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, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
1-11377 CINERGY CORP. 31-1385023
(A Delaware Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 381-2000
1-1232 THE CINCINNATI GAS & ELECTRIC COMPANY 31-0240030
(An Ohio Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 381-2000
1-3543 PSI ENERGY, INC. 35-0594457
(An Indiana Corporation)
1000 East Main Street
Plainfield, Indiana 46168
(317) 839-9611
2-7793 THE UNION LIGHT, HEAT AND POWER COMPANY 31-0473080
(A Kentucky Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 381-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Registrant Title of each class on which registered
Cinergy Corp. Common Stock New York Stock Exchange
The Cincinnati Gas Cumulative Preferred Stock
& Electric Company 4% New York Stock Exchange
Junior Subordinated
Debentures 8.28% New York Stock Exchange
PSI Energy, Inc. Cumulative Preferred Stock
4.32%, 4.16%, 6 7/8%,
7.15%, and 7.44% New York Stock Exchange
First Mortgage Bonds
Series S and Y New York Stock Exchange
The Union Light, None
Heat and Power
Company
Securities registered pursuant to Section 12(g) of the Act for Cinergy Corp.,
The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light,
Heat and Power Company: None
Indicate by check mark whether all registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. 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 registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
Requirements pursuant to Item 405 of Regulation S-K are not applicable for The
Union Light, Heat and Power Company.
The Union Light, Heat and Power Company meets the conditions set forth in
General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this
Form 10-K with the reduced disclosure format specified in General Instruction
I(2) of Form 10-K.
As of February 28, 1997, the aggregate market values of Cinergy Corp. Common
Stock and PSI Energy, Inc. Cumulative Preferred Stock held by non-affiliates
were $5.4 billion and $174 million, respectively.
Cinergy Corp. is the sole owner of the Common Stock of each of PSI Energy,
Inc. and The Cincinnati Gas & Electric Company. The Union Light, Heat and
Power Company's Common Stock is wholly-owned by The Cincinnati Gas & Electric
Company.
As of February 28, 1997, shares of Common Stock outstanding for each
registrant were as listed:
Company Shares
Cinergy Corp., par value $.01 per share 157,679,129
The Cincinnati Gas & Electric Company, par value $8.50 per share 89,663,086
PSI Energy, Inc., without par value, stated value $.01 per share 53,913,701
The Union Light, Heat and Power Company, par value $15.00 per share 585,333
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement of Cinergy Corp. dated March 17, 1997, and the Information
Statement of PSI Energy, Inc. dated March 24, 1997, are incorporated by
reference into Part III of this report.
This combined Form 10-K is separately filed by Cinergy Corp., The Cincinnati
Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power
Company. Information contained herein relating to any individual registrant
is filed by such registrant on its own behalf. Each registrant makes no
representation as to information relating to the other registrants.
TABLE OF CONTENTS
Item Page
Number Number
PART I
1 Business
Organization . . . . . . . . . . . . . . . . . . . . . . X
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . . X
ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . . X
PSI. . . . . . . . . . . . . . . . . . . . . . . . . . . X
Investments. . . . . . . . . . . . . . . . . . . . . . . X
Services . . . . . . . . . . . . . . . . . . . . . . . . XX
Customer, Sales, and Revenue Data. . . . . . . . . . . . XX
Financial Information by Business Segment. . . . . . . . XX
Regulation . . . . . . . . . . . . . . . . . . . . . . . XX
Regulatory Matters . . . . . . . . . . . . . . . . . . . XX
Power Supply . . . . . . . . . . . . . . . . . . . . . . XX
Fuel Supply. . . . . . . . . . . . . . . . . . . . . . . XX
Gas Supply . . . . . . . . . . . . . . . . . . . . . . . XX
Competition. . . . . . . . . . . . . . . . . . . . . . . XX
Capital Requirements . . . . . . . . . . . . . . . . . . XX
Environmental Matters. . . . . . . . . . . . . . . . . . XX
Employees. . . . . . . . . . . . . . . . . . . . . . . . XX
2 Properties . . . . . . . . . . . . . . . . . . . . . . . . XX
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . . XX
PSI. . . . . . . . . . . . . . . . . . . . . . . . . . . XX
ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . . XX
Other Utility Subsidiaries . . . . . . . . . . . . . . . XX
3 Legal Proceedings
Merger Litigation. . . . . . . . . . . . . . . . . . . . XX
WVPA Settlement Agreement. . . . . . . . . . . . . . . . XX
Enertech Litigation.. . . . . . . . . . . . . XX
4 Submission of Matters to a Vote of Security Holders. . . . XX
Executive Officers of the Registrant . . . . . . . . . . . XX
PART II
5 Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . . XX
6 Selected Financial Data. . . . . . . . . . . . . . . . . . XX
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . XX
Index to Financial Statements and Financial Statement
Schedules. . . . . . . . . . . . . . . . . . . . . . . . XX
8 Financial Statements and Supplementary Data. . . . . . . . XX
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . XXX
PART III
10 Directors and Executive Officers of the Registrant . . . . XXX
11 Executive Compensation . . . . . . . . . . . . . . . . . . XXX
12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . XXX
13 Certain Relationships and Related Transactions . . . . . . XXX
PART IV
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Financial Statements and Schedules . . . . . . . . . . XXX
Reports on Form 8-K. . . . . . . . . . . . . . . . . .
XXX
Exhibits . . . . . . . . . . . . . . . . . . . . . . . XXX
Signatures . . . . . . . . . . . . . . . . . . . . . . . . XXX
PART I
ITEM 1. BUSINESS
Cinergy, CG&E, PSI, and ULH&P
Organization
Cinergy Corp., a Delaware corporation (Cinergy or Company), is a registered
holding company under the Public Utility Holding Company Act of 1935 (PUHCA).
Cinergy was created in the October 1994 merger of PSI Resources, Inc.
(Resources) and The Cincinnati Gas & Electric Company (CG&E). The business
combination was accounted for as a pooling of interests. Following the
merger, Cinergy became the parent holding company of PSI Energy, Inc. (PSI),
previously Resources' utility subsidiary, CG&E, Cinergy Investments, Inc.
(Investments) and Cinergy Services, Inc. (Services).
Cinergy's two utility subsidiaries, CG&E and PSI, account for the majority of
Cinergy's revenues and total assets.
Cinergy, CG&E, and ULH&P
CG&E
CG&E, an Ohio corporation, is a combination electric and gas public utility
company with five wholly-owned utility subsidiaries, The Union Light, Heat and
Power Company (ULH&P), Miami Power Corporation (Miami), The West Harrison Gas
and Electric Company, an Indiana corporation (West Harrison), KO Transmission
Company (KO Transmission), and Lawrenceburg Gas Company, an Indiana
corporation (Lawrenceburg). In addition, CG&E has one wholly-owned non-
utility subsidiary, Tri-State Improvement Company (Tri-State).
CG&E and its utility subsidiaries are engaged in the production, transmission,
distribution, and sale of electric energy and/or the sale and transportation
of natural gas in the southwestern portion of Ohio and adjacent areas in
Kentucky and Indiana. The area served with electricity, gas, or both covers
approximately 3,000 square miles, has an estimated population of 1.8 million
people, and includes the cities of Cincinnati and Middletown in Ohio,
Covington and Newport in Kentucky, and Lawrenceburg in Indiana.
KO Transmission, a Kentucky corporation, acquired an interest in an interstate
natural gas pipeline in June 1996, to which CG&E was entitled as a result of a
settlement with the Columbia Gas Transmission Corp. KO Transmission is
engaged in the transportation of natural gas in interstate commerce between
Kentucky and Ohio.
Tri-State, an Ohio corporation, is devoted to acquiring and holding property
in Ohio, Kentucky, and Indiana for substations, electric and gas rights of
way, office space, and other uses in CG&E's and its subsidiaries' operations.
ULH&P
ULH&P, a Kentucky corporation, is engaged in the transmission, distribution,
and sale of electric energy and the sale and transportation of natural gas in
northern Kentucky. The area served with electricity, gas, or both covers
approximately 500 square miles, has an estimated population of 299,000 people,
and includes the cities of Covington and Newport in Kentucky.
Cinergy and PSI
PSI
PSI, an Indiana corporation, is engaged in the production, transmission,
distribution, and sale of electric energy in north central, central, and
southern Indiana. It serves an estimated population of two 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., a wholly-owned subsidiary of PSI and an Indiana
corporation (PSI Energy Argentina), was formed to invest in foreign utility
companies. PSI Energy Argentina is a member of a multinational consortium
which has controlling ownership of Edesur S.A. (Edesur). Edesur is an
electricity-distribution network serving the southern half of Buenos Aires,
Argentina. Edesur provides distribution services to 2.1 million customers.
PSI Energy Argentina owns a small equity interest in this project and provides
operating and consulting services.
South Construction Company, Inc., a wholly-owned subsidiary of PSI and an
Indiana corporation (South Construction), has been used solely to hold legal
title to real estate and interests in real estate which are either not used
and useful in the conduct of PSI's business (such as undeveloped real estate
of PSI abutting a PSI office building) or which has some defect in title which
is unacceptable to PSI. Most of the real estate to which South Construction
acquires title relates to PSI's utility business.
Cinergy
Investments
Investments, a Delaware corporation, is a non-utility subholding company that
was formed to operate Cinergy's domestic non-utility and international
businesses and interests. Investments holds the following non-utility
subsidiaries and interests, which are more fully described below: Enertech
Associates, Inc. (Enertech), formerly Power International, Inc. (Power
International), formerly Enertech Associates International, Inc.; Cinergy
Resources, Inc. (Cinergy Resources), formerly CG&E Resource Marketing, Inc.;
CGE ECK, Inc.; Cinergy Technology, Inc. (Technology), formerly PSI
Environmental Corp.; Cinergy Solutions, Inc. (Solutions); Cinergy Cooling
Corp. (CoolCo); Cinergy UK, Inc. (Cinergy UK), formerly ME Holdings, Inc.; and
Cinergy Capital & Trading, Inc. (Capital & Trading), formerly Wholesale Power
Services, Inc.
Enertech was incorporated in Ohio in 1992 as a vehicle for CG&E to offer
utility management consulting services and to pursue investment opportunities
in energy-related areas, including demand-side management (DSM) services,
consulting, energy and fuel brokering, engineering services, construction
and/or operation of generation, cogeneration, and independent power production
facilities, and project development. In July 1994, Enertech acquired Beheer-
En Belegginsmaatschappij Bruwabel B.V. (Bruwabel) and its subsidiaries for the
purpose of pursuing design, engineering, and development work involving energy
privatization projects, primarily in the Czech Republic. In June 1996,
Investments sold what remained of its investment in Bruwabel and its
subsidiaries and their assets, including the Vytopna Kromeriz Heating Plant
which was acquired by Power Development s.r.o. in 1995. (See Note 12(d) of
the "Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
Cinergy Resources, a Delaware corporation, was formed to hold CG&E's interest
in U.S. Energy Partners, a gas marketing partnership that was dissolved
effective September 1, 1995. Upon dissolution, Cinergy Resources took its
portion of the partnership assets to continue in the gas marketing business.
Cinergy Resources competes with traditional, regulated local distribution
companies by offering "merchant service" (i.e., acquiring natural gas for
resale to end-use customers) and brokers gas to industrial and large
commercial customers.
Technology, an Indiana corporation, was created to manage certain existing
technology-related investments of Cinergy, assess the market potential for
technology-related product and service development opportunities, and form key
alliances for technology-related product development.
Solutions, a Delaware corporation, was formed to market an array of energy-
related products and services and develop, acquire, own, and operate certain
energy-related projects. Solutions holds a 50% interest in Trigen-Cinergy
Solutions LLC, a Delaware limited liability company, (Trigen-Cinergy).
Trigen-Cinergy was formed to build, own, and operate cogeneration and
trigeneration facilities for industrial plants, office buildings, shopping
centers, hospitals, universities, and other major energy users that can
benefit from combined heat and power production economies. Trigen-Cinergy
will also provide energy and asset management services, including fuel
procurement, ancillary to its activities. (See Note 1(e)(ii) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary
Data.")
CoolCo, incorporated in Ohio in February 1996, was formed to engage in the
district cooling business. The City of Cincinnati awarded an exclusive
franchise that permits CoolCo to construct, install, maintain, and operate a
chilled water system in the downtown business district of Cincinnati, Ohio.
Construction of such system began in the third quarter of 1996.
Cinergy UK, a Delaware corporation, was formed to hold Cinergy's 50% interest
in Avon Energy Partners Holdings, an unlimited liability company, and its
wholly owned subsidiary, Avon Energy Partners PLC, a limited liability company
(collectively, Avon Energy). During 1996, Avon Energy acquired all of the
outstanding common stock of Midlands Electricity plc (Midlands), a United
Kingdom (U.K.) regional electric company. Midlands primarily distributes and
supplies electricity to 2.2 million industrial, commercial, and residential
customers. In addition, Midlands, together with its subsidiaries, generates
power, supplies natural gas to industrial and commercial customers, and
performs electrical contracting services. (See Notes 1(e)(i) and 12(g) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
PSI Recycling, Inc. (Recycling) is an Indiana corporation which recycled metal
from CG&E and paper, metal, and other materials from PSI, its largest single
supplier, and other sources. Investments sold the assets of Recycling in
August 1996.
Power Equipment Supply Co. (PESCO) was incorporated in Indiana to sell
equipment and parts from a PSI generating plant which was canceled, the Marble
Hill Nuclear Project. PESCO also purchased equipment for resale, brokered
equipment, and sold equipment on consignment for others. PESCO discontinued
operations in early 1996.
Capital & Trading, an Indiana corporation, was formed to engage in the
business of marketing power, emission allowances, electricity futures, and
related products and services and to provide consulting services in the
wholesale power-related markets. Capital & Trading will be devoted to
marketing and brokering energy commodities to customers nationwide.
Cinergy, CG&E, PSI, and ULH&P
Services
Services, a Delaware corporation, is the service company for the Cinergy
system, providing member companies with a variety of administrative,
management, and support services.
Cinergy, CG&E, PSI, and ULH&P
Customer, Sales, and Revenue Data
The number of customers served at year-end and the percent of operating
revenues derived from the sale of electricity and the sale and transportation
of natural gas for each registrant for 1996 are as follows:
Operating
Customers Revenues
Registrant Electric Gas Electric Gas
Cinergy and subsidiaries 1,391,938 450,047 84% 14%
CG&E and subsidiaries 729,391 450,047 75% 24%
PSI 662,549 N/A 98% N/A
ULH&P 115,969 75,783 71% 28%
Cinergy's utilities' service territory spans 86 counties in Ohio, Indiana, and
Kentucky and includes approximately 840 cities, towns, unincorporated
communities, and adjacent rural areas, including municipal utilities and rural
electric cooperatives.
The service territory of CG&E and its utility subsidiaries, including ULH&P,
is heavily populated and characterized by a stable residential customer base
and a diverse mix of industrial customers. CG&E's and its utility
subsidiaries' service territory spans 19 counties in Ohio, Indiana, and
Kentucky (of which ULH&P serves six counties in Kentucky) and includes
approximately 130 (44 for ULH&P) cities, towns, unincorporated communities,
and adjacent rural areas, including municipal utilities and rural electric
cooperatives. The area served by PSI is a residential, agricultural, and
widely diversified industrial territory. PSI's service territory includes
approximately 710 cities, towns, unincorporated communities, and adjacent
rural areas, including municipal utilities and rural electric cooperatives.
No one customer accounts for more than 5% of operating revenues for PSI, 5% of
electric or gas operating revenues for CG&E and its utility subsidiaries, or
10% of electric or gas operating revenues for ULH&P. Sales of electricity and
gas sales and transportation are affected by seasonal weather patterns, and,
therefore, operating revenues and associated operating expenses are not
distributed evenly during the year.
Cinergy, CG&E, and ULH&P
Financial Information by Business Segment
For financial information by business segment, see Note 15 of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary
Data." For a discussion of the potential divestiture of CG&E's, including
ULH&P's, gas operations, see Note 12(f) of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data."
Regulation
Cinergy, CG&E, PSI, and ULH&P
Cinergy, its utility subsidiaries, and certain of its non-utility subsidiaries
are subject to regulation by the Securities and Exchange Commission (SEC)
under the Public Utilities Holding Company Act of 1935 (PUHCA) with respect
to, among other things, issuances and sales of securities, acquisitions and
sales of certain utility properties, acquisitions and retentions of interests
in non-utility businesses, intrasystem sales of certain goods and services,
the method of keeping accounts, and access to books and records. In addition,
the PUHCA generally limits registered holding companies to a single
"integrated" public utility system, which the SEC traditionally has
interpreted to prohibit a registered holding company, with limited exceptions,
from owning both gas and electric properties. (Refer to the information
appearing under the captions "Repeal of the PUHCA" in the "Competitive
Pressures" section and "Potential Divestiture of Gas Operations" in the
"Regulatory Matters" section in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and to Note 1(f) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
CG&E, ULH&P, Miami, and PSI are each subject to regulation by the Federal
Energy Regulatory Commission (FERC) under the Federal Power Act with respect
to the classification of accounts, rates for wholesale sales of electricity,
interconnection agreements, and acquisitions and sales of certain utility
properties. In addition, services by KO Transmission are rendered in
accordance with terms and conditions and at rates contained in a gas tariff
filed with the FERC. Transportation of gas between CG&E and ULH&P is subject
to regulation by the FERC under the Natural Gas Act.
Cinergy, CG&E, and ULH&P
CG&E, as a public utility under the laws of Ohio, is also subject to
regulation by the Public Utilities Commission of Ohio (PUCO) as to retail
electric and gas rates, services, accounts, depreciation, issuance of
securities, acquisitions and sales of certain utility properties, and in other
respects as provided by Ohio law. Rates within municipalities in Ohio are
subject to original regulation by the municipalities. The Ohio Power Siting
Board, a division of the PUCO, has jurisdiction in Ohio over the location,
construction, and initial operation of new electric generating facilities and
certain electric and gas transmission lines presently utilized by CG&E. As to
retail rates and other matters, ULH&P is regulated by the Kentucky Public
Service Commission (KPSC), and West Harrison and Lawrenceburg are regulated by
the Indiana Utility Regulatory Commission (IURC).
Cinergy and PSI
PSI, as a public utility under the laws of Indiana, is also regulated by the
IURC as to its retail rates, services, accounts, depreciation, issuance of
securities, acquisitions and sales of certain utility properties, and in other
respects as provided by Indiana law. Prior to the construction, purchase, or
lease of a facility used for the generation of electricity, a public utility
in Indiana must obtain from the IURC a certificate of public convenience and
necessity.
Cinergy, CG&E, PSI, and ULH&P
Regulatory Matters
Refer to the information appearing under the caption "Regulatory Matters" in
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Power Supply
Cinergy, CG&E, PSI, and ULH&P
Cinergy and other utilities in an eight-state region are participating in the
East Central Area Reliability Coordination Agreement for the purpose of
coordinating the planning and operation of generating and transmission
facilities to provide for maximum reliability of regional bulk power supply.
(Refer to the information appearing under the caption "Cinergy's Response to
the Changing Competitive Environment" in the "Competitive Pressures" section
of "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of Cinergy's involvement in a
coalition for operation of a regional transmission system.)
In addition to an intercompany tie between CG&E's and PSI's electric systems,
Cinergy's electric system, which is operated by Services, is interconnected
with the electric systems of Indiana Michigan Power Company, Columbus Southern
Power Company, Ohio Power Company (all doing business as American Electric
Power Company, Inc. (AEP)), Central Illinois Public Service Company, East
Kentucky Power Cooperative, Hoosier Energy Rural Electric Cooperative, Inc.,
Indianapolis Power and Light Company, Kentucky Utilities Company, Louisville
Gas & Electric Company (LG&E), Northern Indiana Public Service Company,
Southern Indiana Gas and Electric Company, The Dayton Power and Light Company,
and Ohio Valley Electric Corporation.
Cinergy and PSI
PSI has a power supply relationship with Wabash Valley Power Association, Inc.
(WVPA) and Indiana Municipal Power Agency (IMPA) through power coordination
agreements. WVPA and IMPA are also parties with PSI to a joint transmission
and local facilities agreement.
Cinergy, CG&E, and ULH&P
ULH&P does not own or operate any electric generating facilities. Its
requirements for electric energy are purchased from CG&E at rates regulated by
the FERC.
Fuel Supply
Cinergy
Cinergy purchases approximately 25 million tons of coal annually for use by
CG&E and PSI, which historically would rank Cinergy as the sixth largest
utility coal purchaser in the United States.
