cinergy and CG&E set record peak loads of 11,305 MW and 5,311 MW in August 2002, respectively, while PSI set a record peak load of 6,088 MW in July 2002.

 

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LEGAL PROCEEDINGS

 

ITEM 3.  LEGAL PROCEEDINGS

CLEAN AIR ACT (CAA) LAWSUIT

In November 1999, and through subsequent amendments, the United States brought a lawsuit in the United States Federal District Court for the Southern District of Indiana (District Court) against Cinergy, CG&E, and PSI alleging various violations of the CAA.  Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana State Implementation Plans (SIP) permits for various projects at our owned and co-owned generating stations.  Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the Environmental Protection Agency (EPA) and Cinergy relating to alleged violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Generating Station (Beckjord Station).  The suit seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s Beckjord Station and Miami Fort Station, and PSI’s Cayuga Generating Station, Gallagher Generating Station, Wabash River Generating Station, and Gibson Generating Station (Gibson Station), and (2) civil penalties in amounts of up to $27,500 per day for each violation.  In addition, three northeast states and two environmental groups have intervened in the case.  The case is currently in discovery, and the District Court has set the case for trial by jury commencing in February 2006.

 

In March 2000, the United States also filed in the District Court an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by Columbus Southern Power Company (CSP) and jointly-owned by CSP, The Dayton Power and Light Company (DP&L), and CG&E.  The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  This suit is being defended by CSP.  In April 2001, the District Court in that case ruled that the Government and the intervening plaintiff environmental groups cannot seek monetary damages for alleged violations that occurred prior to November 3, 1994; however, they are entitled to seek injunctive relief for such alleged violations.  Neither party appealed that decision.

 

In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a Notice of Violation (NOV) to DP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at a generating station operated by DP&L and jointly-owned by CG&E.  The NOV indicated the EPA may (1) issue an order requiring compliance with the requirements of the Ohio SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.  In September 2004, Marilyn Wall and the Sierra Club brought a lawsuit against Cinergy, DP&L and CSP for alleged violations of the CAA at this same generating station.

 

We are unable to predict whether resolution of these matters would have a material effect on our financial position or results of operations.  We intend to vigorously defend against these allegations.

 

CARBON DIOXIDE (CO₂) LAWSUIT

In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York brought a lawsuit in the United States District Court for the Southern District of New York against Cinergy, American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed in the United States District Court for the Southern District of New York against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’ emissions of CO₂ from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance.  The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO₂.  Plaintiffs are seeking an injunction requiring each defendant to cap its CO₂ emissions and then reduce them by a specified percentage each year for at least a decade.  Cinergy intends to defend these lawsuits vigorously in court and filed motions to dismiss with the other defendants in September 2004.  We are not able to predict whether resolution of these matters would have a material effect on our financial position or results of operations.

 

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SELECTIVE CATALYTIC REDUCTION UNITS (SCR) AT GIBSON GENERATING STATION

In May 2004, SCRs and other pollution control equipment became operational at Units 4 and 5 of PSI’s Gibson Station in accordance with compliance deadlines under the NO_X SIP Call.  In June and July 2004, Gibson Station temporarily shut down the equipment on these units due to a concern over an acid aerosol mist haze (plume) sometimes occurring in areas near the plant.  Portions of the plume from those units’ stacks appeared to break apart and descend to ground level at certain times under certain weather conditions.  As a result, and, working with the City of Mt. Carmel, Illinois, Illinois EPA, Indiana Department of Environmental Management (IDEM), EPA, and the State of Illinois, we developed a protocol regarding the use of the SCRs while we explored alternatives to address this issue.  After the protocol was finalized, the Illinois Attorney General brought an action in Wabash County Circuit Court against PSI seeking a preliminary injunction to enforce the protocol.  In August 2004, the court granted that preliminary injunction.  PSI is appealing that decision to the Fifth District Appellate Court, but we cannot predict the ultimate outcome of that appeal or of the underlying action by the Illinois Attorney General.

 

We will seek recovery of any related capital as well as increased emission allowance expenditures through the regulatory process.  We do not believe costs related to resolving this matter will have a material impact on our financial position or results of operations.

