______________________________________________________________________________
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 1-3543
PSI ENERGY, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0594457
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 East Main Street
Plainfield, Indiana 46168
(Address of principal executive offices)
Registrant's telephone number: (317) 839-9611
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Cumulative Preferred Stock
4.32%, 4.16%, 7.15%,
7.44%, and 6 7/8% Series New York Stock Exchange
First Mortgage Bonds
Series S and Y 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 Cumulative Preferred
Stock held by non-affiliates was $163 million.
As of February 28, 1995, 53,913,701 shares of Common Stock, without par value,
stated value $.01 per share, were outstanding, all of which were held by
CINergy Corp.
DOCUMENTS INCORPORATED BY REFERENCE
The Information Statement of PSI Energy, Inc. dated March 29, 1995, is
incorporated by reference into Part III of this report.
______________________________________________________________________________
PSI ENERGY, INC.
TABLE OF CONTENTS
Item
Number
PART I
1 Business
Organization . . . . . . . . . . . . . . . . . . . . . .
The Company. . . . . . . . . . . . . . . . . . . . . . .
Customer, Sales, and Revenue Data. . . . . . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . .
Rate Matters . . . . . . . . . . . . . . . . . . . . . .
Power Supply . . . . . . . . . . . . . . . . . . . . . .
Fuel Supply. . . . . . . . . . . . . . . . . . . . . . .
Competition. . . . . . . . . . . . . . . . . . . . . . .
Capital Requirements . . . . . . . . . . . . . . . . . .
Environmental Matters. . . . . . . . . . . . . . . . . .
Employees. . . . . . . . . . . . . . . . . . . . . . . .
2 Properties . . . . . . . . . . . . . . . . . . . . . . . .
3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . .
Merger Litigation. . . . . . . . . . . . . . . . . . . .
Shareholder Litigation . . . . . . . . . . . . . . . . .
Fuel Litigation. . . . . . . . . . . . . . . . . . . . .
4 Submission of Matters to a Vote of Security Holders. . . .
Executive Officers of the Registrant . . . . . . . . . . .
PART II
5 Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . .
6 Selected Financial Data. . . . . . . . . . . . . . . . . .
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . .
Index to Financial Statements and Financial Statement
Schedules. . . . . . . . . . . . . . . . . . . . . . . .
8 Financial Statements and Supplementary Data. . . . . . . .
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . .
PART III
10 Directors and Executive Officers of the Registrant . . . .
11 Executive Compensation . . . . . . . . . . . . . . . . . .
12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . .
13 Certain Relationships and Related Transactions . . . . . .
PART IV
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Financial Statements and Schedules . . . . . . . . . .
Reports on Form 8-K. . . . . . . . . . . . . . . . . .
Exhibits . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . .
PART I
ITEM 1. BUSINESS
Organization
In October 1994, PSI Energy, Inc. (Energy), previously PSI Resources, Inc.'s
(Resources) utility subsidiary, became a subsidiary of CINergy Corp. (CINergy)
as a result of the merger of The Cincinnati Gas & Electric Company (CG&E) and
Resources. CINergy is a registered holding company under the Public Utility
Holding Company Act of 1935 (PUHCA).
The Company
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.
Customer, Sales, and Revenue Data
Approximately 98% of Energy's operating revenues are derived from the sale of
electricity. The area served by Energy is a residential, agricultural, and
widely diversified industrial territory. As of December 31, 1994, Energy
supplied electric service to over 636,000 customers. Energy's service
territory includes approximately 710 cities, towns, unincorporated
communities, and adjacent rural areas, including municipal utilities and rural
electric cooperatives. No one customer accounts for more than 5% of electric
operating revenues. Sales of electricity are affected by seasonal weather
patterns, and, therefore, operating revenues and associated operating expenses
are not distributed evenly during the year.
Regulation
As direct and indirect subsidiaries of CINergy, Energy and South,
respectively, 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.
Energy is 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.
Energy, as a public utility under the laws of Indiana, is also regulated by
the Indiana Utility Regulatory Commission (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
Energy and 28 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.
Energy's electric system, which is operated by CINergy Services, Inc., the
service company which provides a variety of administrative, management, and
support services to the CINergy system, is interconnected with the electric
systems of CG&E, Central Illinois Public Service Company, East Kentucky Power
Cooperative, Inc., 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,
and Southern Indiana Gas and Electric Company.
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 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
and Indiana.
Energy monitors alternative sources to assure a continuing availability of
economical fuel supplies. Energy intends to continue purchasing a portion of
its coal requirements on the spot market and, at the present time, is
investigating the use of low-sulfur coal in connection with its 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").
Energy believes it will be able to obtain sufficient coal to meet future
generating requirements. However, Energy is unable to predict the extent to
which coal availability and price may ultimately be affected by future
environmental requirements. Presently, Energy expects 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.
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
Energy's 1995 construction expenditures for environmental compliance are
forecasted to be $10 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 Energy at December 31, 1994, was 4,025, of whom
1,747 were represented by the International Brotherhood of Electrical Workers
(IBEW) union.
Energy's collective bargaining agreement with the IBEW will expire at the end
of April 1996.
ITEM 2. PROPERTIES
Substantially all utility plant is subject to the lien of Energy'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 14 of the "Notes to Consolidated Financial Statements" in
"Item 8. Financial Statements and Supplementary Data".
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 megawatts (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 kilowatt-hour (kwh) sales are each forecasted
to have annual growth rates of 2%. These forecasts reflect Energy's
assessment of demand-side management programs, 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.
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 13(b) and 13(c) 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
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
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
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Age at
Dec. 31,
Name 1994 Office & Date Elected or in Job
John M. Mutz 1/ 59 Vice President of CINergy - 1995 2/
President of Energy - 1994
President of Resources - 1993
President - Lilly Endowment, Inc. 3/ - 1989
William L. Sheafer 51 Treasurer of CINergy and Energy - 1994
Treasurer of CG&E - 1987
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
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 Energy
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 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.
2/ Mr. Mutz was elected Vice President of CINergy effective March 3,
1995.
3/ Non-affiliate of CINergy.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
All Energy common stock is held by CINergy; therefore, there is no public
trading market for Energy common stock.
The following table shows Energy's common stock dividends declared for the
past two years (all dividends were paid to Resources, previously Energy's
parent company):
Dividends
(in thousands)
Quarter 1994 1993
4th $10 376 $17 898
3rd 16 174 13 868
2nd 16 622 15 375
1st 15 970 15 050
ITEM 6. SELECTED FINANCIAL DATA
1994 1993 1992 1991 1990
(in millions)
Operating revenues (1) $1 127 $1 078 $1 072 $1 120 $1 106
Net income (1) 82 125 107 30 128
Total assets 2 945 2 645 2 300 2 093 2 041
Cumulative preferred stock
subject to mandatory
redemption (2) - - - 26 29
Long-term debt 878 816 737 642 650
Long-term debt due within one year 60 - 40 90 -
Notes payable 194 127 121 - 17
<FN>
(1) See Note 2(a) of the "Notes to Consolidated Financial Statements" in
"Item 8. Financial Statements and Supplementary Data".
