______________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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
For the fiscal year ended December 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-11377
CINERGY CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1385023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
139 East Fourth Street
Cincinnati, Ohio 45202
(Address of principal executive offices)
Registrant's telephone number: (513) 381-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the 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 the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
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 registrant's 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. (x)
As of February 28, 1995, the aggregate market value of Common Stock held by
non-affiliates was $3.8 billion.
As of February 28, 1995, 155,835,207 shares of Common Stock, par value $.01
per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement of CINergy Corp. dated March 17, 1995, is incorporated by
reference into Part III of this report.
______________________________________________________________________________
CINERGY CORP.
TABLE OF CONTENTS
Item Page
Number Number
PART I
1 Business
Organization . . . . . . . . . . . . . . . . . . . . . . 3
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Energy . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investments. . . . . . . . . . . . . . . . . . . . . . . 4
CINergy Services . . . . . . . . . . . . . . . . . . . . 5
Customer, Sales, and Revenue Data. . . . . . . . . . . . 6
Financial Information by Business Segment. . . . . . . . 6
Regulation . . . . . . . . . . . . . . . . . . . . . . . 6
Rate Matters . . . . . . . . . . . . . . . . . . . . . . 7
Power Supply . . . . . . . . . . . . . . . . . . . . . . 7
Fuel Supply. . . . . . . . . . . . . . . . . . . . . . . 8
Gas Supply . . . . . . . . . . . . . . . . . . . . . . . 8
Competition. . . . . . . . . . . . . . . . . . . . . . . 9
Capital Requirements . . . . . . . . . . . . . . . . . . 9
Environmental Matters. . . . . . . . . . . . . . . . . . 9
Employees. . . . . . . . . . . . . . . . . . . . . . . . 9
2 Properties . . . . . . . . . . . . . . . . . . . . . . . . 10
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Energy . . . . . . . . . . . . . . . . . . . . . . . . . 11
ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Other Subsidiaries . . . . . . . . . . . . . . . . . . . 12
3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 12
Merger Litigation. . . . . . . . . . . . . . . . . . . . 12
Shareholder Litigation . . . . . . . . . . . . . . . . . 12
Fuel Litigation. . . . . . . . . . . . . . . . . . . . . 13
4 Submission of Matters to a Vote of Security Holders. . . . 13
Executive Officers of the Registrant . . . . . . . . . . . 14
PART II
5 Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . . 17
6 Selected Financial Data. . . . . . . . . . . . . . . . . . 18
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 19
Index to Financial Statements and Financial Statement
Schedules. . . . . . . . . . . . . . . . . . . . . . . . 44
8 Financial Statements and Supplementary Data. . . . . . . . 45
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . 86
PART III
10 Directors and Executive Officers of the Registrant . . . . 86
11 Executive Compensation . . . . . . . . . . . . . . . . . . 86
12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . 86
13 Certain Relationships and Related Transactions . . . . . . 86
PART IV
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Financial Statements and Schedules . . . . . . . . . . 87
Reports on Form 8-K. . . . . . . . . . . . . . . . . . 87
Exhibits . . . . . . . . . . . . . . . . . . . . . . . 87
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 94
PART I
ITEM 1. BUSINESS
Organization
CINergy Corp. (CINergy), a Delaware corporation, was created for the October
1994 merger of The Cincinnati Gas & Electric Company (CG&E) and PSI Resources,
Inc. (Resources) and is a registered holding company under the Public Utility
Holding Company Act of 1935 (PUHCA). The business combination was accounted
for as a pooling of interests. Following the merger, CINergy became the
parent holding company for CG&E, PSI Energy, Inc. (Energy), previously
Resources' utility subsidiary, CINergy Investments, Inc. (Investments), and
CINergy Services, Inc. (CINergy Services).
CINergy's two utility subsidiaries, CG&E and Energy, account for 99.7% of each
of CINergy's total operating revenues and CINergy's total assets.
CG&E
CG&E, an Ohio corporation, is an electric and gas public utility company with
four wholly-owned utility subsidiaries including The Union Light, Heat and
Power Company (ULH&P), Miami Power Corporation (Miami), The West Harrison Gas
and Electric Company (West Harrison), and Lawrenceburg Gas Company
(Lawrenceburg). In addition, CG&E has two non-utility subsidiaries, KO
Transmission Company (KO Transmission) and Tri-State Improvement Company (Tri-
State), both of which are wholly-owned.
CG&E and its utility subsidiaries are primarily engaged in the production,
transmission, distribution, and sale of electric energy and 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 1.8
million people, and includes the cities of Cincinnati and Middletown in Ohio,
Covington and Newport in Kentucky, and Lawrenceburg in Indiana.
KO Transmission was incorporated in Kentucky in 1994 and will be used to
acquire an interest in an interstate natural gas pipeline to which CG&E is
entitled as a result of a settlement with the Columbia Gas Transmission Corp.
It will have an office in Cincinnati and will be engaged in the transportation
of natural gas in interstate commerce between Kentucky and Ohio. KO
Transmission's portion of the pipeline will extend from central Kentucky to
the Ohio River.
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' utility
operations.
Energy
Energy, 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 1.9 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 Energy 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 1.8 million customers.
PSI Energy Argentina owns a small equity interest in this project and provides
operating and consulting services.
South Construction Company, Inc. (South), another wholly-owned subsidiary of
Energy 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 Energy's business (such as undeveloped real estate of Energy
abutting an Energy office building) or which has some defect in title which is
unacceptable to Energy. Most of the real estate to which South acquires title
relates to Energy's utility business.
Investments
Investments, a non-utility subholding company organized in the state of
Delaware in 1994, was formed to operate CINergy's non-utility businesses.
Investments holds the following active non-utility subsidiaries and interests,
which are more fully described below: Power International, Inc. (Power
International), previously named Enertech Associates International, Inc., its
direct subsidiary Beheer- En Belegginsmaatschappij Bruwabel B.V. (Bruwabel)
and its indirect subsidiary Power International s.r.o.; CG&E Resource
Marketing, Inc. (Resource Marketing) and its interest in U.S. Energy Partners;
CGE ECK, Inc. (CGE ECK) and its interest in ECK s.r.o.; PSI Recycling, Inc.;
Power Equipment Supply Co. (PESCO); Wholesale Power Services, Inc. (Wholesale
Power); and PSI Argentina, Inc. (PSI Argentina) and its subsidiary Costanera
Power Corp. (Costanera).
Power International was incorporated in Ohio 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, and construction
and/or operation of generation, co-generation, and independent power
production facilities, and project development. Power International has
established a regional and international consulting services practice and has
had activities in Ohio, Kentucky, Indiana, and a number of foreign countries,
including Kazakhstan. In addition, Power International renders consulting
services in the Czech Republic. To comply with Czech law and to facilitate
its operations in the Czech Republic and the tax-efficient treatment of
earnings from those operations, certain Power International operations are
conducted through wholly-owned direct and indirect subsidiaries -- Bruwabel,
which was organized under Dutch law and is a direct subsidiary of Power
International, and Power International s.r.o., which was organized under Czech
law and is a subsidiary of Bruwabel. Bruwabel's business is conducted in the
Netherlands, while Power International s.r.o. conducts business in the Czech
Republic.
Resource Marketing was incorporated in Delaware in 1994 and has an office in
Cincinnati. It was formed to hold CG&E's interest in U.S. Energy Partners, a
gas marketing partnership that was formed under Delaware law in 1994. U.S.
Energy Partners will compete with traditional regulated local distribution
companies by offering "merchant service" (i.e., acquiring natural gas and
selling it to customers) and will broker gas to industrial and large
commercial customers, with the initial aim, among other things, of recapturing
former customers of CG&E's gas utility business.
CGE ECK was incorporated in Delaware in 1994 and was formed as the vehicle for
an investment in ECK s.r.o., a Czech limited liability company which owns and
operates a generating facility in the Czech Republic. At present, CGE ECK
holds an approximate 3% interest in ECK s.r.o. and intends to dispose of that
interest.
PSI Recycling, Inc. is an Indiana corporation which recycles metal from CG&E
and paper, metal, and other materials from Energy, its largest single
supplier, and other sources.
PESCO was incorporated in Indiana to sell equipment and parts from an Energy
generating plant which was cancelled, the Marble Hill nuclear project. PESCO
also buys equipment for resale, brokers equipment, and sells equipment on
consignment for others.
Wholesale Power, an Indiana corporation, was formed to engage in the business
of brokering power, emission allowances, electricity futures, and related
products and services and to provide consulting services in the wholesale
power-related markets. In addition, Wholesale Power was formed to create,
market, and maintain the services of an "electronic bulletin board" for the
bulk power market.
PSI Argentina was formed as an Indiana corporation to own foreign generating
facilities. PSI Argentina has a wholly-owned subsidiary, Costanera, also
formed to own foreign generating facilities. Costanera is a member of a
multinational consortium which has controlling ownership of the 1,260-megawatt
(mw) Costanera power plant serving Buenos Aires, Argentina. Costanera owns a
small equity interest in this project, and PSI Argentina provides consulting
services to the project.
CINergy Services
CINergy Services was incorporated in the state of Delaware in 1994 to serve as
the service company for the CINergy system. CINergy Services provides CG&E,
Energy, and the other companies of the CINergy system with a variety of
administrative, management, and support services.
Customer, Sales, and Revenue Data
Approximately 83% and 15% of CINergy's operating revenues are derived from the
sale of electricity and the sale and transportation of natural gas,
respectively. The service territory of CG&E and its subsidiaries is heavily
populated and characterized by a stable residential customer base and a
diverse mix of industrial customers. Similarly, the area served by Energy is
a residential, agricultural, and widely diversified industrial territory. As
of December 31, 1994, CG&E, its subsidiaries, and Energy supplied electric
service to over 1.3 million customers, and CG&E and its subsidiaries provided
gas service to more than 429,000 customers. 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.
No one customer accounts for more than 5% of electric or gas operating
revenues of CG&E and its subsidiaries or the electric operating revenues of
Energy. 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.
Financial Information by Business Segment
For financial information by business segment, see Note 19 of the "Notes to
Consolidated Financial Statements" in "Item 8. Financial Statements and
Supplementary Data". For a discussion of the potential divestiture of CG&E's
gas operations, see Note 16(e) of the "Notes to Consolidated Financial
Statements" in "Item 8. Financial Statements and Supplementary Data".
Regulation
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 caption "Potential Divestiture of Gas
Operations" in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations".)
CG&E, ULH&P, Miami, and Energy 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 will be 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 is subject
to regulation by the FERC under the Natural Gas Act.
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, a division of the PUCO, has jurisdiction in Ohio over the location,
construction, and initial operation of new electric generating facilities and
certain electric and gas transmission lines presently utilized by CG&E. As to
retail rates and other matters, ULH&P is regulated by the Kentucky Public
Service Commission (KPSC), and West Harrison and Lawrenceburg are regulated by
the Indiana Utility Regulatory Commission (IURC).
Energy, 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.
Rate 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
CG&E, Energy, and 27 other electric utilities in an eight-state area 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.
In addition to the intercompany tie between CG&E's and Energy's electric
systems, CINergy's electric system, which is operated by CINergy Services, is
interconnected with the electric systems of Central Illinois Public Service
Company, East Kentucky Power Cooperative, Inc. (East Kentucky), Hoosier Energy
R.E.C., Inc., Indiana Michigan Power Company, Indianapolis Power and Light
Company, Kentucky Utilities Company, Louisville Gas and Electric Company,
Northern Indiana Public Service Company, Southern Indiana Gas and Electric
Company, Columbus Southern Power Company, The Dayton Power and Light Company,
Ohio Valley Electric Corporation, Ohio Power Company, and Tennessee Valley
Authority.
CG&E and East Kentucky have an agreement for the interchange of electric
power, subject to availability, during certain times of the year through March
2000. Under the agreement, CG&E, a summer peaking company, has the right to
obtain up to 150 mw of electricity through March 31, 1997, and up to 50 mw
from April 1, 1997, through March 31, 2000, from East Kentucky during the
months of June, July, and August. East Kentucky, a winter peaking company,
has the right to receive up to 150 mw through March 31, 1997, and up to 50 mw
from April 1, 1997, through March 31, 2000, from CG&E in December, January,
and February. In addition, Energy 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 Energy to a joint transmission and local facilities agreement.
Fuel Supply
A major portion of the coal required by CG&E and Energy 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 to reflect suppliers' costs and
certain other factors. 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
Illinois, Indiana, Ohio, Kentucky, West Virginia, and Pennsylvania.
CG&E and Energy monitor alternative sources to assure a continuing
availability of economical fuel supplies. The companies intend to continue
purchasing a portion of their coal requirements on the spot market and, at the
present time, are investigating the use of low-sulfur coal in connection with
their plans to comply 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 Energy are unable to
predict the extent to which coal availability and price may ultimately be
affected by future environmental requirements. Presently, CG&E and Energy
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.
Gas Supply
The FERC's Order 636 restructured the operations of gas pipelines and the
supply portfolios of gas distribution companies. As gas pipelines unbundled
their historic service of supply aggregating, direct term contracting by gas
distribution companies with producers and marketers diminished the once
prominent spot market (see the information appearing under the caption "Order
636" in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations").
CG&E and its subsidiaries now obtain the majority of their natural gas supply
(89%) 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 subsidiaries' core requirements,
and "swing" load, which is gas available on a daily basis for changes in
demand. While a premium is paid for the swing load, the use of industry
indices to price firm gas volumes on a monthly basis ensures that the price
CG&E and its subsidiaries pay remains economically competitive.
Gas 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
subsidiaries' gas supplies are sourced from the Gulf of Mexico coastal area.
CG&E and its subsidiaries have also obtained limited supply sourced 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 competitiveness with alternative fuels; however, the
costs of discovery and development of new sources of supply will influence
prices.
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".
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".
Environmental Matters
CINergy's utilities' 1995 construction expenditures for environmental
compliance are forecasted to be $16 million. In addition, refer to the
information appearing in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Employees
The number of employees of CINergy and its subsidiaries at December 31, 1994,
was 8,868, of whom 5,019 belonged to bargaining units. These bargaining unit
employees were represented by labor agreements between CG&E and its utility
subsidiaries or Energy and the applicable union organization. Approximately
3,318 employees were represented by the International Brotherhood of
Electrical Workers (IBEW), 475 were represented by the United Steelworkers of
America (USWA), and 1,226 were represented by the Independent Utilities Union
(IUU).
The current contract between CG&E and the IUU will expire in March 1998. CG&E
also has a three-year agreement with the USWA, expiring May 15, 1997. The
agreements between CG&E and the IBEW local 1347 and between Energy and the
IBEW local 1393 expire April 1, 1997, and April 30, 1996, respectively.
ITEM 2. PROPERTIES
Substantially all utility plant is subject to the lien of each applicable
company's first mortgage bond indenture.
In addition to the information further discussed herein, refer to the
information appearing under the caption "New Generation" in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 17 of the "Notes to Consolidated Financial Statements" in
"Item 8. Financial Statements and Supplementary Data".
CG&E
CG&E wholly owns and operates seven steam electric generating units at two
different stations and 20 rapid-start internal combustion generating units at
four different stations. In addition, CG&E operates five commonly owned steam
electric generating units at four different stations, in all of which CG&E has
an undivided interest. CG&E also has an undivided interest in six commonly
owned steam electric generating units at three separate stations which are not
operated by CG&E. All of these properties are located in Ohio, with the
exception of one of the jointly owned stations operated by CG&E which is
located in Kentucky. CG&E-owned system generating capability as of December
31, 1994, was 5,374 mw.
CG&E's 1994 summer peak load, which occurred on July 20, was 4,326 mw, and its
1994 winter peak load, which occurred on January 18, was 4,077 mw, exclusive
of off-system transactions. For the period 1995 through 2004, summer and
winter peak load and kilowatt-hour (kwh) sales are each forecasted to have
annual growth rates of 2%. These forecasts reflect CG&E's assessment of DSM,
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, 1994, CG&E's transmission system consisted of 388 circuit
miles of 345,000 volt line, 604 circuit miles of 138,000 volt line, 475
circuit miles of 69,000 volt line, and 117 circuit miles of lesser volt line,
all within the states of Ohio and Kentucky. In addition, as of December 31,
1994, CG&E's distribution system consisted of 14,388 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 5,860,802 kilovolt-amperes. A portion
of CG&E's total transmission system is jointly owned, primarily in connection
with the previously mentioned jointly owned electric generating units.
During 1994, 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
subsidiaries.
CG&E owns two underground caverns, one with a seven million gallon capacity
and one with an eight million gallon capacity, for the storage of liquid
propane and related vaporization and mixing plants. Both of the storage
caverns are located in Ohio and 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 5,341 miles of mains and
service lines in southwestern Ohio.
Energy
Energy operates six steam electric generating stations, one hydroelectric
generating station, and 16 rapid-start internal combustion generating units,
all within the state of Indiana. Energy owns all of the above, except for
49.95% of Gibson Generating Station Unit 5 which is jointly owned by WVPA
(25%) and IMPA (24.95%). Energy-owned system generating capability as of
December 31, 1994, was 5,800 mw.
Energy's 1994 summer peak load, which occurred on June 20, was 4,869 mw, and
its 1994 winter peak load, which occurred on January 18, was 4,644 mw,
exclusive of off-system transactions. For the period 1995 through 2004,
summer and winter peak load and kwh sales are each forecasted to have annual
growth rates of 2%. These forecasts reflect Energy's assessment of DSM, 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, 1994, Energy's transmission system consisted of 719 circuit
miles of 345,000 volt line, 656 circuit miles of 230,000 volt line, 1,594
circuit miles of 138,000 volt line, and 2,426 circuit miles of 69,000 volt
line, all within the state of Indiana. In addition, as of December 31, 1994,
Energy's distribution system consisted of 19,012 circuit miles, all within the
state of Indiana. As of the same date, Energy's transmission substations had
a combined capacity of 21,450,755 kilovolt-amperes, and the distribution
substations had a combined capacity of 6,051,420 kilovolt-amperes.
For the year ended December 31, 1994, 99% and 1% of Energy's kwh production
were obtained from coal-fired generation and hydroelectric generation,
respectively.
ULH&P
As of December 31, 1994, ULH&P owned 104 circuit miles of 69,000 volt electric
transmission line, an electric distribution system consisting of 2,468 circuit
miles, and a gas distribution system consisting of 1,190 miles of mains and
service lines in northern Kentucky. ULH&P also owns a seven million gallon
capacity underground cavern for the storage of liquid propane and a related
vaporization and mixing plant and feeder lines, located in northern Kentucky
and adjacent to one of the gas lines that transports natural gas to CG&E. The
cavern and vaporization and mixing plant are used primarily to augment CG&E's
and ULH&P's supply of natural gas during periods of peak demand and
emergencies.
Other Subsidiaries
As of December 31, 1994, Lawrenceburg owned a gas distribution system
consisting of 166 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, 1994, 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 Louisville Gas and Electric Company with those of
CG&E.
ITEM 3. LEGAL PROCEEDINGS
Merger Litigation
The original merger agreement between CG&E and Resources was amended in
response to a June 1993 ruling by the IURC, which dismissed a petition by
Energy for approval of the transfer of its license or property to CINergy
Corp., an Ohio corporation. The IURC held that such transfer could not be
made to a corporation incorporated outside of Indiana. The original structure
provided that Resources, Energy, and CG&E would be merged into CINergy Corp.
Under this structure, Energy and CG&E would have become operating divisions of
CINergy Corp., ceasing to exist as separate corporations, and CINergy Corp.
would not have been required to register as a public utility holding company
under the PUHCA. Energy appealed the IURC's decision, and in October 1994,
the Indiana Court of Appeals reversed the IURC's decision. This decision by
the Indiana Court of Appeals did not alter the consummation of the merger
establishing CINergy as a registered holding company.
Shareholder Litigation
In March 1993, in conjunction with a proposed tender offer for Resources,
IPALCO Enterprises, Inc. filed suit in the United States District Court for
the Southern District of Indiana, Indianapolis Division (District Court),
against Resources, CINergy, James E. Rogers, Energy, and CG&E (IPALCO Action).
The IPALCO Action was subsequently dismissed in November 1993. In March 1993
and in the weeks following, six suits with claims similar to the IPALCO Action
were filed by purported shareholders of Resources (Shareholder Litigation).
Four of the suits were filed in the District Court, and two were filed in
state courts, although one of those two was subsequently consolidated with the
four in the District Court.
In January 1994, the parties to the Shareholder Litigation executed a
Stipulation and Agreement of Dismissal (Stipulation) settling and dismissing
with prejudice all of the parties' claims except for plaintiffs' petitions for
fees and expenses and defendants' right to object thereto. An agreement in
principle has been reached in the Shareholder Litigation which contemplates
that counsel for all plaintiffs will receive from Energy a portion of the fees
and expenses claimed. The parties have agreed to provide notice to affected
shareholders of a hearing during which the order on the fees and expenses will
be considered by the District Court. Pending such order, the agreed upon fees
and expenses will be deposited into an interest-bearing escrow account.
Fuel Litigation
(a) Amax Coal Company Energy has initiated several arbitration proceedings
to resolve disputes, including disputes related to price and coal quality,
which have arisen under long-term coal supply agreements between Amax Coal
Company (Amax) and Energy. In October 1994, Energy and Amax entered into an
interim agreement, effective through 1996, which provides, in part, that the
price pursuant to the 3.6 million ton per year Wabash Mine long-term contract
will remain fixed through 1995. During 1996, the price may be reduced as a
result of arbitration, but it may not be increased. In addition, the parties
agreed to waive all rights to recover damages or other amounts based upon the
parties' claims against each other for past periods. Accordingly, the interim
agreement eliminated any liability on the part of Energy to Amax's claims
through 1995. The interim agreement also provides that the parties will
arbitrate any remaining disputes during 1995. Such arbitration decisions will
serve to establish various rights and obligations of the parties, and the
price beginning in 1996.
(b) Exxon Corporation Energy was involved in litigation with Exxon Coal USA,
Inc. and Exxon Corporation (Exxon) regarding the price for coal delivered
under a coal supply contract. In June 1994, the United States Supreme Court
denied Energy's request for review of a ruling by the United States Court of
Appeals for the Seventh Circuit, which established the contract price at $30
per ton and reversed the trial court's decision holding that the price should
be $23.266 per ton. The IURC has authorized Energy to recover the additional
cost through the fuel adjustment clause process. In addition, in August 1994,
Energy announced that it had resolved the two remaining lawsuits with Exxon
related to coal quality, price and price components, and Exxon's claims
against Energy for Energy's failure to take coal after Energy terminated its
contract pursuant to a December 1992 court decision. This August 1994
settlement concluded all outstanding litigation between Energy and Exxon with
no significant effect on Energy's financial condition.
In addition to the above litigation, see Notes 2 and 16(b), 16(c), 16(d), and
16(e) of the "Notes to Consolidated Financial Statements" in "Item 8.