 

ZIMMER GENERATING STATION (ZIMMER STATION) LAWSUIT

In November 2004, a citizen of the Village of Moscow, Ohio, the town adjacent to CG&E’s Zimmer Station, brought a purported class action in the United States District Court for the Southern District of Ohio seeking monetary damages and injunctive relief against CG&E for alleged violations of the CAA, the Ohio SIP, Ohio laws against nuisance and common law nuisance.  CG&E filed a motion to dismiss the lawsuit on primarily procedural grounds and we intend to defend against these claims vigorously.  At this time, we cannot predict whether the outcome of this matter will have a material impact on our financial position or result of operations.

 

MANUFACTURED GAS PLANT (MGP) SITES

Coal tar residues, related hydrocarbons, and various metals have been found in at least 22 sites that PSI or its predecessors previously owned and sold in a series of transactions with Northern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc. (IGC).  The 22 sites are in the process of being studied and will be remediated, if necessary.  In 1998 NIPSCO, IGC, and PSI entered into Site Participation and Cost Sharing Agreements to allocate liability and responsibilities between them.  The IDEM oversees investigation and cleanup of all of these sites.  Thus far, PSI has primary responsibility for investigating, monitoring and, if necessary, remediating nine of these sites.  In December 2003, PSI entered into a voluntary remediation plan with the state of Indiana, providing a formal framework for the investigation and cleanup of the sites.

 

In April 1998, PSI filed suit in Hendricks County in the state of Indiana against its general liability insurance carriers.  PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites; or (2) pay PSI’s cost of defense.  The trial court issued a variety of rulings with respect to the claims and defenses in the litigation.  PSI appealed certain adverse rulings to the Indiana Court of Appeals and the appellate court remanded the case to the trial court.  PSI settled its claims with all but one of the insurance carriers in January 2005 prior to commencement of the trial.  With respect to the lone insurance carrier, a jury returned a verdict against PSI in February 2005.  PSI is considering whether to appeal this decision.  At the present time, PSI cannot predict the outcome of this litigation if it were to appeal the decision.

 

PSI has accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated.  We will continue to investigate and remediate the sites as outlined in the voluntary remediation plan.  As additional facts become known and investigation is completed, we will assess whether the likelihood of incurring additional costs becomes probable.  Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

 

CG&E and ULH&P have performed site assessments on certain of their sites where we believe MGP activities have occurred at some point in the past and have found no imminent risk to the environment.  At the present time,

 

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CG&E and ULH&P cannot predict whether investigation and/or remediation will be required in the future at any of these sites.

 

ASBESTOS CLAIM LITIGATION

CG&E and PSI have been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations.  Currently, there are approximately 100 pending lawsuits.  In these lawsuits, plaintiffs claim to have been exposed to asbestos-containing products in the course of their work at the CG&E and PSI generating stations.  The plaintiffs further claim that as the property owner of the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure.  A majority of the lawsuits to date have been brought against PSI.  The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.

 

Of these lawsuits, one case filed against PSI has been tried to verdict.  The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and a verdict for PSI on punitive damages.  PSI received an adverse ruling in its initial appeal of the negligence claim verdict, but the Indiana Supreme Court accepted the transfer of the case and heard oral argument in June 2004.  In addition, PSI has settled a number of other lawsuits for amounts, which neither individually nor in the aggregate, are material to PSI’s financial position or results of operations.

 

At this time, CG&E and PSI are not able to predict the ultimate outcome of these lawsuits or the impact on CG&E’s and PSI’s financial position or results of operations.

 

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

 

See Note 11 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further information regarding our commitments and contingencies.

 

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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 a vote of security holders of Cinergy, The Cincinnati Gas & Electric Company, or PSI Energy, Inc. during the fourth quarter of 2004.

 

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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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:

 

 

Cinergy Corp. holds all outstanding common stock of The Cincinnati Gas & Electric Company (CG&E) and PSI Energy, Inc. (PSI), and CG&E holds all of the common stock of The Union Light, Heat and Power Company (ULH&P).  Therefore, no public trading market exists for the common stock of CG&E, PSI, and ULH&P.

 

As of January 31, 2005, Cinergy Corp. had 45,628 shareholders of record.

 

Cinergy Corp. declared dividends on its common stock of $.47 and $.46 per share for each quarter of 2004 and 2003, respectively.  The quarterly dividends paid to Cinergy Corp. by CG&E and PSI, and to CG&E by ULH&P for the past two years were as follows:

 

 

On January 14, 2005, the Board of Directors of Cinergy Corp. declared dividends on its common stock of $.48 per share, payable February 15, 2005, to shareholders of record at the close of business on February 1, 2005.