(2) Includes $3 million in each of 1991 and 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 13 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) was created for the October 1994 merger of PSI
Resources, Inc. (Resources) and The Cincinnati Gas & Electric Company (CG&E)
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 or Company), previously Resources' utility
subsidiary. The outstanding preferred stock and debt securities of Energy
were not affected by the merger. Following the merger, CG&E and Energy (the
Operating Companies) began jointly dispatching their generating units.
FINANCIAL CONDITION
Competitive Pressures
Electric Utility Industry
Introduction The primary factor influencing the future profitability of
CINergy and its utility subsidiaries 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.
Although the Operating Companies provide service in separate retail regulatory
jurisdictions, as a result of the merger, strategies and opportunities for
success in a more competitive environment are most appropriately discussed for
CINergy as a whole. Consequently, the discussion that follows addresses
issues for CINergy as a whole while recognizing that regulatory response to
competitive pressures may vary between regulatory jurisdictions.
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 and its
utility subsidiaries support 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 CINergy'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
its 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.
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 CINergy or its utility
subsidiaries (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 Energy's senior securities continue
to be on review for possible upgrade. Energy has been placed on Standard &
Poor's and Duff & Phelps' ratings watch. In addition, in February 1995, Fitch
Investors Service, Inc. (Fitch) raised Energy's first mortgage bonds rating to
A- from BBB+ and preferred stock rating to BBB+ from BBB. The Fitch ratings
reflect Energy's low-cost generation, competitive retail rates, 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.
Energy's goal is to achieve at least an "A" credit rating on its senior
securities.
The current ratings are provided in the following table:
Duff & Standard
Phelps Fitch Moody's & Poor's
First Mortgage Bonds and
Secured Medium-term Notes BBB+ A- Baa1 BBB+
Preferred Stock BBB BBB+ baa2 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 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 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 Energy's first mortgage bonds rating to A- from BBB+ and
preferred stock rating to BBB+ from BBB in February 1995; and
- Energy's 1994 delivered fuel costs per million Btu were the lowest these
costs have been in the past 10 years.
Regulatory Matters
IURC Order - 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 all non-fuel operation and maintenance expense savings
from the merger (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.
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.
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., Energy'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.
Energy's compliance plan with Phase I sulfur dioxide reduction requirements,
which has been approved by the IURC, includes 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 Energy's generating units to
implement the compliance plan have been completed and tested and are
operational. To meet nitrogen oxide reductions required by Phase I, Energy
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, Energy'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 Energy 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. Energy 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, Energy could be forced to consider high-cost capital intensive
options (e.g., installing additional scrubbers).
To meet nitrogen oxide reductions required by Phase II, Energy may install
low-nitrogen oxide burners on certain affected units. In addition, Energy 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.
Energy is forecasting CAAA compliance capital expenditures of $45 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 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.
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. Energy cannot predict the outcome or
the effects of this EPA study.
CAPITAL REQUIREMENTS
Construction
General For 1995, construction expenditures are forecasted to be $160
million, and over the next five years (1995 through 1999), are forecasted to
be approximately $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.
Other
Mandatory redemptions of long-term debt and cumulative preferred stock total
$163 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 13(c) of the
"Notes to Consolidated Financial Statements" in "Item 8. Financial Statements
and Supplementary Data").
Energy currently forecasts approximately $195 million for DSM expenditures
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.
CAPITAL RESOURCES
Energy currently projects that internal generation of funds will be adequate
to finance substantially all of its capital needs during the 1995 through 1999
period. Energy 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.)
Contribution from Parent Company In December 1994, CINergy publicly issued
approximately 7.1 million shares of common stock. 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 Energy currently has an existing shelf
registration statement which permits the sale of up to $205 million of long-
term debt and state regulatory authority to issue up to $298 million of long-
term debt. Additionally, Energy has an effective shelf registration statement
and regulatory authority to issue up to $40 million of preferred stock.
Energy will request regulatory approval to issue additional amounts of debt
securities and preferred stock as needed.
Short-term Debt Energy has authority to borrow up to $330 million as of
December 31, 1994. In connection with this authority, Energy has established
unsecured lines of credit (Committed Lines) which currently permit borrowings
of up to $230 million, of which $110 million remained unused. Energy also
issues commercial paper from time to time. All outstanding commercial paper
is supported by Energy's Committed Lines. Additionally, this authority allows
Energy 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.
INFLATION
Over the past several years, the rate of inflation has been relatively low.
Energy 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 Note 3 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, Energy recognized a charge to earnings of approximately $10 million
($6.5 million, net of taxes) for severance benefits to former officers of
Energy which the Company does not expect to recover from customers due to a
rate settlement related to securing support for the merger. The total $10
million charge is reflected in "OPERATING EXPENSES - Other operation" (see
Note 15 of the "Notes to Consolidated Financial Statements" in "Item 8.
Financial Statements and Supplementary Data").
Kwh Sales
Total kwh sales in 1994, as compared to 1993, increased 6.3% due in large part
to non-firm power sales for resale reflecting third party short-term power
sales by Energy to other utilities through Energy's system and direct power
sales to other utilities. Also 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.
New customers and a return to more normal weather contributed to the 3.6%
increase in total kwh sales in 1993, as compared to 1992. In addition, growth
in the primary metals, transportation equipment, precision instruments, and
photographic and optical goods 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 sales associated with
third party short-term power sales to other utilities through Energy's system.
The reduction of sales for resale in 1992 was largely responsible for a 5.3%
decrease in total kwh sales. Reflected in this decrease was the reduction of
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. Non-firm power sales also decreased,
partially reflecting a reduction in sales associated with third party short-
term power sales to other utilities through Energy's system. 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. . . . . . . . . . . . . . . (1.4)% 12.2% (5.6)%
Commercial. . . . . . . . . . . . . . 1.4 7.2 (1.1)
Industrial. . . . . . . . . . . . . . 4.9 5.5 4.8
Total retail. . . . . . . . . . . . . . 2.0 8.0 (0.1)
Sales for resale
Firm power obligations. . . . . . . . 2.6 2.2 (28.6)
Non-firm power transactions . . . . . 33.5 (15.4) (12.4)
Total sales for resale. . . . . . . . . 22.4 (9.8) (18.3)
Total sales . . . . . . . . . . . . . . 6.3 3.6 (5.3)
Energy 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.