Financial Statements and Supplementary Data".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT (at February 28, 1995)
Age at
Dec. 31,
Name 1994 Office & Date Elected or in Job
Jackson H. Randolph 64 Chairman and Chief Executive Officer
of CINergy, CG&E, and Energy - 1994
Chairman, President and Chief Executive
Officer of CG&E - 1993
President and Chief Executive Officer
of CG&E - 1986
James E. Rogers 47 Vice Chairman, President and Chief
Operating Officer of CINergy - 1994
Vice Chairman and Chief Operating
Officer of CG&E and Energy - 1994
Chairman and Chief Executive Officer
of Resources - 1993
Chairman, President and Chief Executive
Officer of Energy - 1990
Chairman, President and Chief Executive
Officer of Resources - 1988
Chairman and Chief Executive Officer of
Energy - 1988
Terry E. Bruck 49 Group Vice President, Wholesale Power and
Transmission Operations of CG&E - 1995
Group Vice President, Wholesale Power
and Transmission Operations of
CINergy - 1994
Vice President, Electric Operations of
CG&E - 1988
Cheryl M. Foley 47 Vice President, General Counsel and
Corporate Secretary of CG&E - 1995
Vice President, General Counsel and
Corporate Secretary of CINergy - 1994
Vice President, General Counsel and
Secretary of Resources and Energy - 1991
Vice President and General Counsel of
Resources - 1990
Vice President and General Counsel of
Energy - 1989
William J. Grealis 1/ 49 Vice President of CINergy - 1995
President, Gas Business Unit of CG&E - 1995
President of Investments - 1995
Partner - Akin, Gump, Strauss, Hauer
& Feld - 1978 2/
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Age at
Dec. 31,
Name 1994 Office & Date Elected or in Job
J. Wayne Leonard 44 Group Vice President and Chief
Financial Officer of CG&E - 1995
Group Vice President and Chief Financial
Officer of CINergy - 1994
Senior Vice President and Chief Financial
Officer of Resources and Energy - 1992
Vice President and Chief Financial
Officer of Resources and Energy - 1989
John M. Mutz 3/ 59 Vice President of CINergy - 1995 4/
President of Energy - 1994
President of Resources - 1993
President - Lilly Endowment, Inc. 2/ - 1989
Stephen G. Salay 57 Group Vice President, Power Operations
of CG&E - 1995
Group Vice President, Power Operations of
CINergy - 1994
Vice President, Electric Production and
Fuel Supply of CG&E - 1988
William L. Sheafer 51 Treasurer of CINergy and Energy - 1994
Treasurer of CG&E - 1987
George H. Stinson 49 Vice President of CINergy - 1995 4/
President of CG&E - 1994
Vice President, Gas Operations of
CG&E - 1991
Manager, Gas Operations of CG&E - 1990
Manager, CG&E's Miami Fort Station - 1980
Larry E. Thomas 49 Group Vice President, Reengineering and
Operations Services of CG&E - 1995
Group Vice President, Reengineering
and Operations Services of CINergy - 1994
Senior Vice President and Chief Operations
Officer of Energy - 1992
Senior Vice President and Chief Operating
Officer, Customer Operations of Energy -
1990
Senior Vice President, Customer Operations
of Energy - 1986
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Age at
Dec. 31,
Name 1994 Office & Date Elected or in Job
Charles J. Winger 49 Comptroller of CG&E - 1995
Comptroller of CINergy - 1994
Comptroller of Resources - 1988
Comptroller of Energy - 1984
Under the Amended and Restated Agreement and Plan of Reorganization (the
Merger Agreement) by and among CG&E, Resources, Energy, and CINergy, a
Delaware corporation, dated as of December 11, 1992, as amended on July 2,
1993, and as of September 10, 1993, Jackson H. Randolph will be entitled to
serve as Chairman and Chief Executive Officer (CEO) of CINergy until November
30, 1995, and Chairman of CINergy until November 30, 2000. James E. Rogers
will be entitled to serve as Vice Chairman, President and Chief Operating
Officer of CINergy until November 30, 1995, at which time he will be entitled
to serve as Vice Chairman, President and CEO.
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/ 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.
2/ Non-affiliates of CINergy.
3/ Prior to becoming President of Resources, Mr. Mutz was president of
Lilly Endowment, Inc., a private philanthropic foundation located in
Indianapolis, Indiana, and also served two terms as lieutenant
governor of Indiana.
4/ Mr. Mutz and Mr. Stinson were elected Vice Presidents of CINergy effective
March 3, 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
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 6, 1995, CINergy's most recent
dividend record date, there were 85,305 common shareholders of record.
Trading of CG&E's and Resources' common stock ended at the close of the market
October 24, 1994. Trading of CINergy's common stock began upon the opening of
the market October 25, 1994. The following table shows the high and low sales
prices of CG&E's, Resources', and CINergy's common stock and the dividends
declared per share by each company for the past two years:
High Low Dividend (a)
1994 1993 1994 1993 1994 1993
CG&E
4th Quarter $23 3/8 $29 5/8 $21 7/8 $26 1/8 $.3272 $.43
3rd Quarter 23 1/4 29 20 7/8 27 1/8 .43 .415
2nd Quarter 23 7/8 27 3/4 21 24 1/4 .43 .415
1st Quarter 27 3/4 27 23 5/8 23 7/8 .43 .415
Resources
4th Quarter 23 1/2 27 22 24 1/2 .1805 .31
3rd Quarter 23 1/8 26 1/4 20 3/4 23 1/2 .31 .28
2nd Quarter 23 1/8 24 1/4 19 5/8 21 5/8 .31 .28
1st Quarter 26 5/8 24 1/2 22 3/4 19 1/2 .31 .28
CINergy
4th Quarter 24 - 20 3/4 - .1028 -
(a) The prorated fourth quarter dividends for CG&E and Resources were
determined by multiplying that portion of each company's regular dividend
by a fraction equal to the number of days from their last respective
common dividend payment dates (August 15, 1994, for CG&E, September 1,
1994, for Resources) to and including the closing date of the merger,
divided by the number of days in the quarterly period for each respective
company (92 for CG&E, 91 for Resources). These respective prorated
dividends were in addition to, but paid separately from, the partial
CINergy common stock dividend, which was determined by prorating CINergy's
43 cents per share quarterly dividend for the remainder of the quarter
ending November 15, 1994.
Future increases in CINergy's common dividend will continue to be influenced
by the financial conditions of CG&E and Energy.
ITEM 6. SELECTED FINANCIAL DATA
1994 1993 1992 1991 1990
(in millions, except per share amounts)
Operating revenues (1) $2 924 $2 840 $2 634 $2 640 $2 547
Net income (1) 191 63 271 202 332
Common stock
Earnings per share (1) 1.30 .43 1.91 1.46 2.50
Dividends declared per share 1.50 1.46 1.39 1.33 1.26
Total assets 8 150 7 804 7 133 6 681 6 195
Cumulative preferred stock of
subsidiaries subject to mandatory
redemption (2) 210 210 210 192 118
Long-term debt 2 715 2 645 2 547 2 376 2 300
Long-term debt due within one year 60 - 46 115 -
Notes payable 229 178 191 25 26
(1) See Note 2 of the "Notes to Consolidated Financial Statements" in "Item 8.
Financial Statements and Supplementary Data".
(2) Includes $39.5 million in 1991 and $3 million in 1990 to be redeemed
within one year.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 2 and 16 of the "Notes to Consolidated
Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" for discussions of material uncertainties.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MERGER CONSUMMATION
CINergy Corp. (CINergy or Company) was created for the October 1994 merger of
The Cincinnati Gas & Electric Company (CG&E) and PSI Resources, Inc.
(Resources) and is a registered holding company under the Public Utility
Holding Company Act of 1935 (PUHCA). The business combination was accounted
for as a pooling of interests. Each outstanding share of common stock of
Resources and CG&E was exchanged for 1.023 shares and one share, respectively,
of CINergy common stock. Following the merger, CINergy became the parent
holding company of CG&E and PSI Energy, Inc. (Energy), previously Resources'
utility subsidiary. The outstanding preferred stock and debt securities of
Energy, CG&E, and CG&E's utility subsidiaries were not affected by the merger.
FINANCIAL CONDITION
Competitive Pressures
Electric Utility Industry
Introduction The primary factor influencing the future profitability of
CINergy is the changing competitive environment for energy services and the
related commoditization of electric power markets. Changes in the industry
include more competition in wholesale power markets and the imminent
likelihood of "customer choice" by large industrial customers and, ultimately,
by all retail customers. For an electric utility to be successful in this
competitive environment, it is critical that regulatory reform keep pace with
the competitive realities facing electric utilities and their customers.
Strict adherence to traditional, cost-based rate of return regulation will
significantly disadvantage a utility's ability to successfully compete to
supply customer needs. For example, performance-based regulation (e.g., price
caps) would likely add substantial flexibility for the franchise utility in
the transition to a fully competitive environment.
Pressures for "Customer Choice" The granting of choice to end-user customers,
commonly referred to as retail wheeling, would allow a customer within a
particular utility's service territory to buy power directly from another
source using the power lines of the local utility for delivery. The
regulatory and legislative reform to facilitate this result is primarily
driven by large industrial energy users' needs for low-cost power to remain
competitive in the global marketplace. These industrial customers are
intensifying their efforts to change the regulatory process that currently
denies them access to lower-cost power. The current restrictions on access to
low-cost power are exacerbated by cost-of-service regulation which has
produced average industrial rates to customers that vary substantially across
the United States (from approximately 3 cents per kilowatt-hour [kwh] to 10
cents per kwh).
Federal Law, the New Competitors, and the Commoditization of Electric Power
Markets The Energy Policy Act of 1992 (Energy Act), the most comprehensive
energy legislation enacted since the late 1970s, has essentially provided for
open competition at the wholesale level. The Energy Act created a new class
of wholesale power providers, exempt wholesale generators (EWGs), that are not
subject to the restrictive requirements of the PUHCA nor the ownership
restrictions of the Public Utility Regulatory Policies Act of 1978. However,
due to excess capacity in the industry, EWGs have not yet significantly
affected competition in the wholesale power market. To date, the primary
impetus for increased wholesale competition has been the provision of the
Energy Act that granted the Federal Energy Regulatory Commission (FERC) the
authority to order wholesale transmission access. This provision, combined
with the excess capacity in the bulk-power markets, has resulted in the
emergence of power marketers and brokers.
Brokers are intermediaries between buyers and sellers (i.e., they do not take
title to the power). Power marketers are entities licensed by the FERC to
conduct bulk power trades at market-based prices. They manage portfolios of
power contracts (which they have title to) and owned generation and package
energy products for customers of bulk power, including price risk management
contracts such as options on fixed price energy or guaranteed fixed price
contracts.
As regulatory issues such as transmission pricing are resolved, power
marketers and brokers will become more significant factors in wholesale power
markets and, ultimately, the retail markets. With respect to transmission
pricing, the FERC recently issued a policy statement indicating its intent to
allow flexibility in pricing, permitting parties to submit either traditional,
cost-based plans or pricing schemes based on non-traditional designs. The
transmission pricing policy enumerates five principles that the FERC will
consider in approving future proposals, including cost-based rates, adherence
to the FERC's comparability standard, economic efficiency, fairness, and
practicality.
States' Role in Customer Choice (Retail Wheeling) As discussed above, the
Energy Act allows real competition in the wholesale power market; however, it
prohibits the FERC from ordering utilities to provide transmission access to
retail customers (retail wheeling) and is silent with respect to the states'
role and authority in this issue.
Several states are currently reviewing retail wheeling proposals. In
particular, the California Public Utilities Commission proposed a plan in 1994
that would allow all customers to choose their electric supplier by the year
2002. However, it is currently anticipated that implementation of this
proposal could be substantially delayed due to the complex issues involved
(e.g., exclusive use of a power pool run by an impartial third party vs.
bilateral contract arrangements). In addition to California, Michigan
regulators have proposed a limited retail wheeling experiment, and Wisconsin
regulators are reviewing numerous proposals for restructuring that state's
electric supply and related services. Connecticut regulators, on the other
hand, recently decided to delay consideration of retail wheeling until new
capacity is needed in the state (approximately the year 2007).
A significant issue for states and utilities to resolve with respect to retail
wheeling is the regulatory treatment of any stranded investments, or costs
without a customer. California's proposal and a recent proposal by the FERC
contain mechanisms for recovery by the franchise utility of certain sunk costs
or investments "stranded" by the loss of the monopoly franchise; however,
there are numerous arguments being advanced against the collection of stranded
costs. For example, there are concerns that an efficient competitive market
cannot exist if regulators allow recovery in the future of all uncollected
past costs. Given that the most severe electric competition is expected to be
in the commodity sector, stranded costs are usually considered uneconomical
generating property. In addition, stranded costs could include assets created
by the actions of regulators (i.e., regulatory assets) under the provisions of
Statement of Financial Accounting Standards No. 71, Accounting for the Effects
of Certain Types of Regulation (Statement 71), or operating costs such as fuel
supply contracts. The substantial accounting implications from the loss of
franchise territory and related regulatory protections are discussed further
herein.
CINergy's Response to the Changing Competitive Environment CINergy supports
increased competition in the electric utility industry. In fact, the
foresight that competition was about to substantially increase and that retail
wheeling was inevitable was a catalyst for the merger (which was announced in
1992). CINergy possesses certain competitive advantages (e.g., low-cost
generation) that could be substantially eroded by restrictive regulations that
lag the development of a competitive market and limit the Company's ability to
preempt the competition in responding to customer needs. As such, CINergy has
chosen to initiate the retail wheeling debate and be a leader in establishing
the "ground rules" in its franchise area.
Energy recently announced its plans to offer its larger industrial customers
some form of retail wheeling in Indiana. Energy plans to submit a proposal
that would permit certain customers to choose their electric supplier. In
return, Energy would require some form of reciprocal arrangement (i.e., the
opportunity to similarly compete for customers of the selected supplier).
Under this proposal, Energy would be free to negotiate specific contracts with
customers who choose to give up the protection of the franchise obligation to
serve. Energy intends for these contractual relationships to satisfy customer
needs, while at the same time provide an appropriate risk-return relationship
for investors. In addition to the above proposal, Energy, along with other
Indiana utilities, proposed legislation in 1995 that would allow the Indiana
Utility Regulatory Commission (IURC) to adopt alternative regulatory schemes
such as performance-based regulation and the use of more flexible pricing
mechanisms. Energy is also participating in a series of informal conferences
sponsored by the IURC to discuss the consequences of competition and
appropriate responses thereto.
With respect to Ohio, a retail wheeling bill was introduced in early 1994 that
would have given customers the ability to purchase power from their provider
of choice and would have required utilities to provide access to their
transmission lines for delivery of the electric service. No action was taken
on the bill in 1994; however, similar legislation may be introduced in 1995.
CG&E is also participating in roundtable discussions being held by the Public
Utilities Commission of Ohio (PUCO) to more fully consider the emerging
competitive environment.
CINergy will continue to aggressively pursue any legislative or regulatory
reforms necessary to provide the opportunity for its success in a competitive
environment.
CINergy's Competitive Position As stand-alone companies, CG&E and Energy were
well positioned to succeed in a more competitive environment -- as a combined
organization, CINergy believes it is even better positioned to compete in such
an environment. The merger (1) combines two low-cost providers, resulting in
savings in nominal dollars of approximately $1.5 billion over the first 10
years; (2) enhances the companies' transmission capabilities; (3) diversifies
the customer base; and (4) creates a financially stronger company -- all of
which improve an already competitively strong position. CINergy's strategy
will be to aggressively build on its cost advantage by continually focusing on
flexible strategies that are directed toward reducing the cost structure and
shifting the cost mix from fixed to variable. CG&E and Energy have industrial
rates that are below the national average (based on 1993 data) and own
generating plants that are consistently ranked among the most efficient in the
country.
CINergy believes its low-cost position and strategic initiatives will allow it
to maintain, and perhaps expand, its wholesale market share and its current
base of industrial customers. Recent successes in these markets include
Energy's 10-year agreement to serve the power needs of Blue Ridge Power
Agency, a group of municipal utilities organized in Virginia, and CG&E's 14-
year agreement to provide power to a municipal utility serving a portion of
Cleveland, Ohio. Also, CG&E's and Energy's low industrial rates have produced
regional leadership over the last five years (1989 through 1993) with respect
to growth in industrial kwh sales.
In addition, CINergy intends to aggressively pursue the substantial
opportunities that exist in the electricity markets for power marketing and
brokering. These opportunities are being created by the increasing
commoditization of electricity. CINergy believes that the ability to identify
and manage various business risks and innovative packaging of power supply
services and products based upon superior acquisition and analysis of
information will be key factors that will ensure successful participation in
these markets. CINergy's strategy for success in this business is to leverage
the Company's understanding of customer needs and the intricacies of operating
in power markets with new skills and expertise of operating in commodity
markets that are being developed and selectively acquired from outside the
industry.
Outsiders' View of CINergy's Competitive Position Major credit rating
agencies have issued reports recognizing the increased risk in the electric
utility industry due to competition. Specifically, in conjunction with
fundamentally changing the way it evaluates the credit quality of electric
utilities, Standard & Poor's has categorized each electric utility's business
position in one of seven categories ranging from "Above Average" to "Below
Average". As a result, Standard & Poor's placed Energy in the second highest
category, "Somewhat Above Average", and CG&E in the third highest category,
"High Average". In addition, Moody's recently issued a credit report stating
its belief that Energy is well positioned to compete in a more competitive
environment. At the same time, certain sell-side equity analysts have placed
CINergy near the top of their lists of those best equipped to handle
increasing competitive pressures. CINergy believes these actions support its
position that its competitive strategy will be successful.
With respect to accessing financial markets for capital needs, U.S. utilities
must compete for capital in world markets where some forecasts indicate that
as much as $250 billion will be needed by the year 2000 for state-owned
electricity privatization. These forecasts enforce CINergy's belief that
regulatory reform establishing a market structure for utilities similar to
that already existing in other countries is critical in order to successfully
compete for not only customers, but also capital.
Despite the numerous published reports discussing the increased business risk
that investors face from deregulation of the electric utility industry, the
1994 decline in electric utility stocks, taken as a whole, can be
substantially attributed to historical relationships of common stock prices to
changes in interest rates. Therefore, electric utility stocks could see
additional pressures to reflect the increased fundamental business risk as
markets become more workably competitive, particularly, without regulatory
recognition through higher allowed returns and increased flexibility (e.g.,
price caps) in order to compete. On the other hand, there is an increasingly
large disparity between the fundamental valuation measures (e.g., yield,
market-to-book ratio) of low-cost producers, like CINergy, and high-cost
producers. For example, it should be noted that the merger of Resources and
CG&E combined two utilities whose common stocks have outperformed the industry
average for the five-year period 1990 through 1994.
Gas Utility Industry
Customer Choice Energy's retail wheeling proposal discussed above is
consistent with a recent step taken by CG&E to extend a program to its natural
gas customers that is the equivalent of electric retail wheeling. For several
years, large-volume commercial and industrial customers in Ohio and Kentucky
have been able to purchase natural gas directly from suppliers and have it
transported by CG&E or The Union Light, Heat and Power Company (ULH&P). In
September 1994, CG&E implemented a new firm transportation service which
allows all non-residential customers of CG&E to purchase gas directly from
suppliers, up to approximately 5% of CG&E's peak load. The suppliers assume
the risk and obligation associated with supplying the contractual volumes,
while CG&E retains responsibility for delivering the gas through its
distribution system. This new service affords commercial and industrial
customers greater choice in competitively contracting for their energy
requirements.
Order 636 In April 1992, the FERC issued Order 636, which restructured
operations between interstate gas pipelines and their customers for gas sales
and transportation services. Order 636 mandated changes to the way CG&E and
ULH&P purchase gas supplies and contract for transportation and storage
services, resulting in increased risks in meeting the gas demands of their
customers.
CG&E and ULH&P are responding to the supply risks and opportunities of Order
636 by introducing innovations to their supply strategy including contracting
with major southwest producers for firm gas supply agreements with flexible,
extremely market sensitive pricing, marketing short-term unused pipeline
capacity and storage gas to other companies throughout the country through use
of electronic bulletin boards, and restructuring their allotment of interstate
pipeline capacity among delivering pipelines.
Order 636 also allowed pipelines to recover transition costs they incurred in
complying with the order from customers, including CG&E and ULH&P. In July
1994, the PUCO issued an order approving a stipulation between CG&E and its
domestic 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. ULH&P recovers such
costs through its gas cost recovery mechanism.
Substantial Accounting Implications
A potential outcome of the changing competitive environment could be the
inability of regulated utilities to continue application of Statement 71, the
linchpin of regulated industry accounting, which allows the deferral of costs
(i.e., regulatory assets) to future periods based on assurances of a regulator
as to the recoverability of the costs in rates charged to customers. In
connection with assessing the financial exposure related to stranded costs,
regulatory assets would have to be evaluated to determine the portion for
which deferral could be continued based on the existence of the necessary
regulatory assurances.
Although CINergy's current regulatory orders and regulatory environment fully
support the recognition of its regulatory assets, the ultimate outcome of the
changing competitive environment could result in CINergy discontinuing
application of Statement 71 for all or part of its business. Such an event
would require the write-off of the portion of any regulatory asset for which
no regulatory assurance of recovery continues to exist. No evidence currently
exists that would support a write-off of any portion of CINergy's regulatory
assets. CINergy intends to pursue competitive strategies that would mitigate
the impact of this issue on the financial condition of the Company (see Note
1(c) of the "Notes to Consolidated Financial Statements" in "Item 8.
Financial Statements and Supplementary Data" for a summary of regulatory
assets as of December 31, 1994).
Securities Ratings
As a result of the merger, the ratings of CG&E's, Energy's, and ULH&P's senior
securities continue to be on review for possible upgrade. CG&E, Energy, and
ULH&P have been placed on Standard & Poor's ratings watch, while CG&E and
Energy have been placed on Duff & Phelps' ratings watch. In addition, Fitch
Investors Service, Inc. (Fitch) raised CG&E's and Energy's first mortgage
bonds ratings to A- from BBB+ and preferred stock ratings to BBB+ from BBB, in
May 1994 and February 1995, respectively. The Fitch ratings reflect the low-
cost generation and competitive retail rates of both companies combined with
CG&E's limited reliance on wholesale markets and the resolution of rate
proceedings and litigation associated with cost disallowance at the Wm. H.
Zimmer Generating Station (Zimmer). Additionally, the Fitch ratings reflect
Energy's decreases in projected capital expenditures and deferral of plant
construction. The Fitch ratings also incorporate the IURC's acceptance in
February 1995 of a settlement agreement between Energy and certain intervenors
concerning Energy's petition for a retail rate increase, as further discussed
herein. CINergy's goal is to achieve at least an "A" credit rating on its
subsidiaries' senior securities.
The current ratings are provided in the following table:
Duff & Standard
Phelps Fitch Moody's & Poor's
CG&E
First Mortgage Bonds BBB+ A- Baa1 BBB+
Preferred Stock BBB BBB+ baa2 BBB
ENERGY
First Mortgage Bonds and
Secured Medium-term Notes BBB+ A- Baa1 BBB+
Preferred Stock BBB BBB+ baa2 BBB
ULH&P
First Mortgage Bonds Not rated Not rated Baa1 BBB+
These securities ratings may be revised or withdrawn at any time, and each
rating should be evaluated independently of any other rating.
Significant Achievements
Highlights of 1994 include the following key accomplishments:
. Following receipt of support from all state regulatory commissions and
approval by the FERC and the Securities and Exchange Commission (SEC),
CG&E and Resources consummated the merger in October 1994;
. In April 1994, the PUCO approved a settlement agreement which permits CG&E
to retain all electric non-fuel operation and maintenance expense savings
from the merger (Non-fuel Merger Savings) until 1999 in exchange for a
moratorium on increases in base electric rates until January 1, 1999;
. In February 1995, the IURC approved a December 1994 settlement agreement
entered into by Energy and certain intervenors concerning Energy's
petition for a retail rate increase that includes provisions to
satisfactorily address the effects of significant future regulatory lag
(i.e., earnings attrition) and the allocation of its portion of merger
savings between Energy's customers and CINergy's shareholders;
. In December 1994, CINergy raised approximately $160 million in
connection with the public issuance of nearly 7.1 million shares of
common stock at a substantial premium to the market price at the
beginning of the offering period;
. In July 1994, Energy filed with the IURC for an additional retail rate
increase to recover, among other things, the costs of two capital projects
previously approved by the IURC, and Energy anticipates an order in this
proceeding in the second quarter of 1996;
. Fitch raised CG&E's and Energy's first mortgage bonds ratings to A- from
BBB+ and preferred stock ratings to BBB+ from BBB in May 1994 and February
1995, respectively;
. During the first quarter of 1994, CG&E refinanced $305 million of long-
term debt to save approximately $8 million in annualized interest costs;
. CG&E renegotiated a contract for the transportation of coal to CG&E's
generating stations which extends service through the year 2000 and will
save CG&E's and ULH&P's electric customers approximately $6 million per
year; and
. Both Energy's and CG&E's 1994 delivered fuel costs per million Btu were
the lowest these costs have been in the past 10 years.
Regulatory Matters
Potential Divestiture of Gas Operations Under the PUHCA, the divestiture of
CG&E's gas operations may be required. In its order approving the merger, the
SEC reserved judgement over CINergy's ownership of the gas operations for a
period of three years. In November 1994, the SEC requested comments on the
modernization of the PUHCA given the industry's movement toward a more
competitive environment, including whether or not a utility registered under
the PUHCA may own a combination system (i.e., electric and gas). CINergy
believes it has a justifiable basis for retention of its gas operations and
will continue its pursuit of SEC approval to retain the gas portion of the
business. If divestiture is ultimately required, the SEC has historically
allowed companies sufficient time to accomplish divestitures in a manner that
protects shareholder value. Further, CINergy believes that divestiture of the
gas operations, if required, would not have a material effect on merger
savings.
IURC Order - Energy's Retail Rate Proceeding and Merger Savings Allocation
Plan On February 17, 1995, the IURC issued an order (February 1995 Order)
approving a settlement agreement entered into by Energy, the Office of the
Utility Consumer Counselor, Citizens Action Coalition of Indiana, Inc., and
the PSI-Industrial Group concerning Energy's petition for a $93 million retail
rate increase ($103 million including carrying costs attributable to certain
environmental expenditures not included in Energy's base retail electric
rates) and Energy's previously filed plan for the allocation of its portion of
merger savings between Energy's customers and CINergy's shareholders.