Cinergy, CG&E, and PSI
A major portion of the coal required by CG&E and PSI is obtained through both
long- and short-term coal supply agreements, with the remaining requirements
purchased on the spot market. The prices to be paid under most of these
contracts are subject to adjustment. In addition, some of these agreements
include extension options and termination provisions pertaining to coal
quality. The coal delivered under these contracts is primarily from mines
located in Indiana, Illinois, and Pennsylvania for PSI and Ohio, Kentucky,
West Virginia, and Pennsylvania for CG&E.
CG&E and PSI monitor alternative sources to assure a continuing availability
of economical fuel supplies. The companies intend to maintain the practice of
purchasing a portion of their coal requirements on the spot market and will
continue to investigate the least cost coal options in connection with their
compliance with the Clean Air Act Amendments of 1990 (CAAA) (see the
information appearing under the caption "Environmental Issues" in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations").
The companies believe they will be able to obtain sufficient coal to meet
future generating requirements. However, both CG&E and PSI are unable to
predict the extent to which coal availability and price may ultimately be
affected by future environmental requirements. Presently, CG&E and PSI expect
the cost of coal to rise in the long run as the supply of more accessible and
higher-grade coal diminishes and as mining, transportation, and other related
costs continue an upward trend.
Cinergy, CG&E, and ULH&P
Gas Supply
In 1996, CG&E and its utility subsidiaries, including ULH&P, purchased the
majority of their natural gas supply (78%) from firm supply agreements, with
remaining volumes purchased in the spot market. These firm contracts feature
dual levels of gas supply: base load for continuous supply for CG&E's and its
utility subsidiaries' core requirements, and "swing" load, which is gas
available on a daily basis to accommodate changes in demand. CG&E pays
reservation charges for firm base and swing supplies. These charges guarantee
delivery from the supplier during extreme weather and protect the supplier
from fluctuations in daily prices associated with swing supplies.
However, as the trend of industrial customers purchasing gas directly from
producers and utilizing CG&E's facilities for transportation increases, CG&E
and its subsidiaries seek to minimize contract commitment costs to firm
suppliers, and reduce the amount of reservation charges paid to suppliers for
firm supply. Accordingly, CG&E and its subsidiaries anticipate purchasing
approximately 50% of their gas supply in the spot market and only 50% from
firm supply agreements in 1997.
Gas purchased by CG&E and its subsidiaries is transported on interstate
pipelines either directly to CG&E's and its subsidiaries' distribution
systems, or it is injected into pipeline storage facilities for withdrawal and
delivery in the future. Most of CG&E's and its utility subsidiaries' gas
supplies are sourced from the Gulf of Mexico coastal area. CG&E and its
subsidiaries have also obtained limited supply sourced from the Appalachian
region and the mid-continent (Arkansas - Oklahoma) basin, and from methane gas
recovered from an Ohio landfill. Over the long term, natural gas is expected
to retain its competitiveness with alternative fuels. However, colder or
warmer than normal winter weather conditions can cause significant price
fluctuation.
Cinergy, CG&E, PSI, and ULH&P
Competition
Refer to the information appearing under the caption "Competitive Pressures"
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Cinergy, CG&E, PSI, and ULH&P
Capital Requirements
Refer to the information appearing under the caption "Capital Requirements" in
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Cinergy, CG&E, and PSI
Environmental Matters
Environmental compliance construction expenditures for 1997 for Cinergy and
its subsidiaries are forecasted to be as follows:
Registrant Expenditures
(in thousands)
CG&E and subsidiaries $709
PSI 245
Cinergy and subsidiaries $954
In addition, refer to the information appearing under the caption
"Environmental Issues" in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Employees
Cinergy
The number of employees of Cinergy and its subsidiaries at December 31, 1996,
was 7,973, of whom 4,678 belonged to bargaining units. These bargaining unit
employees were represented by labor agreements between CG&E and its
subsidiaries, including ULH&P, or PSI and the applicable union organization.
Of Cinergy's total employees, 3,019 employees were represented by the
International Brotherhood of Electrical Workers (IBEW), 456 were represented
by the United Steelworkers of America (USWA), and 1,203 were represented by
the Independent Utilities Union (IUU).
Employees assigned to Services at December 31, 1996, totaled 2,798, of whom
905 belonged to bargaining units. These bargaining unit employees were
represented by the labor agreements previously discussed. Of Services' total
employees, 477 were represented by the IUU, 7 were represented by the USWA,
and 421 were represented by the IBEW (142 were represented by the agreement
with PSI and 279 were represented by the agreement with CG&E).
Cinergy and CG&E
The number of employees of CG&E and its subsidiaries at December 31, 1996, was
2,964, of whom CG&E employed 2,676, ULH&P employed 276, and Lawrenceburg
employed 12.
CG&E and its subsidiaries have collective bargaining agreements with several
union organizations. Of CG&E's and its subsidiaries' total employees 726
employees were represented by the IUU, 449 were represented by the USWA, and
1,215 were represented by the IBEW. The current contract between CG&E and the
IUU will expire in April 2001. CG&E and its subsidiaries have a contract with
the USWA expiring May 15, 2002. The IBEW contract expires April 1, 2001.
Cinergy and PSI
The number of employees of PSI at December 31, 1996, was 2,211, of whom 1,383
were represented by the IBEW.
PSI's collective bargaining agreement with the IBEW will expire at the end of
April 1999.
Cinergy and ULH&P
The number of employees of ULH&P at December 31, 1996, was 276, of whom 229
belonged to bargaining units. These bargaining unit employees were
represented by the same labor agreements between CG&E and the applicable union
organization. Of ULH&P's total employees, 62 employees were represented by
the IBEW, 102 were represented by the USWA, and 65 were represented by the
IUU.
The current contract between ULH&P and the IUU will expire in April 2001.
ULH&P has agreements with the USWA and IBEW that will expire May 15, 2002, and
April 1, 2001, respectively.
ITEM 2. PROPERTIES
Cinergy, CG&E, PSI, and ULH&P
Substantially all utility plant is subject to the lien of each applicable
company's first mortgage bond indenture.
In addition to the information discussed herein, refer to Note 13 of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data."
Cinergy, CG&E, and PSI
At December 31, 1996, the Cinergy utility subsidiaries owned electric
generating plants, or portions thereof in the case of jointly owned
plants, with net capabilities (winter ratings) as shown in the following
table:
Net
Percent Principal Capability
Plant Name Location Ownership Fuel Source megawatts (mw)__
CG&E
Steam Electric Generating Plants:
Miami Fort Station (Units 5&6) North Bend, Ohio 100.00% Coal 243
Miami Fort Station (Units 7&8) North Bend, Ohio 64.00 Coal 640
W.C. Beckjord Station (Units 1-5) New Richmond, Ohio 100.00 Coal 704
W.C. Beckjord Station (Unit 6) New Richmond, Ohio 37.50 Coal 158
J.M. Stuart Station Aberdeen, Ohio 39.00* Coal 913
Killen Station Adams County, Ohio 33.00* Coal 198
Conesville Station Conesville, Ohio 40.00* Coal 312
William H. Zimmer Generating
Station Moscow, Ohio 46.50 Coal 605
East Bend Station Boone County, Kentucky 69.00 Coal 414
Combustion Turbines:
Dicks Creek Station Middletown, Ohio 100.00 Gas 172
Miami Fort Gas Turbine Station North Bend, Ohio 100.00 Oil 78
W.C. Beckjord Gas Turbine Station New Richmond, Ohio 100.00 Oil 245
Woodsdale Generating Station Butler County, Ohio 100.00 Gas 564
PSI
Steam Electric Generating Plants:
Gibson Generating Station:
(Units 1-4) Princeton, Indiana 100.00 Coal 2,532
(Unit 5) Princeton, Indiana 50.05 Coal 313
Wabash River Station Terre Haute, Indiana 100.00 Coal 668
Cayuga Station Cayuga, Indiana 100.00 Coal 1,005
R.A. Gallagher Station New Albany, Indiana 100.00 Coal 560
Edwardsport Station Edwardsport, Indiana 100.00 Coal 160
Noblesville Station Noblesville, Indiana 100.00 Coal 90
Combustion Turbines:
Cayuga Combustion Turbine Cayuga, Indiana 100.00 Gas 120
Wabash River Coal Gasification
Project Terre Haute, Indiana 100.00 Coal 262
Internal Combustion Units:
Connersville Peaking Station Connersville, Indiana 100.00 Oil 98
Miami-Wabash Peaking Station Wabash, Indiana 100.00 Oil 104
Cayuga Peaking Units Cayuga, Indiana 100.00 Oil 11
Wabash River Peaking Units Terre Haute, Indiana 100.00 Oil 8
Hydroelectric Generating Station:
Markland Generating Station Markland Dam, Ohio
River 100.00 Water 45
<FN>
Station is not operated by CG&E.
Cinergy and CG&E
CG&E
CG&E's 1996 peak load, which occurred on August 6 and was exclusive of off-
system transactions, was 4,452 mw. For the period 1997 through 2006, peak
load and kilowatt-hour (kwh) sales are each forecasted to have annual growth
rates of 2%. These forecasts reflect CG&E's load growth, alternative fuel
choices, population growth, and housing starts. These forecasts exclude an
assessment of DSM, non-firm power transactions, and any potential off-system,
long-term firm power sales.
As of December 31, 1996, CG&E's transmission system consisted of 388 circuit
miles of 345,000 volt line, 618 circuit miles of 138,000 volt line, 520
circuit miles of 69,000 volt line, and 116 circuit miles of lesser volt line,
all within the states of Ohio and Kentucky. In addition, as of December 31,
1996, CG&E's distribution system consisted of 14,647 circuit miles, all within
the state of Ohio. As of the same date, CG&E's transmission substations had a
combined capacity of 14,845,000 kilovolt-amperes, and the distribution
substations had a combined capacity of 5,968,000 kilovolt-amperes. A portion
of CG&E's total transmission system is jointly owned, primarily in connection
with its jointly owned electric generating units.
During 1996, almost all of the electricity generated by units owned by CG&E or
in which it has an ownership interest was produced by coal-fired generating
units. Those units generate most of the electric requirements of CG&E and its
utility subsidiaries.
CG&E owns two propane/air peakshaving plants. Associated with these plants
are two underground caverns, one with a seven million gallon capacity and one
with an eight million gallon capacity. Both plants and storage caverns are
located in Ohio and are used primarily to augment CG&E's supply of natural gas
during periods of peak demand and emergencies. CG&E also owns natural gas
distribution systems consisting of 5,632 miles of mains and service lines in
southwestern Ohio.
Cinergy and PSI
PSI
PSI's 1996 peak load, which occurred on August 7 and was exclusive of off-
system transactions, was 5,227 mw. For the period 1997 through 2006, peak
load and kwh sales are each forecasted to have annual growth rates of 2%.
These forecasts reflect PSI's load growth, alternative fuel choices,
population growth, and housing starts. These forecasts exclude an assessment
of DSM, non-firm power transactions, and any potential off-system, long-term
firm power sales.
As of December 31, 1996, PSI's transmission system consisted of 719 circuit
miles of 345,000 volt line, 656 circuit miles of 230,000 volt line, 1,595
circuit miles of 138,000 volt line, and 2,428 circuit miles of 69,000 volt
line, all within the state of Indiana. In addition, as of December 31, 1996,
PSI's distribution system consisted of 19,486 circuit miles, all within the
state of Indiana. As of the same date, PSI's transmission substations had a
combined capacity of 21,535,000 kilovolt-amperes, and the distribution
substations had a combined capacity of 6,299,000 kilovolt-amperes.
During 1996, almost all of PSI's kwh production was obtained from coal-fired
and hydroelectric generation.
Cinergy, CG&E, and ULH&P
ULH&P
As of December 31, 1996, ULH&P owned 104 circuit miles of 69,000 volt electric
transmission line, an electric distribution system consisting of 2,510 circuit
miles, and a gas distribution system consisting of 1,271 miles of mains and
service lines in northern Kentucky. ULH&P also owns a propane/air peakshaving
plant, a seven million gallon capacity underground cavern for the storage of
liquid propane, and related liquid propane feeder lines, located in northern
Kentucky and adjacent to one of the gas lines that transports natural gas to
CG&E. The propane/air plant and cavern are used primarily to augment CG&E's
and ULH&P's supply of natural gas during periods of peak demand and
emergencies.
Cinergy and CG&E
Other Utility Subsidiaries
As of December 31, 1996, Lawrenceburg owned a gas distribution system
consisting of 170 miles of mains and service lines in Indiana adjacent to the
western part of CG&E's service area. Lawrenceburg is connected with and sells
gas at wholesale to the city of Aurora, Indiana, and is also connected within
Indiana with the lines of Texas Gas Transmission Corporation and Texas Eastern
Transmission Corporation.
As of December 31, 1996, West Harrison owned a small electric distribution
system consisting of 10 circuit miles in Indiana adjacent to CG&E's service
area. As of the same date, Miami owned 40 miles of 138,000 volt transmission
line connecting the lines of LG&E with those of CG&E.
As of December 31, 1996, KO Transmission owned a 32.67% interest in a 90-mile
interstate natural gas pipeline. KO Transmission transports gas from
southeast Kentucky northward to the service territories of CG&E and ULH&P.
ITEM 3. LEGAL PROCEEDINGS
Cinergy, CG&E, and PSI
Merger Litigation
Hearings before the United States Court of Appeals for the District of
Columbia Circuit in connection with AEP's petition for review of the FERC's
order approving the merger of CG&E and Resources to form Cinergy (Merger
Order) concluded on March 18, 1997. AEP has objected to the Merger Order
alleging that the post-merger operations of Cinergy would require the use
of AEP's transmission facilities on a continuous basis without
compensation. AEP contends that the FERC, in issuing the Merger Order, did
not adequately evaluate the impact on AEP or whether the need to use AEP's
transmission facilities would interfere with Cinergy achieving merger
benefits. In addition, AEP claims that the FERC failed to evaluate the
extent to which the merged facilities' operations would be consistent with
the integrated public utility concept of the PUHCA. CG&E and PSI have
intervened in this action. While a decision in the appeal is expected by
the end of 1997, Cinergy, CG&E, and PSI currently cannot predict the
outcome.
Cinergy and PSI
Wabash Valley Power Association, Inc. Settlement Agreement
See Note 12(e) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
Cinergy, CG&E, and PSI
Enertech Litigation
See Note 12(d) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
ULH&P
ULH&P has no material pending legal proceedings.
Cinergy, CG&E, PSI, and ULH&P
In addition to the above litigation, see " Regulatory Matters" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Notes 12(b), 12(c), and 12(f) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cinergy, CG&E, and PSI
None.
ULH&P
Omitted pursuant to instruction I(2)(c).
EXECUTIVE OFFICERS OF THE REGISTRANTS (at February 28, 1997)
Age at
Dec. 31,
Name 1996 Office & Date Elected or in Job
Cinergy, CG&E, and PSI
Jackson H. Randolph 66 Chairman of Cinergy, CG&E, and
PSI - 1995
Chairman and Chief Executive Officer
of Cinergy, CG&E, and PSI - 1994
Chairman, President, and Chief Executive
Officer of CG&E - 1993
President and Chief Executive Officer
of CG&E - 1986
James E. Rogers 49 Vice Chairman, President, and Chief
Executive Officer of Cinergy - 1995
Vice Chairman and Chief Executive
Officer of CG&E and PSI - 1995
Vice Chairman, President, and Chief
Operating Officer of Cinergy - 1994
Vice Chairman and Chief Operating
Officer of CG&E and PSI - 1994
Chairman and Chief Executive Officer
of Resources - 1993
Chairman, President, and Chief Executive
Officer of PSI - 1990
Cheryl M. Foley 49 Vice President, General Counsel, and
Secretary of CG&E - 1995
Vice President, General Counsel, and
Secretary of Cinergy - 1994
Vice President, General Counsel, and
Secretary of PSI and Resources - 1991
Vice President and General Counsel of
Resources - 1990
Elizabeth K. Lanier 1/ 45 Vice President and Chief of Staff - 1996
Partner - Frost & Jacobs 2/ - 1984
J. Wayne Leonard 46 President, Energy Commodities Business Unit
of Cinergy - 1996
Group Vice President and Chief
Financial Officer of CG&E and PSI - 1995
Group Vice President and Chief Financial
Officer of Cinergy - 1994
Senior Vice President and Chief Financial
Officer of PSI and Resources - 1992
Vice President and Chief Financial
Officer of PSI and Resources - 1989
William L. Sheafer 53 Treasurer of Cinergy and PSI - 1994
Treasurer of CG&E - 1987
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1996 Office & Date Elected or in Job
Larry E. Thomas 51 President, Energy Delivery Business Unit
of Cinergy - 1996
Group Vice President and Chief
Transformation Officer of Cinergy, CG&E,
and PSI - 1995
Group Vice President, Reengineering and
Operations Services of CG&E and
PSI - 1995
Group Vice President, Reengineering
and Operations Services of Cinergy - 1994
Senior Vice President and Chief Operations
Officer of PSI - 1992
Senior Vice President and Chief Operating
Officer, Customer Operations of
PSI - 1990
Charles J. Winger 51 Comptroller of CG&E - 1995
Comptroller of Cinergy - 1994
Comptroller of Resources - 1988
Comptroller of PSI - 1984
Cinergy and CG&E
William J. Grealis 3/ 51 President, Energy Services Business Unit
of Cinergy - 1996
President of CG&E - 1995
Vice President of Cinergy - 1995
President, Gas Business Unit of CG&E - 1995
President of Investments - 1995
Partner - Akin, Gump, Strauss, Hauer
& Feld 2/ - 1978
Cinergy and PSI
John M. Mutz 4/ 61 Vice President of Cinergy - 1995
President of PSI - 1994
President of Resources - 1993
President - Lilly Endowment, Inc. 2/ - 1989
Cinergy
J. Joseph Hale, Jr. 47 Vice President of Cinergy - 1996
General Manager, Marketing
Operations of CG&E - 1995
President of Cinergy Foundation,
Inc. 5/ - 1992
President - The Kaiser Group,
Inc. 2/ - 1989
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1996 Office & Date Elected or in Job
M. Stephen Harkness 48 Vice President of Cinergy - 1996
Executive Vice President and Chief
Operating Officer of Trigen-Cinergy
Solutions LLC 6/ - 1996
General Manager, Corporate Development
and Financial Services of Cinergy - 1994
Treasurer of PSI and Resources - 1986
Jerry W. Liggett 55 Vice President of Cinergy - 1996
Senior Manager, Human Resources
Strategy of Cinergy - 1995
General Manager, Employee Relations,
Compensation & Benefits of Cinergy - 1995
Executive Director, Human Resources
of PSI and Resources - 1990
Michael M. Sample 44 Vice President of Cinergy - 1996
General Manager, International
Investments of Cinergy - 1994
Vice President, Government Affairs
of PSI and Resources - 1991
ULH&P
Omitted pursuant to instruction I(2)(c).
Cinergy, CG&E, and PSI
None of the officers is related in any manner. Executive officers of Cinergy
are elected to the offices set opposite their respective names until the next
annual meeting of the Board of Directors and until their successors shall have
been duly elected and shall have been qualified.
1/ Prior to becoming Vice President effective June 1, 1996, Ms. Lanier
was a partner in the law firm of Frost & Jacobs located in Cincinnati,
Ohio.
2/ Non-affiliate of Cinergy.
3/ Prior to becoming President of Investments, Mr. Grealis was a
partner in the Washington, D.C. law firm of Akin, Gump, Strauss, Hauer
& Feld. In addition, prior to the merger, Mr. Grealis was President of
PSI Investments, Inc. on an interim basis beginning in 1992.
4/ Prior to becoming President of Resources, Mr. Mutz was President of
Lilly Endowment, Inc., a private philanthropic foundation located in
Indianapolis, Indiana.
5/ An affiliated public benefit corporation organized and operating
exclusively for charitable purposes.
6/ Joint venture company formed by Cinergy and Trigen Energy Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Cinergy, CG&E, PSI, and ULH&P
Cinergy's common stock is listed on the New York Stock Exchange and has
unlisted trading privileges on the Boston, Chicago, Cincinnati, Pacific, and
Philadelphia exchanges. As of February 7, 1997, Cinergy's most recent
dividend record date, there were 77,405 common shareholders of record. The
following table shows the high and low sales prices per share, if applicable,
and the dividends on common stock declared by Cinergy, CG&E, PSI, and ULH&P
for the past two years:
Market Price (a) Dividends Declared_____
High Low (per share) (in thousands)
1995
Cinergy
4th Quarter 31 1/8 27 3/4 .43
3rd Quarter 27 7/8 25 1/4 .43
2nd Quarter 27 24 5/8 .43
1st Quarter 25 1/4 23 3/8 .43
CG&E
4th Quarter 56 600 (b)
3rd Quarter 55 400 (b)
2nd Quarter 55 900 (b)
1st Quarter 51 650 (b)
ULH&P
4th Quarter 6.00 (b)
1996
Cinergy
4th Quarter 34 1/4 30 7/8 .45
3rd Quarter 32 29 1/8 .43
2nd Quarter 32 27 1/2 .43
1st Quarter 32 1/8 28 1/4 .43
CG&E
4th Quarter 50 949 (b)
3rd Quarter 239 909 (b)
2nd Quarter 45 116 (b)
1st Quarter 41 995 (b)
PSI
4th Quarter 29 713 (b)
3rd Quarter 28 311 (b)
2nd Quarter 28 165 (b)
1st Quarter 25 887 (b)
ULH&P
4th Quarter 8.50 (b)
(a) Market price for CG&E, PSI, and ULH&P is not applicable.