Operating Revenues
Energy's increase in kwh sales and the effects of a $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) of the "Notes to Consolidated Financial
Statements" in "Item 8. Financial Statements and Supplementary Data")
resulted in increased operating revenues of $49 million (4.5%) in 1994, as
compared to 1993.
Operating revenues remained relatively unchanged in 1993, reflecting increased
kwh sales which were substantially offset by the $31 million refund previously
discussed and a decrease in the cost of fuel.
In 1992, operating revenues decreased $48 million (4.3%), as compared to 1991,
primarily as a result of lower kwh sales and a decrease in the cost of fuel.
An analysis of operating revenues for the past three years is shown below:
1994 1993 1992
(in millions)
Previous year's operating revenues . . . . . $1 078 $1 072 $1 120
Increase (Decrease) due to change in:
Price per kwh
Retail . . . . . . . . . . . . . . . . . 4 (58) (5)
Sales for resale
Firm power obligations . . . . . . . . 1 (1) 4
Non-firm power transactions. . . . . . - 7 (12)
Total change in price per kwh. . . . . . . 5 (52) (13)
Kwh sales
Retail . . . . . . . . . . . . . . . . . 19 72 (1)
Sales for resale
Firm power obligations . . . . . . . . 2 1 (28)
Non-firm power transactions. . . . . . 23 (12) (12)
Total change in kwh sales. . . . . . . . . 44 61 (41)
Other. . . . . . . . . . . . . . . . . . . - (3) 6
Current year's operating revenues. . . . . . $1 127 $1 078 $1 072
Operating Expenses
Fuel
Fuel costs, Energy's largest operating expense, increased $15 million (3.8%)
in 1994, as compared to 1993. An analysis of these fuel costs for the past
three years is shown below:
1994 1993 1992
(in millions)
Previous year's fuel expense . . . . . . . . $386 $392 $402
Increase (Decrease) due to change in:
Price of fuel. . . . . . . . . . . . . . . (2) (15) (5)
Kwh generation . . . . . . . . . . . . . . 17 9 (5)
Current year's fuel expense. . . . . . . . . $401 $386 $392
Purchased and Exchanged Power
Purchased and exchanged power increased $17 million (70.6%) 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 (76.8%), as compared to 1992.
Purchased and exchanged power costs decreased $40 million (74.5%) in 1992, as
compared to 1991, reflecting the reduction in 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 $26 million (14.2%) in 1994, as compared to
1993, due to a number of factors including charges of approximately $10
million for severance benefits to former officers of Energy which the Company
does not expect to recover from customers due to a rate settlement related to
securing support for the merger. Also contributing to this increase were fuel
litigation expenses of $8 million.
Charges in 1991 for the incremental non-capital portion ($5 million) of the
costs associated with a severe ice and wind storm primarily attributed to the
$7 million (3.6%) decrease in other operation expenses in 1992.
Maintenance
Maintenance on a number of Energy's generating stations and the initial costs
of a new distribution line clearing program resulted in increased maintenance
expenses of $10 million (12.1%) in 1994.
Depreciation
Additions to electric utility plant led to increases in depreciation expense
of $11 million (8.6%), $10 million (8.3%), and $6 million (5.1%) in 1994,
1993, and 1992, respectively.
Post-in-service Deferred Depreciation
Post-in-service deferred depreciation expenses of $9 million and $5 million in
1994 and 1993, respectively, reflect Energy's January 1993 authorization 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. (See Note
1(g) of the "Notes to Consolidated Financial Statements" in "Item 8.
Financial Statements and Supplementary Data".)
Other Income and Expenses - Net
Allowance for Equity Funds Used During Construction
A decrease of $7 million (62.1%) in allowance for equity funds used during
construction in 1994, as compared to 1993, was due to an increase in
borrowings of short-term debt which resulted in a decrease in the equity rate.
The equity component of AFUDC increased in 1993, as compared to 1992,
primarily as a result of increased construction.
Post-in-service Carrying Costs
Post-in-service carrying costs of $9 million and $5 million in 1994 and 1993,
respectively, reflect Energy's implementation of the January 1993 IURC order
authorizing Energy to continue accrual of the debt component of AFUDC (post-
in-service carrying costs) on qualifying environmental compliance projects.
(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 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)
of the "Notes to Consolidated Financial Statements" in "Item 8. Financial
Statements and Supplementary Data").
Interest and Preferred Dividends
Increased borrowings and accrued interest of $4 million in connection with the
loss related to the IURC's June 1987 Order resulted in increased interest and
preferred dividends of $7 million (10.3%) in 1992.
Index to Financial Statements and Financial Statement Schedules
Financial Statements
Report of Independent Public Accountants. . . . . . . . .
Consolidated Statements of Income for the
three years ended December 31, 1994 . . . . . . . . . .
Consolidated Balance Sheets at
December 31, 1994 and 1993. . . . . . . . . . . . . . .
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1994 . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the three years ended December 31, 1994 . . . . . .
Schedule of Cumulative Preferred Stock. . . . . . . . . .
Schedule of Long-term Debt. . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements. . . . . . . .
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts . . . . .
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 PSI Energy, Inc.:
We have audited the consolidated balance sheets and schedules of cumulative
preferred stock and long-term debt of PSI Energy, Inc. (an Indiana Corporation
and a wholly owned subsidiary of CINergy Corp.) and subsidiary 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 PSI Energy, Inc. and
subsidiary 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 8 and 12 to the consolidated financial statements, PSI
Energy, Inc. changed its methods of accounting for postretirement health care
benefits and income taxes effective January 1, 1993.
As more fully discussed in Note 13 to the consolidated financial statements,
Wabash Valley Power Association, Inc. (WVPA) filed suit in 1984 against PSI
Energy, Inc. for $478 million plus interest and other damages to recover its
share of Marble Hill Nuclear Project costs. PSI Energy, Inc. 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 our audit 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
Indianapolis, Indiana,
January 23, 1995.