The February 1995 Order authorizes Energy to increase annual retail rates
$33.6 million, effective February 1995. The increase excludes reductions for
customer credits for Non-fuel Merger Savings and increases for carrying costs
attributable to certain environmental expenditures not included in Energy's
base retail electric rates, both of which are further discussed herein. The
increase includes the recovery of the costs of postretirement benefits other
than pensions on an accrual basis, the recovery of demand-side management
(DSM) expenditures, the recovery of a portion of amounts deferred for
allowance for funds used during construction (AFUDC) continuation and
depreciation expense, and the adoption of lower depreciation rates, which will
reduce annual depreciation expense by approximately $30 million. This rate
increase reflects an 11.9% return on common equity with an 8.25% overall rate
of return on net original cost rate base.
Additionally, the February 1995 Order provides a mechanism to allocate
Energy's share of net Non-fuel Merger Savings through December 31, 1997,
between Energy's customers and CINergy's shareholders. CINergy currently
anticipates that the estimated nominal merger savings of $1.5 billion will be
apportioned approximately equally between CG&E and Energy. In essence, the
mechanism guarantees Energy's customers 50% of Energy's portion of the
projected net Non-fuel Merger Savings. Energy's customers will receive these
merger savings via credits to base rates of $4.4 million in 1995, an
additional $2.2 million in 1996, and an additional $2.4 million in 1997.
After 1997, the accumulated credits will continue until the effective date of
an order in an Energy general retail rate proceeding. Energy will have to
achieve these levels of merger savings in order to realize the 11.9% return on
equity. This arrangement for sharing of merger savings allows Energy to
recover its portion of transaction costs (currently estimated at $27 million)
and costs to achieve merger savings (currently estimated at $21 million) over
a 10-year period.
The February 1995 Order also provides Energy with a financial incentive to
achieve, or exceed, merger savings projections and enhance operating
efficiencies by allowing Energy to earn up to a 13.25% return on common equity
until the effective date of an order in connection with Energy's July 1994
retail rate petition, which is currently pending before the IURC. Energy
expects an order in this proceeding in the second quarter of 1996. Upon the
effective date of an order relating to the July 1994 retail rate petition, the
February 1995 Order provides Energy an opportunity to earn an additional 100
basis points above the common equity return to be granted by the IURC in such
rate proceeding until December 31, 1997. In order to be eligible for such
additional earnings, Energy must meet certain service-related conditions. Any
mechanism for sharing of merger savings after December 31, 1997, will be
determined in subsequent regulatory proceedings.
Finally, the February 1995 Order includes ratemaking and accounting mechanisms
to address regulatory lag. The February 1995 Order approves Energy's proposal
for current recovery of carrying costs associated with environmental
compliance projects and the applicable portion of the Wabash River Clean Coal
Project (Clean Coal Project) not included in Energy's base retail electric
rates. The Clean Coal Project, which is located at the Wabash River
Generating Station, is a 262-megawatt clean coal power generating facility
planned to be placed in service during the third quarter of 1995. This
ratemaking treatment, including the IURC's March 8, 1995, order approving
Energy's request to earn a cash return on additional construction work in
progress amounts, resulted in cumulative rate increases of approximately 3%.
The February 1995 Order also includes provisions for the deferral of certain
operating costs associated with the Clean Coal Project, together with the debt
component of carrying costs thereon, and continued accrual of the debt
component of carrying costs (to the extent not reflected in rates currently)
and deferral of depreciation expense on the Clean Coal Project and a scrubber
at Gibson Generating Station (Gibson) until the projects' costs are fully
reflected in retail electric rates.
The February 1995 Order approving the settlement agreement resolved a major
uncertainty as to the ultimate level and timing of the rate increase.
Additionally, the order substantially mitigated Energy's risk of not being
able to achieve its allowed return on common equity due to the earnings
attrition resulting from the completion of two major construction projects
within a nine-month period. Finally, the February 1995 Order provides Energy
a realistic opportunity to retain a portion of merger savings for
shareholders.
Energy's July 1994 Retail Rate Petition In addition to the rate petition
addressed in the February 1995 Order, Energy filed a petition in July 1994
with the IURC for a retail rate increase to recover, among other things, the
costs of the Clean Coal Project and the scrubber at Gibson which was placed in
service in September 1994. These two projects were previously approved by the
IURC. Energy initially estimated a rate increase of 8%. Energy is currently
evaluating how the rate settlement and the ability to earn a cash return
during construction on certain projects, as previously discussed, will affect
the estimated rate increase. Energy intends to file testimony supporting its
rate increase request in May 1995 and, as previously discussed, anticipates an
order in the second quarter of 1996. Assuming this petition is satisfactorily
addressed by the IURC, CINergy's objective is to manage costs in order to
eliminate the need for additional rate relief by Energy until the next
century. Energy cannot predict what action the IURC may take with respect to
the proposed rate increase.
CG&E Rate Matters and Merger Savings During the last three years, CG&E has
received a number of electric and gas rate increases. The primary reasons for
the electric rate increases were recovery of CG&E's investments in Zimmer and
the Woodsdale Generating Station (Woodsdale). The gas rate increases reflect
investments in new and replacement gas mains and facilities.
In a May 1992 order (May 1992 Order), the PUCO authorized CG&E to begin
recovering the cost of Zimmer through an increase in electric revenues of
$116.4 million to be phased in over a three-year period through annual
increases beginning each May of $37.8 million in 1992, $38.8 million in 1993,
and $39.8 million in 1994. In this same order, the PUCO also disallowed from
rates approximately $230 million, representing costs related to Zimmer for
nuclear fuel, nuclear wind-down activities during the conversion to a
coal-fired facility, and a portion of the AFUDC accrued on Zimmer.
Pursuant to an appeal by CG&E of the May 1992 Order, the Supreme Court of Ohio
(Court) ruled in November 1993 (November 1993 Ruling) that the PUCO did not
have the authority to order a phase-in of amounts granted in a rate proceeding
and remanded the case to the PUCO to set rates that provide the gross annual
revenues determined in accordance with Ohio statutes. However, the Court
upheld the PUCO's disallowance of Zimmer costs, and, as a result, CG&E wrote
off Zimmer costs of approximately $223 million, net of taxes, in the fourth
quarter of 1993.
In April 1994, the PUCO issued an order approving a settlement agreement
between CG&E, the PUCO Staff, the Ohio Office of Consumers' Counsel, and other
intervenors which addressed the issues raised in the November 1993 Ruling. As
part of the settlement, CG&E did not seek early implementation of the third
phase of the authorized rate increase and will not seek accelerated recovery
of deferrals related to the phase-in plan. These deferrals will be recovered
over the remaining seven-year period as contemplated in the May 1992 Order.
In addition, CG&E agreed to a moratorium on increases in base electric rates
until January 1, 1999 (except under certain circumstances), and, in return, is
allowed to retain all PUCO electric jurisdictional Non-fuel Merger Savings
until 1999.
In an August 1993 order (August 1993 Order), the PUCO approved a stipulation
providing for annual increases of approximately $41 million (5%) in electric
revenues and $19 million (6%) in gas revenues that were effective immediately.
The August 1993 Order precludes CG&E from increasing gas base rates prior to
June 1, 1995, except for rate filings made under certain circumstances.
In 1994, CG&E expensed $32 million of merger transaction costs and costs to
achieve merger savings applicable to its PUCO electric jurisdiction. The
remaining merger-related costs allocable to PUCO electric jurisdictional
customers will be expensed as incurred. CG&E and its utility subsidiaries
intend to continue deferring the non-PUCO electric jurisdictional portion of
merger transaction costs and costs to achieve merger savings (current estimate
of $14 million) for future recovery in customer rates.
ULH&P Rate Matters In mid-1993, the Kentucky Public Service Commission (KPSC)
issued orders authorizing ULH&P to increase annual gas revenues by $4.2
million.
In exchange for the KPSC's support of the merger, in May 1994, ULH&P accepted
the KPSC's request for an electric rate moratorium commencing after ULH&P's
next retail rate case and extending to January 1, 2000. The KPSC also
required CG&E and ULH&P to agree that, for 12 months from consummation of the
merger, no filings will be made to adjust CG&E's base purchase power rate
charged to ULH&P or ULH&P's base electric rates.
Environmental Issues
Clean Air Act Amendments of 1990 (CAAA) The acid rain provisions of the CAAA
require reductions in both sulfur dioxide and nitrogen oxide 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 sulfur dioxide
reduction objectives of the CAAA, emission allowances have been allocated by
the United States Environmental Protection Agency (EPA) to affected sources
(e.g., CINergy's electric generating units). Each allowance permits one ton
of sulfur dioxide 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 is based upon the compliance plans
developed by Energy and CG&E and approved by the state utility commissions of
Indiana and Ohio. CINergy's compliance with Phase I sulfur dioxide reduction
requirements includes increasing the sulfur dioxide removal rate of CG&E's
East Bend Generating Station Unit 2 scrubber, the addition of one scrubber on
Energy's Gibson Unit 4, installation of flue-gas conditioning equipment on
certain units, upgrading certain precipitators, implementation of DSM
programs, burning lower-sulfur coal at some of its major coal-fired generating
stations, and inclusion of the value of emission allowances in the economic
dispatch process. All required modifications to CINergy's generating units to
implement the compliance plans have been completed and tested and are
operational. To meet nitrogen oxide reductions required by Phase I, CINergy
installed low-nitrogen oxide burners at certain stations. In addition, the
successful operation of Energy's Clean Coal Project will further reduce sulfur
dioxide and nitrogen oxide emissions.
To comply with Phase II sulfur dioxide requirements, CINergy's current
compliance strategy includes a combination of switching to lower-sulfur coal
blends and utilizing its emission allowance banking strategy. This cost
effective strategy will allow CINergy to meet Phase II sulfur dioxide
reduction requirements while maintaining optimal flexibility to meet
potentially significant future environmental demands or changes in output due
to increased customer choice. CINergy intends to utilize its emission
allowance banking strategy to the extent a viable emission allowance market is
available. However, the availability and economic value of emission
allowances over the long-term is still uncertain. In the event the market
price for emission allowances or lower-sulfur coal increases substantially
from current estimates, CINergy could be forced to consider high-cost capital
intensive options (e.g., installing additional scrubbers).
To meet nitrogen oxide reductions required by Phase II, CINergy may install
low-nitrogen oxide burners on certain affected units. In addition, CINergy is
investigating the use of a nitrogen oxide emission averaging strategy for
meeting the Phase II requirements. However, this strategy may be impacted by
the delayed release of final nitrogen oxide compliance rules.
CINergy is forecasting CAAA compliance capital expenditures of $130 million
during the 1995 through 1999 period. In addition, operating costs may also
increase due to higher fuel costs (e.g., higher-quality, lower-sulfur coal,
increased use of natural gas) and maintenance expenses.
Manufactured Gas Plants - Energy Coal tar residues and other substances
associated with manufactured gas plant (MGP) sites have been found at former
MGP sites in Indiana, including, but not limited to, sites previously owned by
Energy. Energy has identified at least 21 MGP sites which it previously
owned, including 19 it sold in 1945 to Indiana Gas and Water Company, Inc.
(now Indiana Gas Company [IGC]).
In April 1993, IGC filed testimony with the IURC seeking recovery of costs
incurred in complying with Federal, state, and local environmental regulations
related to MGP sites in which it has an interest, including sites acquired
from Energy. In its testimony, IGC stated that it would also seek to recover
a portion of these costs from other Potentially Responsible Parties (PRP),
including previous owners, pursuant to its rights of contribution under the
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). IGC has informed Energy of the basis for IGC's position that
Energy, as a PRP under CERCLA, should contribute to IGC's response costs
related to investigating and remediating contamination at MGP sites which
Energy sold to IGC. The IURC has not ruled on IGC's petition. In its July
1994 retail rate petition, Energy is seeking approval to defer, and
subsequently recover through rates, any costs it incurs for investigation and
remediation of previously owned MGP sites.
With the exception of one site, Shelbyville, it is premature for Energy to
predict the nature, extent, and costs of, or Energy's responsibility for, any
environmental investigations and remediations which may be required at other
MGP sites owned, or previously owned, by Energy. With respect to the
Shelbyville site, for which Energy and IGC are sharing the costs and based
upon environmental investigations and remediation completed to date, Energy
believes that any further required investigation and remediation will not have
a material adverse effect on its financial condition or results of operations.
Manufactured Gas Plants - CG&E and its Utility Subsidiaries Lawrenceburg Gas
Company (Lawrenceburg), a wholly-owned subsidiary of CG&E, also has an MGP
site which is under investigation to determine a remediation strategy. Total
cleanup cost is currently estimated to be approximately $750,000.
Lawrenceburg has applied to have the site included in the Indiana Department
of Environmental Management's voluntary cleanup program. 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 are known to present a
risk to the environment. Except for the Lawrenceburg site, neither CG&E nor
its utility subsidiaries have undertaken responsibility for investigating
other potential MGP sites.
United Scrap Lead Site The EPA alleges that CG&E is a PRP under the CERCLA
liable for cleanup of the United Scrap Lead site in Troy, Ohio. CG&E 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.
Global Climate Change Concern has been expressed by environmentalists,
scientists, and policymakers as to the potential climate change from
increasing amounts of "greenhouse" gases released as by-products of burning
fossil fuel and other industrial processes. In response to this concern, in
October 1993, the Clinton Administration announced its plan to reduce
greenhouse gases to 1990 levels by the year 2000. The plan calls for the
reduction of 109 million metric tons of carbon equivalents of all greenhouse
gases. Initially, the plan relies largely on voluntary participation of many
industries, with a substantial emissions reduction contribution expected from
the utility industry. Numerous utilities, including Energy and CG&E, have
agreed to study and implement voluntary, cost-effective greenhouse gas
emission control programs. CINergy signed a voluntary reduction agreement
with the United States Department of Energy (DOE) in February 1995. CINergy's
voluntary participation will include a least-cost, market-oriented program
composed of residential, commercial, and industrial DSM programs, energy
efficiency improvements, research and development projects, and arrangements
with other sources through on- and off-system pollution prevention measures.
The DOE and the Clinton Administration have stated they will monitor the
progress of industry to determine whether targeted reductions are being
achieved. If the Clinton Administration or Congress should conclude that
further reductions are needed, legislation requiring utilities to achieve
additional reductions is possible.
Air Toxics The air toxics provisions of the CAAA exempt fossil-fueled steam
utility plants from mandatory reduction of 189 listed air toxics until the EPA
completes a study, expected in November 1995, on the risk of these emissions
on public health. If additional air toxics regulations are established, the
cost of compliance could be significant. CINergy cannot predict the outcome
or the effects of this EPA study.
CAPITAL REQUIREMENTS
Construction
General For 1995, construction expenditures for the CINergy system are
forecasted to be $300 million, and over the next five years (1995 through
1999), are forecasted to be approximately $2.1 billion. (All forecasted
amounts are in nominal dollars and reflect assumptions as to the economy,
capital markets, construction programs, legislative and regulatory actions,
frequency and timing of rate increase requests, and other related factors
which may change significantly.)
New Generation In 1992, the DOE approved for partial funding a joint proposal
by Energy and Destec Energy, Inc. (Destec) for a 262-megawatt clean coal power
generating facility to be located at Energy's Wabash River Generating Station.
In 1993, the IURC issued "certificates of need" for the project. The total
project cost, including construction, Destec's operating costs for a three-
year demonstration period, and Energy's operating costs for a one-year
demonstration period, was originally estimated to be $550 million. The DOE
originally awarded the project up to $198 million. During 1994, the total
project cost was revised to $592 million with the DOE award increasing to $219
million. Of this revised amount, Energy will receive approximately $58
million from the DOE to be used to offset project costs. The remainder of the
project costs will be funded by Energy and Destec, with Energy's portion being
approximately $84 million in construction costs and approximately $9 million
in operating costs, including fuel, during the one-year demonstration period.
During 1994, the IURC approved the increased estimate in costs. The project
is currently under construction, and the demonstration period is expected to
commence in the third quarter of 1995. Once the facility is operational,
Energy's 25-year contractual agreement with Destec requires Energy to pay
Destec a fixed monthly fee plus certain monthly operating expenses. Over the
next five years (1995 through 1999), the fixed fee will total $56 million, and
the variable fee is estimated at $95 million. As previously discussed, Energy
received authorization in the February 1995 Order to defer these costs for
subsequent recovery in an IURC order associated with Energy's July 1994 retail
rate petition.
In November 1994, CG&E began construction of a 100-megawatt combustion turbine
generating unit to be located at Woodsdale. The unit is scheduled to be in
service to meet peak demand by the summer of 1998.
Other
Mandatory redemptions of long-term debt and cumulative preferred stock total
$491 million during the 1995 through 1999 period. Additionally, funds are
required to make a payment of $80 million in accordance with the settlement of
Energy's Wabash Valley Power Association, Inc. (WVPA) litigation. This
payment is not currently expected to occur before 1996 (see Note 16(c) of the
"Notes to Consolidated Financial Statements" in "Item 8. Financial Statements
and Supplementary Data").
The first mortgage bond indentures of both CG&E and ULH&P provide that so long
as any series of bonds issued prior to 1976 and 1978, respectively, are
outstanding, CG&E and ULH&P will pay to the trustee as a Maintenance and
Replacement Fund (M&R Fund), on or before April 30 of each year, in cash,
unfunded property additions, or principal amount of first mortgage bonds of
any series issued under the mortgages, a formularized amount related to the
net revenues of CG&E and ULH&P. For 1994, the M&R Fund requirements (payable
on or before April 30, 1995) for CG&E and ULH&P are approximately $114 million
and $5 million, respectively.
Most of CG&E's and ULH&P's first mortgage bonds are redeemable at par value,
plus accrued interest, through cash deposited to satisfy the annual M&R Fund
requirement. On March 24, 1995, CG&E announced its intention to redeem,
beginning May 1, 1995, $114 million principal amount of its 10.125% and 9.70%
first mortgage bonds at par with cash deposited in the M&R Fund. ULH&P also
announced its intention to redeem $5 million principal amount of its 10.25%
first mortgage bonds (due June 1, 2020) at par with cash deposited in the M&R
Fund, and to redeem the remaining amount of such bonds at the redemption price
of 107.34% on June 1, 1995.
CG&E and ULH&P will continue to evaluate the use of this provision of their
mortgage indentures for the possible redemption of first mortgage bonds in
future years.
CINergy currently forecasts approximately $290 million for DSM expenditures,
primarily related to Energy, during the 1995 through 1999 period. The
February 1995 Order authorized Energy to amortize and recover DSM expenditures
deferred through July 1993 ($35 million), together with carrying costs, over a
five-year period commencing in February 1995. Deferred DSM expenditures as of
February 1995, which are not included for recovery in the February 1995 Order
will continue to be deferred, with carrying costs, for recovery in subsequent
rate proceedings. In addition, base retail electric rates will include
recovery of $23 million of DSM expenditures on an annual basis. Future
deferral of DSM expenditures will be the amount by which actual annual
expenditures exceed the base level of $23 million. If DSM expenditures in any
calendar year are less than the $23 million in base rates, the unamortized
balance of deferred DSM expenditures would be reduced by such difference. In
the PUCO's August 1993 Order, CG&E was authorized to recover approximately $5
million of costs associated with DSM programs for domestic customers. The
PUCO has also permitted CG&E to defer future expenditures of approved DSM
programs, with carrying costs, for future recovery. In addition, CG&E has
applications pending for approval by the PUCO for deferral of the costs of
additional DSM programs.
CAPITAL RESOURCES
CINergy currently projects that internal generation of funds will be adequate
to finance substantially all of its capital needs during the 1995 through 1999
period. CINergy projects that its need, if any, for external funds during
this period will primarily be for the refinancing of long-term debt and
preferred stock, as previously discussed. (All forecasted amounts are in
nominal dollars and reflect assumptions as to the economy, capital markets,
construction programs, legislative and regulatory actions, frequency and
timing of rate increase requests, and other related factors which may change
significantly.)
Common Stock In December 1994, CINergy publicly issued approximately 7.1
million shares of common stock under a shelf registration statement for the
sale of up to eight million shares. The net proceeds of approximately $160
million were contributed to the equity capital of Energy for general corporate
purposes, including repayment of short-term indebtedness incurred for
construction financing.
Long-term Debt and Preferred Stock CINergy's utility subsidiaries currently
have existing shelf registration statements which permit the sale of up to
$605 million of long-term debt and state regulatory authority to issue up to
$298 million of this long-term debt. CINergy's utility subsidiaries have
applications pending before the PUCO and the KPSC for authority to issue up to
an additional $555 million of long-term debt. Additionally, these
subsidiaries had effective shelf registration statements and regulatory
authority to issue up to $40 million of preferred stock. These subsidiaries
will request regulatory approval to issue additional amounts of debt
securities and preferred stock as needed.
Short-term Debt The operating subsidiary companies of CINergy have authority
to borrow up to $575 million as of December 31, 1994. In connection with this
authority, CINergy's subsidiaries have established unsecured lines of credit
(Committed Lines) which currently permit borrowings of up to $343 million, of
which $208 million remained unused. CG&E and Energy also issue commercial
paper from time to time. All outstanding commercial paper is supported by
Committed Lines of the respective companies. Additionally, this authority
allows the subsidiary companies of CINergy to arrange for additional short-
term borrowings with various banks on an "as offered" basis (Uncommitted
Lines). All Uncommitted Lines provide for maturities of up to 365 days with
various interest rate options.
Additionally, CINergy has a $100 million credit facility which expires on
September 27, 1997, of which $25 million remained unused at December 31, 1994.
The facility may be increased to a maximum of $300 million, and the Company
has an annual option of extending the term of the facility by one year. This
credit facility will be used for general corporate purposes and funding
non-utility business ventures.
INFLATION
Over the past several years, the rate of inflation has been relatively low.
CINergy believes that the recent inflation rates do not materially affect its
results of operations or financial condition. However, under existing
regulatory practice, 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
See Notes 5 and 7 of the "Notes to Consolidated Financial Statements" in
"Item 8. Financial Statements and Supplementary Data" for a discussion of the
restrictions on common dividends.
RESULTS OF OPERATIONS
Nonrecurring Charges
In 1994, CINergy recognized charges to earnings of approximately $79 million
($56 million, net of taxes) or 38 cents per share primarily for certain merger
costs and other costs which the Company does not expect to recover from
customers due to rate settlements related to securing support for the merger.
The charges include the PUCO electric jurisdictional portion of merger
transaction costs and costs to achieve merger savings incurred through
December 31, 1994, previously capitalized information systems development
costs, and severance benefits to former officers of CG&E and Energy. Of the
total $79 million charge, $62 million is reflected in "OPERATING EXPENSES -
Other operation" and $17 million is reflected in "OTHER INCOME AND EXPENSES -
NET" (see Note 18 of the "Notes to Consolidated Financial Statements" in
"Item 8. Financial Statements and Supplementary Data").
In 1993, CINergy recognized charges to earnings of approximately $260 million
($239 million, net of taxes) or $1.66 per share for the write-off of a portion
of Zimmer and costs in connection with IPALCO Enterprises, Inc.'s hostile
takeover attempt of Resources prior to the merger. These charges are
reflected in "OTHER INCOME AND EXPENSES - NET".
Kwh Sales
CINergy's total kwh sales in 1994, as compared to 1993, increased 2.9% due in
large part to non-firm power sales for resale reflecting third party short-
term power sales to other utilities through Energy's system and direct power
sales by Energy to other utilities. This increase was partially offset by
CG&E's reduced power sales to other utilities in 1994. Also significantly
contributing to the total kwh sales levels were increased retail sales to
industrial customers. This increase reflects growth in the primary metals and
transportation equipment sectors. Commercial sales increased due, in part, to
new customers. A decrease in domestic sales resulted from the milder weather
experienced during the third and fourth quarters of 1994.
A return to more normal weather contributed to the 4.4% increase in total kwh
sales in 1993, as compared to 1992. In addition, growth in the primary metals
and transportation equipment sectors resulted in increased industrial sales.
Partially offsetting these increases was a reduction in non-firm power sales
for resale, which reflected a significant decrease in Energy's sales
associated with third party short-term power sales to other utilities through
Energy's system.
The reduction of firm power sales for resale in 1992 was responsible, in part,
for a 2.5% decrease in total kwh sales, as compared to 1991. Reflected in
this decrease was the reduction of Energy's firm power sales to WVPA and the
Indiana Municipal Power Agency (IMPA) as they served more of their customers'
requirements from their portion of the jointly owned Gibson Unit 5.