 

See “Dividend Restrictions” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a brief description of the registrants’ common stock dividend restrictions.

 

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The number of shares (or units) provided in the table below represent shares exchanged in connection with employee option exercises and shares purchased by the plan trustee on behalf of the 401(k) Excess Plan.

 

Period		(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)			(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
October 1 — October 31		4,580		$	39.67		N/A		N/A
November 1 — November 30		2,288		$	39.45		N/A		N/A
December 1 — December 31		—		$	—		N/A		N/A

 

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SELECTED FINANCIAL DATA

 

ITEM 6.  SELECTED FINANCIAL DATA

		2004			2003			2002			2001			2000
		(in millions, except per share amounts)
Cinergy(1)
Results of Operations:
Operating revenues		$	4,688		$	4,416		$	4,059		$	3,950		$	3,752
Income before discontinued operations and cumulative effect of changes in accounting principles		401			435			397			457			400
Discontinued operations, net of tax(2)		—			9			(25		)	(15		)	(1		)
Cumulative effect of changes in accounting principles, net of tax(3)		—			26			(11		)	—			—
Net income		401			470			361			442			399
Per Share Data:
Earnings per common share (EPS) - basic:
Income before discontinued operations and cumulative effect of changes in accounting principles		2.22			2.46			2.37			2.87			2.52
Discontinued operations, net of tax(2)		—			0.05			(0.15		)	(0.09		)	(0.01		)
Cumulative effect of changes in accounting principles, net of tax(3)		—			0.15			(0.06		)	—			—
Net income		2.22			2.66			2.16			2.78			2.51
EPS - diluted:
Income before discontinued operations and cumulative effect of changes in accounting principles		2.18			2.43			2.34			2.84			2.51
Discontinued operations, net of tax(2)		—			0.05			(0.15		)	(0.09		)	(0.01		)
Cumulative effect of changes in accounting principles, net of tax(3)		—			0.15			(0.06		)	—			—
Net income		2.18			2.63			2.13			2.75			2.50
Cash dividends declared per share		1.88			1.84			1.80			1.80			1.80
Balance Sheet Data (at end of period):
Total assets from continuing operations		14,982			14,114			13,685			12,558			12,604
Total assets from discontinued operations		—			5			147			234			197
		14,982			14,119			13,832			12,792			12,801
Long-term debt (including amounts due within one year)		4,448			4,971			4,188			3,656			2,868
The Cincinnati Gas & Electric Company (CG&E)
Results of Operations:
Operating revenues		$	2,511		$	2,382		$	2,137		$	2,247		$	2,101
Income before cumulative effect of changes in accounting principles		257			300			264			327			267
Cumulative effect of changes in accounting principles, net of tax(4)		—			31			—			—			—
Net income		257			331			264			327			267
Balance Sheet Data (at end of period):
Total assets		6,232			5,809			5,751			5,559			6,182
Long-term debt (including amounts due within one year)		1,594			1,569			1,690			1,205			1,206
PSI Energy, Inc. (PSI)
Results of Operations:
Operating revenues		$	1,754		$	1,603		$	1,611		$	1,574		$	1,512
Income before cumulative effect of a change in accounting principle		165			134			214			162			135
Cumulative effect of a change in accounting principle, net of tax(5)		—			(1		)	—			—			—
Net income		165			133			214			162			135
Balance Sheet Data (at end of period):
Total assets		5,450			5,140			4,539			4,864			4,906
Long-term debt (including amounts due within one year)		1,874			1,720			1,372			1,348			1,113

 

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

(2)   See Note 14 of the “Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further explanation.

(3)   In 2003, Cinergy recognized a gain/(loss) on cumulative effect of changes in accounting principles of $39 million (net of tax) and $(13) million (net of tax) as a result of the reversal of accrued cost of removal for non-regulated generating assets and the change in accounting of certain energy related contracts from fair value to accrual.  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.

(4)   In 2003, CG&E recognized a gain/(loss) on cumulative effect of changes in accounting principles of $39 million (net of tax) and $(8) million (net of tax) as a result of the reversal of accrued cost of removal for non-regulated generating assets and the change in accounting of certain energy related contracts from fair value to accrual.

(5)   In 2003, PSI recognized a loss on cumulative effect of a change in accounting principle of $(1) million (net of tax) as a result of a change in accounting of certain energy related contracts from fair value to accrual.

 

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