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
1994 1993 1992
(in thousands)
OPERATING REVENUES (Note 2). . . . . . . . . . . . . . . . . . . $1 126 504 $1 078 269 $1 072 183
OPERATING EXPENSES
Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 515 385 927 392 288
Purchased and exchanged power. . . . . . . . . . . . . . . . . 41 400 24 273 13 729
Other operation. . . . . . . . . . . . . . . . . . . . . . . . 213 122 186 695 185 859
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . 94 149 84 020 86 046
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 137 719 126 821 117 092
Post-in-service deferred depreciation. . . . . . . . . . . . . (9 288) (5 069) -
Income taxes (Note 12) . . . . . . . . . . . . . . . . . . . . 50 366 64 911 66 390
Taxes other than income taxes. . . . . . . . . . . . . . . . . 46 335 45 477 42 334
974 318 913 055 903 738
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . 152 186 165 214 168 445
OTHER INCOME AND EXPENSES - NET
Allowance for equity funds used
during construction. . . . . . . . . . . . . . . . . . . . . 4 230 11 173 4 833
Post-in-service carrying costs . . . . . . . . . . . . . . . . 9 780 6 005 -
Reduction of loss related to the IURC's
June 1987 Order (Note 2) . . . . . . . . . . . . . . . . . . - 20 134 -
Income taxes (Note 12)
Related to the IURC's June 1987 Order. . . . . . . . . . . . - (7 444) -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1 312) 3 202 2 788
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . (7 893) (9 403) (2 756)
4 805 23 667 4 865
INCOME BEFORE INTEREST . . . . . . . . . . . . . . . . . . . . . 156 991 188 881 173 310
INTEREST
Interest on long-term debt . . . . . . . . . . . . . . . . . . 68 862 68 946 62 460
Other interest . . . . . . . . . . . . . . . . . . . . . . . . 15 292 4 191 9 552
Allowance for borrowed funds used
during construction. . . . . . . . . . . . . . . . . . . . . (9 355) (9 154) (5 672)
74 799 63 983 66 340
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 192 124 898 106 970
PREFERRED DIVIDEND REQUIREMENT . . . . . . . . . . . . . . . . . 13 182 12 825 7 286
INCOME APPLICABLE TO COMMON STOCK. . . . . . . . . . . . . . . . $ 69 010 $ 112 073 $ 99 684
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1994 1993
(dollars in thousands)
ELECTRIC UTILITY PLANT - ORIGINAL COST
In service . . . . . . . . . . . . . . . . . . . . . $3 789 785 $3 449 127
Accumulated depreciation . . . . . . . . . . . . . . 1 550 297 1 455 871
2 239 488 1 993 256
Construction work in progress . . . . . . . . . . . . 163 761 243 802
Total electric utility plant. . . . . . . . . . . 2 403 249 2 237 058
CURRENT ASSETS
Cash and temporary cash investments . . . . . . . . . 6 341 4 582
Restricted deposits . . . . . . . . . . . . . . . . . 11 190 49 111
Accounts receivable less accumulated provision
of $440,000 in 1994 and $393,000 in 1993
for doubtful accounts (Note 6). . . . . . . . . . . 36 061 28 657
Income tax refunds. . . . . . . . . . . . . . . . . . - 28 900
Materials, supplies, and fuel - at average cost
Fuel. . . . . . . . . . . . . . . . . . . . . . . . 113 861 45 315
Other materials and supplies. . . . . . . . . . . . 29 363 31 212
Prepayments and other . . . . . . . . . . . . . . . . 4 758 2 669
201 574 190 446
OTHER ASSETS
Regulatory assets
Post-in-service carrying costs and deferred
depreciation. . . . . . . . . . . . . . . . . . . 30 142 11 074
Deferred demand-side management costs . . . . . . . 94 125 53 253
Amounts due from customers - income taxes . . . . . 27 134 17 768
Deferred merger costs . . . . . . . . . . . . . . . 37 645 15 425
Unamortized costs of reacquiring debt . . . . . . . 36 998 39 504
Other . . . . . . . . . . . . . . . . . . . . . . . 30 030 21 289
Other . . . . . . . . . . . . . . . . . . . . . . . . 84 027 58 980
340 101 217 293
$2 944 924 $2 644 797
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CAPITALIZATION AND LIABILITIES
December 31
1994 1993
(dollars in thousands)
COMMON STOCK EQUITY (Note 3)
Common stock - without par value; $.01 stated
value; authorized shares - 60,000,000; outstanding
shares - 53,913,701 in 1994 and 1993. . . . . . . . $ 539 $ 539
Paid-in capital . . . . . . . . . . . . . . . . . . . 389 309 229 288
Accumulated earnings subsequent to November 30, 1986
quasi-reorganization. . . . . . . . . . . . . . . . 493 103 483 242
Total common stock equity . . . . . . . . . . . . 882 951 713 069
CUMULATIVE PREFERRED STOCK - NOT SUBJECT
TO MANDATORY REDEMPTION (Page 38, Note 4) . . . . . . 187 929 187 989
LONG-TERM DEBT (Page 39, Note 5). . . . . . . . . . . . 877 512 816 152
Total capitalization. . . . . . . . . . . . . . . 1 948 392 1 717 210
CURRENT LIABILITIES
Long-term debt due within one year. . . . . . . . . . 60 400 160
Notes payable (Note 10) . . . . . . . . . . . . . . . 193 573 126 701
Accounts payable . . . . . . . . . . . . . . . . . . 142 775 144 093
Refund due to customers (Note 2(a)) . . . . . . . . . 15 482 81 832
Litigation settlement (Note 13(c)). . . . . . . . . . 80 000 80 000
Advance under accounts receivable
purchase agreement (Note 6) . . . . . . . . . . . . - 49 940
Accrued taxes . . . . . . . . . . . . . . . . . . . . 30 784 37 269
Accrued interest. . . . . . . . . . . . . . . . . . . 25 685 22 128
Other . . . . . . . . . . . . . . . . . . . . . . . . 3 202 3 664
551 901 545 787
OTHER LIABILITIES
Deferred income taxes (Note 12) . . . . . . . . . . . 324 738 281 417
Unamortized investment tax credits . . . . . . . . . 60 461 64 721
Accrued pension and other postretirement
benefit costs (Notes 7 and 8) . . . . . . . . . . . 31 324 14 097
Other . . . . . . . . . . . . . . . . . . . . . . . . 28 108 21 565
444 631 381 800
COMMITMENTS AND CONTINGENCIES (Note 13)
$2 944 924 $2 644 797
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Accumulated Total Common
Stock Capital Earnings Stock Equity
(in thousands)
BALANCE DECEMBER 31, 1991. . . . . . . . . . . . . . $539 $223 242 $386 973 $610 754
Net income . . . . . . . . . . . . . . . . . . . . 106 970 106 970
Costs of retiring
preferred stock. . . . . . . . . . . . . . . . . (1 430) (1 430)
Dividends on preferred stock . . . . . . . . . . . (7 568) (7 568)
Dividends on common stock. . . . . . . . . . . . . (53 589) (53 589)
Other. . . . . . . . . . . . . . . . . . . . . . . (39) (39)
BALANCE DECEMBER 31, 1992. . . . . . . . . . . . . . 539 221 812 432 747 655 098
Net income . . . . . . . . . . . . . . . . . . . . 124 898 124 898
Costs of issuing and retiring
preferred stock. . . . . . . . . . . . . . . . . (5 062) (5 062)
Dividends on preferred stock . . . . . . . . . . . (12 288) (12 288)
Dividends on common stock. . . . . . . . . . . . . (62 191) (62 191)
Other. . . . . . . . . . . . . . . . . . . . . . . 12 538 76 12 614
BALANCE DECEMBER 31, 1993. . . . . . . . . . . . . . 539 229 288 483 242 713 069
Net income . . . . . . . . . . . . . . . . . . . . 82 192 82 192