(b) All of CG&E's and PSI's dividends were paid to Cinergy and all of
ULH&P's dividends were paid to CG&E.
See Note 2(b) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data" for a brief description of common dividend
restrictions.
All CG&E and PSI common stock is held by Cinergy and all ULH&P common stock is
held by CG&E; therefore, there is no public trading market for their common
stock.
ITEM 6. SELECTED FINANCIAL DATA
Cinergy
1996 1995 1994 1993 1992
(in millions, except per share amounts)
Operating revenues (1) $3 243 $3 023 $2 888 $2 833 $2 613
Net income (1) 335 347 191 63 271
Common stock
Earnings per share (1) (5) 2.00 2.22 1.30 .43 1.91
Dividends declared per share 1.74 1.72 1.50 1.46 1.39
Total assets (2) 8 849 8 220 8 150 7 804 7 133
Cumulative preferred stock of
subsidiaries subject to mandatory
redemption (3) - 160 210 210 210
Long-term debt (4) 2 535 2 531 2 715 2 645 2 547
Long-term debt due within
one year 140 202 60 - 46
CG&E
1996 1995 1994 1993 1992
(in millions)
Operating revenues (1) $1 976 $1 848 $1 788 $1 752 $1 553
Net income (loss)(1) 227 236 158 (9) 202
Total assets (2) 4 967 5 197 5 182 5 144 4 802
Cumulative preferred stock subject
to mandatory redemption (3) - 160 210 210 210
Long-term debt (4) 1 565 1 703 1 838 1 829 1 810
Long-term debt due within
one year 130 152 - - 7
PSI
1996 1995 1994 1993 1992
(in millions)
Operating revenues (1) $1 332 $1 248 $1 114 $1 092 $1 066
Net income (1) 126 146 82 125 107
Total assets (2) 3 295 3 076 2 945 2 645 2 300
Long-term debt (4) 970 828 878 816 737
Long-term debt due within
one year 10 50 60 - 40
Cinergy, CG&E, and PSI
(1) See Notes 1 and 15 of the "Notes to Financial Statements" in
"Item 8. Financial Statements and Supplementary Data."
(2) See Notes 1(f) and 6 of the "Notes to Financial Statements" in
(3) "Item
8. Financial Statements and Supplementary Data."
(3) See Note 3 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
(4) See Note 4 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
(5) Includes costs incurred in 1996 by Cinergy of $.12 per share related
to the reacquisition of 90% of CG&E's preferred stock through a
tender offer.
In addition, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 12 of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data" for
discussions of material uncertainties for Cinergy, CG&E, and PSI.
ULH&P
Omitted pursuant to Instruction I(2)(a).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cinergy, CG&E, PSI, and ULH&P
CAUTIONARY STATEMENTS REGARDING FORWARD - LOOKING INFORMATION Matters
discussed in this "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" reflect and elucidate the Companies'
corporate vision of the future and, as a part of that, outline goals and
aspirations, as well as specific projections. These goals and projections are
considered forward-looking statements and are based on management's beliefs,
as well as certain assumptions made by management. In addition to any
assumptions and other factors that are referred to specifically in connection
with these statements, other factors that could cause actual results to differ
materially from those indicated in any forward-looking statements include,
among others:
Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; unscheduled generation outages;
unusual maintenance or repairs; unanticipated changes to fossil fuel costs,
gas supply costs, or availability constraints due to higher demand,
shortages, transportation problems or other developments; environmental
incidents; or electric transmission or gas pipeline system constraints.
Increased competition in the electric and gas utility industries
including effects of: industry restructuring; transmission system operation
and/or administration; customer choice; and cogeneration.
Regulatory factors such as unanticipated changes in rate-setting policies
or procedures; recovery of investments made under traditional regulation,
and the frequency and timing of rate increases.
Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board (FASB), the Securities and Exchange
Commission (SEC), the Federal Energy Regulatory Commission (FERC), state
public utility commissions, state entities which regulate natural gas
transmission, gathering and processing and similar entities with regulatory
oversight.
Economic conditions including inflation rates and monetary fluctuations.
Changing market conditions and a variety of other factors associated with
physical energy and financial trading activities including, but not limited
to, price, basis, credit, liquidity, volatility, capacity, transmission,
currency exchange, interest rate, and warranty risks.
Availability or cost of capital, resulting from changes in: Cinergy and
its subsidiaries, interest rates, and securities ratings or market
perceptions of the utility industry and energy-related industries.
Employee workforce factors including changes in key executives,
collective bargaining agreements with union employees, or work stoppages.
Legal and regulatory delays and other obstacles associated with mergers,
acquisitions, and investments in joint ventures.
Costs and other effects of legal and administrative proceedings,
settlements, investigations, claims, and other matters, including but not
limited to those described in Note 12 of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data."
Changes in international, Federal, state, or local legislative
requirements such as changes in tax laws or rates; environmental laws and
regulations.
Cinergy and its subsidiaries undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of changes in
actual results, changes in assumptions, or other factors affecting such
statements.
Cinergy, CG&E, PSI, and ULH&P
THE COMPANIES
Cinergy Corp., a Delaware corporation (Cinergy or Company) is a registered
holding company under the Public Utility Holding Company Act of 1935 (PUHCA).
Cinergy was created in the October 1994 merger of PSI Resources, Inc.
(Resources) and The Cincinnati Gas & Electric Company (CG&E). The business
combination was accounted for as a pooling of interests. Following the
merger, Cinergy became the parent holding company of PSI Energy, Inc. (PSI),
previously Resources' utility subsidiary, CG&E, Cinergy Investments, Inc.
(Investments), and Cinergy Services, Inc.
FINANCIAL CONDITION
COMPETITIVE PRESSURES
Electric Utility Industry
Cinergy, CG&E, PSI, and ULH&P
Introduction The changing competitive environment for energy services
continues as the primary factor which will influence the future operations,
structure, and profitability of Cinergy. Changes in the industry include the
convergence of gas and electricity as complementary energy sources, new
emerging technologies, the commoditization of electric power, full competition
in the wholesale power markets from both traditional electric utilities and
new power marketers and brokers, and continuing pressure for "customer choice"
by all classes of customers. In addition, traditional investor owned
utilities are becoming more diversified by using merger and acquisition
strategies to support regional, national, and international market strategies.
These merger and acquisition strategies include the combining of electric
utilities with one another and cross-commodity combinations of electric
utilities with gas transmission, distribution, and marketing companies.
Pressures for Customer Choice Extending choice to end-use customers,
sometimes referred to as retail wheeling or retail access, will allow all
customers within a particular utility's franchise service territory to
"unbundle" their purchase decisions. In effect, customers would be allowed to
purchase power as a commodity directly from any available source and would buy
delivery services (i.e., transmission and distribution) from the local
utilities which own the power lines or from independent system operators (ISO)
(see below). Other value-added services beyond delivery to the customer's
premises could potentially be provided by third-party energy services
companies. The regulatory and legislative reforms to facilitate customer
choice are primarily driven by: (1) large industrial energy users' need to
access lower cost power sources; (2) the continuing emergence of new
technologies and new marketers to provide electric power; and (3) evidence
from other previously regulated industries that wherever effective competition
is feasible, it can yield both lower costs and a wider range of customer
options and services as compared to traditional cost-of-service regulation.
The genesis for the new competitors to the local franchise utilities was the
enactment of the Energy Policy Act of 1992 (Energy Act), which granted the
FERC authority to order wholesale transmission access. As a result, in 1996,
the FERC's order 888 (FERC Order 888) was implemented. This order encourages
full wholesale competition by requiring all utilities subject to the FERC's
jurisdiction to make their transmission systems available to power buyers and
sellers at prices comparable to those the transmission owner charges itself
for comparable service. These new competitors to the local franchise utility
include power marketers, power brokers, and other utilities, who now have the
ability to sell power in regional or national markets. To date, the FERC has
granted licenses to more than 200 power marketers, enabling these new
competitors to sell wholesale power at market-based rates. Cinergy was
granted a power marketing license in December 1995.
Power brokers are intermediaries between buyers and sellers and do not take
title to the power which they broker. Power marketers conduct bulk power
trades at market-based prices. They manage owned generation and portfolios of
power contracts, to which they have title, and package energy products for
customers of bulk power, including price risk management contracts such as
options on fixed-price energy and guaranteed fixed-price contracts. Power
marketers compete not only in price, but also on service, such as structuring,
hedging services, and scheduling flexibility.
The demands of industrial and commercial customers continue to drive
deregulation into the legislative process in many states. Four states,
California, New Hampshire, Pennsylvania, and Rhode Island, enacted legislation
in 1996 which will lead to total customer choice for power supply. Several
states have proposed legislation which is currently being debated in their
respective legislatures and in most other states the complex technical and
economic issues presented by deregulation and restructuring are being
discussed and examined. Among other things, states are considering the trade-
offs between achieving long-run economic efficiency and potential short-term
wealth transfers between customers and shareholders or among customer groups,
as well as the potential impact (if any) restructuring may have on state and
local tax structures and socially desirable objectives such as clean air or
energy efficiency. In addition to legislative efforts to totally restructure
the electric utility industry, several states have initiated pilot retail
access programs which allow a limited number of retail customers the
opportunity to shop for electricity among several suppliers.
The most contentiously debated issue has been how best to transition from the
historical monopoly cost-of-service regulated environment to the competitive
market-driven environment and who will bear the costs of past commitments made
under the old order. If the generation component of the industry was
immediately brought to market and priced at competitive wholesale prices, it
is likely many utilities would be unable to recover a large percentage of
their fixed costs. Other costs such as investments in energy efficiency
(demand-side management (DSM) investments) could also become "stranded" (i.e.,
unrecoverable at competitive market prices) in this scenario. The financial
impact to the industry and each investor owned utility of alternative
scenarios for a transition to a competitive market is highly dependent upon:
(1) the speed of the transition and type of price regulation during the
transition; (2) the ultimate clearing price for electricity in a competitive
environment; and (3) customer behavior when afforded potentially lower-cost
alternatives.
Because of the complex nature of electric power flows, the variety of state-
by-state regulations and the potential inability or unwillingness to shut down
high-cost, uneconomical generation facilities, such as nuclear, in a fully
competitive environment, great uncertainty exists as to the time frame
required for the future price of electricity in a commodity market to rise to
long-run marginal cost (e.g., full cost of new resources) and, importantly,
how close to short-term marginal cost (e.g., fuel and variable operating
costs) prices may fall in the interim. For example, Moody's Investors
Service, Inc. (Moody's) has estimated the stranded investment issue for the
industry at $136 billion (computed on a present value basis), while Standard
and Poor's (S&P) has estimated a total exposure of between $10 billion and $26
billion (6% and 16%, respectively) of total industry annual revenues. The
position that recovery of prudent past investments and commitments must be
considered has received support at the FERC, in FERC Order 888, and in the
four states which have enacted competition-related legislation (see further
discussion herein).
In addition either corporate separation and/or divestiture continues to be
advocated by some constituents in order to protect against market power abuses
which could result from one electric utility controlling large segments of
generating capacity and transmission assets within a local or regional market.
As a result, electric utilities could face substantial costs to restructure
the corporate vertical integration in the delivery of electric power which
exists today. If legal separation is required, for example, first mortgage
bond indentures may not allow for major asset dispositions by the electric
utility. In order to legally unbundle, the electric utility could be required
to repurchase the outstanding debt under the indenture at substantial call
premiums or pay similar fees to the bondholders in order to amend the bond
indenture to allow for the unbundling. At a minimum, regulators will likely
mandate functional unbundling of the generation, transmission, and
distribution businesses.
In addition, electric utilities could also face substantial costs or
competitive restrictions to comply with codes of conduct which are likely to
be implemented by regulators to encourage fair competition among the many new
competitors entering a market and the local franchise utility.
Cinergy's Response to the Changing Competitive Environment Cinergy continues
to be an aggressive supporter of increased competition in the electric utility
industry. Cinergy believes competition would benefit electric customers
individually and the economy as a whole. At the same time, Cinergy possesses
certain competitive advantages, such as low-cost generation, which could
benefit shareholders in a deregulated environment. However, these advantages
could be substantially eroded by restrictive regulations which lag the
development of a competitive market and which limit Cinergy's energy commodity
and energy services business units' ability to preempt the competition in
responding to the needs of customers or which result in pricing at the lower
of cost or market for former "franchise" holding utilities. As such, Cinergy
will continue its leadership role in both state and Federal debates on
industry reform.
Cinergy believes there are two substantial impediments to realizing the
potential efficiencies of competition in the generation component of the
business: (1) resolving the issue of stranded costs associated with past
utility commitments and (2) recognizing states' rights, concerns, and
authority in regulating a product which flows in interstate commerce. While
Cinergy is among the lowest-cost producers nationwide and has been recognized
by both Moody's and S&P as having minimal exposure to stranded investment,
Cinergy nevertheless recognizes the legitimacy of the industry's argument for
recovery of at least some of the costs associated with past commitments and
the importance of resolving this issue in the interest of moving the debate to
more important issues such as, how to achieve the potential economic
efficiencies which competition offers and what regulatory and structural
reforms are necessary to achieve those results. Cinergy believes that even
low-cost producers, under certain scenarios, could face difficult if not
ruinous competition in an excess capacity market which was created at least in
part by past government policies. Cinergy has approximately $1 billion of
regulatory assets (past costs incurred for which regulators have promised
recovery from customers in the future) which could be at risk, at least in
part, in some scenarios. At the same time, regardless of certain regulatory
actions or statements to the contrary, Cinergy believes full recovery of the
industry's potential stranded investment is unrealistic to expect in a
marketplace where certain customers can bypass stranded cost recovery
mechanisms through self-generation (see Trigen Energy Corporation (Trigen)
below), is politically infeasible, and is neither necessarily equitable nor
efficient. Cinergy believes the resolution of certain broad restructuring
issues (e.g., market power, codes of conduct, universal service to customers,
reliability standards, and certain tax consequences) must be addressed on a
regional or national basis to prevent state-by-state disparity which could
provide inequitable advantages to some competitors while unduly harming
others' ability to compete in the marketplace.
During 1996, Cinergy has taken numerous steps to prepare itself not only for
the changing environment, but to assure equity and consistency in the setting
of rules and regulations in the various markets in which Cinergy competes,
including the following:
Cinergy and five other midwestern utilities formed a coalition to create
and develop a multi-state transmission region operated by an ISO. Since
its formation, 18 additional midwestern transmission owners have joined the
coalition. The coalition is proposing a Midwest ISO which would ensure
non-discriminatory open transmission access and system reliability, as well
as, the development of a regional transmission tariff that helps eliminate
the "pancaking" of transmission rates that occurs today when power is
transmitted through multiple utility systems. Cinergy believes the
existence of ISO's will ease regulatory and customer concerns over the
exercise of market power by transmission-owning utilities.
Cinergy reorganized its electric operations into three strategic business
units. This functional unbundling separated Cinergy's electric utility
business into an energy services business unit, an energy delivery business
unit, and an energy commodities business unit. Each of these separate
business units will be responsible for expanding its business through,
among other things, expansion of its markets and the offering of new
products and services.
Cinergy acquired, through a joint venture, a 50% interest in Midlands
Electricity plc (Midlands), an electricity distribution company located in
the United Kingdom (U.K.). In addition to diversifying Cinergy's
distribution business into a foreign market, the U.K.'s advanced stage of
opening its electricity market to competition will allow Cinergy to gain
experience and knowledge of customer behavior in a competitive market prior
to deregulation in its United States (U.S.) markets.
Cinergy and Trigen formed a joint venture to develop and operate
cogeneration and trigeneration energy facilities throughout the U.S. and
Canada. This will allow Cinergy to participate in the delivery of
alternative low-cost energy solutions and technologies to its own franchise
customers and to customers outside of its franchise territory.
Cinergy was an active and successful participant in retail access pilot
programs in Illinois, New Hampshire, New York, and Washington. In
addition, Cinergy intends to be an active participant in certain states'
restructuring processes.
Cinergy's energy commodities business unit accelerated its marketing of
power in the wholesale market (megawatt (mw) sales increased by more than
80%). Cinergy now has power marketing representation in all regions of the
U.S. In late 1996, Cinergy acquired exclusive rights to provide power to
two midwestern electric cooperatives for the next five to seven years.
Cinergy continued its business reengineering efforts, which were
initiated in 1994. These initiatives continue to streamline and make
operations more efficient in order for Cinergy to become even more prepared
to compete in a competitive environment.
As discussed below, Cinergy worked with industrial groups and one other
franchise utility in Indiana and is currently working with the other
investor owned utilities in Ohio to propose customer choice legislation
which properly considers the issues and trade-offs discussed above.
For an electric utility to be successful in a competitive environment, it is
critical that regulatory reform keep pace with the market realities facing
electric utilities and their customers not only in generation, but also
transmission, distribution, and energy services activities. Strict adherence
to traditional, cost-based rate-of-return regulation will both significantly
disadvantage a utility's ability to compete successfully to supply customer
needs and result in a failure to realize the potential economic efficiencies
from restructuring. For example, performance-based regulation for those
businesses which remain regulated would result in better economic incentives
to control costs and likely add flexibility for the franchise utility in the
transition to a fully competitive environment.
Federal Developments
Open Access Transmission - FERC Orders 888 and 889 The Energy Act granted the
FERC authority to order wholesale transmission access. Acting on that
authority, in April 1996, the FERC issued its final orders. The final rules
provide for mandatory filing of open access/comparability transmission
tariffs, provide for functional unbundling of all services, require utilities
to use the filed tariffs for their own bulk power transactions, establish an
electronic bulletin board for transmission availability and pricing
information, and establish a contract-based approach to recovering any
potential stranded costs as a result of customer choice at the wholesale
level. The final rules became effective in July 1996. PSI, CG&E, and its
Kentucky subsidiary, The Union Light, Heat and Power Company (ULH&P) have made
compliance filings with the FERC and are now operating under open
access/comparability tariffs.
In adopting these rules, the FERC considered, but did not require, the
divestiture of any facilities. Additionally, ISO's will not be required;
however, principles to guide the FERC's evaluation of ISO proposals are set
forth to encourage their formation.
FERC Merger Policy In December 1996, the FERC issued a policy statement
setting forth new guidelines which address three key factors the FERC will
consider in evaluating public utility mergers: the effect on competition
(i.e., market power); the effect on rates; and the effect on regulation. The
purpose of the policy statement is to ensure that mergers are consistent with
the public interest and to provide greater certainty and expedition in the
FERC's analysis of merger applications. The new guidelines are in response to
the continuing changes in the electric power industry and the regulation of
the industry and are intended to accelerate the FERC approval process.
A proposed merger's effect on market power will be determined by analyzing the
merger candidates' share of the defined market (in terms of both geographic
and product markets). In cases where utilities may exercise market power, the
guidelines encourage the utility to offer potential remedies such as turning
over control of their transmission systems to an ISO or divesting themselves
of generation assets. With respect to effect on rates, estimates of future
costs and benefits of the merger will no longer be required. Instead, the
utility should propose appropriate rate protections for its wholesale
customers, such as open seasons for customers to terminate contracts, rate
freezes, or rate reductions.
Repeal of the PUHCA In 1995, the SEC endorsed recommendations for reform of
the PUHCA. The recommendations call for repeal and, pending repeal,
significant administrative reform of the 61-year-old statute. While the
recommendation report offers three alternative approaches to repeal and
legislative reform, the SEC's preferred option is repeal coupled with a
transition period of one year or longer and a transfer of certain consumer-
protection provisions of the PUHCA to the FERC.
The report further recommends that, pending consideration of legislative
options, the SEC take prompt administrative action, by rulemaking and on a
case-by-case basis, to modernize and simplify regulation under the PUHCA, with
particular reference to financing transactions, diversification into non-
utility businesses, utility mergers and acquisitions, and the PUHCA's
"integration" standards. In the latter regard, the report recommends a
changed interpretation of the PUHCA to permit registered holding companies to
own combination electric and gas utility companies, provided the affected
states agree. Subsequent to the issuance of the report, the SEC adopted rule
changes exempting various types of financing transactions by utility and non-
utility subsidiaries of registered holding companies. The SEC also proposed a
rule which would exempt investments by registered systems in specified
"energy-related companies," subject to certain conditions. In February 1997,
the rule was adopted substantially as proposed.