Additionally, beginning in August 1992, WVPA substantially reduced its
purchases associated with an interim scheduled power agreement between Energy
and WVPA. The decrease in domestic and commercial sales due to the milder
weather experienced during the 1992 cooling season was significantly offset
by continued growth in industrial sales.
Year-to-year changes in kwh sales for each class of customers are shown below:
Increase (Decrease) from Prior Year
1994 1993 1992
Retail
Domestic. . . . . . . . . . . . . . . (1.7)% 10.3% (6.6)%
Commercial. . . . . . . . . . . . . . 1.9 6.3 (1.5)
Industrial. . . . . . . . . . . . . . 4.6 4.2 5.7
Total retail. . . . . . . . . . . . . . 1.6 6.9 (.8)
Sales for resale
Firm power obligations. . . . . . . . 2.5 2.6 (26.3)
Non-firm power transactions . . . . . 13.3 (10.9) (1.6)
Total sales for resale. . . . . . . . . 10.0 (7.2) (9.9)
Total sales . . . . . . . . . . . . . . 2.9 4.4 (2.5)
CINergy currently forecasts a 2% annual compound growth rate in kwh sales over
the 1995 through 2004 period. This forecast reflects the effects of DSM and
excludes non-firm power transactions and any potential off-system, long-term
firm power sales.
Mcf Sales and Transportation
The milder weather experienced in 1994 contributed to a decrease in domestic
and commercial gas sales volumes and led to the decrease in total Mcf sales
and transportation of 1.2%. The leading reason for an increase in gas
transportation services was additional demand for gas transportation services
by industrial customers, mainly in the primary metals sector.
The increase in retail Mcf sales of 5.4% in 1993, when compared to 1992, was
primarily attributable to higher domestic and commercial sales volumes as a
result of the return to more normal weather during the 1993 heating season and
the addition of a number of customers to CG&E's gas system during the year.
Gas transportation volumes for 1993 increased largely as a result of
additional industrial demand for gas transportation services in the primary
metals sector. The increase in Mcf transported more than offset the decrease
in Mcf sold to industrial customers.
In 1992, total gas sales and transportation volumes increased 7.3%, as
compared to 1991. Contributing to the increase in total retail Mcf sales were
the less mild weather during the 1992 heating season and an increase in the
average number of gas customers, both of which resulted in greater domestic
and commercial gas sales. These increases in domestic and commercial sales
were partially offset by decreased industrial sales volumes. The increase in
transportation volumes mainly reflected increased industrial demand in the
primary metals sector for gas transportation services.
Year-to-year changes in Mcf sales and transportation for each class of
customers are shown below:
Increase (Decrease) from Prior Year
1994 1993 1992
Retail
Domestic. . . . . . . . . . . . . . . (10.2)% 9.5% 4.5%
Commercial. . . . . . . . . . . . . . (1.5) 1.1 4.0
Industrial. . . . . . . . . . . . . . (9.9) (.8) (5.4)
Total retail. . . . . . . . . . . . . . (6.7) 5.4 3.0
Gas transported . . . . . . . . . . . . 13.9 12.7 22.3
Total gas sold and transported. . . . . (1.2) 7.2 7.3
Revenues
Electric Operating Revenues
CG&E's electric rate increases which became effective in May 1993, August
1993, and May 1994, Energy's increased kwh sales, and the effects of Energy's
$31 million refund accrued in June 1993 as a result of the settlement of the
IURC's April 1990 rate order (April 1990 Order) (see Note 2(a)(i) of the
"Notes to Consolidated Financial Statements" in "Item 8. Financial Statements
and Supplementary Data") resulted in increased electric operating revenues of
$111 million (4.7%) in 1994, as compared to 1993.
Electric operating revenues increased $130 million (5.8%) in 1993 primarily as
a result of greater kwh sales and electric rate increases granted to CG&E in
1993 and 1992. These increases were partially offset by Energy's $31 million
refund resulting from the settlement of the IURC's April 1990 Order and a
decrease in Energy's cost of fuel used in electric production.
In 1992, electric operating revenues decreased $29 million (1.3%) primarily as
a result of lower kwh sales and a decrease in Energy's cost of fuel used in
electric production. These decreases were partially offset by electric rate
increases granted to CG&E.
An analysis of electric operating revenues for the past three years is shown
below:
1994 1993 1992
(in millions)
Previous year's electric
operating revenues . . . . . . . . . . . . $2 371 $2 241 $2 270
Increase (Decrease) due to change in:
Price per kwh
Retail . . . . . . . . . . . . . . . . . 59 (9) 17
Sales for resale
Firm power obligations . . . . . . . . 1 (1) 4
Non-firm power transactions. . . . . . 3 12 (17)
Total change in price per kwh. . . . . . . 63 2 4
Kwh sales
Retail . . . . . . . . . . . . . . . . . 33 138 (15)
Sales for resale
Firm power obligations . . . . . . . . 2 2 (28)
Non-firm power transactions. . . . . . 14 (11) (2)
Total change in kwh sales. . . . . . . . . 49 129 (45)
Other. . . . . . . . . . . . . . . . . . . (1) (1) 12
Current year's electric
operating revenues . . . . . . . . . . . . $2 482 $2 371 $2 241
Gas Operating Revenues
In 1994, gas operating revenues decreased $27 million (5.7%) when compared to
1993 due to the operation of fuel adjustment clauses, which reflected a lower
average cost of gas purchased during the latter part of 1994 and a reduction
in total volumes sold and transported.
Gas operating revenues increased $75 million (19.1%) in 1993, as compared to
1992, primarily as a result of gas rate increases in 1993, higher total
volumes of gas sold and transported, and the operation of fuel adjustment
clauses reflecting an increase in the average cost of gas purchased.
In 1992, gas operating revenues increased $23 million (6.3%). The increased
revenues were primarily a result of higher total volumes sold and transported
and the operation of fuel adjustment clauses reflecting an increase in the
average cost of gas purchased.
Operating Expenses
Fuel
(a) Fuel Used in Electric Production Electric fuel costs, CINergy's largest
operating expense, remained relatively unchanged in 1994, showing less than a
1% increase. An analysis of these fuel costs for the past three years is
shown below:
1994 1993 1992
(in millions)
Previous year's fuel expense . . . . . . . . $719 $713 $733
Increase (Decrease) due to change in:
Price of fuel. . . . . . . . . . . . . . . (11) (23) (18)
Kwh generation . . . . . . . . . . . . . . 18 29 (2)
Current year's fuel expense. . . . . . . . . $726 $719 $713
(b) Gas Purchased A reduction in the average cost per Mcf of gas purchased
(5.1%) and lower volumes purchased (6.8%) contributed to the decline in gas
purchased expense of $33 million (11.6%) in 1994, as compared to 1993.
Gas purchased expense in 1993, as compared to 1992, increased $53 million
(23.0%) as a result of an increase in the average cost per Mcf of gas
purchased of 17.5% and an increase in volumes purchased of 4.7%.
In 1992, gas purchased expense increased $16 million (7.7%) as a result of an
increase in volumes purchased of 1.7% and an increase in the average cost per
Mcf of gas purchased of 5.9%.
Purchased and Exchanged Power
Purchased and exchanged power increased $16 million (33.4%) in 1994, as
compared to 1993, reflecting an increase in third party short-term power sales
to other utilities through Energy's system and increased purchases of other
non-firm power by Energy primarily to serve its own load.
In 1993, Energy increased its purchases of non-firm power primarily to serve
its own load, which resulted in an increase in purchased and exchanged power
costs of $11 million (30.4%) as compared to 1992.
Purchased and exchanged power costs decreased $31 million (46.4%) in 1992,
reflecting a reduction in Energy's third party short-term power sales to other
utilities through Energy's system and the scheduled reduction in Energy's
purchase obligations from WVPA and IMPA under the Gibson Unit 5 joint
ownership arrangement.
Other Operation
Other operation expenses increased $107 million (23.4%) in 1994, as compared
to 1993, due to a number of factors including charges of approximately $62
million for merger-related costs and other expenditures which the Company does
not expect to recover from customers due to rate settlements related to
securing support for the merger. Additionally, fuel litigation expenses of $8
million incurred by Energy and increased electric production and distribution
expenses contributed to the increase.
Maintenance
Increased maintenance on a number of Energy's generating stations and the
initial costs of Energy's new distribution line clearing program resulted in
increased maintenance expenses of $8 million (4.2%) in 1994.
Maintenance expenses decreased $17 million (8.2%) in 1992 primarily due to
decreased maintenance expenses on CG&E's electric generating units and gas and
electric distribution facilities.
Depreciation
Depreciation expense increased $16 million (5.6%) in 1994, as compared to
1993, primarily as a result of additions to electric utility plant.
Depreciation expense increased $21 million (8.1%) in 1993 primarily due to a
full year's effect of the first five units of Woodsdale which were placed in
commercial operation in 1992, the sixth unit which was placed in commercial
operation in 1993, and other additions to electric utility plant.
Depreciation expense in 1992 increased $16 million (6.6%) primarily due to a
full year's effect of Zimmer which was placed in commercial operation in March
1991, the first five units of Woodsdale which were placed in commercial
operation in 1992, and other additions to electric utility plant.
Post-in-service Deferred Operating Expenses - Net
Post-in-service deferred operating expenses of $12 million and $28 million in
1993 and 1992, respectively, reflect deferral of depreciation, operation and
maintenance expenses (exclusive of fuel costs), and property taxes related to
the first five units of Woodsdale between the time the units began commercial
operation and the effective date of new rates authorized by the PUCO in August
1993 which reflect these costs. In accordance with the August 1993 Order,
CG&E began amortizing the deferred Woodsdale expenses over a 10-year period.
Additionally, in January 1993, Energy received authority from the IURC to
defer depreciation expense on the combustion turbine generating unit
constructed at its Cayuga Generating Station and major environmental
compliance projects from the date the projects were placed in service until
the effective date of an order in a general retail rate proceeding. The
post-in-service deferred operating expenses for 1992 also reflect deferral of
depreciation, operation and maintenance expenses (exclusive of fuel costs),
and property taxes related to Zimmer from January 1992 through May 1992, the
effective date of new rates which reflected Zimmer costs. In accordance with
the May 1992 Order, CG&E began amortizing the deferred expenses associated
with Zimmer over a 10-year period. (See Note 1(h) of the "Notes to
Consolidated Financial Statements" in "Item 8. Financial Statements and
Supplementary Data".)
Phase-in Deferred Depreciation
Phase-in deferred depreciation reflects the PUCO ordered phase-in plan for
Zimmer (see Note 1(g) of the "Notes to Consolidated Financial Statements" in
"Item 8. Financial Statements and Supplementary Data").
Taxes
Taxes other than income taxes increased $15 million (6.5%) in 1994, $13
million (5.8%) in 1993, and $25 million (12.8%) in 1992 primarily due to
increased property taxes resulting from a greater investment in taxable
property (including Zimmer and Woodsdale) and higher property tax rates.
Other Income and Expenses - Net
Post-in-service Carrying Costs
In 1994, post-in-service carrying costs decreased $8 million (46.0%) as a
result of discontinuing the accrual of carrying costs on the first five units
of Woodsdale after the August 1993 effective date of new rates for CG&E which
reflected Woodsdale. Additional environmental compliance projects completed
by Energy which qualified, under IURC authority, for continued accrual of the
debt component of AFUDC (post-in-service carrying costs) partially offset this
decrease.
Post-in-service carrying costs decreased $19 million (50.6%) in 1993 as a
result of discontinuing the accrual of carrying costs on Zimmer when it was
reflected in rates in May 1992. Partially offsetting this decrease was
Energy's implementation of the January 1993 IURC order authorizing the accrual
of post-in-service carrying costs, as previously discussed (see Note 1(h) of
the "Notes to Consolidated Financial Statements" in "Item 8. Financial
Statements and Supplementary Data").
Post-in-service carrying costs decreased $13 million (26.8%) in 1992 also as a
result of discontinuing the accrual of carrying costs on Zimmer when it was
reflected in rates in May 1992. Post-in-service carrying costs for 1992 also
reflect the accrual of carrying costs on the first five units of Woodsdale
(see Note 1(h) of the "Notes to Consolidated Financial Statements" in "Item 8.
Financial Statements and Supplementary Data").
Phase-in Deferred Return
Phase-in deferred return reflects the PUCO ordered phase-in plan for Zimmer
(see Note 1(g) of the "Notes to Consolidated Financial Statements" in "Item 8.
Financial Statements and Supplementary Data").
Reduction of Loss Related to the IURC's June 1987 Order
Energy had previously recognized a loss of $139 million for the IURC's June
1987 tax order (June 1987 Order) which related to the effect on Energy of the
1987 reduction in the Federal income tax rate. An IURC order in December
1993, approving a settlement agreement, provided for Energy to refund $119
million applicable to the June 1987 Order to Energy's retail customers (see
Note 2(a)(i) of the "Notes to Consolidated Financial Statements" in "Item 8.
Financial Statements and Supplementary Data").
Write-off of a Portion of Zimmer Station
In November 1993, CG&E wrote off Zimmer costs disallowed from rates by the
PUCO in the May 1992 Order.
Interest and Other Charges
Interest and other charges increased $22 million (9.4%) in 1992. This
increase was partially attributable to a decrease in the allowance for
borrowed funds used during construction. This decrease was related to
decreases in construction work in progress associated with the first five
units of Woodsdale being placed in service in 1992.
Index to Financial Statements and Financial Statement Schedules
Page Number
Financial Statements
Report of Independent Public Accountants. . . . . . . . . 45-46
Consolidated Statements of Income for the
three years ended December 31, 1994 . . . . . . . . . . 47
Consolidated Balance Sheets at
December 31, 1994 and 1993. . . . . . . . . . . . . . . 48-49
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1994 . . . . . . . . . . . . . . . . 50
Consolidated Statements of Cash Flows
for the three years ended December 31, 1994 . . . . . . 51
Schedule of Cumulative Preferred Stock
of Subsidiaries . . . . . . . . . . . . . . . . . . . . 52
Schedule of Long-term Debt. . . . . . . . . . . . . . . . 53-54
Notes to Consolidated Financial Statements. . . . . . . . 55-85
Page Number
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts . . . . . 97-99
The information required to be submitted in schedules other than those
indicated above has been included in the consolidated balance sheets, the
consolidated statements of income, related schedules, the notes thereto, or
omitted as not required by the Rules of Regulation S-X.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of CINergy Corp.:
We have audited the consolidated balance sheets and schedules of cumulative
preferred stock of subsidiaries and long-term debt of CINERGY CORP. (a
Delaware Corporation) and its subsidiary companies as of December 31, 1994 and
1993, 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, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of CINergy Corp. and subsidiary
companies as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As explained in Notes 11 and 15 to the consolidated financial statements, the
Company changed its methods of accounting for postretirement health care
benefits and income taxes effective January 1, 1993.
As more fully discussed in Note 16 to the consolidated financial statements,
Wabash Valley Power Association, Inc. (WVPA) filed suit in 1984 against PSI
Energy, Inc. (Energy), a subsidiary of CINergy Corp., for $478 million plus
interest and other damages to recover its share of Marble Hill Nuclear Project
costs. Energy and its officers reached a settlement with WVPA in 1989 that is
subject to approval of judicial and regulatory authorities and has recorded an
estimated loss related to the litigation. The eventual outcome of this
litigation cannot presently be determined.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in
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 schedules have been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Cincinnati, Ohio,
January 23, 1995
CINERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
1994 1993 1992
(in thousands, except per share amounts)
OPERATING REVENUES (Note 2)
Electric . . . . . . . . . . . . . . . . . . . . . . . . . . . $2 481 779 $2 370 812 $2 240 506
Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 398 469 296 393 970
2 924 177 2 840 108 2 634 476
OPERATING EXPENSES
Fuel used in electric production . . . . . . . . . . . . . . . 725 985 719 206 713 362
Gas purchased. . . . . . . . . . . . . . . . . . . . . . . . . 248 293 280 836 228 272
Purchased and exchanged power. . . . . . . . . . . . . . . . . 62 332 46 732 35 845
Other operation. . . . . . . . . . . . . . . . . . . . . . . . 563 650 456 590 442 250
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . 200 959 192 877 190 826
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 294 395 278 882 258 088
Post-in-service deferred operating
expenses - net . . . . . . . . . . . . . . . . . . . . . . . (5 998) (11 540) (27 799)
Phase-in deferred depreciation . . . . . . . . . . . . . . . . (2 161) (8 524) (8 468)
Income taxes (Note 15) . . . . . . . . . . . . . . . . . . . . 152 181 172 637 160 399
Taxes other than income taxes. . . . . . . . . . . . . . . . . 244 051 229 148 216 600
2 483 687 2 356 844 2 209 375
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . 440 490 483 264 425 101
OTHER INCOME AND EXPENSES - NET
Allowance for equity funds used
during construction. . . . . . . . . . . . . . . . . . . . . 6 201 14 327 14 799
Post-in-service carrying costs . . . . . . . . . . . . . . . . 9 780 18 105 36 655
Phase-in deferred return . . . . . . . . . . . . . . . . . . . 15 351 35 334 26 609
Reduction of loss related to the IURC's
June 1987 Order (Note 2) . . . . . . . . . . . . . . . . . . - 20 134 -
Write-off of a portion of
Zimmer Station (Note 2). . . . . . . . . . . . . . . . . . . - (234 844) -
Income taxes (Note 15)
Related to the IURC's June 1987 Order. . . . . . . . . . . . - (7 444) -
Related to the write-off of a portion of
Zimmer Station . . . . . . . . . . . . . . . . . . . . . . - 12 085 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 609 21 043 30 174
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . (28 444) (40 299) (2 466)
13 497 (161 559) 105 771
INCOME BEFORE INTEREST AND OTHER CHARGES . . . . . . . . . . . . 453 987 321 705 530 872
INTEREST AND OTHER CHARGES
Interest on long-term debt . . . . . . . . . . . . . . . . . . 219 248 225 990 225 708
Other interest . . . . . . . . . . . . . . . . . . . . . . . . 20 370 7 923 12 752
Allowance for borrowed funds used
during construction. . . . . . . . . . . . . . . . . . . . . (12 332) (12 740) (13 289)
Preferred dividend requirements of
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 35 559 37 985 34 896
262 845 259 158 260 067
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 191 142 $ 62 547 $ 270 805
AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . . . . . . . . 147 426 144 226 141 884
EARNINGS PER COMMON SHARE. . . . . . . . . . . . . . . . . . . . $1.30 $.43 $1.91
DIVIDENDS DECLARED PER COMMON SHARE. . . . . . . . . . . . . . . $1.50 $1.46 $1.39
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1994 1993
(dollars in thousands)
UTILITY PLANT - ORIGINAL COST
In service
Electric . . . . . . . . . . . . . . . . . . . . . $8 292 625 $7 842 925
Gas . . . . . . . . . . . . . . . . . . . . . . . . 645 602 611 579
Common . . . . . . . . . . . . . . . . . . . . . . 185 718 183 225
9 123 945 8 637 729
Accumulated depreciation. . . . . . . . . . . . . . . 3 163 802 2 928 184
5 960 143 5 709 545
Construction work in progress . . . . . . . . . . . . 238 750 313 153
Total utility plant . . . . . . . . . . . . . . . 6 198 893 6 022 698
CURRENT ASSETS
Cash and temporary cash investments . . . . . . . . . 71 880 11 121
Restricted deposits . . . . . . . . . . . . . . . . . 11 288 49 231
Accounts receivable less accumulated provision
of $9,716,000 in 1994 and $15,561,000 in 1993
for doubtful accounts (Note 9). . . . . . . . . . . 299 509 340 059
Materials, supplies, and fuel - at average cost
Fuel for use in electric production . . . . . . . . 156 028 99 673
Gas stored for current use. . . . . . . . . . . . . 31 284 36 048
Other materials and supplies. . . . . . . . . . . . 92 880 98 522
Property taxes applicable to subsequent year. . . . . 112 420 107 410
Prepayments and other . . . . . . . . . . . . . . . . 36 416 60 906
811 705 802 970
OTHER ASSETS
Regulatory assets
Post-in-service carrying costs and deferred
operating expenses. . . . . . . . . . . . . . . . 185 280 173 038
Phase-in deferred return and depreciation . . . . . 100 943 83 431
Deferred demand-side management costs . . . . . . . 104 127 56 859
Amounts due from customers - income taxes . . . . . 408 514 405 516
Deferred merger costs . . . . . . . . . . . . . . . 49 658 28 397
Unamortized costs of reacquiring debt . . . . . . . 70 424 66 924
Other . . . . . . . . . . . . . . . . . . . . . . . 86 017 70 228
Other . . . . . . . . . . . . . . . . . . . . . . . . 134 281 93 838
1 139 244 978 231
$8 149 842 $7 803 899
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
CAPITALIZATION AND LIABILITIES
December 31
1994 1993
(dollars in thousands)
COMMON STOCK EQUITY (Notes 3, 4, and 5)
Common stock - $.01 par value;
authorized shares - 600,000,000;
outstanding shares - 155,198,038 in 1994
and 146,404,785 in 1993 . . . . . . . . . . . . . . $ 1 552 $ 1 453
Paid-in capital . . . . . . . . . . . . . . . . . . . 1 535 658 1 312 426
Retained earnings . . . . . . . . . . . . . . . . . . 877 061 907 802
Total common stock equity . . . . . . . . . . . . 2 414 271 2 221 681
CUMULATIVE PREFERRED STOCK OF SUBSIDIARIES
(Page 52, Notes 6 and 7)
Not subject to mandatory redemption . . . . . . . . . 267 929 307 989
Subject to mandatory redemption . . . . . . . . . . . 210 000 210 000
LONG-TERM DEBT (Pages 53 and 54, Note 8). . . . . . . . 2 715 269 2 645 213
Total capitalization. . . . . . . . . . . . . . . 5 607 469 5 384 883
CURRENT LIABILITIES
Long-term debt due within one year. . . . . . . . . . 60 400 160
Notes payable (Note 13) . . . . . . . . . . . . . . . 228 900 177 714
Accounts payable . . . . . . . . . . . . . . . . . . 266 467 274 658
Refund due to customers (Note 2(a)(i)). . . . . . . . 15 482 81 832
Litigation settlement (Note 16(c)). . . . . . . . . . 80 000 80 000
Advance under accounts receivable
purchase agreement (Note 9) . . . . . . . . . . . . - 49 940
Accrued taxes . . . . . . . . . . . . . . . . . . . . 258 041 259 502
Accrued interest. . . . . . . . . . . . . . . . . . . 58 504 51 290
Other . . . . . . . . . . . . . . . . . . . . . . . . 36 610 33 160
1 004 404 1 008 256
OTHER LIABILITIES
Deferred income taxes (Note 15) . . . . . . . . . . . 1 071 104 1 018 891
Unamortized investment tax credits . . . . . . . . . 195 878 206 241
Accrued pension and other postretirement
benefit costs (Notes 10 and 11) . . . . . . . . . . 133 578 85 953
Other . . . . . . . . . . . . . . . . . . . . . . . . 137 409 99 675
1 537 969 1 410 760
COMMITMENTS AND CONTINGENCIES (Note 16)
$8 149 842 $7 803 899
CINERGY CORP.