Dividends on preferred stock . . . . . . . . . . . (13 182) (13 182)
Dividends on common stock. . . . . . . . . . . . . (59 142) (59 142)
Contribution from parent
company . . . . . . . . . . . . . . . . . . . . 159 999 159 999
Other. . . . . . . . . . . . . . . . . . . . . . . 22 (7) 15
BALANCE DECEMBER 31, 1994. . . . . . . . . . . . . . $539 $389 309 $493 103 $882 951
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1994 1993 1992
(in thousands)
OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82 192 $ 124 898 $ 106 970
Items providing (using) cash currently:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 137 719 126 821 117 092
Deferred income taxes and investment
tax credits - net. . . . . . . . . . . . . . . . . . . . . . . . 24 127 68 103 8 917
Allowance for equity funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . (4 230) (11 173) (4 833)
Regulatory assets
Post-in-service cost deferrals. . . . . . . . . . . . . . . . . (19 068) (11 074) -
Deferred merger costs . . . . . . . . . . . . . . . . . . . . . (22 220) (13 205) (2 220)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 371 (5 630) (4 461)
Changes in current assets and current
liabilities
Restricted deposits . . . . . . . . . . . . . . . . . . . . . 10 024 (69) (9 724)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . (7 404) 7 168 8 916
Income tax refunds. . . . . . . . . . . . . . . . . . . . . . 28 900 (28 900) -
Materials, supplies, and fuel . . . . . . . . . . . . . . . . (66 697) 59 421 (20 901)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (1 318) 56 415 (7 834)
Refund due to customers . . . . . . . . . . . . . . . . . . . (66 350) (57 302) 4 134
Advance under accounts receivable
purchase agreement. . . . . . . . . . . . . . . . . . . . . (49 940) 49 940 -
Accrued taxes and interest. . . . . . . . . . . . . . . . . . (2 928) (8 504) 16 189
Other items - net . . . . . . . . . . . . . . . . . . . . . . . . (6 052) (12 677) (7 857)
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . . . . . . . . 41 126 344 232 204 388
FINANCING ACTIVITIES
Issuance of preferred stock . . . . . . . . . . . . . . . . . . . . - 156 325 -
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . 108 978 241 704 224 331
Funds on deposit from issuance of long-term
debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 897 (31 342) 12 733
Retirement of preferred stock . . . . . . . . . . . . . . . . . . . (26) (60 107) (26 912)
Redemption of long-term debt . . . . . . . . . . . . . . . . . . . (160) (207 880) (184 135)
Change in short-term debt . . . . . . . . . . . . . . . . . . . . . 66 872 5 900 120 801
Dividends on preferred stock. . . . . . . . . . . . . . . . . . . . (13 182) (12 288) (7 568)
Dividends on common stock . . . . . . . . . . . . . . . . . . . . . (59 142) (62 191) (53 589)
Contribution from parent company. . . . . . . . . . . . . . . . . . 159 999 12 538 -
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . . . . . . . . 291 236 42 659 85 661
INVESTING ACTIVITIES
Construction expenditures (less allowance for
equity funds used during construction) . . . . . . . . . . . . . . (289 731) (350 434) (285 029)
Deferred demand-side management costs . . . . . . . . . . . . . . . (40 872) (30 736) (16 670)
Equity investment in Argentine utility. . . . . . . . . . . . . . . - (10 200) (505)
Net cash provided by (used in)
investing activities. . . . . . . . . . . . . . . . . . . . (330 603) (391 370) (302 204)
Net increase (decrease) in cash and temporary
cash investments . . . . . . . . . . . . . . . . . . . . . . . . . . 1 759 (4 479) (12 155)
Cash and temporary cash investments at
beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 4 582 9 061 21 216
Cash and temporary cash investments at end
of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 341 $ 4 582 $ 9 061
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . $ 67 150 $ 60 653 $ 49 305
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 162 41 376 51 497
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
<CAPTION
PSI ENERGY, INC.
SCHEDULE OF CUMULATIVE PREFERRED STOCK
December 31
1994 1993
(dollars in thousands)
Not subject to mandatory redemption (Note 4)
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
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
SCHEDULE OF LONG-TERM DEBT
December 31
1994 1993
(dollars in thousands)
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $877 512 $816 152
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
(a) Merger On October 24, 1994, PSI Resources, Inc. (Resources), previously
PSI Energy, Inc.'s (Energy or Company) parent holding company, was merged with
and into CINergy Corp. (CINergy), 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 Energy were not
affected by the merger. Following the merger, CINergy became the parent
holding company of Energy and CG&E. The merger was accounted for as a pooling
of interests. Due to immateriality, no adjustments were made to conform the
accounting policies of the two companies.
(b) Consolidation Policy The accompanying Consolidated Financial Statements
include the accounts of Energy and its subsidiary, PSI Energy Argentina, Inc.,
after elimination of significant intercompany transactions and balances.
(c) Regulation Energy is subject to regulation by the Securities and
Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935
(PUHCA). Energy is also subject to regulation by the Federal Energy
Regulatory Commission (FERC) and the Indiana Utility Regulatory Commission
(IURC). Energy's accounting policies 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 Energy associated with
deferred costs to be recovered from customers through the ratemaking process.
The following regulatory assets of Energy are reflected in the Consolidated
Balance Sheets as of December 31:
1994 1993
(in millions)
Post-in-service carrying costs and
deferred depreciation . . . . . . . . . . . $ 30 $ 11
Deferred demand-side
management (DSM) costs. . . . . . . . . . . 94 53
Amounts due from customers - income taxes . . 27 18
Deferred merger costs . . . . . . . . . . . . 38 15
Costs of reacquiring debt . . . . . . . . . . 37 40
Postretirement benefit costs. . . . . . . . . 21 10
Other . . . . . . . . . . . . . . . . . . . . 9 11
Total . . . . . . . . . . . . . . . . . . . $256 $158
In February 1995, the IURC issued an order (February 1995 Order) which
approved a rate settlement agreement among Energy and certain intervenors (see
Note 2(b)). 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 (see Note 2(c)).
See Note 1(g), (h), (i), and (k) for additional information regarding post-in-
service carrying costs and deferred depreciation, deferred DSM costs, amounts
due from customers - income taxes, and costs of reacquiring debt,
respectively. For additional information regarding deferred merger costs and
postretirement benefit costs, see Notes 2(b), 8, and 9.