Since the release of the SEC's report, numerous bills were introduced in both
houses of the U.S. Congress providing for the repeal or significant amendment
of the PUHCA. It is expected that similar bills addressing repeal of the
PUHCA and industry restructuring will be introduced in Congress during 1997.
Cinergy continues to support the repeal of the PUHCA, either as part of
comprehensive reform of the electric industry or as separate legislation.
Cinergy, CG&E, PSI, ULH&P
State Developments While the pace of deregulation varies by state and region,
nearly all states have initiated or taken part in formal or informal
processes, held hearings, and/or passed legislation addressing retail
wheeling, restructuring, competition, alternative regulation, or closely
related issues.
Cinergy and CG&E
Ohio The Public Utilities Commission of Ohio (PUCO) continues to explore
potential opportunities under the existing regulatory framework prior to
embarking on a more fundamental restructuring which could lead to customer
choice. In April 1996, the PUCO approved a "buy-through" plan allowing large
industrial customers with interruptible contracts to purchase electricity
supplies from generators outside the host utility's service territory in order
to avoid an interruption in their power supply. Also, in December 1996, the
PUCO issued its order and guidelines for a conjunctive electric service two-
year pilot program. Under this program, different customer service locations
in a service territory may be aggregated for cost of service, rate design,
rate eligibility, and billing purposes. CG&E has filed tariffs complying with
the buy-through order, and will submit tariffs complying with the conjunctive
electric service order, during the first quarter of 1997.
Both the interruptible buy-through plan and the conjunctive electric service
guidelines were initially developed by The Ohio Electric Competition
Roundtable (Roundtable). The Roundtable, which was formed by the PUCO,
continues to meet and is currently discussing competitive market structures,
including universal service and unbundling.
The PUCO has approved long-term rate plans for two "at-risk," high-cost
utilities, with both plans designed to improve the competitive position of the
utilities by the end of each respective plan. One plan involved a price cap,
together with provisions allowing for accelerated depreciation and
amortization of the utility's nuclear generation and regulatory assets while
the second plan involved a rate increase and a recommendation from the PUCO
that the utility develop a plan to reduce the carrying value of its regulatory
and nuclear generation assets during the next five years. Neither plan
involved provisions for any type of customer choice.
Finally, a retail wheeling and industry restructuring bill was introduced in
the Ohio legislature during 1996. The bill, which was not passed during the
1996 legislative session, would have restructured the provision of electric
service in Ohio, allowed all electric consumers to choose an alternative power
supplier beginning in 1998, and permit utilities to recover "legitimate,
verifiable, and fully mitigated costs." A similar bill (House Bill 220) has
been introduced in the 1997 legislative session. Additionally, the state
legislature has created a bipartisan joint study committee to make
recommendations regarding customer choice legislation. Cinergy is currently
working with other investor owned utilities in Ohio to propose customer choice
legislation and will continue its efforts to bring consumer groups and other
stakeholders into the process. Although Cinergy is aggressively pursuing
customer choice legislation in Ohio, the time frame for passage of legislation
providing for customer choice is uncertain due to the complex issues and
numerous stakeholder interests involved.
Cinergy and PSI
Indiana Enacted legislation allows the Indiana Utility Regulatory Commission
(IURC) to approve utility alternative regulation proposals upon a showing
that, among other things, traditional regulation in a particular service
sector is no longer needed. However, during 1996, the IURC did not approve
the Company's limited customer choice pilot proposals which were included in a
general rate case previously filed by PSI. The IURC stated that any type of
industry restructuring should be left to the state legislature.
Although no formal investigation into electric competition has been initiated,
the IURC has continued to sponsor informal competition forums which are
designed to develop a better understanding of issues related to expanding the
competitive market on both the wholesale and retail levels.
In January 1997, customer choice legislation was introduced in the Indiana
legislature. The legislation was drafted by a coalition which included
Cinergy, the Indiana Manufacturers Association, the Indiana Industrial Energy
Consumers, Inc., and one other Indiana investor owned electric utility. Under
the proposed legislation, there would be a transition period from October 1,
1999, through June 30, 2004, during which customers would have the right to
choose their electric supplier. Those customers not selecting a supplier
would continue to buy their electric power from the franchise utility at a
total "bundled" price. The total bundled price would be frozen at the rate in
effect as of July 1, 1999, subject to certain adjustments during the
transition period, including limited adjustments for specific material cost
changes and a downward trending of the retail electric production component of
the total frozen price to the current statewide average. Trending of the
frozen price would not be applicable to those utilities, such as PSI, whose
retail electric production price is currently below the statewide average.
Those customers choosing a supplier would pay that supplier's open market
price for power and would pay the franchise utility the portion of the bundled
price applicable to transmission and distribution services, and an access
charge (designed to compensate the franchise utility for its loss in revenues,
if any, during the transition period, after giving effect to the revenues
which would be realized by the franchise utility from sales of the power in
the open market). After June 30, 2004, all customers would continue to have
the right to choose their supplier and would continue to pay the franchise
utility for transmission and distribution services which would continue to be
regulated as to price by the IURC. The access charge would no longer be paid
by any customer.
The proposed legislation provides for each utility to file a transition plan
with the IURC which would include, among other things, a proposed amortization
period for regulatory asset balances as of the beginning of the transition
period. Recovery of regulatory assets during the transition period would be
included in retail rates as a charge for transmission and distribution
services. However, any regulatory assets, as well as other stranded costs, at
the end of the transition period which are applicable to retail electric
production, would be the responsibility of the shareholders.
Although Cinergy is aggressively pursuing customer choice legislation in
Indiana, the time frame for passage of legislation providing for customer
choice is uncertain due to the complex issues and numerous stakeholder
interests involved.
Cinergy, CG&E, and ULH&P
Kentucky There continues to be considerably less activity and interest in
industry restructuring in Kentucky. This situation is generally attributable
to the fact that Kentucky is one of the lowest-cost states in the country for
electric service. During 1996, the Kentucky Public Service Commission (KPSC)
began an informal investigation into alternative regulation by holding
conferences addressing competition and soliciting input from interested
parties to determine the appropriate approach to considering such regulation.
Cinergy, CG&E, PSI, and ULH&P
Other States As illustrated by the above discussion of customer choice
initiatives in the states where Cinergy holds franchise agreements, the
Midwest, traditionally a low-cost region, has moved more slowly than the high-
cost regions of the country. Michigan has a pilot retail wheeling program in
place and the state's governor has submitted a restructuring plan which
proposes the creation of an ISO by 1998 and direct access for new commercial
and industrial load by 1997. Illinois, which has pilot retail wheeling
programs in place, has several retail access proposals supported by utilities
and/or consumer groups which may be introduced in the state legislature during
1997.
Outside the Midwest, California, New Hampshire, Pennsylvania, and Rhode
Island, all of which are considered to be high-cost states, each enacted
legislation during the year which will lead to complete retail competition
over the next several years. Several other states likely will enact or at
least consider customer choice legislation in 1997. Other states are pursuing
restructuring plans and pilot retail wheeling experiments on a smaller scale
to gain "real world" knowledge on the issues surrounding customer choice.
The California plan, for example, will simultaneously create an ISO, a
wholesale power exchange, and direct access (customer choice) phased in over
four years beginning January 1, 1998. The plan further provides for a non-
bypassable competitive transition charge (CTC) on all retail customers to
provide utilities the opportunity for recovery of their stranded costs by
2002. The California legislation also allows utilities to securitize a
portion of their stranded cost recovery through the issuance of state-backed
rate reduction bonds. This will enable the utilities to receive the CTC in
advance of payment by customers, thereby allowing for the repayment of higher-
cost debt with the proceeds from issuance of the lower-cost rate reduction
bonds. These cost savings will be used to fund decreases in customers' rates.
Legislation in New Hampshire and Rhode Island requires customer choice by
1998. Pennsylvania requires full competition in generation by 2001. All
three states' plans allow for at least partial stranded investment recovery
during a transition period. Pennsylvania will also have a structure for
utilities to securitize their stranded investment recovery.
Cinergy
United Kingdom
Transition to full competition in the U.K.'s electric utility industry began
with the industry's privatization in 1991. When the industry was privatized,
the generation, transmission, and regional distribution businesses were, in
effect, unbundled into separate companies. The regional distribution
companies, including Midlands, own no transmission facilities and are limited
as to the amount of generation they may own. Third-party access to the
transmission and local distribution systems was also put into place, enabling
licensed suppliers to use these networks.
Upon privatization, customers with a maximum demand of greater than one mw
were allowed to buy electricity from any licensed supplier and, since 1994,
choice of supplier has been available to all customers with a maximum demand
above 100 kilowatts. Beginning in 1998, choice of supplier will be permitted
on a phased-in basis for all classes of customers. The distribution and
transmission portions of the industry will continue to be regulated.
Suppliers purchase their respective power requirements from a "pool" that was
established as part of the overall industry privatization. Generators bid
volumes and prices into the pool, which then issues a series of next-day half-
hourly prices to meet expected demand. Suppliers purchase their requirements
under this system, but also have the ability to enter into "contracts for
differences" (Cfds) with generators and others. Cfds are used to avoid the
uncertainties of pool prices, fix future obligations, and hedge at least
portions of the risk of the pool system.
New entrants into the industry have been limited to independent power
producers, who compete with the formerly state-run generators by using new,
efficient technology such as gas-fired combined-cycle generation. There have
been no new major entrants into the supply business from outside of the
industry. However, it is believed that with full competition for all customer
classes in 1998, new entrants, such as retailers, banks, or companies with
strong consumer brand names may emerge into the supply business.
Approximately 30% of Midlands' revenues are related to the distribution
business which remains a regulated monopoly. In the supply business, Midlands
has retained a significant number of its customers who have the ability to
choose suppliers and at the same time has gained new customers outside of its
franchise territory. Midlands intends to actively pursue expansion of its
customer base when all customers gain the ability to choose suppliers.
Cinergy, CG&E, PSI, and ULH&P
The Industry and Cinergy's Future - Others' Views The major credit rating
agencies continue to recognize the risk of the restructuring of the electric
utility industry. As discussed above, two major credit rating agencies have
quantified their views of the potential stranded investment resulting from
competition. In an October 1996 report, a credit rating agency stated that
credit ratings will remain volatile as individual companies reinvent
themselves. Despite these cautious views of the electric industry, Cinergy
has received praise and some measure of optimism for its position in a more
competitive environment. At its last upgrading of Cinergy's operating
subsidiaries' debt and preferred stock, in November 1995, Moody's expressed
its opinion that Cinergy "will have no exposure to stranded costs" and that
"Cinergy is expected to be a formidable competitor because of its low
production costs." In its July 1995 upgrade of Cinergy's operating
subsidiaries' debt and preferred stock, S&P commented that "the business
position evaluation of all the Cinergy operating units is now high average"
reflecting "low electric production costs, efficient coal-fired equipment,
relatively low rates, a well-positioned gas operation, the absence of nuclear
challenges, a healthy service territory, and a balanced capital structure."
In October 1996, The Energy Daily presented its annual Corporate Leadership
Award to Cinergy, for "the aggressive example it has set in moving forward
with industry reform" and for Cinergy having "led the search for new and
imaginative concepts in the reengineering of the industry."
Certain sell-side equity analysts continue to rank Cinergy highly as a utility
possessing a strong competitive profile and aggressive and forward-looking
management with some considering Cinergy prepared to outperform the market in
the competitive arena. In particular, in a recent study of global competition
in various industries, Cinergy was one of nine energy companies world-wide
which were identified as most likely to prosper in the more competitive
environment of the coming decade.
Cinergy believes these opinions further support its position that its
competitive strategy and agenda will be successful.
Cinergy, CG&E, and ULH&P
Gas Utility Industry
Order 636 In 1992, the FERC issued order 636 (Order 636) which restructured
operations between interstate gas pipelines and their customers for gas sales
and transportation services. Order 636 mandated changes in the way CG&E and
its utility subsidiaries purchase gas supplies and contract for transportation
and storage services, resulting in increased risks in meeting the gas demands
of their customers.
CG&E and its utility subsidiaries have responded to the supply risks and
opportunities of Order 636 by introducing innovations to their supply
strategy. These innovations include: contracting with major producers and
marketers for firm gas supply agreements with flexible, market-sensitive
pricing; marketing short-term unused pipeline capacity and storage gas to
other companies throughout the country through use of electronic bulletin
boards; and restructuring their allotment of interstate pipeline capacity
among delivering pipelines.
Order 636 also allowed pipelines to recover from customers, including CG&E and
its utility subsidiaries, transition costs incurred in complying with the
order. In July 1994, the PUCO issued an order approving a stipulation between
CG&E and its residential and industrial customer groups providing for recovery
of these pipeline transition costs. CG&E is presently recovering its Order
636 transition costs pursuant to a PUCO-approved tariff. CG&E's utility
subsidiaries, including ULH&P, recover such costs through their gas cost
recovery mechanisms.
Customer Choice In a January 1996 filing in Ohio, CG&E proposed to initiate a
pilot program which would allow residential customers the ability to choose
their gas supplier and have CG&E transport the gas for them. The proposed
pilot would extend to residential customers the choice that has been available
for several years to large-volume commercial and industrial customers. The
PUCO did not approve CG&E's pilot program as filed but directed CG&E to meet
with interested parties and refine the program in accordance with certain
guidelines specified by the PUCO. CG&E expects to file a modified plan, as
directed by the PUCO, in the second quarter of 1997.
House Bill 476 (HB 476) In June 1996, HB 476 was signed into law in Ohio. HB
476 addresses regulatory reform of the natural gas industry at the state level
and thus is an extension of Order 636 for local distribution companies. HB
476, among other things, provides that natural gas commodity sales services
may be exempted from PUCO regulation and that the PUCO allow alternative
ratemaking methodologies in connection with other regulated services. The
PUCO issued final rules under the new law in March 1997.
Cinergy, CG&E, PSI, and ULH&P
Substantial Accounting Implications
Historically, regulated utilities have applied the provisions of Statement of
Financial Accounting Standards No. 71, Accounting for the Effects of Certain
Types of Regulation (Statement 71). The accounting afforded regulated
utilities in Statement 71 is based on the fundamental premise that rates
authorized by regulators allow recovery of a utility's costs in its
generation, transmission, and distribution operations. These principles have
allowed the deferral of costs (i.e., regulatory assets) based on assurances of
a regulator as to the future recoverability of the costs in rates charged to
customers. Certain criteria must be met for the continued application of the
provisions of Statement 71, including regulated rates designed to recover the
specific utility's costs. Failure to satisfy the criteria in Statement 71
would eliminate the basis for recognition of regulatory assets.
The provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of (Statement 121), became effective in January 1996 for
Cinergy. Statement 121, which addresses the identification and measurement of
asset impairments for all enterprises, is particularly relevant for electric
utilities as a result of the potential for deregulation of the generation
component of the business. Statement 121 requires the recognition of
impairment losses on long-lived assets when book values exceed expected future
cash flows. In addition, Statement 121 imposes a stricter criterion for
recognition of regulatory assets by requiring that future recovery be probable
at each balance sheet date.
Based on Cinergy's current regulatory orders and the regulatory environment in
which it currently operates, the recognition of its regulatory assets as of
December 31, 1996, is fully supported. In addition, the application of the
provisions of Statement 121 did not have an effect on reported amounts for
regulatory assets and other long-lived assets at December 31, 1996.
The ultimate outcome of the changing competitive environment could result in
Cinergy discontinuing the application of Statement 71 for its generation,
transmission, and/or distribution businesses. As a result, regardless of
whether such previously deferred costs would be recoverable (i.e., covered by
revenues) in a competitive environment, Cinergy would be required to write-off
the portion of any regulatory asset for which sufficient regulatory assurance
of future recovery no longer exists. In addition, the outcome of applying the
provisions of Statement 121 could change significantly as a result of future
competitive pressures and the type of restructuring of the electric utility
industry to which Cinergy will be subjected.
Cinergy intends to continue its pursuit of competitive strategies which
mitigate the potential impact of these issues on the financial condition of
the Company.
Cinergy, CG&E, PSI, and ULH&P
SECURITIES RATINGS
The current ratings provided by the major credit rating agencies; Duff &
Phelps Credit Rating Co. (D&P), Fitch Investors Service, LP (Fitch), Moody's,
and S&P are included in the following table:
D&P Fitch Moody's S&P
CG&E
Secured Debt A- A- A3 A-
Senior Unsecured Debt BBB+ Not rated Baa1 BBB+
Junior Unsecured Debt BBB Not rated Baa2 BBB+
Preferred Stock BBB BBB+ baa1 BBB+
PSI
Secured Debt A- A A3 A-
Unsecured Debt BBB+ A- Baa1 BBB+
Preferred Stock BBB BBB+ baa1 BBB+
ULH&P
Secured Debt A- Not rated A3 A-
Unsecured Debt Not rated Not rated Baa1 BBB+
These securities ratings may be revised or withdrawn at any time, and each
rating should be evaluated independently of any other rating.
REGULATORY MATTERS
Cinergy and PSI
Indiana
IURC Orders - PSI's Retail Rate Proceeding and DSM Proceeding In September
1996, the IURC issued an order (September 1996 Order) approving an overall
average retail rate increase for PSI of 7.6% ($75.7 million annually). PSI
had requested a retail rate increase of 10.5% ($104.8 million annually).
Among other things, the IURC authorized the inclusion in rates of the costs of
a 262-mw clean coal power generating facility located at Wabash River
Generating Station (Clean Coal Project) and the costs of a scrubber at Gibson
Generating Station. The order also reflects a return on common equity of
11.0%, before the 100 basis points additional common equity return allowed as
a merger savings sharing mechanism in the IURC's February 1995 order (February
1995 Order) discussed further herein, with an 8.21% overall rate of return on
net original cost rate base. The difference between the Company's request and
the authorized increase is primarily related to return on common equity and
the deferral to a separate proceeding of an increase in the level of recovery
of DSM costs, as discussed below.
In October 1996, The Office of the Utility Consumer Counselor (UCC) and the
Citizens Action Coalition of Indiana, Inc. (CAC) filed a Joint Petition for
Reconsideration and Rehearing of the September 1996 Order with the IURC. The
principal issues raised by the UCC and CAC are the fair value rate of return
and the cut-off date for the inclusion of costs to achieve merger savings in
retail rates. PSI has filed a response in opposition and cannot predict what
action the IURC may take with respect to the requested rehearing and
reconsideration.
A settlement agreement between PSI and certain intervenors in a proceeding
established to review PSI's current and proposed DSM programs was approved by
the IURC in December 1996. The settlement agreement allows PSI to recover $35
million per year over the next four years, which is designed to recover all
previously incurred, but as yet unrecovered, DSM costs and all costs related
to satisfying remaining commitments associated with a previous DSM settlement
agreement, together with carrying costs thereon, through a non-bypassable
charge in PSI's retail rates. The new agreement also authorizes PSI to spend
up to $8 million annually on ongoing DSM programs through the year 1999 and to
collect such amounts currently in retail rates.
February 1995 Order - Retail Rate Proceeding and Merger Savings Allocation
Plan The IURC's February 1995 Order approved a settlement agreement between
PSI and certain intervenors authorizing PSI to increase retail rates $33.6
million before credits to base rates of $4.4 million in 1995 and an additional
$2.2 million and $2.4 million in 1996 and 1997, respectively, to reflect the
sharing with customers of non-fuel operation and maintenance expense merger
savings (Non-fuel Merger Savings).
Additionally, the February 1995 Order provides PSI an opportunity to earn up
to an additional 100 basis points above the common equity return authorized in
the September 1996 Order until December 31, 1997. In order to be eligible for
such additional earnings, PSI must meet certain performance-related standards.
PSI currently meets these standards, which are measured in conjunction with
quarterly fuel adjustment clause filings. After December 31, 1997, the 100
basis point increment to the authorized common equity return will be phased
out ratably over a twelve-month period.
Effective with this order, PSI began recovering carrying costs on certain
environmental-related projects while under construction and prior to the date
of an order reflecting such projects in rates. Through this mechanism,
revenues were increased by $9 million, $18 million, and $2 million on an
annual basis in February 1995, March 1995, and January 1996, respectively.