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, 1991. . . . . . . . . . . . . . $1 407 $1 210 239 $ 985 704 $2 197 350
Net income . . . . . . . . . . . . . . . . . . . . 270 805 270 805
Issuance of 2,290,738 shares of
common stock . . . . . . . . . . . . . . . . . . 23 51 190 51 213
Common stock issuance
expenses . . . . . . . . . . . . . . . . . . . . (407) (407)
Costs of issuing and
retiring preferred
stock of subsidiaries. . . . . . . . . . . . . . (548) (3 660) (4 208)
Dividends on common stock
(see page 47 for per
share amounts) . . . . . . . . . . . . . . . . . (197 770) (197 770)
Other. . . . . . . . . . . . . . . . . . . . . . . (39) (39)
BALANCE DECEMBER 31, 1992. . . . . . . . . . . . . . 1 430 1 260 474 1 055 040 2 316 944
Net income . . . . . . . . . . . . . . . . . . . . 62 547 62 547
Issuance of 3,443,918 shares of
common stock . . . . . . . . . . . . . . . . . . 23 57 159 57 182
Common stock issuance
expenses . . . . . . . . . . . . . . . . . . . . (145) (145)
Costs of issuing and
retiring preferred
stock of subsidiaries. . . . . . . . . . . . . . (5 062) (5 062)
Dividends on common stock
(see page 47 for per
share amounts) . . . . . . . . . . . . . . . . . (209 861) (209 861)
Other. . . . . . . . . . . . . . . . . . . . . . . 76 76
BALANCE DECEMBER 31, 1993. . . . . . . . . . . . . . 1 453 1 312 426 907 802 2 221 681
Net income . . . . . . . . . . . . . . . . . . . . 191 142 191 142
Issuance of 9,830,042 shares of
common stock . . . . . . . . . . . . . . . . . . 99 227 882 227 981
Common stock issuance
expenses . . . . . . . . . . . . . . . . . . . . (5 225) (5 225)
Dividends on common stock
(see page 47 for per
share amounts) . . . . . . . . . . . . . . . . . (221 362) (221 362)
Other. . . . . . . . . . . . . . . . . . . . . . . 575 (521) 54
BALANCE DECEMBER 31, 1994. . . . . . . . . . . . . . $1 552 $1 535 658 $ 877 061 $2 414 271
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1994 1993 1992
(in thousands)
OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 191 142 $ 62 547 $ 270 805
Items providing (using) cash currently:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 294 395 278 882 258 088
Deferred income taxes and investment
tax credits - net. . . . . . . . . . . . . . . . . . . . . . . . 30 926 96 470 55 374
Allowance for equity funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . (6 201) (14 327) (14 799)
Deferred gas and electric fuel costs - net. . . . . . . . . . . . (10 271) 3 914 (1 394)
Regulatory assets
Post-in-service and phase-in cost
deferrals. . . . . . . . . . . . . . . . . . . . . . . . . . . (33 290) (73 503) (99 531)
Deferred merger costs . . . . . . . . . . . . . . . . . . . . . (21 261) (22 481) (5 916)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3 520) (3 444) (35 836)
Write-off of a portion of Zimmer Station. . . . . . . . . . . . . - 234 844 -
Changes in current assets and current
liabilities
Restricted deposits . . . . . . . . . . . . . . . . . . . . . 10 046 40 (9 572)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 40 550 (24 152) (11 638)
Materials, supplies, and fuel . . . . . . . . . . . . . . . . (45 949) 61 969 (34 135)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (8 191) 62 508 (26 728)
Refund due to customers . . . . . . . . . . . . . . . . . . . (66 350) (57 302) 4 134
Advance under accounts receivable
purchase agreement. . . . . . . . . . . . . . . . . . . . . (49 940) 49 940 -
Accrued taxes and interest. . . . . . . . . . . . . . . . . . 5 753 7 257 41 309
Other items - net . . . . . . . . . . . . . . . . . . . . . . . . 112 569 (16 336) 31 920
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . . . . . . . . 440 408 646 826 422 081
FINANCING ACTIVITIES
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . 222 756 57 037 50 806
Issuance of preferred stock of subsidiaries . . . . . . . . . . . . - 156 325 79 300
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . 420 935 538 704 553 337
Funds on deposit from issuance of long-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 897 (31 342) 45 562
Retirement of preferred stock of subsidiaries . . . . . . . . . . . (40 426) (60 107) (145 307)
Redemption of long-term debt . . . . . . . . . . . . . . . . . . . (313 682) (502 335) (506 301)
Change in short-term debt . . . . . . . . . . . . . . . . . . . . . 51 186 (13 033) 165 734
Dividends on common stock . . . . . . . . . . . . . . . . . . . . . (221 362) (209 861) (197 770)
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . . . . . . . . 147 304 (64 612) 45 361
INVESTING ACTIVITIES
Construction expenditures (less allowance for
equity funds used during construction) . . . . . . . . . . . . . . (479 685) (549 143) (504 796)
Deferred demand-side management costs . . . . . . . . . . . . . . . (47 268) (33 763) (17 249)
Equity investments in Argentine utilities . . . . . . . . . . . . . - (206) (20 285)
Net cash provided by (used in)
investing activities. . . . . . . . . . . . . . . . . . . . (526 953) (583 112) (542 330)
Net increase (decrease) in cash and temporary
cash investments . . . . . . . . . . . . . . . . . . . . . . . . . . 60 759 (898) (74 888)
Cash and temporary cash investments at
beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 11 121 12 019 86 907
Cash and temporary cash investments at end
of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71 880 $ 11 121 $ 12 019
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . $ 211 163 $ 213 774 $ 201 609
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 680 81 327 75 613
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
SCHEDULE OF CUMULATIVE PREFERRED STOCK OF SUBSIDIARIES
December 31
1994 1993
(dollars in thousands)
The Cincinnati Gas & Electric Company
Authorized 6,000,000 shares -
Not subject to mandatory redemption (Note 6)
Par value $100 per share - outstanding
4% Series 270,000 shares in 1994 and 1993 . . . . . . . . . . . . . . . $ 27 000 $ 27 000
4 3/4% Series 130,000 shares in 1994 and 1993 . . . . . . . . . . . . . . . 13 000 13 000
7.44% Series 400,000 shares in 1994 and 1993 . . . . . . . . . . . . . . . 40 000 40 000
9.28% Series 400,000 shares in 1993. . . . . . . . . . . . . . . . . . . . - 40 000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 000 120 000
Subject to mandatory redemption (Notes 6 and 7)
Par value $100 per share - outstanding
9.15% Series 500,000 shares in 1994 and 1993
(redeemable, upon call, prior to July 1, 1995
at $106.71; reduced amounts thereafter). . . . . . . . . . . . . . . 50 000 50 000
7 7/8% Series 800,000 shares in 1994 and 1993
(subject to mandatory redemption on January 1, 2004
at $100; not redeemable prior to that date). . . . . . . . . . . . . 80 000 80 000
7 3/8% Series 800,000 shares in 1994 and 1993
(redeemable, upon call, after August 1, 2002 at $100). . . . . . . . 80 000 80 000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 000 210 000
PSI Energy, Inc.
Not subject to mandatory redemption (Note 6)
Par value $25 per share - authorized 5,000,000 shares - outstanding
4.32% Series 169,162 shares in 1994 and 1993 . . . . . . . . . . . . . . 4 229 4 229
4.16% Series 148,763 shares in 1994 and 1993 . . . . . . . . . . . . . . 3 719 3 719
7.44% Series 4,000,000 shares in 1994 and 1993 . . . . . . . . . . . . . . 100 000 100 000
Par value $100 per share - authorized 5,000,000 shares - outstanding
3 1/2% Series 41,172 shares in 1994 and 41,770 shares in 1993. . . . . . 4 117 4 177
6 7/8% Series 600,000 shares in 1994 and 1993 . . . . . . . . . . . . . . 60 000 60 000
7.15% Series 158,640 shares in 1994 and 1993 . . . . . . . . . . . . . . 15 864 15 864
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 929 187 989
Total - CINergy Corp.
Total not subject to mandatory redemption . . . . . . . . . . . . . . . . . $267 929 $307 989
Total subject to mandatory redemption . . . . . . . . . . . . . . . . . . . $210 000 $210 000
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
SCHEDULE OF LONG-TERM DEBT
December 31
1994 1993
The Cincinnati Gas & Electric Company and Subsidiaries (dollars in thousands)
The Cincinnati Gas & Electric Company
First Mortgage Bonds
5 7/8 % Series due July 1, 1997. . . . . . . . . . . . . . . . . . . . . . . $ 30 000 $ 30 000
6 1/4 % Series due September 1, 1997 . . . . . . . . . . . . . . . . . . . . 100 000 100 000
5.80 % Series due February 15, 1999 . . . . . . . . . . . . . . . . . . . . 110 000 -
7 3/8 % Series due May 1, 1999 . . . . . . . . . . . . . . . . . . . . . . . 50 000 50 000
8 5/8 % Series due December 1, 2000. . . . . . . . . . . . . . . . . . . . . - 60 000
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 60 000
6.45 % Series due February 15, 2004 . . . . . . . . . . . . . . . . . . . . 110 000 -
8.55 % Series due October 15, 2006. . . . . . . . . . . . . . . . . . . . . - 75 000
9 1/8 % Series due April 15, 2008. . . . . . . . . . . . . . . . . . . . . . - 75 000
9 5/8 % Series A and B due May 1, 2013 (Pollution Control) . . . . . . . . . - 31 700
10 1/8% Series due December 1, 2015 (Pollution Control). . . . . . . . . . . 84 000 84 000
9.70 % Series due June 15, 2019 . . . . . . . . . . . . . . . . . . . . . . 100 000 100 000
10 1/8% Series due May 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . 100 000 100 000
10.20 % Series due December 1, 2020. . . . . . . . . . . . . . . . . . . . . 150 000 150 000
8.95 % Series due December 15, 2021 . . . . . . . . . . . . . . . . . . . . 100 000 100 000
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 A and B due January 1, 2024 (Pollution Control) . . . . . . . 46 700 -
5 1/2 % Series due January 1, 2024 (Pollution Control) . . . . . . . . . . . 48 000 -
Total first mortgage bonds. . . . . . . . . . . . . . . . . . . . . . . . 1 648 700 1 575 700
Pollution Control Notes
6.70% to 8.50% due June 1, 1997 to October 1, 2009 . . . . . . . . . . . . . - 63 000
Variable rate due August 1, 2013 and December 1, 2015. . . . . . . . . . . . 100 000 100 000
6.50% due November 15, 2022. . . . . . . . . . . . . . . . . . . . . . . . . 12 721 12 721
Total pollution control notes . . . . . . . . . . . . . . . . . . . . . . 112 721 175 721
Total - The Cincinnati Gas & Electric Company . . . . . . . . . . . . . . 1 761 421 1 751 421
The Union Light, Heat and Power Company
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
9 1/2 % Series due December 1, 2008. . . . . . . . . . . . . . . . . . . . . 10 000 10 000
9.70 % Series due July 1, 2019. . . . . . . . . . . . . . . . . . . . . . . 20 000 20 000
10 1/4% Series due June 1, 2020 and November 15, 2020. . . . . . . . . . . . 30 000 30 000
Total first mortgage bonds. . . . . . . . . . . . . . . . . . . . . . . . 90 000 90 000
Lawrenceburg Gas Company
First Mortgage Bonds
9 3/4 % Series due October 1, 2001 . . . . . . . . . . . . . . . . . . . . . 1 200 1 200
Other Subsidiary Company Debt. . . . . . . . . . . . . . . . . . . . . . . . . - 275
Unamortized Premium and Discount - Net . . . . . . . . . . . . . . . . . . . . (14 864) (13 835)
Total - The Cincinnati Gas & Electric Company and Subsidiaries. . . . . . $1 837 757 $1 829 061
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
SCHEDULE OF LONG-TERM DEBT (Cont'd)
December 31
1994 1993
(dollars in thousands)
PSI Energy, Inc.
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 BB, 6 5/8%, due March 1, 2004
(Pollution Control). . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 000 5 000
Series NN, 7.60%, due March 15, 2012
(Pollution Control). . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 000 35 000
Series QQ, 8 1/4%, due June 15, 2013
(Pollution Control). . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 000 23 000
Series RR, 9 3/4%, due August 1, 1996 . . . . . . . . . . . . . . . . . . . 50 000 50 000
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). . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 000 30 000
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 -
Total first mortgage bonds . . . . . . . . . . . . . . . . . . . . . . . 317 819 267 819
Secured Medium-term Notes (excluding amounts due within one year)
Series A, 6.65% to 8.88%,
due January 3, 1997 to June 1, 2022. . . . . . . . . . . . . . . . . . . . 300 000 300 000
Series B, 5.22% to 8.26%,
due September 17, 1998 to August 22, 2022. . . . . . . . . . . . . . . . . 230 000 230 000
(Series A and B, 7.64% weighted average
interest rate and 17 year weighted
average remaining life)
Total secured medium-term notes. . . . . . . . . . . . . . . . . . . . . 530 000 530 000
Pollution Control Notes (excluding amounts due within one year)
5 3/4%, due December 15, 1995 to December 15, 2003 . . . . . . . . . . . . . 19 600 20 000
Series 1994A Promissory Note, non-interest bearing,
due January 3, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 825 -
Unamortized Premium and Discount - Net . . . . . . . . . . . . . . . . . . . . (9 732) (1 667)
Total - PSI Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . $ 877 512 $ 816 152
Total - CINergy Corp.
First Mortgage Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2 057 719 $1 934 719
Secured Medium-term Notes
(excluding amounts due within one year). . . . . . . . . . . . . . . . . . 530 000 530 000
Pollution Control Notes (excluding amounts due within one year). . . . . . . 132 321 195 721
Other Long-term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 825 275
Unamortized Premium and Discount - Net . . . . . . . . . . . . . . . . . . . (24 596) (15 502)
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . $2 715 269 $2 645 213
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
(a) Merger On October 24, 1994, PSI Resources, Inc. (Resources) was merged
with and into CINergy Corp. (CINergy or Company), and a subsidiary of CINergy
was merged with and into The Cincinnati Gas & Electric Company (CG&E). Each
outstanding share of common stock of Resources and CG&E was exchanged for
1.023 shares and one share, respectively, of CINergy common stock, resulting
in the issuance of approximately 148 million shares of CINergy common stock,
par value $.01 per share. The outstanding preferred stock and debt securities
of CG&E, its utility subsidiaries, and PSI Energy, Inc. (Energy), previously
Resources' utility subsidiary, were not affected by the merger. Following the
merger, CINergy became the parent holding company of CG&E and Energy. The
merger was accounted for as a pooling of interests, and the Consolidated
Financial Statements, along with the related notes, are presented as if the
merger was consummated as of the beginning of the earliest period presented.
Due to immateriality, no adjustments were made to conform the accounting
policies of the two companies.
Resources' and CG&E's consolidated operating revenues and net income for the
nine months ended September 30, 1994, and each of the two years ended December
31, 1993, and 1992, were as follows:
Resources CG&E CINergy
(in millions)
Nine months ended September 30, 1994
(unaudited)
Operating revenues. . . . . . . . . $ 868 $1 363 $2 231
Net income. . . . . . . . . . . . . 60 146 206
Year ended December 31, 1993
Operating revenues. . . . . . . . . 1 088 1 752 2 840
Net income (loss) . . . . . . . . . 97 (34) (i) 63
Year ended December 31, 1992
Operating revenues. . . . . . . . . 1 081 1 553 2 634
Net income. . . . . . . . . . . . . 96 175 271
(i) See Note 2(b) for information on the write-off of a portion of Wm. H.
Zimmer Generating Station (Zimmer).
(b) Consolidation Policy The accompanying Consolidated Financial Statements
include the accounts of CINergy and its subsidiaries after elimination of
significant intercompany transactions and balances.
(c) Regulation CINergy, its utility subsidiaries (CG&E, together with its
subsidiaries, and Energy), and certain of its non-utility subsidiaries are
subject to regulation by the Securities and Exchange Commission (SEC) under
the Public Utility Holding Company Act of 1935 (PUHCA). CINergy's utility
subsidiaries are also subject to regulation by the Federal Energy Regulatory
Commission (FERC) and the state utility commissions of Indiana, Ohio, and
Kentucky. The accounting policies of CINergy's utility subsidiaries conform
to the accounting requirements and ratemaking practices of these regulatory
authorities and to generally accepted accounting principles, including the
provisions of Statement of Financial Accounting Standards No. 71, Accounting
for the Effects of Certain Types of Regulation (Statement 71).
Regulatory assets represent probable future revenue to CINergy's utility
subsidiaries associated with deferred costs to be recovered from customers
through the ratemaking process. The following regulatory assets of Energy and
CG&E and its utility subsidiaries are reflected in the Consolidated Balance
Sheets as of December 31:
1994 1993
Energy CG&E CINergy Energy CG&E CINergy
(in millions)
Post-in-service carrying
costs and deferred
operating expenses . . . . . . . . . . . $ 30 $155 $ 185 $ 11 $162 $173
Phase-in deferred return
and depreciation . . . . . . . . . . . . - 101 101 - 83 83
Deferred demand-side
management (DSM) costs . . . . . . . . . 94 10 104 53 4 57
Amounts due from customers -
income taxes . . . . . . . . . . . . . . 27 382 409 18 388 406
Deferred merger costs. . . . . . . . . . . 38 12 50 15 13 28
Costs of reacquiring debt. . . . . . . . . 37 33 70 40 27 67
Postretirement benefit
costs. . . . . . . . . . . . . . . . . . 21 4 25 10 5 15
1992 workforce reduction
costs. . . . . . . . . . . . . . . . . . - 17 17 - 27 27
Other. . . . . . . . . . . . . . . . . . . 9 35 44 11 17 28
Total. . . . . . . . . . . . . . . . . . $256 $749 $1 005 $158 $726 $884
In February 1995, the Indiana Utility Regulatory Commission (IURC) issued an
order (February 1995 Order) which approved a rate settlement agreement among
Energy and certain intervenors (see Note 2(a)(ii)). This order, together with
previous regulatory orders, provides for recovery of $153 million of Energy's
regulatory assets as of December 31, 1994. In addition, testimony to be filed
in 1995 in connection with Energy's July 1994 retail rate petition will
include a request for additional recovery of regulatory assets, including
approximately $100 million of the balance at December 31, 1994.
CG&E currently has regulatory orders in effect which provide for the recovery
of $704 million of its regulatory assets as of December 31, 1994, and will
request recovery of the remaining amounts in its next rate proceedings in each
applicable jurisdiction.
See Note 1(g), (h), (i), (j), and (l) for additional information regarding
phase-in deferred return and depreciation, post-in-service carrying costs and
deferred operating expenses, deferred DSM costs, amounts due from customers -
income taxes, and costs of reacquiring debt, respectively. For additional
information regarding deferred merger costs, postretirement benefit costs, and
1992 workforce reduction costs, see Notes 2(a)(ii), 2(b), 11, and 12.
Although CINergy's current regulatory orders and regulatory environment fully
support the recognition of these regulatory assets, the ultimate outcome of
the changing competitive environment discussed in the "Competitive Pressures"
section of "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" could result in CINergy discontinuing
application of Statement 71 for all or part of its business. Such an event
would require the write-off of the portion of any regulatory asset for which
no regulatory assurance of recovery continues to exist. No evidence currently
exists that would support a write-off of any portion of CINergy's regulatory
assets. CINergy intends to pursue competitive strategies that would mitigate
the impact of this issue on the financial condition of the Company.
(d) 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.
(e) 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". For CINergy's utility subsidiaries, AFUDC accrual rates averaged
6.9% in 1994, 9.2% in 1993, and 9.5% in 1992, and are compounded semi-
annually.
(f) 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 depreciation rates for
utility plant during each of the following three years were:
1994 1993 1992
Electric - Energy . . . . . . . 3.8% 3.8% 3.8%
Electric - CG&E and its
utility subsidiaries. . . . . 2.9 2.9 2.9
Gas - CG&E and its
utility subsidiaries. . . . . 2.8 2.7 2.6
Common - CG&E and its
utility subsidiaries. . . . . 3.4 3.3 3.1
In May 1992, the Public Utilities Commission of Ohio (PUCO) issued an order
(May 1992 Order) which authorized changes in depreciation accrual rates on
CG&E's electric and common plant. The changes resulted in an annual decrease
in depreciation expense of about $9 million. In accordance with the IURC's
February 1995 Order discussed further herein, Energy's annual depreciation
expense will decrease by approximately $30 million.
For CINergy's operating 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.
(g) Phase-in Deferred Return and Depreciation In the May 1992 Order, the
PUCO authorized CG&E to begin recovering the cost of Zimmer through an
increase in electric revenues of $116.4 million to be phased in over a
three-year period under a plan that met the requirements of Statement of
Financial Accounting Standards No. 92, Regulated Enterprises - Accounting for
Phase-in Plans. The phase-in plan was designed so that the three rate
increases would provide revenues sufficient to recover all operating expenses
and provide a fair rate of return on plant investment. In the first three
years of the phase-in plan, rates charged to customers did not fully recover
depreciation expense and return on shareholders' investment. This deficiency
has been deferred on the Consolidated Balance Sheets and will be recovered
over a seven-year period beginning in May 1995, at which point the revenue
levels authorized pursuant to the phase-in plan are designed to be sufficient
to recover annual operating expenses, a fair return on the unrecovered
investment, and annual amortization of the deferred depreciation and deferred
return recorded during the first three years of the plan.
(h) Post-in-service Carrying Costs and Deferred Operating Expenses In
accordance with a March 1991 order by the PUCO, CG&E capitalized carrying
costs for Zimmer from the time it was placed in service in March 1991 until
the effective date of new rates authorized by the PUCO's May 1992 Order which
reflected Zimmer. CG&E began recovering these carrying costs over the useful
life of Zimmer in accordance with a stipulation approved by the PUCO in August
1993 (August 1993 Order) (see Note 2(b)).
Effective in January 1992, the PUCO authorized CG&E to defer Zimmer
depreciation, operation and maintenance expenses (exclusive of fuel costs),
and property taxes which were not being recovered in rates charged to
customers. The PUCO also authorized CG&E to accrue carrying costs on the
deferred expenses. In its May 1992 Order, the PUCO authorized CG&E to begin
recovering these deferred expenses and associated carrying costs over a
10-year period.
In May 1992, the first three units at CG&E's Woodsdale Generating Station
(Woodsdale) began commercial operation, and, in July 1992, two additional
units were declared operational. In accordance with an October 1992 order
issued by the PUCO, CG&E deferred carrying costs on the first five units at
Woodsdale and deferred depreciation, operation and maintenance expenses
(exclusive of fuel costs), and property taxes from the time these units were
placed in service until the effective date of new rates approved in the August
1993 Order which reflected the Woodsdale units. CG&E began recovering the
carrying costs over the useful life of Woodsdale and the deferred expenses
over a 10-year period in accordance with the August 1993 Order (see Note
2(b)).
In January 1993, Energy received authority from the IURC to continue accrual
of the debt component of AFUDC and to defer depreciation expense on the
combustion turbine generating unit constructed at its Cayuga Generating
Station and major environmental compliance projects from the date the projects
are placed in service until the effective date of an order in a general retail
rate proceeding. The February 1995 Order authorizes Energy to begin
recovering amounts deferred as of May 31, 1994 ($9 million), for AFUDC
continuation and July 31, 1993 ($1 million), for depreciation expense over the
remaining lives of the related utility plant. Additionally, the February 1995
Order authorizes Energy to continue deferral of the applicable AFUDC and
depreciation recorded after the above cut-off dates through February 1995, for
subsequent recovery in an IURC order associated with Energy's July 1994 retail
rate petition which is currently pending before the IURC. The February 1995
Order also authorizes Energy to continue the accrual of the debt component of
AFUDC and to defer depreciation expenses on two major environmental projects
from the date the projects are placed in service until the projects' costs are
reflected in retail electric rates.
(i) DSM Costs Energy is authorized by the February 1995 Order to amortize
and recover DSM expenditures deferred through July 1993 ($35 million),
together with carrying costs, over a five-year period. Deferred DSM
expenditures as of February 1995, which are not included for recovery in the
February 1995 Order, will continue to be deferred, with carrying costs, for
recovery in subsequent rate proceedings. In addition, base rates will include
recovery of $23 million of DSM expenditures on an annual basis. Future
deferral of DSM expenditures will be the amount by which actual annual
expenditures exceed the base level of $23 million. If DSM expenditures in any
calendar year are less than the $23 million in base rates, the unamortized
balance of deferred DSM expenditures would be reduced by such difference.
In the August 1993 Order, CG&E was authorized to recover approximately $5
million of costs associated with DSM programs for domestic customers. The
PUCO has also permitted CG&E to defer future expenditures of approved DSM
programs with carrying costs for future recovery. In addition, CG&E has
applications pending for approval by the PUCO for deferral of the costs of
additional DSM programs.
(j) Federal and State Income Taxes Deferred tax assets and liabilities are
recognized for the expected future tax consequences of existing differences
between the financial reporting and tax reporting bases of assets and
liabilities. Investment tax credits utilized to reduce Federal income taxes
payable have been deferred 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 Energy,
CG&E, and CG&E's utility subsidiaries. To the extent deferred income taxes
are not reflected in rates charged to customers, income taxes payable in
future years are recoverable from customers as paid. These amounts are
reflected in the accompanying Consolidated Financial Statements as a
regulatory asset on the basis of their probable recovery in future periods.
(k) Operating Revenues and Fuel Costs
(i) Energy Energy recognizes revenues for electric service rendered
during the month, which includes revenues for sales unbilled at the end of
each month. Revenues reflect fuel cost charges based on the actual costs of
fuel. Fuel cost charges applicable to all of Energy's metered kilowatt-hour
sales are included in customer billings based on the estimated costs of fuel.
Customer bills are adjusted in subsequent months to reflect the difference
between actual and estimated costs of fuel. Indiana law subjects the recovery
of fuel costs to a determination that such recovery will not result in earning
a return in excess of that allowed by the IURC in its last general rate order.
(ii) CG&E CG&E and its utility subsidiaries recognize revenues for
electric and gas service rendered during the month, which includes revenues
for sales unbilled at the end of each month. CG&E and its Kentucky
subsidiary, The Union Light, Heat and Power Company (ULH&P), expense the costs
of electricity and gas purchased and the cost of fuel used in electric
production as recovered through revenues and defer the portion of these costs
recoverable or refundable in future periods.