Although Energy'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 Energy 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 Energy's regulatory
assets. Energy intends to pursue competitive strategies that would mitigate
the impact of this issue on the financial condition of the Company.
(d) Electric Utility Plant Electric 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 electric utility plant is subject to the lien of Energy's
first mortgage bond indenture.
(e) AFUDC Energy capitalizes 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". The
AFUDC accrual rate was 6.4% in 1994, 9.5% in 1993, and 8.5% in 1992, and is
compounded semi-annually.
(f) Depreciation and Maintenance Energy's provision for depreciation is
determined by using the straight-line method applied to the cost of
depreciable plant in service. The rate is based on periodic studies of the
estimated service lives and net cost of removal of the properties. The
depreciation rate for electric utility plant was 3.8% for each of the years
1992 through 1994. In accordance with the IURC's February 1995 Order
discussed further herein, Energy's annual depreciation expense will decrease
by approximately $30 million.
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) Post-in-service Carrying Costs and Deferred Depreciation 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 electric 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 expense on two major environmental projects
from the date the projects are placed in service until the projects' costs are
reflected in retail electric rates.
(h) 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.
(i) 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.
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.
(j) Operating Revenues and Fuel Costs 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.
(k) Debt Discount, Premium, and Issuance Expense and Costs of Reacquiring
Debt Debt discount, premium, and issuance expense on Energy's outstanding
long-term debt are amortized over the lives of the respective issues.
In accordance with established ratemaking practices, Energy is deferring costs
(principally call premiums) from the reacquisition of long-term debt and is
amortizing such amounts over periods ranging from four years to 18 years.
(l) Consolidated Statements of Cash Flows All temporary cash investments
with maturities of three months or less, when acquired, are reported as cash
equivalents. Energy had no material non-cash investing or financing
transactions during the years 1992 through 1994.
(m) Reclassification Certain amounts in the 1992 and 1993 Consolidated
Financial Statements have been reclassified to conform to the 1994
presentation.
2. Rates
(a) 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.
(b) 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.
(c) 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.
3. Common Stock
All of Energy's common stock is held by CINergy. No common dividends can be
paid by Energy if dividends are in arrears on its preferred stock.
4. Preferred Stock
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
3 1/2% Series. . . . . . . . . . . . (598) $ (60)
1993
Cumulative preferred stock
Not subject to mandatory redemption
Par value $25 per share
7.44 % Series. . . . . . . . . . . . 4 000 000 100 000
Par value $100 per share
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
3 1/2% Series. . . . . . . . . . . . (10) (1)
Subject to mandatory redemption
Par value $100 per share
13.25% Series. . . . . . . . . . . . (255 000) (25 500)
Currently, Energy can sell up to an additional $40 million of preferred stock
under an effective shelf registration statement and IURC authority.
5. Long-term Debt
Long-term debt maturities, excluding sinking fund requirements, for the next
five years are $60 million in 1995, $50 million in 1996, $10 million in 1997,
$35 million in 1998, and $6 million in 1999.
6. 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)), 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.
7. Pension Plan
Energy's defined benefit pension plan covers 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.
Energy's funding policy is to contribute annually to the plan 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, $8.2 million, and $7.4 million, respectively. The plan's
assets consist of investments in equity and fixed income securities.
Pension cost for 1994, 1993, and 1992 included the following components:
1994 1993 1992
(in millions)
Benefits earned during the period . . . . . . . $ 8.7 $ 7.7 $ 7.1
Interest accrued on projected
benefit obligation . . . . . . . . . . . . . 19.8 19.4 18.3
Actual (return) loss on plan's assets . . . . . 2.4 (38.5) (24.1)
Net amortization and deferral . . . . . . . . . (23.1) 20.1 7.4
Net periodic pension cost . . . . . . . . . . . $ 7.8 $ 8.7 $ 8.7
1994 1993 1992
Actuarial Assumptions:
For determination of projected benefit
obligation
Discount rate . . . . . . . . . . . . . . . 8.5% 7.5% 8.5%
Rate of increase in future compensation . . 5.5 4.5 5.5
For determination of pension cost
Rate of return on plan's assets . . . . . . . 9.0 9.0 9.0
The following table reconciles the plan's 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 plan are deferred and
recognized in the Consolidated Financial Statements in subsequent periods.
1994 1993
(in millions)
Actuarial present value of benefits
Vested benefits . . . . . . . . . . $(197.5) $(206.1)
Non-vested benefits . . . . . . . . (8.0) (8.5)
Accumulated benefit obligation. . (205.5) (214.6)
Effect of future compensation
increases . . . . . . . . . . . . (67.3) (55.4)
Projected benefit obligation. . . (272.8) (270.0)
Plan's assets at fair value . . . . . 256.3 266.0
Projected benefit obligation in
excess of plan's assets . . . . . . (16.5) (4.0)
Remaining balance of plan's net
assets existing at date of initial
application of Statement 87 to be
recognized as a reduction of
pension cost in future periods. . . (5.7) (6.4)
Unrecognized net (gain) loss
resulting from experience different
from that assumed and effects of
changes in assumptions. . . . . . . 5.7 (.9)
Prior service cost not yet recognized
in net periodic pension cost. . . . 17.2 14.9
Prepaid pension cost at December 31 . $ .7 $ 3.6
8. Other Postretirement Benefits
Energy provides certain health care and life insurance benefits to retired
employees and their eligible dependents. The health care benefits include
medical and dental coverage and prescription drugs. Prior to 1993, the cost
of retiree health care was charged to expense as claims were paid, and the
cost of life insurance benefits was charged to expense at retirement. 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, Energy 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 Obligation (APBO) existing at the date of
initial application of Statement 106 (i.e., the transition obligation) of
$107.6 million is being amortized over a 20-year period.
Postretirement benefit cost for 1994 and 1993 included the following
components:
1994 1993
(in millions)
Benefits earned during the period. . . . . . $ 4.4 $ 3.4
Interest accrued on APBO . . . . . . . . . . 10.1 9.3
Net amortization and deferral. . . . . . . . .1 -
Amortization of transition obligation. . . . 5.4 5.4
Net periodic postretirement benefit cost . . $20.0 $18.1
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 plan are deferred
and recognized in the Consolidated Financial Statements in subsequent periods.