Coal Contract Buyout Costs In August 1996, PSI entered into a coal supply
agreement with Eagle Coal Company (Eagle) for the supply of approximately
three million tons of coal per year. The agreement, which terminates December
31, 2000, provides for a buyout fee of $179 million (including interest) to be
included in the price of coal to PSI over the term of the contract. This fee
represents the costs to Eagle of the buyout of the coal supply agreement
between PSI and Exxon Coal and Minerals Company. The retail jurisdictional
portion of the buyout charge, excluding the portion applicable to joint
owners, will be recovered through the quarterly fuel adjustment clause, with
carrying costs on unrecovered amounts, through December 2002. PSI has also
filed a petition at the FERC for recovery of the wholesale jurisdictional
portion of the buyout costs through the wholesale fuel adjustment clause.
Generally, the FERC will allow recovery if the utility can demonstrate there
will be net benefits to customers during the buyout cost recovery period. The
FERC is expected to issue an order on PSI's petition during 1997. PSI cannot
predict what action the FERC may take with respect to this petition. (See
Note 1(i) of the "Notes to Financial Statements" in Item 8. "Financial
Statements and Supplementary Data.")
Cinergy and CG&E
Ohio
PUCO Order - CG&E's Gas Rate Proceeding In December 1996, the PUCO issued an
order (December 1996 Order) approving an overall average increase in gas
revenues for CG&E of 2.5% ($9.3 million annually). CG&E had requested a rate
increase of 7.8% ($26.2 million annually). The PUCO established an overall
rate of return of 9.7%, including a return on common equity of 12.0%. In
developing this return on common equity, the PUCO considered, among other
things, CG&E's efforts to reduce costs and increase operating efficiency and
its proposals to allow residential customers to choose their natural gas
supplier. The PUCO disallowed certain of CG&E's requests, including the
requested working capital allowance, recovery of certain capitalized
information systems development costs, and certain merger-related costs.
These disallowances resulted in a pretax charge to earnings during the fourth
quarter of $20 million ($15 million net of taxes or 10 cents per share).
CG&E's request for a rehearing on the disallowed information systems costs and
other aspects of the order was denied. CG&E has until April 14, 1997 to
appeal these issues to the Supreme Court of Ohio.
Other In April 1994, the PUCO issued an order approving a settlement
agreement among CG&E, the PUCO Staff, the Office of the Ohio Consumers'
Counsel, and other intervenors which resolved outstanding issues related to
the merger and the PUCO's May 1992 order which established a rate phase-in
plan for the Wm. H. Zimmer Generating Station (Zimmer). As a result of this
order, the rate phase-in plan, which granted annual increases in electric
revenues of $37.8 million, $38.8 million, and $39.8 million in May 1992, 1993,
and 1994, respectively, remained unchanged. Additionally, as part of this
settlement, CG&E agreed to a moratorium on increases in base electric rates
until January 1, 1999 (except under certain circumstances). In return, CG&E
is allowed to retain all PUCO electric jurisdictional Non-fuel Merger Savings
until 1999.
Consistent with the provisions of the settlement agreement and the December
1996 Order, CG&E expensed merger transaction costs and costs to achieve merger
savings (Merger Costs) applicable to its PUCO jurisdiction of $32 million, $5
million, and $41 million (including $6 million as a result of the December
1996 Order) in 1994, 1995, and 1996, respectively. CG&E and its utility
subsidiaries are deferring the non-PUCO jurisdictional portion of Merger Costs
for future recovery in customer rates.
Additionally, in December 1996, the PUCO issued an order applicable to CG&E's
DSM programs. The order requires CG&E to spend up to one-half of the annual
$5 million currently included in retail rates on PUCO-sanctioned low-income
residential programs. The remaining portion of the $5 million is to be
applied to the recovery of DSM cost deferrals. CG&E's participation in the
low-income programs will be a factor considered by the PUCO in setting future
rates of return and approving competitive transition plans.
Cinergy, CG&E, and ULH&P
Kentucky In exchange for the KPSC's support of the merger, in May 1994, ULH&P
accepted the KPSC's request for an electric rate moratorium commencing after
ULH&P's next retail rate case (which has not yet been filed) and extending to
January 1, 2000. In addition, the KPSC has authorized concurrent recovery of
costs related to various DSM programs of ULH&P.
ULH&P is deferring its portion of Merger Costs for future recovery in
customers' rates.
KPSC Order In July 1996, the KPSC issued an order authorizing a decrease in
ULH&P's electric rates of approximately $1.8 million annually to reflect a
reduction in the cost of electricity purchased from CG&E.
Cinergy, CG&E, and ULH&P
Potential Divestiture of Gas Operations Under the PUHCA, the divestiture of
CG&E's gas operations may be required. In its order approving the merger, the
SEC reserved judgment over Cinergy's ownership of the gas operations for a
period of three years. As previously discussed in the "Competitive Pressures"
section, in June 1995, the SEC endorsed recommendations for reform/repeal of
the PUHCA, including allowing registered holding companies to own combination
electric and gas utility companies, provided the affected states agree. It is
expected that legislation addressing repeal of the PUHCA and industry
restructuring will be introduced in Congress during 1997.
Regardless of the outcome of the proposals to reform/repeal the PUHCA, Cinergy
believes it has a justifiable basis for retention of its gas operations and
will continue its pursuit of SEC approval. If divestiture is ultimately
required, the SEC has historically allowed companies sufficient time to
accomplish divestitures in a manner that protects shareholder value.
ENVIRONMENTAL ISSUES
Cinergy, CG&E, and PSI
Clean Air Act Amendments of 1990 (CAAA) The 1990 revisions to the Clean Air
Act require reductions in both sulfur dioxide and nitrogen oxide emissions
from utility sources. Reductions of these emissions are to be accomplished in
two phases. Compliance under Phase I was required by January 1, 1995, and
Phase II compliance is required by January 1, 2000. To achieve the sulfur
dioxide reduction objectives of the CAAA, emission allowances have been
allocated by the United States Environmental Protection Agency (EPA) to
affected sources (e.g., Cinergy's electric generating units). Each allowance
permits one ton of sulfur dioxide emissions. The CAAA allows compliance to be
achieved on a national level, which provides companies the option to achieve
this compliance by reducing emissions and/or purchasing emission allowances.
Cinergy's operating strategy for Phase I is based upon the compliance plans
developed by PSI and CG&E and approved by the IURC and the PUCO. All required
modifications to Cinergy's generating units to implement the compliance plans
were completed prior to January 1, 1995.
To comply with Phase II sulfur dioxide emission requirements, Cinergy's
current strategy includes a combination of switching to lower-sulfur coal
blends and utilizing an emission allowance banking strategy. This cost-
effective strategy will allow Cinergy to meet Phase II sulfur dioxide
reduction requirements while maintaining optimal flexibility to meet changes
in output due to increased customer choice as well as potentially significant
future environmental requirements. Cinergy intends to utilize an emission
allowance banking strategy to the extent a viable emission allowance market
exists. However, the availability and economic value of emission allowances
over the long term is still uncertain. In the event the market price for
emission allowances or lower-sulfur coal increases substantially from the
current forecast, Cinergy could be forced to consider high capital cost
options.
To meet nitrogen oxide reductions required by Phase II, Cinergy may install
additional low-nitrogen oxide burners on certain affected units in addition to
the use of a system-wide nitrogen oxide emission averaging strategy.
Cinergy is forecasting CAAA compliance capital expenditures of $27 million
during the 1997 through 2001 period. Of these forecasted expenditures, $15
million relates to CG&E and $12 million relates to PSI. These expenditures
are included in the amounts provided in the "Capital Requirements" section
herein. In addition, operating costs may increase due to higher fuel costs
(e.g., higher-quality, lower-sulfur coal; increased use of natural gas) and
maintenance expenses.
Global Climate Change Some scientists, environmentalists, and policymakers
continue to express concern about the potential for climate change from
increasing amounts of greenhouse gases released as by-products of burning
fossil fuel and other industrial processes. However, significant uncertainty
exists concerning increased greenhouse gas concentrations and their effect on
the global climate system. Cinergy's plan for managing the potential risk and
uncertainty of climate change includes: (1) implementing cost effective
greenhouse gas emission reduction and offsetting activities; (2) encouraging
the use of alternative fuels for transportation vehicles (a major source of
greenhouse gases); (3) funding research of more efficient and alternative
electric generating technologies; (4) funding research to better understand
the causes and consequences of climate change; and (5) encouraging a global
discussion of the issues and how best to manage them. Cinergy believes that
voluntary programs, such as the United States Department of Energy Climate
Challenge Program, which Cinergy joined in 1995, can successfully limit
greenhouse gas emissions.
Air Toxics The air toxics provisions of the CAAA exempted fossil-fueled steam
utility plants from mandatory reduction of 189 listed air toxics until the EPA
completes a study. In October 1996, the EPA issued its final interim report
indicating these emissions create little risk to public health. A final
report, including further assessments on mercury emissions, is expected at a
later date. If additional air toxics regulations are issued, the cost of
compliance could be significant. Cinergy cannot predict the outcome or the
effects of this EPA study.
Ambient Air Standards The EPA is proceeding with two programs aimed at
assuring clean air. As required by the CAAA, the EPA is reviewing the
adequacy of the ozone and particulate matter National Ambient Air Quality
Standards (NAAQS) to protect human health. Preliminary proposals indicate the
EPA's intent is to make the standards more stringent, thus designating more
areas as non-attainment. The EPA has stated its intent to issue final rules
by summer 1997. At the same time, the EPA has published its intent to notify
certain states that their State Implementation Plans (SIPs) need to be
modified in order for existing non-attainment areas to more rapidly reach
attainment with the current ozone standard. Even states in attainment of the
NAAQS could be required to reduce emissions if they are determined to impact
non-attainment areas in other states. The specific affected states and
proposed ozone precursor reductions are to be proposed this spring and
finalized later in the year. Since the new NAAQS levels are not yet final and
the studies of long-range pollution transport have not been completed, Cinergy
cannot predict the outcome or effect of the proposed NAAQS and SIP
modifications.
Cinergy, CG&E, PSI, and ULH&P
Other As more fully discussed in Note 12(b)(ii) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data", PSI has
received notification from Indiana Gas Company, Inc. (IGC) and Northern
Indiana Public Service Company (NIPSCO) alleging PSI is a Potentially
Responsible Party under the Comprehensive Environmental Response, Compensation
and Liability Act with respect to certain manufactured gas plant (MGP) sites.
PSI has not assumed any responsibility to reimburse IGC or NIPSCO for their
costs of investigating and remediating MGP sites, with the exception of a site
at Shelbyville, Indiana, for which the costs are not material. It is
premature, at this time, to predict the nature, extent, and ultimate costs of,
or PSI's responsibility for, environmental investigations and remediations at
MGP sites owned or previously owned by PSI or its predecessors. Information
available to PSI regarding the current status of investigation and/or
remediation at the sites identified in IGC's claim indicates PSI's potential
exposure to probable and reasonably estimable liabilities associated with
these MGP sites would not be material to its financial condition or results of
operations. However, further investigation and remediation activities at
these sites and the additional sites identified in NIPSCO's claim may indicate
that the potential liability for MGP sites could be material.
Refer to Note 12(b) and (c) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data" for a more detailed discussion of
the status of certain environmental issues.
CAPITAL REQUIREMENTS
CONSTRUCTION AND OTHER INVESTING ACTIVITIES
Cinergy, CG&E, PSI, and ULH&P
Construction expenditures for the Cinergy system are forecasted to be
approximately $345 million for 1997, and over the next five years (1997
through 2001), are forecasted to be approximately $1.7 billion. Of these
projected expenditures, approximately $170 million and $817 million relate to
CG&E (including $19 million and $111 million for ULH&P) and $175 million and
$908 million relate to PSI, for 1997, and over the next five years,
respectively. Substantially all of these expenditures are for capital
improvements to and expansion of Cinergy's operating facilities.
Cinergy's 1995 Form 10-K, as amended, and CG&E's, PSI's, and ULH&P's 1995 Form
10-K, reflected forecasted capital expenditures of $2.1 billion ($1.1 billion
for CG&E, including $102 million for ULH&P, and $1.0 billion for PSI) for the
period 1996-2000. That amount included expenditures for investments in new
generation of $520 million ($285 million for CG&E and $235 million for PSI)
over the five-year period. Cinergy is no longer forecasting investments in
new generating facilities under the belief that excess supply in the market
will continue to exist at least through the transition to full customer
choice. However, Cinergy is in the process of securing options to purchase
power in order to assure the necessary resources are available to meet its
franchise obligations during the transition (see further discussion in
"Competitive Pressures" section). If deregulation of the generation component
of the electric utility industry does not occur in the manner or in the time
frame anticipated, and depending on capacity constraints, franchise demand
requirements, and the regulatory requirements dictated for Integrated Resource
Planning, Cinergy could be forced to make capital investments in new
generating facilities in excess of $100 million annually in lieu of relying
upon the existing market for its energy needs. (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 increases, and other related factors, all or any of which may
change significantly.)
Cinergy
As discussed in the "Competitive Pressures" section, during 1996, Cinergy
acquired a 50% interest in Midlands. Cinergy and GPU, Inc. (GPU) formed Avon
Energy Partners Holdings (Avon Energy), a 50%/50% joint venture, and acquired
the outstanding common stock of Midlands through Avon Energy's wholly-owned
subsidiary for approximately $2.6 billion. Cinergy and GPU have each invested
approximately $500 million in Avon Energy. Cinergy funded its investment
through its credit facility. Avon Energy funded the remainder of the purchase
price through the issuance of non-recourse debt (see Note 1(e)(i) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data").
In the fourth quarter of 1996, Cinergy and Trigen formed a joint venture,
Trigen-Cinergy Solutions LLC (Trigen-Cinergy). Cinergy expects to invest up
to $100 million and to provide guaranties of debt and other obligations in an
aggregate amount not to exceed $250 million at any one time with respect to
energy-related products and services, including those undertaken by Trigen-
Cinergy. (See the "Competitive Pressures" section herein.)
Cinergy
Cinergy's net cash used in investing activities was $832 million in 1996,
compared to $330 million and $528 million in 1995 and 1994, respectively. The
increase in 1996 was primarily attributable to Cinergy's investment in
Midlands.
CG&E and ULH&P
CG&E and its subsidiaries' net cash used in investing activities was $156
million in 1996 (including $19 million for ULH&P), compared to $147 million
and $196 million in 1995 and 1994 (including $19 million and $20 million for
ULH&P), respectively. The increase in 1996 was primarily attributable to an
increase in the amount of DSM expenditures.
PSI
PSI's net cash used in investing activities was $163 million in 1996, compared
to $203 million and $331 million in 1995 and 1994, respectively. The decrease
in 1996 was primarily attributable to an increase in the amortization of DSM
deferrals as a result of the September 1996 Order.
OTHER COMMITMENTS
Cinergy, CG&E, PSI, and ULH&P
Securities Redemptions Mandatory redemptions of long-term debt total $492
million ($371 million for CG&E and its subsidiaries, including $20 million for
ULH&P, and $121 million for PSI) during the period 1997 through 2001. Cinergy
will continue to evaluate opportunities for the refinancing of outstanding
securities beyond mandatory redemption requirements.
Maintenance and replacement fund provisions contained in CG&E's, PSI's, and
ULH&P's first mortgage bond indentures require cash payments, bond
retirements, or pledges of unfunded property additions each year based on an
amount related to the net revenues of the respective company.
Cinergy and CG&E
Preferred Stock Tender Offer During the third quarter of 1996, Cinergy
commenced an offer to purchase any and all outstanding shares of preferred
stock of CG&E. The total cost of the tender for these preferred shares ($194
million) was funded from short-term borrowings and the liquidation of certain
short-term investments. Through the tender, approximately 90% of the
outstanding preferred stock of CG&E was retired. At the same time, a
restrictive covenant as to the amount of unsecured debt which could be issued
by CG&E was eliminated. The resulting premium on the reacquisition of
preferred stock of $18 million (including fees paid to tender agents) is shown
as a reduction from net income for purposes of determining net income and
earnings per share applicable to common stock.
Cinergy, CG&E, PSI, and ULH&P
Year 2000 Costs Cinergy, like most owners of computer software, will be
required to modify significant portions of its software so that it will
function properly in the year 2000. Preliminary estimates of the total costs
to be incurred prior to 2000 range from $12 million to $17 million.
Maintenance or modification costs will be expensed as incurred, while the
costs of new software will be capitalized and amortized over the software's
useful life.
CAPITAL RESOURCES
Cinergy, CG&E, PSI, and ULH&P
Cinergy, CG&E and its subsidiaries (including ULH&P), and PSI forecast that
their need for external funds during the 1997 through 2001 period will
primarily be for the refinancing of existing securities. (This forecast
reflects nominal dollars and assumptions as to the economy, capital markets,
construction programs, legislative and regulatory actions, frequency and
timing of rate increases, and other related factors, all or any of which may
change significantly.)
INTERNAL FUNDS
Cinergy, CG&E, PSI, and ULH&P
General Currently, the majority of Cinergy's revenues and corresponding cash
flows are derived from cost-of-service regulated operations. As previously
discussed in the "Competitive Pressures" section, Cinergy believes the
generation component of the electric utility industry will ultimately be
deregulated. However, the timing and nature of the deregulation and
restructuring of the industry is uncertain. In the interim, revenues provided
by cost-of-service regulated operations are anticipated to continue as the
primary source of funds for Cinergy. As a result of its low-cost position and
market strategy, over the long term, Cinergy believes it will be successful in
a more competitive environment. However, as the industry becomes more
competitive, future cash flows from Cinergy's operations could be subject to a
higher degree of volatility than under the present regulatory structure.
Cinergy
For the year ended December 31, 1996, Cinergy's cash provided from operating
activities was $816 million compared to $703 million in 1995 and $441 million
in 1994. The increase in 1996 was primarily due to CG&E's and ULH&P's sales
of accounts receivables during 1996. The increase was offset, in part, by
PSI's payment of $80 million in accordance with a 1989 settlement agreement
between PSI and Wabash Valley Power Association, Inc. (WVPA). (See Notes 6
and 12(e) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
CG&E and ULH&P
For the year ended December 31, 1996, CG&E and its subsidiaries' cash provided
from operating activities was $676 million (including $42 million for ULH&P)
compared to $441 million in 1995 (including $37 million for ULH&P) and $447
million (including $33 million for ULH&P) in 1994. The increase in 1996 was
primarily due to CG&E's and ULH&P's sales of accounts receivable during 1996.
(See Note 6 of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
PSI
For the year ended December 31, 1996, PSI's cash provided from operating
activities was $228 million compared to $257 million in 1995 and $42 million
in 1994. The decrease in 1996 reflects PSI's payment of $80 million in
accordance with a 1989 settlement agreement between PSI and WVPA. (See Note
12(e) of the "Notes to Financial Statements" in "Item 8. Financial Statements
and Supplementary Data.")
PSI
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 PSI for general corporate purposes, including
repayment of short-term indebtedness incurred for construction financing.
Cinergy, CG&E, PSI, and ULH&P
Merger Savings As previously discussed in the "Regulatory Matters" section,
PSI and CG&E currently have regulatory orders in effect which provide
mechanisms for the retention of a portion of net Non-fuel Merger Savings.
COMMON STOCK
Cinergy
During 1996, 1995, and 1994, Cinergy issued 15 thousand, 2.6 million, and 2.8
million shares, respectively, of common stock pursuant to its dividend
reinvestment and stock purchase plan and various stock-based employee plans.
Cinergy purchased 1.2 million outstanding shares on the open market to satisfy
substantially all of its 1996 obligations under these plans. Cinergy plans to
continue using market purchases of common stock to satisfy all or at least a
portion of its obligations under these plans.
In October 1996, Cinergy increased the quarterly dividend by approximately 5%
to 45 cents per share of common stock.
LONG-TERM DEBT
Cinergy, CG&E, PSI, and ULH&P
As of December 31, 1996, CG&E, PSI, and ULH&P had state regulatory authority
for long-term debt issuances of $250 million, $87 million, and $40 million,
respectively. Regulatory approval to issue additional amounts of securities
will be requested as needed.
SHORT-TERM DEBT
Cinergy, CG&E, PSI, and ULH&P
Cinergy's subsidiaries had regulatory authority to borrow up to $838 million
($438 million for CG&E and its subsidiaries, including $35 million for ULH&P,
and $400 million for PSI) as of December 31, 1996. In connection with this
authority, unsecured lines of credit (Committed Lines) have been established
which permit borrowings of up to $280 million ($80 million for CG&E and $200
million for PSI), of which $181 million ($65 million for CG&E and $116 million
for PSI) remained unused at December 31, 1996. CG&E and PSI also have the
capability to issue commercial paper which must be supported by Committed
Lines of the respective company. Neither CG&E nor PSI issued commercial paper
in 1996 and none remained outstanding as of December 31, 1996. Additionally,
pursuant to this authority, additional short-term borrowings with various
banks are arranged on an "as offered" basis.