(l) Debt Discount, Premium, and Issuance Expense and Costs of Reacquiring
Debt Debt discount, premium, and issuance expense on Energy's, CG&E's, and
CG&E's utility subsidiaries' outstanding long-term debt are amortized over the
lives of the respective issues.
In accordance with established ratemaking practices, CINergy's utility
subsidiaries are deferring costs (principally call premiums) from the
reacquisition of long-term debt and are amortizing such amounts over periods
ranging from one year to 18 years.
(m) Order 636 In April 1992, the FERC issued 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
transition costs they incurred in complying with the order from customers,
including CG&E and ULH&P. In July 1994, the PUCO issued an order approving a
stipulation between CG&E and its domestic and industrial customer groups
providing for recovery of these pipeline transition costs. CG&E presently is
recovering its Order 636 transition costs pursuant to a PUCO approved tariff.
ULH&P recovers such costs through its gas cost recovery mechanism. These
costs are deferred as incurred by CG&E and ULH&P and amortized as recovered
from customers.
(n) Consolidated Statements of Cash Flows All temporary cash investments
with maturities of three months or less, when acquired, are reported as cash
equivalents. CINergy and its subsidiaries had no material non-cash investing
or financing transactions during the years 1992 through 1994.
2. Rates
(a) Energy
(i) Settlement Agreement - IURC's June 1987 and April 1990 Orders In
December 1993, the IURC issued an order (December 1993 Order) approving a
settlement agreement entered into by Energy, the appellants, and certain other
intervenors which resolved the outstanding issues related to the appeals of
the IURC's April 1990 retail rate order (April 1990 Order) and the IURC's June
1987 tax order (June 1987 Order). The December 1993 Order provided for Energy
to refund $150 million to its retail customers ($119 million applicable to the
June 1987 Order and $31 million applicable to the April 1990 Order). The
December 1993 Order further provided for Energy to reduce its retail rates by
1.5% (approximately $13.5 million on an annual basis) to reflect a return on
common equity of 14.25%. The refunds and rate reduction commenced in December
1993.
Energy had previously recognized a loss of $139 million for the June 1987
Order. The difference between the $139 million and the $119 million portion
of the refund applicable to the June 1987 Order is reflected in the
Consolidated Statement of Income for the year ended December 31, 1993, as a
reduction of the loss. The $31 million portion of the refund applicable to
the April 1990 Order is reflected in the Consolidated Statement of Income for
the same period as a reduction in operating revenues.
(ii) February 1995 Order - Retail Rate Proceeding and Merger Savings
Allocation Plan The IURC issued the February 1995 Order approving a
settlement agreement entered into by Energy, the Office of the Utility
Consumer Counselor, Citizens Action Coalition of Indiana, Inc., and the PSI-
Industrial Group concerning Energy's petition for a $93 million retail rate
increase ($103 million including carrying costs attributable to certain
environmental expenditures not included in Energy's base retail electric
rates) and Energy's previously filed plan for the allocation of its portion of
merger savings between Energy's customers and CINergy's shareholders.
The February 1995 Order authorizes Energy to increase annual retail rates
$33.6 million, effective February 1995. The increase excludes reductions for
customer credits for non-fuel operation and maintenance expense merger savings
(Non-fuel Merger Savings) and increases for carrying costs attributable to
certain environmental expenditures not included in Energy's base retail
electric rates, both of which are further discussed herein. The increase
includes the recovery of the costs of postretirement benefits other than
pensions on an accrual basis, the recovery of DSM expenditures, the recovery
of a portion of amounts deferred for AFUDC continuation and depreciation
expense, and the adoption of lower depreciation rates, which will reduce
annual depreciation expense by approximately $30 million. This rate increase
reflects an 11.9% return on common equity with an 8.25% overall rate of return
on net original cost rate base.
Additionally, the February 1995 Order provides a mechanism to allocate
Energy's share of net Non-fuel Merger Savings through December 31, 1997,
between Energy's customers and CINergy's shareholders. CINergy currently
anticipates that the estimated nominal merger savings of $1.5 billion will be
apportioned approximately equally between CG&E and Energy. In essence, the
mechanism guarantees Energy's customers 50% of Energy's portion of the
projected net Non-fuel Merger Savings. Energy's customers will receive these
merger savings via credits to base rates of $4.4 million in 1995, an
additional $2.2 million in 1996, and an additional $2.4 million in 1997.
After 1997, the accumulated credits will continue until the effective date of
an order in an Energy general retail rate proceeding. Energy will have to
achieve these levels of merger savings in order to realize the 11.9% return on
equity. This arrangement for sharing of merger savings allows Energy to
recover its portion of transaction costs (currently estimated at $27 million)
and costs to achieve merger savings (currently estimated at $21 million) over
a 10-year period.
The February 1995 Order also provides Energy with a financial incentive to
achieve, or exceed, merger savings projections and enhance operating
efficiencies by allowing Energy to earn up to a 13.25% return on common equity
until the effective date of an order in connection with Energy's July 1994
retail rate petition, which is currently pending before the IURC. Energy
expects an order in this proceeding in the second quarter of 1996. Upon the
effective date of an order relating to the July 1994 retail rate petition, the
February 1995 Order provides Energy an opportunity to earn an additional 100
basis points above the common equity return to be granted by the IURC in such
rate proceeding until December 31, 1997. In order to be eligible for such
additional earnings, Energy must meet certain service-related conditions. Any
mechanism for sharing of merger savings after December 31, 1997, will be
determined in subsequent regulatory proceedings.
Finally, the February 1995 Order includes ratemaking and accounting mechanisms
to address regulatory lag. The February 1995 Order approves Energy's proposal
for current recovery of carrying costs associated with environmental
compliance projects and the applicable portion of the Wabash River Clean Coal
Project (Clean Coal Project) not included in Energy's base retail electric
rates. The Clean Coal Project, which is located at the Wabash River
Generating Station, is a 262-megawatt clean coal power generating facility
planned to be placed in service during the third quarter of 1995. The
February 1995 Order also includes provisions for the deferral of certain
operating costs associated with the Clean Coal Project, together with the debt
component of carrying costs thereon, and continued accrual of the debt
component of carrying costs (to the extent not reflected in rates currently)
and deferral of depreciation expense on the Clean Coal Project and a scrubber
at Gibson Generating Station (Gibson) until the projects' costs are fully
reflected in retail electric rates.
(iii) July 1994 Retail Rate Petition In addition to the rate petition
addressed in the February 1995 Order, Energy filed a petition in July 1994
with the IURC for a retail rate increase to recover, among other things, the
costs of the Clean Coal Project and the scrubber at Gibson which was placed in
service in September 1994. These two projects were previously approved by the
IURC. Energy initially estimated a rate increase of 8%. Energy is currently
evaluating how the rate settlement and the ability to earn a cash return
during construction on certain projects, as previously discussed, will affect
the estimated rate increase. Energy intends to file testimony supporting its
rate increase request in May 1995 and, as previously discussed, anticipates an
order in this proceeding in the second quarter of 1996. Energy cannot predict
what action the IURC may take with respect to this proposed rate increase.
(b) CG&E
In its May 1992 Order authorizing the phase-in of Zimmer costs into customer
rates, the PUCO disallowed from rates approximately $230 million, representing
costs related to Zimmer for nuclear fuel, nuclear wind-down activities during
the conversion to a coal-fired facility, and a portion of the AFUDC accrued on
Zimmer.
Pursuant to an appeal by CG&E of the May 1992 Order, the Supreme Court of Ohio
(Court) ruled in November 1993 (November 1993 Ruling) that the PUCO does not
have the authority to order a phase-in of amounts granted in a rate proceeding
and remanded the case to the PUCO to set rates that provide the gross annual
revenues determined in accordance with Ohio statutes. However, the Court
upheld the PUCO's disallowance of Zimmer costs, and, as a result, CG&E wrote
off Zimmer costs of approximately $223 million, net of taxes, in the fourth
quarter of 1993.
In April 1994, the PUCO issued an order approving a settlement agreement
between CG&E, the PUCO Staff, the Ohio Office of Consumers' Counsel, and other
intervenors which addressed the issues raised in the November 1993 Ruling. As
part of the settlement, CG&E did not seek early implementation of the third
phase of the authorized rate increase and will not seek accelerated recovery
of deferrals related to the phase-in plan. These deferrals will be recovered
over the remaining seven-year period as contemplated in the May 1992 Order.
In addition, CG&E agreed to a moratorium on increases in base electric rates
until January 1, 1999 (except under certain circumstances), and, in return, is
allowed to retain all PUCO electric jurisdictional Non-fuel Merger Savings
until 1999.
In the August 1993 Order, the PUCO authorized annual increases of
approximately $41 million (5%) in electric revenues and $19 million (6%) in
gas revenues that were effective immediately. The August 1993 Order precludes
CG&E from increasing gas base rates prior to June 1, 1995, except for rate
filings made under certain circumstances.
In 1994, CG&E expensed $32 million of merger transaction costs and costs to
achieve merger savings applicable to its PUCO electric jurisdiction. The
remaining merger-related costs allocable to PUCO electric jurisdictional
customers will be expensed as incurred. CG&E and its utility subsidiaries
intend to continue deferring the non-PUCO electric jurisdictional portion of
merger transaction costs and costs to achieve merger savings (current estimate
of $14 million) for future recovery in customer rates.
(c) ULH&P
In mid-1993, the Kentucky Public Service Commission (KPSC) issued orders
authorizing ULH&P to increase annual gas revenues by $4.2 million.
In exchange for the KPSC's support of the merger, in May 1994, ULH&P accepted
the KPSC's request for an electric rate moratorium commencing after ULH&P's
next retail rate case and extending to January 1, 2000. The KPSC also
required CG&E and ULH&P to agree that, for 12 months from consummation of the
merger, no filings will be made to adjust CG&E's base purchase power rate
charged to ULH&P or ULH&P's base electric rates.
3. Common Stock
The following table reflects the shares of CINergy common stock reserved for
issuance at December 31, 1994, and issued in 1994, 1993, and 1992, for the
stock-based plans, including previous plans of Resources and CG&E. Shares
issued prior to merger consummation have been adjusted for Resources' merger
conversion ratio of 1.023.
Shares
Reserved at Shares Issued
Dec. 31, 1994 1994 1993 1992
401(k) Savings Plans. . . . . . 7 691 752 1 458 631 1 152 096 1 193 926
Dividend Reinvestment and
Stock Purchase Plan . . . . . 2 734 197 1 127 881 944 168 941 128
Directors' Deferred
Compensation Plan . . . . . . 200 000 77 61 266 -
Performance Shares Plan* . . . 800 000 27 116 28 447 26 156
Employee Stock Purchase
and Savings Plan. . . . . . . 1 933 394 140 039 244 129 528
Stock Option Plan . . . . . . . 5 000 000 25 575 139 026 -
*A long-term incentive compensation plan for certain participants designated
by the Compensation Committee of CINergy's Board of Directors.
In addition to the issuances of common stock previously discussed, Resources
issued 1,118,671 shares of common stock in 1993 to the trustee of its two
Master Trust Agreements as required as a result of the announcement of the
merger. Prior to consummation of the merger in October 1994, Resources issued
an additional 16,518 shares to the trustee and distributed 98,400 shares
(reflected in the above table as shares issued in 1994) to participants of
certain benefit plans. As a result of the merger consummation, in December
1994, CINergy retired the remaining 1,036,789 shares held by the trustee.
In December 1994, CINergy publicly issued 7,089,000 shares of common stock
under a shelf registration statement for the sale of up to eight million
shares. In addition, upon consummation of the merger, CINergy awarded five
shares of common stock to all non-officer employees for an additional issuance
of 43,605 shares under this shelf registration statement.
4. Stock Option Plan
Resources' 1989 Stock Option Plan was merged into and made a part of CINergy's
Stock Option Plan at merger consummation. Under CINergy's Stock Option Plan,
incentive and non-qualified stock options and stock appreciation rights may be
granted to key employees, officers, and outside directors. Common stock
granted under the Stock Option Plan may not exceed five million shares.
Options are granted at the fair market value of the shares on the date of
grant, except that non-qualified stock options were granted to two executive
officers under Resources' 1989 Stock Option Plan at an option price equal to
91% of the fair market value of the shares at the date of grant. Options vest
over five years and have a purchase term of up to 10 years. All options
granted prior to November 1993, but not previously vested, became vested upon
approval of the merger by Resources' shareholders. No incentive stock options
may be granted under the plan after October 24, 2004.
The Stock Option Plan activity for 1992, 1993, and 1994, adjusted for
Resources' merger conversion ratio of 1.023, is summarized as follows:
Range of
Shares Subject Option Prices
to Option Per Share
Balance at December 31, 1991. . . . . . . . 1 212 129 $12.26 to 16.92
Options Granted . . . . . . . . . . . . . . 25 575 17.35
Options Cancelled . . . . . . . . . . . . . (51 150) 16.56
Balance at December 31, 1992. . . . . . . . 1 186 554 $12.26 to 17.35
Options Exercised . . . . . . . . . . . . . (139 026) 12.26 to 16.56
Balance at December 31, 1993. . . . . . . . 1 047 528 $12.50 to 17.35
Options Granted . . . . . . . . . . . . . . 1 387 500 22.88
Options Exercised . . . . . . . . . . . . . (25 575) 13.14 to 16.56
Balance at December 31, 1994. . . . . . . . 2 409 453 $12.50 to 22.88
Shares Reserved for Future Grants
At December 31, 1992. . . . . . . . . . 1 368 263
At December 31, 1993. . . . . . . . . . 1 368 263
At December 31, 1994. . . . . . . . . . 2 590 547
In addition, 1,395,000 options were granted to various employees on January
24, 1995, at an option price of $24.31 per share. An additional 25,000
options were granted on February 6, 1995, at an option price of $24.625 per
share.
No stock appreciation rights have been granted under this plan. The total
options exercisable at December 31, 1994, 1993, and 1992, were 1,021,953,
1,047,528, and 731,343, respectively.
5. Common Stock of Subsidiaries
CINergy owns all of the common stock of CG&E and Energy. No common dividends
can be paid by CG&E or Energy if dividends are in arrears on their
preferred stock. The ability of CINergy to pay dividends to holders of
CINergy common stock will depend on the ability of CG&E and Energy to pay
common dividends to CINergy.
6. Preferred Stock of Subsidiaries
Changes in preferred stock outstanding during 1994, 1993, and 1992, were as
follows:
Shares
Issued Par
(Retired) Value
(dollars in thousands)
1994
Cumulative preferred stock
Not subject to mandatory redemption
Par value $100 per share
Energy
3 1/2% Series. . . . . . . . . . . . . . (598) $ (60)
CG&E
9.28 % Series. . . . . . . . . . . . . . (400 000) (40 000)
1993
Cumulative preferred stock
Not subject to mandatory redemption
Par value $25 per share
Energy
7.44 % Series. . . . . . . . . . . . . . 4 000 000 100 000
Par value $100 per share
Energy
3 1/2% Series. . . . . . . . . . . . . . (237) (24)
8.52 % Series. . . . . . . . . . . . . . (211 190) (21 119)
8.38 % Series. . . . . . . . . . . . . . (162 520) (16 252)
8.96 % Series. . . . . . . . . . . . . . (216 900) (21 690)
6 7/8% Series. . . . . . . . . . . . . . 600 000 60 000
1992
Cumulative preferred stock
Not subject to mandatory redemption
Par value $100 per share
Energy
3 1/2% Series. . . . . . . . . . . . . . (10) (1)
CG&E
9.52 % Series. . . . . . . . . . . . . . (450 000) (45 000)
9.30 % Series. . . . . . . . . . . . . . (350 000) (35 000)
Subject to mandatory redemption
Par value $100 per share
Energy
13.25% Series. . . . . . . . . . . . . . (255 000) (25 500)
CG&E
7 3/8% Series. . . . . . . . . . . . . . 800 000 80 000
10.20% Series. . . . . . . . . . . . . . (365 000) (36 500)
Currently, Energy can sell up to an additional $40 million of preferred stock
under an effective shelf registration statement and IURC authority.
7. Preferred Stock of Subsidiary with Mandatory Redemption
CG&E's preferred stock redemption requirements for the next five years are
$2.5 million in each of 1996 and 1997 and $6.5 million in each of 1998 and
1999.
CG&E's Cumulative Preferred Stock, 9.15% Series is subject to mandatory
redemption each July 1, beginning in 1996, in an amount sufficient to retire
25,000 shares, and CG&E's 7 3/8% Series is subject to mandatory redemption
each August 1, beginning in 1998, in an amount sufficient to retire 40,000
shares, each at $100 per share, plus accrued dividends. For both series, CG&E
has the noncumulative option to redeem up to a like amount of additional
shares in each year. CG&E has the option to satisfy the mandatory redemption
requirements in whole or in part by crediting shares acquired by CG&E. To the
extent CG&E does not satisfy its mandatory sinking fund obligation in any
year, such obligation must be satisfied in the succeeding year or years. If
CG&E is in arrears in the redemption pursuant to the mandatory sinking fund
requirement, CG&E shall not purchase or otherwise acquire for value, or pay
dividends on, common stock.
8. Long-term Debt
CINergy's long-term debt maturities, excluding sinking fund requirements, for
the next five years are $60 million in 1995, $50 million in 1996, $140 million
in 1997, $35 million in 1998, and $186 million in 1999.
The first mortgage bond indentures of both CG&E and ULH&P provide that so long
as any series of bonds issued prior to 1976 and 1978, respectively, are
outstanding, CG&E and ULH&P will pay to the trustee as a Maintenance and
Replacement Fund (M&R Fund), on or before April 30 of each year, in cash,
unfunded property additions, or principal amount of first mortgage bonds of
any series issued under the mortgages, a formularized amount related to the
net revenues of CG&E and ULH&P. For 1994, the M&R Fund requirements (payable
on or before April 30, 1995) for CG&E and ULH&P are approximately $114 million
and $5 million, respectively.
Most of CG&E's and ULH&P's first mortgage bonds are redeemable at par value,
plus accrued interest, through cash deposited to satisfy the annual M&R Fund
requirement. On March 24, 1995, CG&E announced its intention to redeem,
beginning May 1, 1995, $114 million principal amount of its 10.125% and 9.70%
first mortgage bonds at par with cash deposited in the M&R Fund. ULH&P also
announced its intention to redeem $5 million principal amount of its 10.25%
first mortgage bonds (due June 1, 2020) at par with cash deposited in the M&R
Fund, and to redeem the remaining amount of such bonds at the redemption price
of 107.34% on June 1, 1995.
9. Sale of Accounts Receivable and Interest Rate Swap
Energy has an agreement through January 1996 to sell, with limited recourse,
an undivided percentage interest in certain of its accounts receivable from
customers up to a maximum of $90 million. As of December 31, 1994, Energy's
obligation under the limited recourse provision is $20 million. The refund
provided for by the December 1993 Order, as previously discussed (see Note
2(a)(i)), reduced accounts receivable available for sale at December 31, 1993,
to $40 million. Accounts receivable on the Consolidated Balance Sheets are
net of the $87 million and $40 million interest sold at December 31, 1994, and
December 31, 1993, respectively. The excess of $90 million over the accounts
receivable available for sale at December 31, 1993, is reflected in the
Consolidated Balance Sheet as "Advance under accounts receivable purchase
agreement".
As a hedge against floating rate conditions, effective February 1, 1991,
Energy entered into an interest rate swap agreement which effectively changed
Energy's variable interest rate exposure on its $90 million (the notional
principal amount) sale of accounts receivable to a fixed rate of 8.19%. Costs
associated with the interest rate swap agreement are included in "Other - net"
in the Consolidated Statements of Income. The interest rate swap agreement
matures January 31, 1996. In the event of nonperformance by the other parties
to the interest rate swap agreement, Energy would be exposed to floating rate
conditions.
10. Pension Plans
The defined benefit pension plans of CINergy's subsidiaries cover
substantially all employees meeting certain minimum age and service
requirements. Plan benefits are determined under a final average pay formula
with consideration of years of participation, age at retirement, and the
applicable average Social Security wage base or benefit amount.
The funding policies of the operating subsidiaries are to contribute annually
to 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 than the
maximum amount deductible for income tax purposes. Contributions for the
1994, 1993, and 1992 plan years were $3.5 million, $11.3 million, and $7.4
million, respectively. The plans' assets consist of investments in equity and
fixed income securities.
CINergy's pension cost for 1994, 1993, and 1992 included the following
components:
1994 1993 1992
(in millions)
Benefits earned during the period . . . . . . . $ 19.4 $ 16.9 $ 15.9
Interest accrued on projected
benefit obligations . . . . . . . . . . . . . 54.9 53.9 48.7
Actual (return) loss on plans' assets . . . . . 8.0 (69.9) (51.1)
Net amortization and deferral . . . . . . . . . (66.3) 15.4 (.1)
Net periodic pension cost . . . . . . . . . . . $ 16.0 $ 16.3 $ 13.4
Additionally, during 1992 and 1994, CG&E recognized $28.4 million and $15.6
million, respectively, 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. These amounts represented the costs associated with additional
benefits extended in connection with voluntary early retirement programs and
workforce reductions in those years (see Note 12).
1994 1993 1992
Actuarial Assumptions:
For determination of projected benefit
obligations
Discount rate . . . . . . . . . . . . . . 8.50% 7.50% 8.25-8.50%
Rate of increase in future compensation . 5.50 4.50-5.00 5.50-5.75
For determination of pension cost
Rate of return on plans' assets . . . . . . 9.00-9.50 9.00-9.50 9.00-9.50
The following table reconciles the plans' funded status with amounts recorded
in the Consolidated Financial Statements. 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 in subsequent periods.
1994 1993
Plans' Plan's Plans'
Assets Exceed Accumulated Assets Exceed
Accumulated Benefits Accumulated
Benefits Exceed Assets Benefits
(in millions)
Actuarial present value of benefits
Vested benefits . . . . . . . . $(320.7) $(206.5) $(534.2)
Non-vested benefits . . . . . . (25.5) (11.0) (40.8)
Accumulated benefit
obligations . . . . . . . . (346.2) (217.5) (575.0)
Effect of future compensation
increases . . . . . . . . . . (120.3) (52.2) (165.7)
Projected benefit
obligations . . . . . . . . (466.5) (269.7) (740.7)
Plans' assets at fair value . . . 438.4 198.7 689.1
Projected benefit obligations in
excess of plans' assets . . . . (28.1) (71.0) (51.6)
Remaining balance of plans' net
assets existing at date of
initial application of
Statement 87 to be recognized
as a reduction of pension
cost in future periods. . . . . (8.6) (3.8) (13.8)
Unrecognized net gain
resulting from experience
different from that assumed
and effects of changes in
assumptions . . . . . . . . . . (7.9) (1.9) (16.9)
Prior service cost not yet
recognized in net periodic
pension cost. . . . . . . . . . 38.1 18.2 44.1
Accrued pension cost at
December 31 . . . . . . . . . . $ (6.5) $ (58.5) $ (38.2)
11. Other Postretirement Benefits
CINergy's subsidiaries provide certain health care and life insurance benefits
to retired employees and their eligible dependents. The health care benefits
include medical coverage and prescription drugs. Additionally, Energy
provides dental benefits. Prior to 1993, the cost of retiree health care was
charged to expense as claims were paid. The cost of life insurance benefits
provided by Energy was charged to expense at retirement. The accounting for
life insurance benefits provided by CG&E is further discussed herein. CG&E
does not currently pre-fund its obligations for these postretirement benefits.
Energy, in connection with the settlement which resulted in the February 1995
Order, agreed to begin funding its obligation for these postretirement
benefits.
Effective with the first quarter of 1993, CINergy's subsidiaries implemented
the provisions of Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions
(Statement 106). Under the provisions of Statement 106, the costs of health
care and life insurance benefits provided to retirees are recognized for
accounting purposes during periods of employee service (accrual basis). The
unrecognized and unfunded Accumulated Postretirement Benefit Obligations
(APBO) existing at the date of initial application of Statement 106 (i.e., the
transition obligations) of $159.3 million are being amortized over a 20-year
period.
Life insurance benefits are fully paid by CG&E for qualified employees.
Eligibility to receive postretirement coverage is limited to those employees
who participated in the plans and earned the right to postretirement benefits
prior to January 1, 1991. In 1988, CG&E and its subsidiaries recognized the
actuarially determined APBO for postretirement life insurance benefits earned
by retirees. The portion of the APBO applicable to active employees is being
amortized over 15 years, the employees' estimated remaining service lives.