1994 1993
(in millions)
Actuarial present value of benefits
Fully eligible active plan participants. . $ (9.3) $ (11.7)
Other active plan participants . . . . . . (58.5) (63.7)
Retirees and beneficiaries . . . . . . . . (68.6) (61.5)
Projected APBO . . . . . . . . . . . . . (136.4) (136.9)
Unamortized transition obligation. . . . . . 96.8 102.2
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions. . . 7.5 17.0
Accrued postretirement benefit obligation
at December 31 . . . . . . . . . . . . . . $ (32.1) $ (17.7)
The following assumptions were used to determine the APBO:
1994 1993 1992
Discount rate. . . . . . . . . . 8.5% 7.5% 8.5%
Health care cost trend rate,
gradually declining to 5%. . . 8.0-12.0% 8.0-12.0% 8.0-12.0%
Year ultimate trend rates
achieved . . . . . . . . . . . 2007 2007 2007
Increasing the health care cost trend rate by one percentage point in each
year would increase the APBO by approximately $17 million and $19 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 $2.5 million and $2 million, respectively.
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, to 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.
9. Voluntary Workforce Reduction
In an effort to begin to realize merger savings, Energy completed a voluntary
workforce reduction program in 1994. Under the program, 169 employees elected
to terminate their employment with Energy, resulting in a pre-tax cost of
approximately $11.3 million. This cost was deferred as a cost to achieve
merger savings. In accordance with the February 1995 Order, Energy began
amortization of costs to achieve merger savings October 1, 1994.
10. Notes Payable
Energy had authority to borrow up to $330 million as of December 31, 1994. In
connection with this authority, Energy has established unsecured lines of
credit (Committed Lines) which currently permit borrowings of up to $230
million, of which $110 million remained unused. Energy also issues commercial
paper from time to time. All outstanding commercial paper is supported by
Energy's Committed Lines. Additionally, this authority allows Energy 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 Committed Lines
are maintained by commitment fees, which were immaterial during the 1992
through 1994 period.
For the years 1994, 1993, and 1992, Energy'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. . . . . . $139.4 6.19% $298.9 $246.6 4.73%
Commercial paper. . . - - 7.9 1.0 4.22
Note payable to
CINergy . . . . . . 54.2 5.76 54.2 54.0 5.39
1993
Bank loans. . . . . . 126.7 3.38 126.7 69.8 3.41
Commercial paper. . . - - 24.8 6.4 3.29
1992
Bank loans. . . . . . 120.8 3.91 120.8 77.3 4.02
Commercial paper. . . - - 30.7 8.2 3.82
11. Fair Values of Financial Instruments
The estimated fair values of financial instruments were as follows (this
information does not purport to be a valuation of Energy 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. . . $315 $326 $265 $314
Other long-term debt. . . 623 586 551 580
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, on the present value of future cash flows. The discount rates used
approximate the incremental borrowing costs for similar instruments.
12. Income Taxes
Effective with the first quarter of 1993, Energy 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. Energy
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 Energy's 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 Energy's net deferred income tax liability at
December 31, 1994, and 1993, are as follows:
1994 1993
(in millions)
Deferred Income Tax Liabilities
Electric utility plant. . . . . . . . . . . . $308.0 $305.4
Unamortized costs of reacquiring debt . . . . 15.8 15.0
Deferred operating expenses
and accrued carrying costs. . . . . . . . . 11.4 4.2
Deferred demand-side management costs . . . . 37.2 21.2
Other . . . . . . . . . . . . . . . . . . . . 13.7 13.1
Total deferred income tax liabilities . . . 386.1 358.9
Deferred Income Tax Assets
Unamortized investment tax credits. . . . . . 22.9 24.5
Litigation settlement . . . . . . . . . . . . 29.8 29.8
Accrued pension and other benefit costs . . . 6.1 5.4
Other . . . . . . . . . . . . . . . . . . . . 2.6 17.8
Total deferred income tax assets. . . . . . 61.4 77.5
Net Deferred Income Tax Liability . . . . . . . $324.7 $281.4
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 . . . . . . . . . . . . . . . . . . . $22.0 $ .6 $47.3
State . . . . . . . . . . . . . . . . . . . . 5.5 .4 7.4
Total current income taxes. . . . . . . . . 27.5 1.0 54.7
Deferred Income Taxes
Federal
Depreciation and other electric utility
plant-related items . . . . . . . . . . . 19.2 9.6 7.5
Loss related to settlement of the IURC's
June 1987 and April 1990 Orders (Note 2). (5.2) 45.9 -
Property taxes. . . . . . . . . . . . . . . (2.0) 2.0 -
Demand-side management costs. . . . . . . . 12.6 10.6 5.3
Other items - net . . . . . . . . . . . . . 1.7 (2.7) (.8)
Total deferred Federal income taxes . . . 26.3 65.4 12.0
State . . . . . . . . . . . . . . . . . . . . 2.2 7.0 1.3
Total deferred income taxes . . . . . . . 28.5 72.4 13.3
Investment Tax Credits - Net. . . . . . . . . . (4.3) (4.2) (4.4)
Total Income Taxes. . . . . . . . . . . . $51.7 $69.2 $63.6
Allocated to:
Operating income. . . . . . . . . . . . . . . $50.4 $64.9 $66.4
Other income and expenses - net . . . . . . . 1.3 4.3 (2.8)
$51.7 $69.2 $63.6
As a result of the merger, Resources will file its final consolidated Federal
and state income tax returns for the period January 1, 1994, through October
24, 1994. This return will include Energy to the extent its activities are
allocable to that period. For the remainder of Energy's taxable income and
tax liability, Energy will participate in the filing of a consolidated Federal
income tax return with its parent, CINergy, and other affiliated companies for
the year ended December 31, 1994. The current tax liability is allocated
among the members of the group pursuant to a tax sharing agreement consistent
with Rule 45(c) of the PUHCA.
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. . . . . $44.2 $65.3 $55.0
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits. . . . (4.3) (4.2) (4.4)
Depreciation and other electric utility
plant-related differences . . . . . . . . . 1.8 4.1 4.2
AFUDC equity. . . . . . . . . . . . . . . . . (1.5) (3.9) (1.6)
Other - net . . . . . . . . . . . . . . . . . 3.8 .5 1.7
Federal income tax expense. . . . . . . . . . . $44.0 $61.8 $54.9
13. Commitments and Contingencies
(a) Construction Energy will have substantial commitments in connection with
its construction program. Aggregate expenditures for Energy's construction
program for the 1995 through 1999 period are currently estimated to be
approximately $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 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.
(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.
14. 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. The Consolidated Statements of Income
reflect Energy's portion of all operating costs associated with the commonly
owned facilities.