To better manage cash and working capital requirements, Cinergy's utility
subsidiaries, including CG&E, PSI, and ULH&P, participate in a money pooling
arrangement. Under this money pooling arrangement, Cinergy system companies
with surplus short-term funds, whether from internal or external sources,
provide short-term loans to other system companies at rates that reflect (1)
the actual costs of the external borrowing and/or (2) the costs of the
internal funds which are set at the 30-day Federal Reserve "AA" industrial
commercial paper rate. The SEC's approval of the money pool, pursuant to the
PUHCA, extends through May 31, 1997. In March 1997, Cinergy's utility
subsidiaries, including CG&E, PSI, and ULH&P and other Cinergy system
companies, which participate in the money pooling arrangement, filed an
application with the SEC under the PUHCA requesting reauthorization of the
money pool through December 31, 2002.
Cinergy
Cinergy has established a $600 million credit facility, which expires in May
2001, of which $91 million remained unused as of December 31, 1996. This new
credit facility was established, in part, to fund the acquisition of Midlands
through Avon Energy and its wholly-owned subsidiary ($500 million has been
designated for this purpose) with the remaining portion available for general
corporate purposes. The prior $100 million credit facility, which would have
expired in September 1997, has been terminated.
In addition, Cinergy U.K., a subsidiary of Investments, which holds Cinergy's
50% investment in Avon Energy, entered into a $40 million non-recourse credit
agreement, of which $27 million is outstanding as of December 31, 1996. This
new credit agreement was also used to fund the acquisition of Midlands.
Cinergy has borrowed approximately $500 million under the two agreements to
fund its equity investment in Avon Energy.
Net cash used in financing activities totaled $110 thousand for 1996, as
compared to $410 million for 1995 and a source of $147 million for 1994. The
change in cash flow from financing activities for 1996 primarily resulted from
Cinergy borrowing under its credit facility to fund the acquisition of
Midlands.
CG&E and ULH&P
CG&E and its subsidiaries' net cash used in financing activities totaled $521
million (including $23 million for ULH&P) for 1996, as compared to $339
million (including $17 million for ULH&P) for 1995 and $203 million (including
$14 million for ULH&P) for 1994. The change in cash flow from financing
activities for 1996 was primarily attributable to CG&E's payments of common
stock dividends to Cinergy during 1996.
PSI
PSI's net cash used in financing activities totaled $77 million for 1996, as
compared to $45 million for 1995 and a source of $291 million for 1994. The
change in cash flow from financing activities for 1996 was primarily
attributable to PSI's payments of common stock dividends to Cinergy during
1996.
SALE OF ACCOUNTS RECEIVABLE
Cinergy, CG&E, PSI, and ULH&P
In January 1996, CG&E, PSI, and ULH&P entered into an agreement to sell, on a
revolving basis, undivided percentage interests in certain of their accounts
receivable up to an aggregate maximum of $350 million, of which $246 million
($164 million by CG&E and its subsidiaries, including $23 million by ULH&P,
and $82 million by PSI) has been sold as of December 31, 1996. PSI had a
similar agreement, which expired in January 1996, to sell up to $90 million of
its accounts receivable.
FINANCIAL DERIVATIVES
Cinergy, CG&E, PSI, and ULH&P
As discussed in Notes 8(a) and 16(b) of the "Notes to Financial Statements" in
"Item 8. Financial Statements and Supplementary Data," Cinergy and its
subsidiaries use forward foreign exchange contracts and currency swaps to
hedge exposures to fluctuations in foreign currency exchange rates, and
interest rate swap agreements to lower funding costs and reduce exposures to
fluctuations in interest rates.
POWER MARKETING AND TRADING
Cinergy, CG&E, and PSI
As discussed in the "Competitive Pressures" section, Cinergy has functionally
reorganized its electric operations into three strategic business units,
including an energy commodities business unit. The energy commodities
business unit includes Cinergy's power marketing and trading function, which
was formally established in 1995 and was the natural successor of CG&E's and
PSI's existing bulk power operations.
At present, the competitive electric power market is dominated by a small
number of large participants (primarily utilities and a few power marketers),
trading liquidity is limited, and pricing is not transparent. Similar to the
development of natural gas markets, the market for trading electricity is
expected to develop rapidly and Cinergy plans to be a major participant.
At December 31, 1996, Cinergy's trading book principally consisted of physical
contracts with fixed pricing. The majority of these physical contracts are
fixed-price forward-purchase and sales contracts, which require settlement by
physical delivery of electricity. During 1996, Cinergy also began entering
into option contracts which, to the extent the options are exercised, are also
settled with physical delivery of electricity. Contracts requiring settlement
in cash were not significant during 1996.
These transactions give rise to market risk, which represents the potential
adverse impact of changes in the market value of a particular commitment. As
Cinergy continues to develop its power marketing and trading business (and due
to its substantial investment in generating assets), its potential exposure to
movements in the price of electricity and other energy commodities will become
greater.
Credit risk represents to the risk of loss which would occur as a result of
nonperformance by counterparties pursuant to the terms of their contractual
obligations. As the competitive electric power market expands, counterparties
will increasingly include new market entrants, such as other power marketers,
brokers, and commodities traders. This increased level of new market
entrants, as well as competitive pressures on the utility market participants,
could increase Cinergy's exposure to credit risk.
As Cinergy expands its power marketing and trading business, in addition to
increased exposure to market and credit risks, it will also be subject to
increased earnings volatility. Cinergy has established a risk management
function and is implementing risk management policies and procedures to manage
its exposure to market and credit risks.
ACCOUNTING CHANGES
Cinergy, CG&E, PSI, and ULH&P
The FASB has issued Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (Statement 125). Statement 125, which is effective for
transactions occurring after December 31, 1996, provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. Based on the terms of CG&E's, PSI's, and ULH&P's
current securitization agreement with respect to their sales of accounts
receivables, the application of the provisions of Statement 125 will not
significantly affect the companies financial statements. Costs to service the
receivables sold are not material. (See Note 6 of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")
INFLATION
Cinergy, CG&E, PSI, and ULH&P
Over the past several years, the rate of inflation has been relatively low.
Cinergy believes that the recent inflation rates do not materially affect its
results of operations or financial condition. However, under existing
regulatory practice, only the historical cost of plant is recoverable from
customers. As a result, cash flows designed to provide recovery of historical
plant costs may not be adequate to replace plant in future years.
DIVIDEND RESTRICTIONS
Cinergy, CG&E, and PSI
See Note 2(b) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
RESULTS OF OPERATIONS
Cinergy, CG&E, PSI, and ULH&P
Reference is made to "ITEM 8. Financial Statements and Supplementary Data."
Index to Financial Statements and Financial Statement Schedules
Page Number
Financial Statements
Cinergy, CG&E, PSI, and ULH&P
Report of Independent Public Accountants. . . . . . . . XX
Cinergy
Consolidated Statements of Income for the
three years ended December 31, 1996. . . . . . . . . XX
Consolidated Balance Sheets at
December 31, 1996 and 1995 . . . . . . . . . . . . . XX
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1996. . . . . . . . . . . . . . . XX
Consolidated Statements of Cash Flows
for the three years ended December 31, 1996. . . . . XX
Results of Operations. . . . . . . . . . . . . . . . . XX
CG&E
Consolidated Statements of Income for the
three years ended December 31, 1996. . . . . . . . . XX
Consolidated Balance Sheets at
December 31, 1996 and 1995 . . . . . . . . . . . . . XX
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1996. . . . . . . . . . . . . . . XX
Consolidated Statements of Cash Flows
for the three years ended December 31, 1996. . . . . XX
Results of Operations. . . . . . . . . . . . . . . . . XX
PSI
Consolidated Statements of Income for the
three years ended December 31, 1996. . . . . . . . . XX
Consolidated Balance Sheets at
December 31, 1996 and 1995 . . . . . . . . . . . . . XX
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1996. . . . . . . . . . . . . . . XX
Consolidated Statements of Cash Flows
for the three years ended December 31, 1996. . . . . XX
Results of Operations. . . . . . . . . . . . . . . . . XX
ULH&P
Statements of Income for the three years ended
December 31, 1996. . . . . . . . . . . . . . . . . . XX
Balance Sheets at December 31, 1996 and 1995 . . . . . XX
Statements of Changes in Common Stock Equity
for the three years ended December 31, 1996. . . . . XX
Statements of Cash Flows for the three years
ended December 31, 1996. . . . . . . . . . . . . . . XX
Results of Operations. . . . . . . . . . . . . . . . . XX
Notes to Financial Statements . . . . . . . . . . . . . . XX
Index to Financial Statements and Financial Statement Schedules (cont.)
Page Number
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Cinergy . . . . . . . . . . . . . . . . . . . . . . XXX
CG&E. . . . . . . . . . . . . . . . . . . . . . . . XXX
PSI . . . . . . . . . . . . . . . . . . . . . . . . XXX
ULH&P . . . . . . . . . . . . . . . . . . . . . . . XXX
The information required to be submitted in schedules other than those
indicated above has been included in the balance sheets, the statements of
income, related schedules, the notes thereto, or omitted as not required by
the Rules of Regulation S-X.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Cinergy Corp., The Cincinnati Gas & Electric
Company, PSI Energy, Inc., and The Union Light, Heat and Power Company:
We have audited the financial statements of Cinergy Corp. (a Delaware
Corporation), The Cincinnati Gas & Electric Company (an Ohio Corporation), PSI
Energy, Inc. (an Indiana Corporation), and The Union Light, Heat and Power
Company (a Kentucky Corporation), as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, as listed in
the index on page 48. These financial statements and the schedules referred
to below are the responsibility of management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cinergy Corp., The Cincinnati
Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power
Company as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental financial statement
schedules listed in the index on page 49 pursuant to Item 14, are presented
for purposes of complying with the Securities and Exchange Commission's Rules
and Regulations under the Securities Exchange Act of 1934 and are not a
required part of the basic financial statements. The supplemental financial
statement schedules have been subjected to the auditing procedures applied in
our audits of the basic financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Cincinnati, Ohio,
January 29, 1997
<PAGE
Cinergy Corp.
and Subsidiaries
<PAGE
CINERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
1996 1995 1994
(in thousands, except per share amounts)
Operating Revenues
Electric $2 768 706 $2 612 579 $2 446 049
Gas 474 034 410 852 442 398
3 242 740 3 023 431 2 888 447
Operating Expenses
Fuel used in electric production 713 250 716 754 712 993
Gas purchased 249 116 206 250 248 293
Purchased and exchanged power 158 838 47 632 49 082
Other operation 598 434 520 590 549 152
Maintenance 193 908 182 180 200 959
Depreciation 282 763 279 759 294 395
Amortization of phase-in deferrals 13 598 9 091 -
Post-in-service deferred operating
expenses - net (1 509) (2 500) (5 998)
Phase-in deferred depreciation - - (2 161)
Income taxes (Note 11) 218 269 221 429 154 494
Taxes other than income taxes 257 815 255 533 243 716
2 684 482 2 436 718 2 444 925
Operating Income 558 258 586 713 443 522
Other Income and Expenses - Net
Allowance for equity funds used
during construction 1 225 1 964 6 201
Post-in-service carrying costs 1 223 3 186 9 780
Phase-in deferred return 8 372 8 537 15 351
Equity in earnings of unconsolidated
subsidiary (Note 1(e)) 25 430 - -
Income taxes (Note 11) 19 536 7 358 12 922
Other - net (40 464) (3 051) (33 789)
15 322 17 994 10 465
Income Before Interest and Other Charges 573 580 604 707 453 987
Interest and Other Charges
Interest on long-term debt 190 617 213 911 219 248
Other interest 31 169 20 826 20 370
Allowance for borrowed funds used
during construction (6 183) (8 065) (12 332)
Preferred dividend requirements of
subsidiaries 23 180 30 853 35 559
238 783 257 525 262 845
Net Income $ 334 797 $ 347 182 $ 191 142
Costs of Reacquisition of Preferred
Stock of Subsidiary (Note 3(b)) (18 391) - - _
Net Income Applicable to Common Stock $ 316 406 $ 347 182 $ 191 142
Average Common Shares Outstanding 157 678 156 620 147 426
Earnings Per Common Share
Net income $2.12 $2.22 $1.30
Costs of reacquisition of preferred
stock of subsidiary (Note 3(b)) (.12) - - _
Net income applicable to
common stock $2.00 $2.22 $1.30
Dividends Declared Per Common Share $1.74 $1.72 $1.50
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1996 1995_
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $8 809 786 $8 617 695
Gas 713 829 680 339
Common 185 255 183 422
9 708 870 9 481 456
Accumulated depreciation 3 591 858 3 367 401
6 117 012 6 114 055
Construction work in progress 172 614 135 852
Total utility plant 6 289 626 6 249 907
Current Assets
Cash and temporary cash investments 19 327 35 052
Restricted deposits 1 721 2 336
Accounts receivable less accumulated provision
for doubtful accounts of $10,618 in 1996 and
$10,360 in 1995 (Note 6) 199 361 371 150
Materials, supplies, and fuel - at average cost
Fuel for use in electric production 71 730 122 409
Gas stored for current use 32 951 21 493
Other materials and supplies 80 292 85 076
Property taxes applicable to subsequent year 123 580 116 822
Prepayments and other 37 049 32 347
566 011 786 685
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 377 194 423 493
Post-in-service carrying costs and deferred
operating expenses 186 396 187 190
Coal contract buyout costs 138 171 -
Deferred demand-side management costs 134 742 129 400
Phase-in deferred return and depreciation 95 163 100 388
Deferred merger costs 93 999 56 824
Unamortized costs of reacquiring debt 70 518 73 904
Other 72 483 74 911
Investment in unconsolidated
subsidiary (Note 1(e)) 592 660 -
Other 231 551 137 362
1 992 877 1 183 472
$8 848 514 $8 220 064
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
CAPITALIZATION AND LIABILITIES
December 31
1996 1995_
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $.01 par value;
authorized shares - 600,000,000;
outstanding shares - 157,679,129 in 1996
and 157,670,141 in 1995 $ 1 577 $ 1 577
Paid-in capital 1 590 735 1 597 050
Retained earnings 992 273 950 216
Cumulative foreign currency
translation adjustment (131) - _
Total common stock equity 2 584 454 2 548 843
Cumulative Preferred Stock of Subsidiaries
(Note 3)
Not subject to mandatory redemption 194 232 227 897
Subject to mandatory redemption - 160 000
Long-term Debt (Note 4) 2 534 978 2 530 766
Total capitalization 5 313 664 5 467 506
Current Liabilities
Long-term debt due within one year (Note 4) 140 000 201 900
Notes payable (Note 5) 713 617 165 800
Accounts payable 305 420 268 139
Litigation settlement (Note 12(e)) - 80 000
Accrued taxes 323 059 317 185
Accrued interest 55 590 55 995
Other 114 653 57 202
1 652 339 1 146 221
Other Liabilities
Deferred income taxes (Note 11) 1 146 263 1 120 900
Unamortized investment tax credits 175 935 185 726
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 263 319 171 771
Other 296 994 127 940
1 882 511 1 606 337
Commitments and Contingencies (Note 12)
$8 848 514 $8 220 064
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Cumulative
Foreign
Currency
Common Paid-in Retained Translation Total Common
Stock Capital Earnings Adjustment Stock Equity
(dollars in thousands)
Balance December 31, 1993 $1 453 $1 312 426 $ 907 802 $ - $2 221 681
Net income 191 142 191 142
Issuance of 9,830,042 shares of
common stock 99 227 882 227 981
Common stock issuance expenses (5 225) (5 225)
Dividends on common stock (see
page 52 for per share amounts) (221 362) (221 362)
Other 575 (521) 54
Balance December 31, 1994 1 552 1 535 658 877 061 2 414 271
Net income 347 182 - 347 182
Issuance of 2,472,103 shares of
common stock - net 25 60 343 60 368
Common stock issuance expenses (229) (229)
Dividends on common stock (see
page 52 for per share amounts) (268 851) (268 851)
Other 1 278 (5 176) (3 898)
Balance December 31, 1995 1 577 1 597 050 950 216 - 2 548 843
Net income 334 797 334 797
Issuance of 8,988 shares of
common stock - net 311 311
Dividends on common stock (see
page 52 for per share amounts) (274 358) (274 358)
Translation adjustments (131) (131)
Costs of reacquisition of
preferred stock of subsidiary (18 391) (18 391)
Other (6 626) 9 ____ (6 617)
Balance December 31, 1996 $1 577 $1 590 735 $ 992 273 $(131) $2 584 454
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1996 1995 1994
(in thousands)
Operating Activities
Net income $ 334 797 $ 347 182 $ 191 142
Items providing (using) cash currently:
Depreciation 282 763 279 759 294 395
Deferred income taxes and investment
tax credits - net 47 912 28 411 30 926
Allowance for equity funds used during
construction (1 225) (1 964) (6 201)
Regulatory assets - net 280 1 026 (58 165)
Changes in current assets and current
liabilities
Restricted deposits (358) (1 035) 10 046
Accounts receivable, net of reserves
on receivables sold 132 749 (71 641) 40 550
Materials, supplies, and fuel 44 005 51 214 (45 949)
Accounts payable 37 281 1 672 (8 191)
Advance under accounts receivable purchase
agreement - - (49 940)
Litigation settlement (80 000) - -
Accrued taxes and interest 5 469 56 635 5 753
Other items - net 12 416 12 136 36 890
Net cash provided by operating activities 816 089 703 395 441 256
Financing Activities
Issuance of common stock 311 60 139 222 756
Issuance of long-term debt 174 817 344 280 420 935
Funds on deposit from issuance of long-term debt 973 9 987 27 897
Retirement of preferred stock of subsidiaries (212 487) (93 466) (40 426)
Redemption of long-term debt (237 183) (398 833) (313 682)
Change in short-term debt 547 817 (63 100) 51 186
Dividends on common stock (274 358) (268 851) (221 362)
Net cash provided by (used in) financing
activities (110) (409 844) 147 304
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (323 013) (324 905) (480 533)
Deferred demand-side management costs - net (5 342) (25 273) (47 268)
Investment in unconsolidated subsidiary (503 349) - -
Equity investments in Argentine utilities - 19 799 -
Net cash used in investing activities (831 704) (330 379) (527 801)
Net increase (decrease) in cash and temporary
cash investments (15 725) (36 828) 60 579
Cash and temporary cash investments at beginning
of period 35 052 71 880 11 121
Cash and temporary cash investments at end of
period $ 19 327 $ 35 052 $ 71 880
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $ 207 393 $ 218 357 $ 211 163
Income taxes 141 917 140 189 96 680
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - CINERGY
Kilowatt-Hour (kwh) Sales
Cinergy's total kwh sales in 1996, as compared to 1995, increased 11.0%
reflecting an increase in sales to all customer classes. Increased activity
in Cinergy's power marketing and trading operations led to higher non-firm
power sales for resale. The increase in retail sales which reflects a higher
average number of residential and commercial customers was partially offset by
the return to more normal weather in 1996. The increase in industrial sales
was due to growth in the primary metals sector.
As compared to 1994, total kwh sales in 1995 increased 4.1% reflecting higher
sales to all retail customer classes. Contributing significantly to this
increase were higher residential and commercial sales due to warmer weather
during the 1995 summer cooling season and colder weather during the fourth
quarter of 1995. Additionally, increased sales to industrial customers,
reflecting growth in the primary metals and chemicals sectors, contributed to
the increased kwh sales level. These increases were offset, in part, by a
decline in non-firm power sales for resale.
Total kwh sales increased 2.8% in 1994, as compared to 1993, due, in large
part, to non-firm power sales for resale, reflecting third-party, short-term
power sales to other utilities through PSI's system and direct power sales by
PSI to other utilities. This increase was partially offset by CG&E's reduced
power sales to other utilities in 1994. Also significantly contributing to
the total kwh sales levels were increased sales to industrial customers. This
increase reflected growth in the primary metals and transportation equipment
sectors. Commercial sales increased due, in part, to new customers. A
decrease in residential sales resulted from the milder weather experienced
during the third and fourth quarters of 1994.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1996 1995 1994_
Retail
Residential 2.4% 5.8% (1.7)%
Commercial 1.3 4.3 1.9
Industrial 3.3 4.6 4.6
Total retail 2.4 4.9 1.6
Sales for resale
Firm power obligations 10.5 1.7 2.5
Non-firm power transactions 82.0 (1.3) 14.4
Total sales for resale 59.6 (.4) 10.5
Total sales 11.0 4.1 2.8
Cinergy currently forecasts a 2% annual compound growth rate in kwh sales over
the 1997 through 2001 period. This forecast does not reflect the effects of
DSM programs and excludes non-firm power sales for resale and any potential
new off-system, long-term firm power sales.