The accounting for CG&E's postretirement life insurance benefits was not
affected by the adoption of Statement 106.
Postretirement benefit cost for 1994 and 1993 included the following
components:
Health Life
Care Insurance Total
(in millions)
1994
Benefits earned during the period. . . . . . $ 5.2 $ .2 $ 5.4
Interest accrued on APBO . . . . . . . . . . 13.8 2.2 16.0
Net amortization and deferral. . . . . . . . .1 - .1
Amortization of transition obligations . . . 8.1 .3 8.4
Net periodic postretirement benefit cost . . $27.2 $2.7 $29.9
1993
Benefits earned during the period. . . . . . $ 4.3 $ .2 $ 4.5
Interest accrued on APBO . . . . . . . . . . 13.4 2.1 15.5
Amortization of transition obligations . . . 8.1 .3 8.4
Net periodic postretirement benefit cost . . $25.8 $2.6 $28.4
The following table reconciles the APBO of the health care and life insurance
plans with amounts recorded in the Consolidated Financial Statements. Under
the provisions of Statement 106, certain obligations of the plans are deferred
and recognized in the Consolidated Financial Statements in subsequent periods.
Health Life
Care Insurance Total
(in millions)
1994
Actuarial present value of benefits
Fully eligible active plan participants. . $ (11.4) $ (.9) $ (12.3)
Other active plan participants . . . . . . (84.3) (2.3) (86.6)
Retirees and beneficiaries . . . . . . . . (92.0) (23.5) (115.5)
Projected APBO . . . . . . . . . . . . . (187.7) (26.7) (214.4)
Unamortized transition obligations . . . . . 145.2 1.0 146.2
Unrecognized net (gain) loss resulting from
experience different from that assumed
and effects of changes in assumptions. . . 2.2 (2.6) (.4)
Accrued postretirement benefit obligations
at December 31, 1994 . . . . . . . . . . . $ (40.3) $(28.3) $ (68.6)
1993
Actuarial present value of benefits
Fully eligible active plan participants. . $ (13.9) $ (1.7) $ (15.6)
Other active plan participants . . . . . . (90.6) (3.5) (94.1)
Retirees and beneficiaries . . . . . . . . (82.4) (24.1) (106.5)
Projected APBO . . . . . . . . . . . . . (186.9) (29.3) (216.2)
Unamortized transition obligations . . . . . 153.8 1.2 155.0
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions. . . 12.9 .6 13.5
Accrued postretirement benefit obligations
at December 31, 1993 . . . . . . . . . . . $ (20.2) $(27.5) $ (47.7)
The following assumptions were used to determine the APBO:
1994 1993 1992
Discount rate. . . . . . . . . . 8.50% 7.50% 8.25-8.50%
Health care cost trend rate,
gradually declining to 5%
CG&E . . . . . . . . . . . . . 9.00-12.00% 10.00-13.00% 12.00-15.00%
Energy . . . . . . . . . . . . 8.00-12.00 8.00-12.00 8.00-12.00
Year ultimate trend rates achieved
CG&E . . . . . . . . . . . . . 2002 2002 2003
Energy . . . . . . . . . . . . 2007 2007 2007
Increasing the health care cost trend rate by one percentage point in each
year would increase the APBO by approximately $27 million and $29.5 million
for 1994 and 1993, respectively, and the aggregate of the service and interest
cost components of the postretirement benefit cost for 1994 and 1993 by
approximately $3.7 million and $3.4 million, respectively.
CG&E and its subsidiaries began amortizing the transition obligation for
health care costs over 20 years in accordance with Statement 106. The
majority of CG&E's and its subsidiaries' postretirement benefit costs are
subject to PUCO jurisdiction. The PUCO authorized CG&E to begin recovering
these costs in September 1993. The adoption of Statement 106 did not have a
material effect on the results of operations of CG&E and its subsidiaries.
In accordance with the February 1995 Order, Energy will recover the cost of
postretirement benefits other than pensions on an accrual basis commencing
February 1995. Prior to the recovery of these costs in customers' rates on an
accrual basis, the difference between postretirement benefit costs determined
in accordance with the provisions of Statement 106 and the costs determined in
accordance with Energy's previous accounting practice was deferred for future
recovery. Energy's deferrals totaled $21 million as of December 31, 1994.
Commencing February 1995, approximately $6 million of costs deferred for the
period January 1, 1993, through July 31, 1993, will be recovered over a five-
year period. Recovery over a five-year period of the remaining deferrals is
being requested in Energy's July 1994 retail rate petition.
12. Workforce Reductions
In 1992, CG&E and its subsidiaries eliminated 464 positions. The workforce
reduction was accomplished through a voluntary early retirement program and
involuntary separations. At December 31, 1992, the accrued liability
associated with the workforce reduction was $30.4 million (including $28.4
million of additional pension costs previously discussed in Note 10). In
accordance with the August 1993 Order, CG&E is recovering the majority of
these costs through rates over a period of three years.
Additionally, in an effort to begin to realize merger savings, CG&E and Energy
completed voluntary workforce reduction programs in 1994. Under the programs,
284 employees elected to terminate their employment with the companies,
resulting in a combined pre-tax cost of approximately $28.7 million ($17.4
million for CG&E, including $15.6 million of additional pension costs
previously discussed in Note 10, and $11.3 million for Energy). In the third
quarter of 1994, CG&E expensed $11 million representing the PUCO electric
jurisdictional portion of these costs. The remaining $6.4 million of costs
have been deferred as costs to achieve merger savings for future recovery
through rates. The cost of Energy's voluntary workforce reduction plan was
deferred as costs to achieve merger savings. In accordance with the February
1995 Order, Energy began amortization of costs to achieve merger savings
October 1, 1994.
13. Notes Payable
The operating subsidiary companies of CINergy had authority to borrow up to
$575 million as of December 31, 1994. In connection with this authority,
CINergy's subsidiaries have established unsecured lines of credit (Committed
Lines) which currently permit borrowings of up to $343 million, of which $208
million remained unused. CG&E and Energy also issue commercial paper from
time to time. All outstanding commercial paper is supported by Committed
Lines of the respective companies. Additionally, this authority allows the
subsidiary companies of CINergy to arrange for additional short-term
borrowings with various banks on an "as offered" basis (Uncommitted Lines).
All Uncommitted Lines provide for maturities of up to 365 days with various
interest rate options.
Amounts outstanding under the Committed Lines 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. The lines are
maintained by compensating balances or commitment fees. Commitment fees for
the Committed Lines were immaterial during the 1992 through 1994 period.
In addition, CINergy has a $100 million credit facility which expires on
September 27, 1997, of which $25 million remained unused at December 31, 1994.
The facility may be increased to a maximum of $300 million, and the Company
has an annual option of extending the term of the facility by one year.
For the years 1994, 1993, and 1992, CINergy's short-term borrowings
outstanding at various times were as follows:
Weighted
Weighted Maximum Average Average
Average Amount Amount Interest
Balance Interest Outstanding Outstanding Rate
at Rate at at Any During the During
Dec. 31 Dec. 31 Month-end Year the Year
(dollars in millions)
1994
Bank loans. . . . . . $228.9 6.11% $377.4 $284.7 4.79%
Commercial paper. . . - - 7.9 1.0 4.22
1993
Bank loans. . . . . . 177.7 3.45 194.3 115.1 3.52
Commercial paper. . . - - 44.8 14.1 3.37
1992
Bank loans. . . . . . 177.7 3.89 211.2 112.9 4.04
Commercial paper. . . 13.0 4.22 43.7 11.3 3.82
14. Fair Values of Financial Instruments
The estimated fair values of CINergy's and its subsidiaries' financial
instruments were as follows (this information does not purport to be a
valuation of CINergy as a whole):
December 31 December 31
1994 1993
Carrying Fair Carrying Fair
Financial Instrument Amount Value Amount Value
(in millions)
Long-term debt (includes amounts
due within one year)
First mortgage bonds. . . . . $2 041 $2 018 $1 919 $2 161
Other long-term debt. . . . . 735 700 726 773
Cumulative preferred stock of
subsidiary - subject to
mandatory redemption. . . . . . 210 221 210 230
The following methods and assumptions were used to estimate the fair values of
each major class of financial instrument:
Cash and temporary cash investments, restricted deposits, and notes payable
Due to the short period to maturity, the carrying amounts reflected on the
Consolidated Balance Sheets approximate fair values.
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 New York Stock
Exchange (NYSE), on the present value of future cash flows. The discount
rates used approximate the incremental borrowing costs for similar
instruments.
Cumulative preferred stock of subsidiary - subject to mandatory redemption
The aggregate fair value of preferred stock subject to mandatory redemption
was based on the latest closing prices quoted on the NYSE for each series.
15. Income Taxes
Effective with the first quarter of 1993, CINergy and its subsidiaries
implemented the provisions of Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (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. Net-of-tax accounting and
reporting is prohibited. CINergy and its subsidiaries adopted this new
accounting standard as the cumulative effect of a change in accounting
principle with no restatement of prior periods. The adoption of Statement 109
had no material effect on CINergy's consolidated earnings.
In August 1993, Congress enacted the Omnibus Budget Reconciliation Act of
1993, which included a provision to increase the Federal corporate income tax
rate from 34% to 35%, retroactive to January 1, 1993. In accordance with the
provisions of Statement 109, the income tax rate increase resulted in an
increase in the net deferred income tax liability and recognition of a
regulatory asset to reflect expected future recovery of the increased
liability through rates charged to customers.
The significant components of CINergy's net deferred income tax liability at
December 31, 1994, and 1993, are as follows:
1994 1993
(in millions)
Deferred Income Tax Liabilities
Utility plant . . . . . . . . . . . . . . . . $ 947.8 $ 937.0
Unamortized costs of reacquiring debt . . . . 26.1 24.8
Deferred operating expenses,
phase-in deferred return,
and accrued carrying costs. . . . . . . . . 87.8 74.8
Amounts due from customers - income taxes . . 112.1 109.7
Deferred demand-side management costs . . . . 39.8 22.1
Other . . . . . . . . . . . . . . . . . . . . 47.2 37.2
Total deferred income tax liabilities . . . 1 260.8 1 205.6
Deferred Income Tax Assets
Unamortized investment tax credits. . . . . . 70.8 74.4
Litigation settlement . . . . . . . . . . . . 29.8 29.8
Deferred fuel costs . . . . . . . . . . . . . 13.1 15.3
Accrued pension and other benefit costs . . . 33.7 21.3
Other . . . . . . . . . . . . . . . . . . . . 42.3 45.9
Total deferred income tax assets. . . . . . 189.7 186.7
Net Deferred Income Tax Liability . . . . . . . $1 071.1 $1 018.9
A summary of Federal and state income taxes charged (credited) to income and the
allocation of such amounts is as follows:
1994 1993 1992
(in millions)
Current Income Taxes
Federal . . . . . . . . . . . . . . . . . . . $104.1 $ 49.1 $ 67.6
State . . . . . . . . . . . . . . . . . . . . 6.5 1.3 7.2
Total current income taxes. . . . . . . . 110.6 50.4 74.8
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items . . . . . . . . . . . . . . 62.2 58.4 52.3
Loss related to settlement of the IURC's
June 1987 and April 1990 Orders (Note 2). (5.2) 45.9 -
Property taxes. . . . . . . . . . . . . . . (13.3) (9.3) 6.4
Demand-side management costs. . . . . . . . 14.5 11.7 5.3
Write-off of a portion of Zimmer (Note 2) . - (11.0) -
Pension and other benefit costs . . . . . . (12.5) (4.2) (2.3)
Post-in-service deferred operating
expenses. . . . . . . . . . . . . . . . . (1.6) 4.7 4.0
Other items - net . . . . . . . . . . . . . (5.4) 3.2 (2.6)
Total deferred Federal income taxes . . . 38.7 99.4 63.1
State . . . . . . . . . . . . . . . . . . . . 2.7 7.5 2.5
Total deferred income taxes . . . . . . . 41.4 106.9 65.6
Investment Tax Credits - Net. . . . . . . . . . (10.4) (10.3) (10.2)
Total Income Taxes. . . . . . . . . . . . $141.6 $147.0 $130.2
Allocated to:
Operating income. . . . . . . . . . . . . . . $152.2 $172.6 $160.4
Other income and expenses - net . . . . . . . (10.6) (25.6) (30.2)
$141.6 $147.0 $130.2
Federal income taxes, computed by applying the statutory Federal income tax
rate to book income before Federal income tax, are reconciled to Federal
income tax expense reported in the Consolidated Statements of Income as
follows:
1994 1993 1992
(in millions)
Statutory Federal income tax provision. . . . . $121.0 $ 70.2 $133.1
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits. . . . (10.4) (10.0) (9.9)
Depreciation and other utility plant-
related differences . . . . . . . . . . . . 13.5 13.1 9.7
Preferred dividend requirements of
subsidiaries. . . . . . . . . . . . . . . . 12.4 13.3 11.9
AFUDC equity. . . . . . . . . . . . . . . . . (2.2) (5.0) (5.0)
Deferred operating expenses, phase-in
deferred return, and accrued
carrying costs. . . . . . . . . . . . . . . (6.5) (9.3) (21.5)
Write-off of a portion of Zimmer. . . . . . . - 69.4 -
Other - net . . . . . . . . . . . . . . . . . 4.6 (3.5) 2.2
Federal income tax expense. . . . . . . . . . . $132.4 $138.2 $120.5
16. Commitments and Contingencies
(a) Construction CINergy will have substantial commitments in connection
with its construction program. Aggregate expenditures for CINergy's
construction program for the 1995 through 1999 period are currently estimated
to be approximately $2.1 billion.
In connection with Energy's Clean Coal Project, Energy has a 25-year
contractual agreement with Destec Energy, Inc. (Destec) which requires Energy
to pay Destec a fixed monthly fee plus certain monthly operating expenses once
the facility is operational. Over the next five years (1995 through 1999),
the fixed fee will be $56 million, and the variable fee is estimated at $95
million. As previously discussed, Energy received authorization in the
February 1995 Order to defer these costs for subsequent recovery in an IURC
order associated with Energy's July 1994 retail rate petition.
(b) Manufactured Gas Plants
(i) Energy Coal tar residues and other substances associated with
manufactured gas plant (MGP) sites have been found at former MGP sites in
Indiana, including, but not limited to, sites in Shelbyville and Lafayette,
two sites previously owned by Energy. Energy has identified at least 21 MGP
sites which it previously owned, including 19 it sold in 1945 to Indiana Gas
and Water Company, Inc. (now Indiana Gas Company [IGC]), including the
Shelbyville and Lafayette sites.
The Shelbyville site has been the subject of an investigation and cleanup
enforcement action by the Indiana Department of Environmental Management
(IDEM) against IGC and Energy. Without admitting liability, Energy and IGC
have conducted an investigation and remedial activities at the Shelbyville
site. Energy and IGC are sharing equally in the costs of investigation and
cleanup of this site.
In 1992, the IDEM issued an order to IGC, naming IGC as a potentially
responsible party (PRP) as defined by the Comprehensive Environmental
Response, Compensation and Liability Act (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 the site.
In April 1993, IGC filed testimony with the IURC seeking recovery of costs
incurred in complying with Federal, state, and local environmental regulations
related to MGP sites in which it has an interest, including sites acquired
from Energy. In its testimony, IGC stated that it would also seek to recover
a portion of these costs from other PRPs, including previous owners. IGC has
informed Energy of the basis for IGC's position that Energy, as a PRP under
CERCLA, should contribute to IGC's response costs related to investigating and
remediating contamination at MGP sites which Energy sold to IGC. The IURC has
not ruled on IGC's petition. In its July 1994 retail rate petition, Energy is
seeking approval to defer, and subsequently recover through rates, any costs
it incurs for investigation and remediation of previously owned MGP sites.
Except for the Shelbyville site, Energy has not assumed any responsibility to
reimburse IGC for its costs for investigating and cleaning up MGP sites. With
respect to the Shelbyville site, based upon environmental investigations
completed to date, Energy believes that any further required investigation and
remediation will not have a material adverse effect on its financial condition
or results of operations. At this time, it is premature for Energy to predict
the nature, extent, and costs of, or Energy's responsibility for, any
environmental investigations and remediations which may be required at other
MGP sites owned, or previously owned, by Energy.
(ii) CG&E and its Utility Subsidiaries Lawrenceburg Gas Company
(Lawrenceburg), a wholly-owned subsidiary of CG&E, also has an MGP site which
is under investigation to determine a remediation strategy. Total cleanup
cost is currently estimated to be approximately $750,000. Lawrenceburg has
applied to have the site included in the IDEM's voluntary cleanup program.
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
are known to present a risk to the environment. Except for the Lawrenceburg
site, neither CG&E nor its utility subsidiaries have undertaken responsibility
for investigating other potential MGP sites.
(c) Wabash Valley Power Association, Inc. (WVPA) Litigation In February
1984, WVPA discontinued payments to Energy for its 17% share of Marble Hill, a
nuclear project jointly owned by Energy and WVPA which was cancelled by Energy
in 1984, and filed suit against Energy in the United States District Court for
the Southern District of Indiana (Indiana District Court), seeking $478
million plus interest and other damages to recover its Marble Hill costs. The
suit was amended to include as defendants several officers of Energy along
with certain contractors and their officers involved in the Marble Hill
project, and to allege claims against all defendants under the Racketeer
Influenced and Corrupt Organizations Act (RICO). Claims proven and damages
allowed under RICO may be trebled and attorneys' fees assessed against the
defendants. The suit was further amended to add claims of common law fraud,
constructive fraud and deceit, and negligent misrepresentation against Energy
and the other defendants.
In 1985, Energy and WVPA entered into an agreement under which Energy agreed
to place in escrow 17% of all salvage proceeds received from the sales of
Marble Hill equipment, materials, and nuclear fuel after May 23, 1985, as a
result of WVPA's filing for protection under Chapter 11 of the Federal
Bankruptcy Code.
In 1989, Energy and its officers reached a settlement with WVPA which, if
approved by judicial and regulatory authorities, will settle the suit filed by
WVPA. The settlement is also contingent on the resolution of the WVPA
bankruptcy proceeding.
The principal terms of the settlement are:
. Energy, on behalf of itself and its officers, will pay $80 million on
behalf of WVPA to Rural Utility Services (RUS), previously called the Rural
Electrification Administration, and the National Rural Utilities
Cooperative Finance Corporation (CFC). The $80 million obligation, net of
insurance proceeds, other credits, and applicable income tax effects, was
charged to income in 1988 and 1989.
. WVPA will transfer its 17% ownership interest in the site to Energy, and
Energy will assume responsibility for all future costs associated with the
site, excluding WVPA's 17% share of future salvage program expenses.
Additionally, RUS and CFC will receive the balance in the salvage escrow
account and 17% of future salvage proceeds, net of related salvage program
expenses.
. Energy will enter into a 35-year take-or-pay power supply agreement for the
sale of 70 megawatts of firm power to WVPA. This power will be supplied
from Gibson Unit 1 and will be priced at Energy's firm power rates for
service to WVPA. The difference between the revenues received from WVPA
and the costs of operating Gibson Unit 1 (the Margin) will be remitted
annually by Energy, on behalf of itself and its officers, to RUS and CFC to
discharge a $90 million obligation, plus accrued interest. If, at the end
of the term of the power supply agreement, the $90 million obligation plus
accrued interest has not been fully discharged, Energy must do so within 60
days. The settlement provides that in the event Energy is party to a
merger or acquisition, Energy and WVPA will use their best efforts to
obtain regulatory approval to price the power sale exclusive of the effects
of the merger or acquisition.
Certain aspects of the settlement are subject to approval by the FERC and
potentially by the IURC and the Michigan Public Service Commission. At such
time as the necessary approvals from these regulatory authorities are
received, Energy will record a $90 million regulatory asset. Concurrently, a
$90 million obligation to RUS and CFC will be recorded as a long-term
commitment. Recognition of the asset is based, in part, on projections which
indicate that the Margin will be sufficient to discharge the $90 million
obligation to RUS and CFC, plus accrued interest, within the 35-year term of
the power supply agreement. If, in some future period, projections indicate
the Margin would not be sufficient to discharge the obligation plus accrued
interest within the 35-year term, the deficiency would be recognized as a
loss.
RUS has proposed a plan of reorganization which, similar to WVPA's plan,
incorporates the settlement agreement. However, RUS's plan provides for full
recovery of principal and interest on WVPA's debt to RUS, which is
substantially in excess of the amount to be recovered under WVPA's proposed
plan. In 1991, the United States Bankruptcy Court for the Southern District
of Indiana (Bankruptcy Court) confirmed WVPA's plan of reorganization and
denied confirmation of RUS's opposing plan. The Bankruptcy Court's approval
of WVPA's reorganization plan is contingent upon WVPA's receipt of regulatory
approval to change its rates. RUS appealed the Bankruptcy Court's decision to
the Indiana District Court. In June 1994, the Indiana District Court ruled in
favor of WVPA's plan. RUS subsequently appealed this decision. Energy cannot
predict the outcome of this appeal, nor is it known whether WVPA can obtain
regulatory approval to change its rates. If reasonable progress is not made
in satisfying conditions to the settlement by February 1, 1996, either party
may terminate the settlement agreement.
(d) United Scrap Lead Site The United States Environmental Protection Agency
(EPA) alleges that CG&E is a PRP under the CERCLA liable for cleanup of the
United Scrap Lead site in Troy, Ohio. CG&E 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.
(e) Potential Divestiture of Gas Operations Under the PUHCA, the divestiture
of CG&E's gas operations may be required. In its order approving the merger,
the SEC reserved judgement over CINergy's ownership of the gas operations for
a period of three years. In November 1994, the SEC requested comments on the
modernization of the PUHCA given the industry's movement toward a more
competitive environment, including whether or not a utility registered under
the PUHCA may own a combination system (i.e., electric and gas). CINergy
believes it has a justifiable basis for retention of its gas operations and
will continue its pursuit of SEC approval to retain the gas portion of the
business. If divestiture is ultimately required, the SEC has historically
allowed companies sufficient time to accomplish divestitures in a manner that
protects shareholder value. Further, CINergy believes that divestiture of the
gas operations, if required, would not have a material effect on merger
savings. See Note 19 for financial information by business segments.
17. Jointly Owned Plant
Energy is a joint owner of Gibson Unit 5 with WVPA and the Indiana Municipal
Power Agency (IMPA). Additionally, Energy is a co-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 Energy. CG&E, Columbus Southern Power Company,
and 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 Energy's and CG&E's portions of
all operating costs associated with the commonly owned facilities.
Energy's and CG&E's investments in jointly owned plant are as follows:
1994
Utility Plant Accumulated Construction
Share in Service Depreciation Work in Progress
(dollars in millions)
Energy
Production
Gibson (Unit 5) . . . . . . . 50.05% $ 207 $ 92 $ 3
Transmission property
and local facilities. . . . . 93.68 1 630 565 53
CG&E
Production
Miami Fort Station
(Units 7 and 8) . . . . . . 64 202 100 1
W.C. Beckjord Station
(Unit 6). . . . . . . . . . 37.5 41 22 -
J.M. Stuart Station . . . . . 39 262 107 5
Conesville Station
(Unit 4). . . . . . . . . . 40 70 31 3
Zimmer. . . . . . . . . . . . 46.5 1 211 133 3
East Bend Station . . . . . . 69 329 140 1
Killen Station. . . . . . . . 33 186 71 -
Transmission. . . . . . . . . . various 62 28 -
18. Quarterly Financial Data (unaudited)
Net Earnings
Operating Operating Income (Loss)
Quarter Ended Revenues Income (Loss) Per Share
(in millions, except per share amounts)
1994
March 31 . . . . . . . . . . . $ 866 $155 $ 99 $ .68
June 30. . . . . . . . . . . . 673 106 49 .33
September 30 . . . . . . . . . 692 118(a) 58 (a) .39 (a)
December 31. . . . . . . . . . 693 61(a) (15)(a) (.10)(a)
Total . . . . . . . . . . . $2 924 $440 $ 191 $ 1.30
1993
March 31 . . . . . . . . . . . $ 783 $140 $ 95 $ .65
June 30. . . . . . . . . . . . 590 80 45 .30
September 30 . . . . . . . . . 703 134 77 .53
December 31. . . . . . . . . . 764 129 (154)(b) (1.05)(b)
Total . . . . . . . . . . . $2 840 $483 $ 63 $ .43
(a) In 1994, CINergy recognized charges to earnings of approximately $79
million ($56 million, net of taxes) or 38 cents per share primarily for
certain merger costs and other costs which the Company does not expect to
recover from customers due to rate settlements related to securing support for
the merger. Of these charges, approximately $46 million, net of taxes (31
cents per share), was recognized in the fourth quarter and approximately $8
million, net of taxes (5 cents per share), was recognized in the third
quarter. The charges include the PUCO electric jurisdictional portion of
merger transaction costs and costs to achieve merger savings incurred through
December 31, 1994, previously capitalized information systems development
costs, and severance benefits to former officers of CG&E and Energy. Of the
total $79 million charge, $62 million is reflected in "OPERATING EXPENSES -
Other operation" and $17 million is reflected in "OTHER INCOME AND EXPENSES -
NET".