Energy's investment in jointly owned plant is as follows:
1994
------------------------------------------------------------
Electric
Utility Plant Accumulated Construction
Share in Service Depreciation Work in Progress
(dollars in millions)
Production
Gibson (Unit 5) . . . . 50.05% $ 207 $ 92 $ 3
Transmission property
and local facilities. . 93.68 1 630 565 53
15. Quarterly Financial Data (unaudited)
Operating Operating Net
Quarter Ended Revenues Income Income
(in millions)
1994
March 31 . . . . . . . . . . . $ 301 $ 48 $ 35
June 30. . . . . . . . . . . . 280 37 19
September 30 . . . . . . . . . 281 38 20
December 31. . . . . . . . . . 265 29 (a) 8 (a)
Total. . . . . . . . . . . . $1 127 $152 $ 82
1993
March 31 . . . . . . . . . . . $ 286 $ 51 $ 35
June 30. . . . . . . . . . . . 221 17 16
September 30 . . . . . . . . . 293 49 36
December 31. . . . . . . . . . 278 48 38
Total. . . . . . . . . . . . $1 078 $165 $125
(a) In the fourth quarter of 1994, Energy recognized a charge to earnings of
approximately $10 million ($6.5 million, net of taxes) for severance
benefits to former officers of Energy which the Company does not expect
to recover from customers due to a rate settlement related to securing
support for the merger. The total $10 million charge is reflected in
"OPERATING EXPENSES - Other operation".
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 PSI Energy, Inc.'s (Energy) 1995 Information Statement
with respect to identification of directors and their current principal
occupations. In addition, reference is made to Energy's 1995 Information
Statement regarding compliance with Section 16 of the Securities Exchange Act
of 1934.
Executive Officers
The information included in Part I of this report on pages 9 through 11 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 Energy's 1995 Information Statement with respect to
executive compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Reference is made to Energy's 1995 Information 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
Reference is made to Energy's 1995 Information Statement concerning certain
relationships and related transactions.
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 30 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 report on Form 8-K was filed during the last quarter of 1994:
Date of Report Items Filed
December 9, 1994 Item 5. Other Events
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 *Amended Articles of Consolidation, as
amended to May 11, 1994. (Exhibit to PSI
Energy, Inc.'s (Energy) September 30, 1994,
Form 10-Q in File No. 1-3543.)
3-b By-laws, as amended March 3, 1995.
4-a *Original Indenture (First Mortgage Bonds)
dated September 1, 1939, between 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).
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.)
Exhibit
Designation Nature of Exhibit
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.)
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.)
Exhibit
Designation Nature of Exhibit
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.)
10-a *+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-b *+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.)
10-c *+Employment Agreement dated October 4,
1993, among CINergy Corp. (CINergy), Energy,
and John M. Mutz. (Exhibit to Energy's
September 30, 1993, Form 10-Q in File No.
1-3543.)
Exhibit
Designation Nature of Exhibit
10-d *Text of Settlement Agreement dated October
27, 1993, by and among PSI Resources, Inc.,
Energy, The Cincinnati Gas & Electric
Company (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 Energy's
Form 8-K in File No. 1-3543, dated October
27, 1993.)
10-e *+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-f *+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. (Exhibit
to CINergy's 1994 Form 10-K in File No.
1-11377.)
10-g *+Employment Agreement dated January 1,
1995, among CINergy, CG&E, CINergy Services,
Inc., CINergy Investments, Inc., Energy, and
William J. Grealis. (Exhibit to CINergy's
1994 Form 10-K in File No. 1-11377.)
21 Not Applicable.
23 Consent of Independent Public Accountants.
24 Power of Attorney.
27 Financial Data Schedule (included in
electronic submission only).
____________________
+ Management contract, compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
PSI ENERGY, INC.
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 $ 78 567 $ 5 495 $ - $ 2 790 $ - $ 81 272 1/
Miscellaneous Materials & Supplies
Provisions 6 852 405 - 638 926 5 693
Accumulated Depreciation 1 455 871 137 719 479 43 909 2/ (137) 1 550 297
Other Accumulated Provisions
Deferred Income Taxes 3/ $ 281 417 $ 73 145 $14 933 $44 757 $ - $ 324 738
Accrued Pension and Other
Postretirement Benefit Costs 14 097 10 614 17 563 10 501 449 31 324
Injuries & Damages 3 104 4 324 - 3 889 - 3 539
Other 16 235 2 435 3 593 1 643 444 20 176
$ 314 853 $ 90 518 $36 089 $60 790 $ 893 $ 379 777
<FN>
_1/ Includes $80,832 for the WVPA Marble Hill receivable. See Note 13(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(i) and 12 of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" for further information with respect to deferred income taxes.
PSI ENERGY, INC.
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 $ 76 275 $ 4 459 $ - $ 2 167 $ - $ 78 567 1/
Miscellaneous Materials & Supplies
Provisions 8 844 554 - 2 356 190 6 852
Accumulated Depreciation 1 380 442 126 821 392 52 067 2/ (283) 1 455 871
Other Accumulated Provisions
Deferred Income Taxes 3/ $ 188 252 $109 967 $20 818 $37 620 $ - $ 281 417
Accrued Pension and Other
Postretirement Benefit Costs 231 10 596 16 253 12 889 94 14 097
Injuries & Damages 4 134 2 529 - 3 559 - 3 104
Other 16 203 2 044 790 2 784 18 16 235
$ 208 820 $125 136 $37 861 $56 852 $ 112 $ 314 853
<FN>
_1/ Includes $78,174 for the WVPA Marble Hill receivable. See Note 13(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(i) and 12 of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" for further information with respect to deferred income taxes.
PSI ENERGY, INC.
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 $ 73 744 $ 4 632 $ - $ 2 101 $ - $ 76 275 1/
Miscellaneous Materials & Supplies
Provisions 8 474 948 140 718 - 8 844
Accumulated Depreciation 1 294 791 117 092 397 32 052 2/ (214) 1 380 442
Other Accumulated Provisions
Deferred Income Taxes 3/ $ 174 923 $ 38 634 $ - $25 282 $ 23 $ 188 252
Accrued Pension and Other
Postretirement Benefit Costs 12 7 189 1 797 8 767 - 231
Injuries & Damages 3 243 3 912 - 3 021 - 4 134
Other 16 548 1 528 289 1 427 735 16 203
$ 194 726 $ 51 263 $ 2 086 $38 497 $ 758 $ 208 820
<FN>
_1/ Includes $75,838 for the WVPA Marble Hill receivable. See Note 13(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(i) and 12 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.
PSI ENERGY, INC.
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
James K. Baker Director
Hugh A. Barker Director
Michael G. Browning Director
Kenneth M. Duberstein Director
John A. Hillenbrand, II Director
Emerson Kampen Director
John M. Mutz President and
Director
Melvin Perelman, Ph.D. Director
Van P. Smith Director
James E. Rogers Vice Chairman, Chief Operating March 28, 1995
Attorney-in-fact for all Officer and Director
the foregoing persons
J. Wayne Leonard Senior Vice President, Chief March 28, 1995
Financial Officer and Director
(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)