Thousand Cubic Feet (Mcf) Sales and Transportation
Mcf gas sales and transportation volumes increased 8.4%, as compared to 1995.
Colder weather in the first quarter of 1996 and cooler than normal weather
early in the second quarter of 1996 led to increased gas sales to residential
and commercial customers. Also contributing to the increase in total sales
was an increase in the number of residential and commercial customers.
Industrial sales decreased and gas transported increased as customers
continued to purchase gas directly from suppliers using transportation
services provided by CG&E. The increase in transportation volumes mainly
reflects demand for gas transportation services in the primary metals sector.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. Increased sales to residential customers, resulting from colder
weather during the fourth quarter of 1995 and an increase in the number of
customers, contributed to the higher sales levels. Additionally, increases in
commercial and industrial transportation volumes, which resulted from
customers electing to purchase gas directly from suppliers, more than offset
declines in industrial and commercial sales. The increased transportation
volumes mainly reflect industrial demand for gas transportation services in
the primary metals, food products, and paper products sectors.
The milder weather experienced in 1994 contributed to a decrease in
residential and commercial gas sales volumes and led to the decrease in total
Mcf sales and transportation of 1.2%, as compared to 1993. An increase in gas
transportation volumes to industrial customers, mainly in the primary metals
sector, partially offset this decrease.
Year-to-year changes in Mcf sales for each major class of customers and Mcf
transportation volumes are shown below:
Increase (Decrease) from Prior Year
1996 1995 1994 _
Retail
Residential 3.6% 10.5% (10.2)%
Commercial 7.8 (2.0) (1.5)
Industrial (13.3) (26.6) (9.9)
Total sales 2.1 1.5 (6.7)
Gas transported 19.8 24.4 13.9
Total gas sold and transported 8.4 8.6 (1.2)
Operating Revenues
ELECTRIC OPERATING REVENUES
The $156 million (6.0%) increase in 1996 electric operating revenues, as
compared to 1995, is due, in large part, to the increase in kwh sales as
previously discussed. Also contributing to the increase was the effect of
PSI's 7.6% retail rate increase approved in the September 1996 Order, as well
as a full year's effect of PSI's 4.3% retail rate increase approved in the
February 1995 Order and PSI's 1.9% increase for carrying costs on construction
work in progress property which was approved by the IURC in March 1995. These
rate increases were offset by the return of approximately $10 million to PSI's
customers in accordance with the February 1995 Order, which requires all
retail operating income above a certain level to be refunded to customers, the
operation of CG&E's fuel adjustment clauses reflecting a lower average cost of
fuel used in electric production, and a decrease in ULH&P's electric rates
reflecting a reduction in the cost of electricity purchased from CG&E.
Higher retail kwh sales, PSI's electric rate increases which became effective
in February 1995 and March 1995, and a full year's effect of CG&E's electric
rate increase which became effective in May 1994, significantly contributed to
the $167 million (6.8%) increase in electric operating revenues for 1995, when
compared to 1994.
Electric operating revenues increased $82 million (3.5%) in 1994, as compared
to 1993, as a result of CG&E's electric rate increases which became effective
in May 1993, August 1993, and May 1994, PSI's increased kwh sales, and the
effects of PSI's $31 million refund to retail customers accrued in June 1993
as a result of the settlement of an April 1990 IURC order.
An analysis of electric operating revenues for the past three years is shown
below:
1996 1995 1994_
(dollars in millions)
Previous year's electric
operating revenues $2 613 $2 446 $2 364
Increase (Decrease) due to change in:
Price per kwh
Retail (1) 54 32
Sales for resale
Firm power obligations (4) (1) 1
Non-firm power transactions - 4 -
Total change in price per kwh (5) 57 33
Kwh sales
Retail 56 109 34
Sales for resale
Firm power obligations 9 1 2
Non-firm power transactions 94 (1) 14
Total change in kwh sales 159 109 50
Other 2 1 (1)
Current year's electric
operating revenues $2 769 $2 613 $2 446
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and utilizing CG&E facilities to transport the gas (see the "Mcf
Sales and Transportation" section) continues to put downward pressure on gas
operating revenues. When Cinergy sells gas, the sales price reflects the cost
of gas purchased by Cinergy to support the sale plus the costs to deliver the
gas. When gas is transported, Cinergy does not incur any purchased gas costs
but delivers gas the customer has purchased from other sources. Since
providing transportation services does not necessitate recovery of gas
purchased costs, the revenue per Mcf transported is less than the revenue per
Mcf sold. As a result, a higher relative volume of gas transported to gas
sold translates into lower gas operating revenues.
Gas operating revenues increased $63 million (15.4%), as compared to 1995.
This increase is attributable to the increase in gas sales and transportation
volumes. Also contributing to the increase was the operation of fuel
adjustment clauses reflecting a higher cost of gas purchased.
In 1995, gas operating revenues declined $32 million (7.1%), as compared to
1994, as a result of the aforementioned trend toward increased transportation
services and the operation of fuel adjustment clauses reflecting a lower
average cost of gas purchased.
Gas operating revenues decreased $27 million (5.7%) in 1994, as compared to
1993, due to the operation of fuel adjustment clauses which reflected a lower
average cost of gas purchased during the latter part of 1994 and a reduction
in total volumes sold and transported.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs, Cinergy's largest
operating expense, remained relatively constant in 1996, showing less than a
1% decrease when compared to 1995.
An analysis of fuel costs for the past three years is shown below:
1996 1995 1994
(dollars in millions)
Previous year's fuel expense $717 $713 $733
Increase (Decrease) due to change in:
Price of fuel (6) (25) (39)
Kwh generation 2 29 19
Current year's fuel expense $713 $717 $713
Gas Purchased Gas purchased increased $43 million (20.8%), as compared to
1995 due to an increase in volumes purchased and a higher average cost per Mcf
of gas purchased, as previously discussed.
In 1995, gas purchased expense decreased $42 million (16.9%), as compared to
1994, primarily reflecting a decline in the average cost per Mcf of gas
purchased.
A reduction in the average cost per Mcf of gas purchased and lower volumes
purchased contributed to the decline in gas purchased expense of $33 million
(11.6%) in 1994, as compared to 1993.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $111 million, as compared to 1995.
The increase primarily reflects increased purchases of non-firm power for
resale to others as a result of increased activity in Cinergy's power
marketing and trading operations.
The increase in purchased and exchanged power of $13 million (35.6%) in 1994,
as compared to 1993, reflected an increase in third-party, short-term power
sales to other utilities through PSI's system and increased purchases of other
non-firm power by PSI primarily to serve its own load.
OTHER OPERATION
Other operation increased $78 million (15.0%) in 1996, as compared to 1995.
This increase is due to a number of factors, including increased
administrative and general expenses reflecting, in part, charges of $35
million for voluntary early retirement and severance programs and charges
totaling $6 million related to the December 1996 Order. In addition, an
increase of $7 million in production expenses associated with the operations
of the Clean Coal Project contributed to the increase.
In 1995, other operation expenses decreased $29 million (5.2%), as compared to
1994. Charges of $62 million in 1994 for Merger Costs and other expenditures
which cannot be recovered from customers under the merger savings sharing
mechanisms authorized by regulators significantly contributed to the decrease.
In addition, emphasis on achieving merger savings and other cost reductions
led to lower operating costs for 1995. These decreases were partially offset
by the recognition of postretirement benefit costs on an accrual basis, an
increase in the ongoing level of DSM expenses, and the amortization of
deferred postretirement benefit costs, deferred Merger Costs, and deferred DSM
costs, all of which are being recovered in revenues pursuant to the February
1995 Order.
Other operation expenses increased $105 million (23.7%) in 1994, as compared
to 1993, due to a number of factors including the previously discussed charges
of $62 million, fuel litigation expenses of $8 million incurred by PSI, and
increased electric production and distribution expenses.
MAINTENANCE
An increase of $12 million (6.4%) in maintenance costs, as compared to 1995,
is primarily attributable to increased maintenance associated with the Clean
Coal Project which began commercial operation in November 1995. Increased
transmission and distribution expenses also contributed to the higher level of
maintenance expense.
Maintenance costs decreased $19 million (9.3%) in 1995, as compared to 1994,
primarily due to improved scheduling of routine maintenance on electric
generating units. Lower maintenance costs on gas and electric distribution
facilities also contributed to this decrease.
Increased maintenance on a number of PSI's generating stations and the initial
costs of PSI's new distribution line clearing program resulted in increased
maintenance expenses of $8 million (4.2%) in 1994, as compared to 1993.
DEPRECIATION
In 1995, depreciation expense decreased $15 million (5.0%), when compared to
1994, due in large part to the adoption of lower depreciation rates for PSI
effective in March 1995. This decrease was partially offset by the effect of
additions to utility plant.
Depreciation expense increased $16 million (5.6%) in 1994, as compared to
1993, primarily as a result of additions to electric utility plant.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect various deferrals of
depreciation, operation and maintenance expenses (exclusive of fuel costs),
and property taxes on certain generating units and other utility plant from
the in-service date until the related plant is reflected in retail rates, net
of amortization of these deferrals as they are recovered through retail rates.
(See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
PHASE-IN DEFERRED DEPRECIATION AND RETURN AND AMORTIZATION OF PHASE-IN
DEFERRALS
Phase-in deferred depreciation, phase-in deferred return, and amortization of
phase-in deferrals reflect the PUCO-ordered phase-in plan for Zimmer. (See
Note 1(k) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $12 million (4.8%) in 1995 and $15
million (6.5%) in 1994, primarily due to increased property taxes resulting
from a greater investment in taxable property and higher property tax rates.
Other Income and Expenses - Net
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on
certain generating units and other utility plant from the in-service date
until the related plant is reflected in retail rates. (See Note 1(h) of the
Notes to Consolidated Financial Statements).
OTHER - NET
The change in other - net of $37 million, as compared to 1995, is due to a
number of factors including $4 million of interest received in 1995 on an
income tax refund related to prior years, charges totaling $14 million
associated with the December 1996 Order, expenses associated with CG&E's and
ULH&P's sales of accounts receivables in 1996, and the effect of a $10 million
gain in 1995 on the sale of Cinergy's investment in an Argentine utility.
The $31 million change in other - net in 1995, as compared to 1994, is due in
part to interest on the income tax refund and the $10 million gain discussed
above and charges of $17 million in 1994 for merger-related and other
expenditures which cannot be recovered from customers.
In 1994, other - net increased $9 million, as compared to 1993, primarily as a
result of the write-off during 1993 of $22 million related to the defense
against the IPALCO Enterprises, Inc. hostile takeover attempt. The increase
was offset, in part, by the charges in 1994 of $17 million previously
discussed.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased $23 million (10.9%), as compared to 1995,
due to the refinancing and redemptions of long-term debt by CG&E, PSI, and
ULH&P during 1995 and 1996.
OTHER INTEREST
Other interest increased $10 million (49.7%), as compared to 1995, primarily
reflecting increased interest expense on short-term borrowings used to fund
Cinergy's investment in Avon Energy.
PREFERRED DIVIDEND REQUIREMENTS OF SUBSIDIARIES
Preferred dividend requirements of subsidiaries decreased $8 million (24.9%),
as compared to 1995. The decrease was primarily attributable to the
reacquisition of approximately 90% of the outstanding preferred stock of CG&E,
pursuant to Cinergy's tender offer (see Note 3(b) of the Notes to Financial
Statements).
The Cincinnati Gas & Electric Company
and subsidiaries
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME
1996 1995 1994
(in thousands)
Operating Revenues
Electric
Non-affiliated companies $1 458 828 $1 407 119 $1 341 120
Affiliated companies 43 180 30 104 4 667
Gas
Non-affiliated companies 474 034 410 852 442 398
Affiliated companies 7 - - _
Total operating revenues 1 976 049 1 848 075 1 788 185
Operating Expenses
Fuel used in electric production 349 197 327 353 325 470
Gas purchased 249 116 206 250 248 293
Purchased and exchanged power
Non-affiliated companies 46 333 13 870 12 349
Affiliated companies 21 921 42 575 8 583
Other operation 330 169 291 874 336 030
Maintenance 96 205 94 688 106 810
Depreciation 160 951 158 986 156 676
Amortization of phase-in deferrals 13 598 9 091 -
Post-in-service deferred operating
expenses - net 3 290 3 290 3 290
Phase-in deferred depreciation - - (2 161)
Income taxes (Note 11) 145 075 136 386 104 128
Taxes other than income taxes 207 904 203 680 197 381
1 623 759 1 488 043 1 496 849
Operating Income 352 290 360 032 291 336
Other Income and Expenses - Net
Allowance for equity funds
used during construction 1 225 1 790 1 971
Phase-in deferred return 8 372 8 537 15 351
Income taxes (Note 11) 9 139 4 587 6 619
Other - net (21 296) 4 221 (6 726)
(2 560) 19 135 17 215
Income Before Interest 349 730 379 167 308 551
Interest
Interest on long-term debt 123 616 143 334 150 386
Other interest 2 793 3 486 2 831
Allowance for borrowed funds
used during construction (3 859) (3 854) (2 977)
122 550 142 966 150 240
Net Income 227 180 236 201 158 311
Preferred Dividend Requirement 10 643 17 673 22 377
Costs of Reacquisition of
Preferred Stock (Note 3(b)) 18 391 - -___
Net Income Applicable to
Common Stock $ 198 146 $ 218 528 $ 135 934
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1996 1995
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $4 631 605 $4 564 711
Gas 713 829 680 339
Common 185 255 183 422
5 530 689 5 428 472
Accumulated depreciation 1 868 579 1 730 232
3 662 110 3 698 240
Construction work in progress 95 984 77 661
Total utility plant 3 758 094 3 775 901
Current Assets
Cash and temporary cash investments 5 120 6 612
Restricted deposits 1 171 1 144
Notes receivable from affiliated companies 31 740 24 715
Accounts receivable less accumulated
provision for doubtful accounts of $9,178 in
1996 and $9,615 in 1995 (Note 6) 117 912 292 493
Accounts receivable from affiliated companies 2 453 17 162
Materials, supplies, and fuel - at average cost
Fuel for use in electric production 29 865 40 395
Gas stored for current use 32 951 21 493
Other materials and supplies 52 023 55 388
Property taxes applicable to subsequent year 123 580 116 822
Prepayments and other 32 433 30 572
429 248 606 796
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 344 126 397 155
Post-in-service carrying costs and deferred
operating expenses 141 492 148 316
Phase-in deferred return and depreciation 95 163 100 388
Deferred demand-side management costs 33 534 19 158
Deferred merger costs 17 709 14 538
Unamortized costs of reacquiring debt 38 439 39 428
Other 19 545 41 025
Other 89 908 54 691
779 916 814 699
$4 967 258 $5 197 396
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CAPITALIZATION AND LIABILITIES
December 31
1996 1995
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $8.50 par value;
authorized shares - 120,000,000;
outstanding shares - 89,663,086 in 1996
and 1995 $ 762 136 $ 762 136
Paid-in capital 536 276 339 101
Retained earnings 247 403 427 226
Total common stock equity 1 545 815 1 528 463
Cumulative Preferred Stock (Note 3)
Not subject to mandatory redemption 21 146 40 000
Subject to mandatory redemption - 160 000
Long-term Debt (Note 4) 1 565 108 1 702 650
Total capitalization 3 132 069 3 431 113
Current Liabilities
Long-term debt due within one year (Note 4) 130 000 151 500
Notes payable (Note 5) 30 488 -
Notes payable to affiliated companies 103 -
Accounts payable 166 064 138 735
Accounts payable to affiliated companies 12 726 20 468
Accrued taxes 267 841 250 189
Accrued interest 30 570 31 299
Other 32 191 40 409
669 983 632 600
Other Liabilities
Deferred income taxes (Note 11) 767 085 795 385
Unamortized investment tax credits 123 185 129 372
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 165 282 117 641
Other 109 654 91 285
1 165 206 1 133 683
Commitments and Contingencies (Note 12)
$4 967 258 $5 197 396
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 1993 $748 528 $314 218 $ 456 511 $1 519 257
Net income 158 311 158 311
Issuance of 1,601,003 shares of
common stock 13 608 23 142 36 750
Common stock issuance expenses (39) (39)
Dividends on preferred stock (22 377) (22 377)
Dividends on common stock (158 970) (158 970)
Other 553 (513) 40
Balance December 31, 1994 762 136 337 874 432 962 1 532 972
Net income 236 201 236 201
Dividends on preferred stock (17 673) (17 673)
Dividends on common stock (219 550) (219 550)
Other 1 227 (4 714) (3 487)
Balance December 31, 1995 762 136 339 101 427 226 1 528 463
Net income 227 180 227 180
Dividends on preferred stock (10 643) (10 643)
Dividends on common stock (377 969) (377 969)
Contribution from parent company 197 207 197 207
Costs of reacquisition of
preferred stock (18 391) (18 391)
Other (32) (32)
Balance December 31, 1996 $762 136 $536 276 $ 247 403 $1 545 815
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
1996 1995 1994
(in thousands)
Operating Activities
Net income $ 227 180 $ 236 201 $ 158 311
Items providing (using) cash currently
Depreciation 160 951 158 986 156 676
Deferred income taxes and investment
tax credits - net 18 929 26 938 13 680
Allowance for equity funds used during
construction (1 225) (1 790) (1 971)
Regulatory assets - net 34 761 16 654 (21 248)
Changes in current assets and current
liabilities
Restricted deposits (27) (1 046) 22
Accounts and notes receivable, net of
reserves on receivables sold 156 182 (65 350) 43 145
Materials, supplies, and fuel 2 437 14 039 21 202
Accounts payable 19 587 38 386 (8 093)
Accrued taxes and interest 16 923 21 935 8 211
Other items - net 39 843 (4 105) 77 462
Net cash provided by operating activities 675 541 440 848 447 397
Financing Activities
Issuance of common stock - - 36 711
Issuance of long-term debt - 344 280 311 957
Retirement of preferred stock - (93 450) (40 400)
Redemption of long-term debt (162 583) (338 378) (313 522)
Change in short-term debt 30 591 (14 500) (16 500)
Dividends on preferred stock (10 643) (17 673) (22 377)
Dividends on common stock (377 969) (219 550) (158 970)
Net cash used in financing activities (520 604) (339 271) (203 101)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (142 053) (138 325) (189 954)
Deferred demand-side management costs - net (14 376) (9 156) (6 396)
Net cash used in investing activities (156 429) (147 481) (196 350)
Net increase (decrease) in cash and temporary
cash investments (1 492) (45 904) 47 946
Cash and temporary cash investments at beginning
of period 6 612 52 516 4 570
Cash and temporary cash investments at end of
period $ 5 120 $ 6 612 $ 52 516
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $ 117 848 $ 137 892 $ 142 380
Income taxes 109 034 79 769 88 639
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - CG&E
Kwh Sales
CG&E's total kwh sales increased 10.6% in 1996, as compared to 1995,
reflecting an increase in sales to all customer classes. The increase to
retail sales which reflects a higher average number of residential and
commercial customers was partially offset by the return to more normal weather
in 1996. The increase in industrial sales was due to growth in the primary
metals sector. Increased activity in Cinergy's power marketing and trading
operations led to higher non-firm power sales for resale.
Kwh sales for 1995 increased 15.3% over 1994, reflecting increased sales to
all customer classes. Significantly contributing to this increase were higher
non-firm power sales for resale primarily due to increased sales to PSI, as a
result of the coordination of CG&E's and PSI's electric dispatch systems.
Higher residential and commercial sales resulted primarily from warmer weather
during the 1995 summer cooling season and colder weather during the fourth
quarter of 1995. Additionally, increased sales to industrial customers were
mainly attributable to growth in the primary metals and chemicals sectors.
CG&E's total kwh sales in 1994, as compared to 1993, decreased 1.2%, due in
large part to reduced power sales to other utilities in 1994 and decreased
residential sales resulting from milder weather experienced during the third
and fourth quarters of 1994. This decrease was partially offset by increased
kwh sales to industrial customers reflecting growth in the primary metals and
machinery sectors.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1996 1995 1994
Retail
Residential 4.7% 3.8% (2.0)%
Commercial 2.3 3.4 2.3
Industrial 3.4 3.9 4.3
Total retail 3.3 3.8 1.1
Sales for resale
Firm power obligations 3.7 6.3 1.7
Non-firm power transactions 51.7 211.8 (29.3)
Total sales for resale 48.1 172.6 (24.9)
Total sales 10.6 15.3 (1.2)
CG&E currently forecasts a 2% annual compound growth rate in kwh sales over
the 1997 through 2001 period. This forecast does not reflect the effects of
DSM programs and excludes non-firm power sales for resale and any potential
new off-system, long-term firm power sales.