(b) In the fourth quarter of 1993, CINergy recognized a charge to earnings of
approximately $235 million ($223 million, net of taxes) or $1.55 per share for
the write-off of a portion of Zimmer. Additionally, approximately $25 million
($16 million, net of taxes) or 11 cents per share of costs incurred in
connection with IPALCO Enterprises, Inc.'s hostile takeover attempt of
Resources prior to the merger was charged to expense during the last three
quarters of 1993. These charges are reflected in "OTHER INCOME AND EXPENSES -
NET".
19. Financial Information by Business Segments
Operating
Operating Operating Income Provision for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in millions)
1994
Electric......... $2 482 $412 $144 $274 $432
Gas.............. 442 28 8 20 42
Total.......... $2 924 $440 $152 $294 $474
1993
Electric......... $2 371 $450 $166 $261 $517
Gas.............. 469 33 7 18 45
Total.......... $2 840 $483 $173 $279 $562
1992
Electric......... $2 240 $402 $157 $242 $474
Gas.............. 394 23 3 16 42
Total.......... $2 634 $425 $160 $258 $516
December 31
1994 1993 1992
(in millions)
Property, Plant, and Equipment - net
Electric.......................... $5 680 $5 519 $5 461
Gas............................... 519 504 476
6 199 6 023 5 937
Other Corporate Assets.............. 1 951 1 781 1 196
Total Assets.................... $8 150 $7 804 $7 133
For a discussion of the potential divestiture of CG&E's gas operations, see
Note 16(e).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
Reference is made to CINergy Corp.'s (CINergy) 1995 Proxy Statement with
respect to identification of directors and their current principal
occupations.
Executive Officers
The information included in Part I of this report on pages 14 through 16 under
the caption "Executive Officers of the Registrant" is referenced in reliance
upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to CINergy's 1995 Proxy Statement with respect to executive
compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Reference is made to CINergy's 1995 Proxy Statement with respect to security
ownership of certain beneficial owners, security ownership of management, and
changes in control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
Refer to the page captioned "Index to Financial Statements and Financial
Statement Schedules", page 44 of this report, for an index of the financial
statements and financial statement schedules included in this report.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the last quarter of 1994:
Date of Report Items Filed
October 24, 1994 Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
Item 7. Financial Statements and Exhibits
November 23, 1994 Item 7. Financial Statements and Exhibits
December 29, 1994 Item 7. Financial Statements and Exhibits
(c) Exhibits.
Copies of the documents listed below which are identified with an asterisk (*)
have heretofore been filed with the Securities and Exchange Commission and are
incorporated herein by reference and made a part hereof. Exhibits not so
identified are filed herewith.
Exhibit
Designation Nature of Exhibit
3-a *Certificate of Incorporation of CINergy
Corp. (CINergy). (Exhibit to CINergy's
Annual Report on Form 10-K for the year
ended December 31, 1993.)
3-b By-laws of CINergy as adopted October 24,
1994.
4-a *Original Indenture (First Mortgage Bonds)
dated September 1, 1939, between PSI Energy,
Inc. (Energy) and The First National Bank of
Chicago, as Trustee (Exhibit A-Part 3 in
File No. 70-258), and LaSalle National Bank
as Successor Trustee (Supplemental Indenture
dated March 30, 1984).
Exhibit
Designation Nature of Exhibit
4-b *Nineteenth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated January 1, 1972. (Exhibit to
File No. 2-42545.)
4-c *Twenty-third Supplemental Indenture between
Energy and The First National Bank of
Chicago dated January 1, 1977. (Exhibit to
File No. 2-57828.)
4-d *Twenty-fifth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated September 1, 1978. (Exhibit
to File No. 2-62543.)
4-e *Twenty-seventh Supplemental Indenture
between Energy and The First National Bank
of Chicago dated March 1, 1979. (Exhibit to
File No. 2-63753.)
4-f *Thirty-fifth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated March 30, 1984. (Exhibit to
Energy's 1984 Form 10-K in File No. 1-3543.)
4-g *Thirty-ninth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated March 15, 1987. (Exhibit to
Energy's 1987 Form 10-K in File No. 1-3543.)
4-h *Forty-first Supplemental Indenture between
Energy and The First National Bank of
Chicago dated June 15, 1988. (Exhibit to
Energy's 1988 Form 10-K in File No. 1-3543.)
4-i *Forty-second Supplemental Indenture between
Energy and The First National Bank of
Chicago dated August 1, 1988. (Exhibit to
Energy's 1988 Form 10-K in File No. 1-3543.)
4-j *Forty-fourth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated March 15, 1990. (Exhibit to
Energy's 1990 Form 10-K in File No. 1-3543.)
4-k *Forty-fifth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated March 15, 1990. (Exhibit to
Energy's 1990 Form 10-K in File No. 1-3543.)
Exhibit
Designation Nature of Exhibit
4-l *Forty-sixth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated June 1, 1990. (Exhibit to
Energy's 1991 Form 10-K in File No. 1-3543.)
4-m *Forty-seventh Supplemental Indenture
between Energy and The First National Bank
of Chicago dated July 15, 1991. (Exhibit to
Energy's 1991 Form 10-K in File No. 1-3543.)
4-n *Forty-eighth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated July 15, 1992. (Exhibit to
Energy's 1992 Form 10-K in File No. 1-3543.)
4-o *Forty-ninth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated February 15, 1993. (Exhibit
to Energy's 1992 Form 10-K in File No. 1-
3543.)
4-p *Fiftieth Supplemental Indenture between
Energy and The First National Bank of
Chicago dated February 15, 1993. (Exhibit
to Energy's 1992 Form 10-K in File No. 1-
3543.)
4-q *Fifty-first Supplemental Indenture between
Energy and The First National Bank of
Chicago dated February 1, 1994. (Exhibit to
Energy's 1993 Form 10-K in File No. 1-3543.)
4-r *Indenture (Secured Medium-term Notes,
Series A), dated July 15, 1991, between
Energy and The First National Bank of
Chicago, as Trustee. (Exhibit to Energy's
Form 10-K/A in File No. 1-3543, Amendment
No. 2, dated July 15, 1993.)
4-s *Indenture (Secured Medium-term Notes,
Series B), dated July 15, 1992, between
Energy and The First National Bank of
Chicago, as Trustee. (Exhibit to Energy's
Form 10-K/A in File No. 1-3543, Amendment
No. 2, dated July 15, 1993.)
Exhibit
Designation Nature of Exhibit
4-t *Original Indenture (First Mortgage Bonds)
between The Cincinnati Gas & Electric
Company (CG&E) and The Bank of New York (as
Trustee) dated as of August 1, 1936.
(Exhibit to CG&E's Registration Statement
No. 2-2374.)
4-u *Tenth Supplemental Indenture between CG&E
and The Bank of New York dated as of July 1,
1967. (Exhibit to CG&E's Registration
Statement No. 2-26549.)
4-v *Eleventh Supplemental Indenture between
CG&E and The Bank of New York dated as of
May 1, 1969. (Exhibit to CG&E's
Registration Statement No. 2-32063.)
4-w *Thirteenth Supplemental Indenture between
CG&E and The Bank of New York dated as of
November 1, 1971. (Exhibit to CG&E's
Registration Statement No. 2-41974.)
4-x *Fourteenth Supplemental Indenture between
CG&E and The Bank of New York dated as of
November 2, 1972. (Exhibit to CG&E's
Registration Statement No. 2-60961.)
4-y *Fifteenth Supplemental Indenture between
CG&E and The Bank of New York dated as of
August 1, 1973. (Exhibit to CG&E's
Registration Statement No. 2-60961.)
4-z *Twenty-fifth Supplemental Indenture between
CG&E and The Bank of New York dated as of
December 1, 1985. (Exhibit to CG&E's 1985
Form 10-K in File No. 1-1232.)
4-aa *Twenty-ninth Supplemental Indenture between
CG&E and The Bank of New York dated as of
June 15, 1989. (Exhibit to CG&E's June 30,
1989, Form 10-Q in File No. 1-1232.)
4-bb *Thirtieth Supplemental Indenture between
CG&E and The Bank of New York dated as of
May 1, 1990. (Exhibit to CG&E's June 30,
1990, Form 10-Q in File No. 1-1232.)
Exhibit
Designation Nature of Exhibit
4-cc *Thirty-first Supplemental Indenture between
CG&E and The Bank of New York dated as of
December 1, 1990. (Exhibit to CG&E's 1990
Form 10-K in File No. 1-1232.)
4-dd *Thirty-second Supplemental Indenture
between CG&E and The Bank of New York dated
as of December 15, 1991. (Exhibit to CG&E's
Registration Statement No. 33-45115.)
4-ee *Thirty-third Supplemental Indenture between
CG&E and The Bank of New York dated as of
September 1, 1992. (Exhibit to CG&E's
Registration Statement No. 33-53578.)
4-ff *Thirty-fourth Supplemental Indenture
between CG&E and The Bank of New York dated
as of October 1, 1993. (Exhibit to CG&E's
September 30, 1993, Form 10-Q in File No. 1-
1232.)
4-gg *Thirty-fifth Supplemental Indenture between
CG&E and The Bank of New York dated as of
January 1, 1994. (Exhibit to CG&E's
Registration Statement No. 33-52335.)
4-hh *Thirty-sixth Supplemental Indenture between
CG&E and The Bank of New York dated as of
February 15, 1994. (Exhibit to CG&E's
Registration Statement No. 33-52335.)
4-ii *Loan Agreement between CG&E and County of
Boone, Kentucky dated as of February 1,
1985. (Exhibit to CG&E's 1984 Form 10-K in
File No. 1-1232.)
4-jj *Loan Agreement between CG&E and State of
Ohio Air Quality Development Authority dated
as of December 1, 1985. (Exhibit to CG&E's
1985 Form 10-K in File No. 1-1232.)
4-kk *Loan Agreement between CG&E and State of
Ohio Air Quality Development Authority dated
as of December 1, 1985. (Exhibit to CG&E's
1985 Form 10-K in File No. 1-1232.)
4-ll *Loan Agreement between CG&E and State of
Ohio Air Quality Development Authority dated
as of December 1, 1985. (Exhibit to CG&E's
1985 Form 10-K in File No. 1-1232.)
Exhibit
Designation Nature of Exhibit
4-mm *Repayment Agreement between CG&E and The
Dayton Power and Light Company dated as of
December 23, 1992. (Exhibit to CG&E's 1992
Form 10-K in File No. 1-1232.)
4-nn *Loan Agreement between CG&E and State of
Ohio Water Development Authority dated as of
January 1, 1994. (Exhibit to CG&E's 1993
Form 10-K in File No. 1-1232.)
4-oo *Loan Agreement between CG&E and State of
Ohio Air Quality Development Authority dated
as of January 1, 1994. (Exhibit to CG&E's
1993 Form 10-K in File No. 1-1232.)
4-pp *Loan Agreement between CG&E and County of
Boone, Kentucky dated as of January 1, 1994.
(Exhibit to CG&E's 1993 Form 10-K in File
No. 1-1232.)
4-qq *Original Indenture (First Mortgage Bonds)
between The Union Light, Heat and Power
Company (ULH&P) and The Bank of New York
dated as of February 1, 1949. (Exhibit to
ULH&P's Registration Statement No. 2-7793.)
4-rr *Fifth Supplemental Indenture between ULH&P
and The Bank of New York dated as of January
1, 1967. (Exhibit to CG&E's Registration
Statement No. 2-60961.)
4-ss *Seventh Supplemental Indenture between
ULH&P and The Bank of New York dated as of
October 1, 1973. (Exhibit to CG&E's
Registration Statement No. 2-60961.)
4-tt *Eighth Supplemental Indenture between ULH&P
and The Bank of New York dated as of
December 1, 1978. (Exhibit to CG&E's
Registration Statement No. 2-63591.)
4-uu *Tenth Supplemental Indenture between ULH&P
and The Bank of New York dated as of July 1,
1989. (Exhibit to CG&E's June 30, 1989,
Form 10-Q in File No. 1-1232.)
4-vv *Eleventh Supplemental Indenture between
ULH&P and The Bank of New York dated as of
June 1, 1990. (Exhibit to CG&E's June 30,
1990, Form 10-Q in File No. 1-1232.)
Exhibit
Designation Nature of Exhibit
4-ww *Twelfth Supplemental Indenture between
ULH&P and The Bank of New York dated as of
November 15, 1990. (Exhibit to ULH&P's 1990
Form 10-K in File No. 2-7793.)
4-xx *Thirteenth Supplemental Indenture between
ULH&P and The Bank of New York dated as of
August 1, 1992. (Exhibit to ULH&P's 1992
Form 10-K in File No. 2-7793.)
10-a *Energy Union Employees' 401(k) Savings
Plan, amended and restated October 24, 1994,
effective January 1, 1992. (Exhibit to
CINergy's Form S-8, filed October 18, 1994.)
10-b *Energy Employees' 401(k) Savings Plan,
amended and restated October 24, 1994,
effective January 1, 1992. (Exhibit to
CINergy's Form S-8, filed October 18, 1994.)
10-c *CG&E Deferred Compensation and Investment
Plan, as amended, effective January 1, 1989.
(Exhibit to CINergy's Form S-8, filed August
30, 1994.)
10-d *CG&E Savings Incentive Plan, as amended,
effective January 1, 1989. (Exhibit to
CINergy's Form S-8, filed August 30, 1994.)
10-e +Amended and Restated Employment Agreement
dated October 24, 1994, among CG&E, CINergy
Corp. (an Ohio corporation), CINergy (a
Delaware corporation), PSI Resources, Inc.,
Energy, and Jackson H. Randolph.
10-f *+Amended and Restated Employment Agreement
dated July 2, 1993, among PSI Resources,
Inc., Energy, CG&E, CINergy, CINergy Sub,
Inc., and James E. Rogers, Jr. (Exhibit to
CINergy's Amendment No. 3 to Form S-4, filed
October 8, 1993.)
10-g *+Employment Agreement dated October 4,
1993, among CINergy, Energy, and John M.
Mutz. (Exhibit to PSI Resources, Inc.'s
September 30, 1993, Form 10-Q, File No.
1-9941.)
Exhibit
Designation Nature of Exhibit
10-h +Employment Agreement dated January 1, 1995,
among CINergy, CG&E, CINergy Services, Inc.,
CINergy Investments, Inc., Energy, and
William J. Grealis.
10-i *+CINergy Stock Option Plan, adopted October
18, 1994, effective October 24, 1994.
(Exhibit to CINergy's Form S-8, filed
October 19, 1994.)
10-j *+CINergy Performance Shares Plan, adopted
October 18, 1994, effective October 24,
1994. (Exhibit to CINergy's Form S-8, filed
October 19, 1994.)
10-k +CINergy Annual Incentive Plan, adopted
October 18, 1994, effective October 24,
1994.
10-l *CINergy Employee Stock Purchase and Savings
Plan, adopted October 18, 1994, effective
October 24, 1994. (Exhibit to CINergy's
Form S-8, filed October 19, 1994.)
10-m Amendment to CINergy Employee Stock Purchase
and Savings Plan, adopted January 25, 1995,
retroactively effective January 1, 1995.
10-n *+CINergy Directors' Deferred Compensation
Plan, adopted October 18, 1994, effective
October 24, 1994. (Exhibit to CINergy's
Form S-8, filed October 19, 1994.)
10-o +CINergy Retirement Plan for Directors,
adopted October 18, 1994, effective October
24, 1994.
10-p +CINergy 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.
Exhibit
Designation Nature of Exhibit
10-q *Text of Settlement Agreement dated October
27, 1993, by and among PSI Resources, Inc.,
Energy, CG&E, CINergy, IPALCO Enterprises,
Inc., Indianapolis Power & Light Company,
James E. Rogers, John R. Hodowal, and Ramon
L. Humke (together with the exhibits and
schedules thereto). (Exhibit to PSI
Resources, Inc.'s Form 8-K dated October 27,
1993.)
10-r *+Deferred Compensation Agreement between
Jackson H. Randolph and CINergy dated
January 1, 1992. (Exhibit to CG&E's 1992
Form 10-K in File No. 1-1232.)
10-s +Split Dollar Insurance Agreement, effective
as of May 1, 1993, between CINergy and
Jackson H. Randolph.
10-t *+Deferred Compensation Agreement, effective
as of January 1, 1992, between CINergy and
James E. Rogers, Jr. (Exhibit to Energy's
Form 10-K/A in File No. 1-3543, Amendment
No. 1, dated April 29, 1993.)
10-u *+Split Dollar Life Insurance Agreement,
effective as of January 1, 1992, between
CINergy and James E. Rogers, Jr. (Exhibit
to Energy's Form 10-K/A in File No. 1-3543,
Amendment No. 1, dated April 29, 1993.)
10-v *+First Amendment to Split Dollar Life
Insurance Agreement between CINergy and
James E. Rogers, Jr. dated December 11,
1992. (Exhibit to Energy's Form 10-K/A in
File No. 1-3543, Amendment No. 1, dated
April 29, 1993.)
10-w *+Energy Supplemental Retirement Plan
amended and restated December 16, 1992,
retroactively effective January 1, 1989.
(Exhibit to Energy's 1992 Form 10-K in File
No. 1-3543.)
10-x *+Energy Excess Benefit Plan, formerly named
the Supplemental Pension Plan, amended and
restated December 16, 1992, retroactively
effective January 1, 1989. (Exhibit to
Energy's 1992 Form 10-K in File No. 1-3543.)
Exhibit
Designation Nature of Exhibit
10-y *+Supplemental Executive Retirement Income
Plan between CG&E and certain executive
officers. (Exhibit to CG&E's 1988 Form 10-K
in File No. 1-1232.)
10-z *+Amendment to Supplemental Executive
Retirement Income Plan between CG&E and
certain executive officers. (Exhibit to
CG&E's 1992 Form 10-K in File No 1-1232.)
10-aa *+Executive Severance Agreement between CG&E
and certain executive officers. (Exhibit to
CG&E's 1989 Form 10-K in File No. 1-1232.)
10-bb *+Amendment to Executive Severance Agreement
between CG&E and certain executive officers.
(Exhibit to CG&E's 1992 Form 10-K in File
No. 1-1232.)
21 *Subsidiaries of CINergy. (Exhibit to
CINergy's Form U5B, filed January 23, 1995.)
23 Consent of Independent Public Accountants.
24 Power of Attorney.
27 Financial Data Schedule (included in
electronic submission only).
99-a 1994 Form 11-K Annual Report of CINergy
Directors' Deferred Compensation Plan. (To
be filed by amendment.)
99-b 1994 Form 11-K Annual Report of CINergy
Employee Stock Purchase and Savings Plan.
(To be filed by amendment.)
_________________________
+ Management contract, compensation plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.
CINERGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994
Col. A Col. B Col. C Col. D Col. E
Additions Deductions
For Purposes
Balance at Charged For Which Balance at
Beginning Charged to to Other Reserves Were Close of
Description of Period Income Accounts Created Other Period
(in thousands)
Accumulated Provisions Deducted from
Applicable Assets
Allowance for Doubtful Accounts $ 93 735 $ 31 145 $15 010 $49 343 $ - $ 90 547 1/
Miscellaneous Materials & Supplies
Provisions 6 852 405 - 638 926 5 693
Accumulated Depreciation 2 928 184 307 386 4 793 76 698 2/ (137) 3 163 802
Other Accumulated Provisions
Deferred Income Taxes 3/ $1 018 891 $ 78 028 $ 8 985 $34 800 $ - $1 071 104
Accrued Pension and Other
Postretirement Benefit Costs 85 953 37 180 22 806 11 912 449 133 578
Environmental Liability 8 000 - 750 - - 8 750
Injuries & Damages 3 578 9 836 - 9 104 - 4 310
Other 30 275 10 628 3 973 2 162 444 42 270
$1 146 697 $ 135 672 $36 514 $57 978 $ 893 $1 260 012
_1/ Includes $80,832 for the WVPA Marble Hill receivable. See Note 16(c) of the "Notes to Consolidated Financial
Statements" in "Item 8. Financial Statements and Supplementary Data".
_2/ Includes property retired at original cost or estimated original cost less the net cost of removal.
_3/ See Notes 1(j) and 15 of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" for further information with respect to deferred income taxes.
CINERGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1993
Col. A Col. B Col. C Col. D Col. E
Additions Deductions
For Purposes
Balance at Charged For Which Balance at
Beginning Charged to to Other Reserves Were Close of
Description of Period Income Accounts Created Other Period
(in thousands)
Accumulated Provisions Deducted from
Applicable Assets
Allowance for Doubtful Accounts $ 88 651 $ 24 260 $ 1 032 $20 208 $ - $ 93 735 1/
Miscellaneous Materials & Supplies
Provisions 8 844 554 - 2 356 190 6 852
Accumulated Depreciation 2 742 910 277 342 4 827 80 089 2/ 16 806 2 928 184
Other Accumulated Provisions
Deferred Income Taxes 3/ $ 494 910 $155 738 $417 125 $48 882 $ - $1 018 891
Accrued Pension and Other
Postretirement Benefit Costs 59 393 20 905 21 719 15 970 94 85 953
Environmental Liability 5 000 3 000 - - - 8 000
Injuries & Damages 5 212 7 563 - 9 197 - 3 578
Other 20 818 11 380 1 313 3 218 18 30 275
$ 585 333 $198 586 $440 157 $77 267 $ 112 $1 146 697
_1/ Includes $78,174 for the WVPA Marble Hill receivable. See Note 16(c) of the "Notes to Consolidated Financial
Statements" in "Item 8. Financial Statements and Supplementary Data".
_2/ Includes property retired at original cost or estimated original cost less the net cost of removal.
_3/ See Notes 1(j) and 15 of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" for further information with respect to deferred income taxes.
CINERGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1992
Col. A Col. B Col. C Col. D Col. E
Additions Deductions
For Purposes
Balance at Charged For Which Balance at
Beginning Charged to to Other Reserves Were Close of
Description of Period Income Accounts Created Other Period
(in thousands)
Accumulated Provisions Deducted from
Applicable Assets
Allowance for Doubtful Accounts $ 85 997 $ 22 787 $ 989 $21 122 $ - $ 88 651 1/
Miscellaneous Materials & Supplies
Provisions 8 474 948 140 718 - 8 844
Accumulated Depreciation 2 543 837 257 621 4 844 63 606 2/ (214) 2 742 910
Other Accumulated Provisions
Deferred Income Taxes 3/ $ 420 492 $118 721 $ 586 $44 866 $ 23 $ 494 910
Accrued Pension and Other
Postretirement Benefit Costs 25 024 12 684 30 452 8 767 - 59 393
Environmental Liability - 5 000 - - - 5 000
Injuries & Damages 4 815 14 187 - 13 790 - 5 212
Other 20 163 2 841 289 1 740 735 20 818
$ 470 494 $153 433 $31 327 $69 163 $ 758 $ 585 333
_1/ Includes $75,838 for the WVPA Marble Hill receivable. See Note 16(c) of the "Notes to Consolidated Financial
Statements" in "Item 8. Financial Statements and Supplementary Data".
_2/ Includes property retired at original cost or estimated original cost less the net cost of removal.
_3/ See Notes 1(j) and 15 of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" for further information with respect to deferred income taxes.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CINERGY CORP.
Registrant
Dated: March 28, 1995
By Jackson H. Randolph
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
Neil A. Armstrong Director
James K. Baker Director
Hugh A. Barker Director
Michael G. Browning Director
Clement L. Buenger Director
Phillip R. Cox Director
Kenneth M. Duberstein Director
John A. Hillenbrand, II Director
George C. Juilfs Director
Melvin Perelman, Ph.D. Director
Thomas E. Petry Director
John J. Schiff, Jr. Director
Van P. Smith Director
Dudley S. Taft Director
Oliver W. Waddell Director
James E. Rogers Vice Chairman, President, March 28, 1995
Attorney-in-fact for all Chief Operating Officer
the foregoing persons and Director
J. Wayne Leonard Group Vice President March 28, 1995
and Chief Financial Officer
(Principal Financial Officer)
Jackson H. Randolph Chairman, Chief Executive March 28, 1995
Officer and Director
(Principal Executive Officer)
Charles J. Winger Comptroller March 28, 1995
(Principal Accounting Officer)