Mcf Sales and Transportation
Mcf gas sales and transportation volumes increased 8.4%, as compared to 1995.
Colder weather in the first quarter of 1996 and cooler than normal weather
early in the second quarter of 1996 led to increased gas sales to residential
and commercial customers. Also contributing to the increase in total sales
was an increase in the number of residential and commercial customers.
Industrial sales decreased and gas transported increased as customers
continued to purchase gas directly from suppliers using transportation
services provided by CG&E. The increase in transportation volumes mainly
reflects demand for gas transportation services in the primary metals sector.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. Increased sales to residential customers, resulting from colder
weather during the fourth quarter of 1995 and an increase in the number of
customers, contributed to the higher sales levels. Additionally, increases in
commercial and industrial transportation volumes, which resulted from
customers electing to purchase gas directly from suppliers, more than offset
declines in industrial and commercial sales. The increased transportation
volumes mainly reflect industrial demand for gas transportation services in
the primary metals, food products, and paper products sectors.
The milder weather experienced in 1994 contributed to a decrease in
residential and commercial gas sales volumes and led to the decrease in total
Mcf sales and transportation of 1.2%, as compared to 1993. An increase in gas
transportation volumes to industrial customers, mainly in the primary metals
sector, partially offset this decrease.
Year-to-year changes in Mcf sales for each major class of customers and Mcf
transportation volumes are shown below:
Increase (Decrease) from Prior Year
1996 1995 1994
Retail
Residential 3.6 % 10.5 % (10.2)%
Commercial 7.8 (2.0) (1.5)
Industrial (13.3) (26.6) (9.9)
Total sales 2.1 1.5 (6.7)
Gas transported 19.8 24.4 13.9
Total gas sold and transported 8.4 8.6 (1.2)
Operating Revenues
ELECTRIC OPERATING REVENUES
The $65 million (4.5%) increase in 1996 electric operating revenues, as
compared to 1995, is due, in large part, to the increase in kwh sales as
previously discussed. This increase was partially offset by the operation of
fuel adjustment clauses reflecting a lower average cost of fuel used in
electric production.
Electric operating revenues increased $91 million (6.8%) in 1995, as compared
to 1994. This increase reflects the higher kwh sales, as previously discussed
and a full year's effect of CG&E's electric rate increase which became
effective in May 1994. This increase was partially offset by the operation of
fuel adjustment clauses reflecting a lower average cost of fuel used in
electric production.
CG&E's electric rate increases which became effective in May 1993, August
1993, and May 1994 substantially contributed to the increase in electric
operating revenues of $63 million (4.9%) in 1994, as compared to 1993.
An analysis of electric operating revenues for the past three years is shown
below:
1996 1995 1994_
(in millions)
Previous year's electric
operating revenues $1 437 $1 346 $1 282
Increase (Decrease) due to change in:
Price per kwh
Retail (13) (10) 55
Sales for resale
Firm power obligations - 1 -
Non-firm power transactions (10) (9) 3
Total change in price per kwh (23) (18) 58
Kwh sales
Retail 44 49 14
Sales for resale
Firm power obligations 1 1 -
Non-firm power transactions 41 60 (9)
Total change in kwh sales 86 110 5
Other 2 (1) 1
Current year's electric
operating revenues $1 502 $1 437 $1 346
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and utilizing CG&E facilities to transport the gas (see the "Mcf
Sales and Transportation" section) continues to put downward pressure on gas
operating revenues. When CG&E sells gas, the sales price reflects the cost of
gas purchased by CG&E to support the sale plus the costs to deliver the gas.
When gas is transported, CG&E does not incur any purchased gas costs but
delivers gas the customer has purchased from other sources. Since providing
transportation services does not necessitate recovery of gas purchased costs,
the revenue per Mcf transported is less than the revenue per Mcf sold. As a
result, a higher relative volume of gas transported to gas sold translates
into lower gas operating revenues.
Gas operating revenues increased $63 million (15.4%)as compared to 1995.
This increase is attributable to the increase in gas sales and transportation
volumes. Also contributing to the increase was the operation of fuel
adjustment clauses reflecting a higher cost of gas purchased.
In 1995, gas operating revenues declined $32 million (7.1%), as compared to
1994, as a result of the aforementioned trend toward increased transportation
services and the operation of fuel adjustment clauses reflecting a lower
average cost of gas purchased.
Gas operating revenues decreased $27 million (5.7%)in 1994, as compared to
1993, due to the operation of fuel adjustment clauses which reflected a lower
average cost of gas purchased during the latter part of 1994 and a reduction
in total volumes sold and transported.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs increased $22 million
(6.7%) in 1996, when compared to 1995.
An analysis of fuel costs for the past three years is shown below:
1996 1995 1994
(in millions)
Previous year's fuel expense $327 $325 $333
Increase (Decrease) due to change in:
Price of fuel (4) (20) (9)
Kwh generation 26 22 1
Current year's fuel expense $349 $327 $325
Gas Purchased
Gas purchased increased $43 million (20.8%), as compared to 1995, due to an
increase in volumes purchased and a higher average cost per Mcf of gas
purchased, as previously discussed.
In 1995, gas purchased expense decreased $42 million (16.9%), as compared to
1994, primarily reflecting a decline in the average cost per Mcf of gas
purchased.
A reduction in the average cost per Mcf of gas purchased and lower volumes
purchased contributed to the decline in gas purchased expense of $33 million
(11.6%) in 1994, as compared to 1993.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $12 million (20.9%), as compared to
1995. The increase primarily reflects increased purchases of non-firm power
for resale to others as a result of increased activity in Cinergy's power
marketing and trading operations.
Purchased and exchanged power costs increased $36 million in 1995, as compared
to 1994, reflecting increased purchases from PSI resulting from the
coordination of PSI's and CG&E's electric dispatch systems. These increases
were partially offset by a decline in third-party, short-term power sales to
other utilities.
OTHER OPERATION
Other operation increased $38 million (13.1%) in 1996, as compared to 1995.
This increase is attributable to higher administrative and general expenses
reflecting, in part, charges of $30 million for voluntary early retirement and
severance programs and charges totaling $6 million related to the December
1996 Order. The increase is partially offset by a decrease in electric
distribution expenses.
In 1995, other operation expenses decreased $44 million (13.1%), as compared
to 1994. Charges of $52 million in 1994 for Merger Costs and other
expenditures which cannot be recovered from customers under the merger savings
sharing mechanism authorized by the PUCO significantly contributed to the
decrease. In addition, emphasis on achieving merger savings and other cost
reductions led to lower operating costs for 1995. The decrease was partially
offset by the write-off of obsolete inventory in December 1995.
Other operation expenses increased $79 million (30.5%) in 1994, as compared to
1993, due to a number of factors including the previously discussed charges of
$52 million and increased electric production and distribution expenses.
MAINTENANCE
The decrease in maintenance expense of $12 million (11.3%) in 1995, as
compared to 1994, was primarily attributable to improved scheduling of routine
maintenance on electric generating units. Lower maintenance costs on gas and
electric distribution facilities also contributed to the decline.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect various deferrals of
depreciation, operation and maintenance expenses (exclusive of fuel costs),
and property taxes on certain generating units and other utility plant from
the in-service date until the related plant is reflected in retail rates, net
of amortization of these deferrals as they are recovered through retail rates.
(See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
PHASE-IN DEFERRED DEPRECIATION AND RETURN AND AMORTIZATION OF PHASE-IN
DEFERRALS
Phase-in deferred depreciation, phase-in deferred return, and amortization of
phase-in deferrals reflect the PUCO-ordered phase-in plan for Zimmer. (See
Note 1(k) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $6 million (3.2%) in 1995, and $14
million (7.6%) in 1994, primarily due to increased property taxes resulting
from a greater investment in taxable property and higher property tax rates.
Other Income and Expenses - Net
OTHER - NET
The change in other - net of $26 million in 1996, as compared to 1995, is due
to a number of factors including $4 million of interest received in 1995 on an
income tax refund related to prior years, charges totaling $14 million
associated with the December 1996 Order, and expenses associated with CG&E's
and ULH&P's sales of accounts receivables in 1996.
The increase in other - net of $11 million in 1995, as compared to 1994, is
due in part to interest on the income tax refund discussed above and charges
of $12 million in 1994 for merger-related and other expenditures which cannot
be recovered from customers.
Interest and Other Charges
Interest on Long-term Debt
Interest on long-term debt decreased $20 million (13.8%), as compared to 1995,
due to the refinancing and redemptions of long-term debt in 1996 and 1995.
PREFERRED DIVIDEND REQUIREMENT
Preferred dividend requirements decreased $7 million (39.8%), as compared to
1995. The decrease was primarily attributable to the reacquisition of
approximately 90% of the outstanding preferred stock of CG&E, pursuant to
Cinergy's tender offer (see Note 3(b) of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data").
CG&E's preferred dividend requirement decreased $5 million (21.0%) for 1995,
as compared to 1994. The decrease was attributable to the early redemption of
400,000 shares of $100 par value, 9.28% Series Cumulative Preferred Stock in
April 1994, along with the early redemption of 400,000 and 500,000 shares of
$100 par value Cumulative Preferred Stock, 7.44% Series and 9.15% Series,
respectively, on July 1, 1995.
PSI Energy, Inc.
and Subsidiaries
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
1996 1995 1994
(in thousands)
Operating Revenues
Non-affiliated companies $1 309 878 $1 205 460 $1 104 929
Affiliated companies 22 084 42 575 8 583
1 331 962 1 248 035 1 113 512
Operating Expenses
Fuel 364 053 389 401 387 523
Purchased and exchanged power
Non-affiliated companies 112 505 33 762 36 733
Affiliated companies 43 343 30 104 4 667
Other operation 268 478 228 508 213 122
Maintenance 97 703 87 492 94 149
Depreciation 121 812 120 773 137 719
Post-in-service deferred operating
expenses - net (4 799) (5 790) (9 288)
Income taxes (Note 11) 73 194 85 043 50 366
Taxes other than income taxes 49 911 51 853 46 335
1 126 200 1 021 146 961 326
Operating Income 205 762 226 889 152 186
Other Income and Expenses - Net
Allowance for equity funds
used during construction - 174 4 230
Post-in-service carrying costs 1 223 3 186 9 780
Income taxes (Note 11) (3 997) 941 (1 312)
Other - net 1 878 (3 188) (7 893)
(896) 1 113 4 805
Income Before Interest 204 866 228 002 156 991
Interest
Interest on long-term debt 67 001 70 577 68 862
Other interest 14 511 15 821 15 292
Allowance for borrowed funds
used during construction (2 324) (4 211) (9 355)
79 188 82 187 74 799
Net Income 125 678 145 815 82 192
Preferred Dividend Requirement 12 537 13 180 13 182
Net Income Applicable to Common Stock $ 113 141 $ 132 635 $ 69 010
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1996 1995
(dollars in thousands)
Electric Utility Plant - Original Cost
In service $4 178 181 $4 052 984
Accumulated depreciation 1 723 279 1 637 169
2 454 902 2 415 815
Construction work in progress 76 630 58 191
Total electric utility plant 2 531 532 2 474 006
Current Assets
Cash and temporary cash investments 2 911 15 522
Restricted deposits 550 1 187
Notes receivable from affiliated companies 3 -
Accounts receivable less accumulated provision
for doubtful accounts of $1,269 in 1996 and
$468 in 1995 (Note 6) 74 289 73 419
Accounts receivable from affiliated companies 4 016 20 568
Materials, supplies, and fuel - at average cost
Fuel 41 865 82 014
Other materials and supplies 28 268 29 462
Prepayments and other 3 184 1 234
155 086 223 406
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 33 068 26 338
Post-in-service carrying costs and deferred
operating expenses 44 904 38 874
Coal contract buyout costs 138 171 -
Deferred demand-side management costs 101 208 110 242
Deferred merger costs 76 290 42 286
Unamortized costs of reacquiring debt 32 079 34 476
Other 52 938 33 886
Other 129 667 92 056
608 325 378 158
$3 294 943 $3 075 570
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CAPITALIZATION AND LIABILITIES
December 31
1996 1995
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - without par value; $.01 stated
value; authorized shares - 60,000,000;
outstanding shares - 53,913,701 in 1996 and 1995 $ 539 $ 539
Paid-in capital 402 947 403 253
Retained earnings 626 089 625 275
Total common stock equity 1 029 575 1 029 067
Cumulative Preferred Stock (Note 3)
Not subject to mandatory redemption 173 086 187 897
Long-term Debt (Note 4) 969 870 828 116
Total capitalization 2 172 531 2 045 080
Current Liabilities
Long-term debt due within one year (Note 4) 10 000 50 400
Notes payable (Note 5) 147 129 165 800
Notes payable to affiliated companies 13 186 32 731
Accounts payable 114 330 116 817
Accounts payable to affiliated companies 12 850 -
Litigation settlement (Note 12(e)) - 80 000
Accrued taxes 73 206 65 851
Accrued interest 24 045 24 696
Other 17 107 16 000
411 853 552 295
Other Liabilities
Deferred income taxes (Note 11) 372 997 331 876
Unamortized investment tax credits 52 750 56 354
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 98 037 54 130
Other 186 775 35 835
710 559 478 195
Commitments and Contingencies (Note 12)
$3 294 943 $3 075 570
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 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
Net income 145 815 145 815
Dividends on preferred stock (13 181) (13 181)
Contribution from parent company 13 926 13 926
Other 18 (462) (444)
Balance December 31, 1995 539 403 253 625 275 1 029 067
Net income 125 678 125 678
Dividends on preferred stock (12 629) (12 629)
Dividends on common stock (112 076) (112 076)
Other (306) (159) (465)
Balance December 31, 1996 $539 $402 947 $626 089 $1 029 575
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1996 1995 1994
(in thousands)
Operating Activities
Net income $125 678 $ 145 815 $ 82 192
Items providing (using) cash currently:
Depreciation 121 812 120 773 137 719
Deferred income taxes and investment
tax credits - net 29 925 5 201 24 127
Allowance for equity funds used during
construction - (174) (4 230)
Regulatory assets - net (34 481) (15 628) (36 917)
Changes in current assets and current
liabilities
Restricted deposits (336) 16 10 024
Accounts receivable 2 722 (57 926) (7 404)
Income tax refunds - - 28 900
Materials, supplies, and fuel 41 343 31 748 (66 697)
Accounts payable 10 363 (25 958) (1 318)
Advance under accounts receivable
purchase agreement - - (49 940)
Litigation settlement (80 000) - -
Accrued taxes and interest 6 704 34 078 (2 928)
Other items - net 3 813 18 714 (71 554)
Net cash provided by operating activities 227 543 256 659 41 974
Financing Activities
Issuance of long-term debt 174 817 - 108 978
Funds on deposit from issuance of long-term debt 973 9 987 27 897
Retirement of preferred stock (15 116) (16) (26)
Redemption of long-term debt (74 600) (60 455) (160)
Change in short-term debt (38 216) 4 958 66 872
Dividends on preferred stock (12 629) (13 181) (13 182)
Dividends on common stock (112 076) - (59 142)
Capital contribution from parent company - 13 926 159 999
Net cash provided by (used in) financing
activities (76 847) (44 781) 291 236
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (172 341) (186 580) (290 579)
Deferred demand-side management costs - net 9 034 (16 117) (40 872)
Net cash used in investing activities (163 307) (202 697) (331 451)
Net increase (decrease) in cash and temporary
cash investments (12 611) 9 181 1 759
Cash and temporary cash investments at beginning
of period 15 522 6 341 4 582
Cash and temporary cash investments at end of
period $ 2 911 $ 15 522 $ 6 341
Supplemental Disclosure Of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $ 76 655 $ 80 465 $ 67 150
Income taxes 37 048 60 148 8 162
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - PSI
Kwh Sales
PSI's total kwh sales increased 11.0% in 1996, as compared to 1995. Increased
activity in Cinergy's power marketing and trading operations led to higher
non-firm power sales for resale. The increase in retail sales which reflects
a higher average number of residential and industrial customers was partially
offset by the return to more normal weather in 1996. The increase in
industrial sales was due to growth in the primary metals and transportation
equipment sectors.
As compared to 1994, total kwh sales in 1995 increased 6.3%, reflecting
increased sales to all customer classes. Contributing significantly to this
increase were higher residential and commercial sales due to warmer weather
during the 1995 summer cooling season, colder weather during the fourth
quarter of 1995, and an increase in the number of residential and commercial
customers. Increased sales to industrial customers, reflecting growth in the
primary metals, chemicals, and food products sectors, also contributed to the
increased kwh sales level. This increase also reflects higher non-firm power
sales for resale resulting from an increase in sales to CG&E reflecting the
coordination of PSI's and CG&E's electric dispatch systems.
Total kwh sales increased 6.3% in 1994, as compared to 1993, due, in large
part, to non-firm power sales for resale, reflecting third party, short-term
power sales to other utilities through PSI's system and direct power sales by
PSI to other utilities. Also contributing to the total kwh sales levels were
increased sales to industrial customers. This increase reflected growth in
the primary metals and transportation equipment sectors. A decrease in
residential sales resulted from the milder weather experienced during the
third and fourth quarters of 1994.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1996 1995 1994
Retail
Residential - % 7.9% (1.4)%
Commercial 0.4 5.2 1.4
Industrial 3.3 5.1 4.9
Total retail 1.5 6.0 2.0
Sales for resale
Firm power obligations 11.4 1.1 2.6
Non-firm power transactions 51.6 10.2 33.5
Total sales for resale 40.2 7.4 22.4
Total sales 11.0 6.3 6.3
PSI currently forecasts a 2% annual compound growth rate in kwh sales over the
1997 through 2001 period. This forecast does not reflect the effects of DSM
programs and excludes non-firm power sales for resale and any potential new
off-system, long-term firm power sales.
Operating Revenues
Operating revenues increased $84 million (6.7%) in 1996, as compared to 1995,
due, in large part, to the increase in kwh sales as previously discussed.
Also contributing to the increase was the effect of a 7.6% retail rate
increase approved in the September 1996 Order, as well as a full year's effect
of a 4.3% retail rate increase approved in the February 1995 Order and a 1.9%
increase for carrying costs on construction work in progress (CWIP) property
which was approved by the IURC in March 1995. Partially offsetting these
increases was the return of approximately $10 million to customers in
accordance with the February 1995 Order, which requires all retail operating
income above a certain level to be refunded to customers.
Higher kwh sales and electric rate increases which became effective in
February 1995 and March 1995 significantly contributed to the $135 million
(12.1%) increase in operating revenues for 1995, when compared to 1994.
Operating revenues increased $21 million (1.9%) in 1994, as compared to 1993,
as a result of increased kwh sales, the effects of a $31 million refund to
retail customers accrued in June 1993 as a result of the settlement of an
April 1990 IURC order, and increased fuel costs. Partially offsetting these
increases were the 1.5% retail rate reduction resulting from a December 1993
IURC order and the return of approximately $9 million to customers in
connection with certain provisions of Indiana law which limit the level of
retail operating income as determined in quarterly fuel adjustment clause
proceedings.
An analysis of operating revenues for the past three years is shown below:
1996 1995 1994
(in millions)
Previous year's operating revenues $1 248 $1 114 $1 092
Increase (Decrease) due to change in:
Price per kwh
Retail 8 68 (23)
Sales for resale
Firm power obligations (3) (1) 2
Non-firm power transactions - 1 -_ _
Total change in price per kwh 5 68 (21)
Kwh sales
Retail 16 55 18
Sales for resale
Firm power obligations 8 1 2
Non-firm power transactions 55 9 23
Total change in kwh sales 79 65 43
Other - 1 - __
Current year's operating revenues $1 332 $1 248 $1 114
Operating Expenses
FUEL
Fuel costs, PSI's largest operating expense, decreased approximately $25
million (6.5%) in 1996, when compared to 1995.
An analysis of fuel costs for the past three years is shown below:
1996 1995 1994
(in millions)
Previous year's fuel expense $389 $387 $400
Increase (Decrease) due to change in:
Price of fuel (2) (5) (30)
Kwh generation (23) 7 17
Current year's fuel expense $364 $389 $387
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $92 million in 1996, as compared to
1995. This increase primarily reflects increased purchases of non-firm power
for resale to others as a result of increased activity in Cinergy's power
marketing and trading operations and increased purchases from CG&E as a result
of the coordination of PSI's and CG&E's electric dispatch systems.
Purchased and exchanged power increased $22 million (54.3%) in 1995, as
compared to 1994, reflecting increased purchases from CG&E as a result of the
coordination of PSI's and CG&E's electric dispatch systems. These increases
were partially offset by a decline in third party, short-term power sales to
other utilities.
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 PSI's system and increased purchases of other
non-firm power by PSI primarily to serve its own load.
OTHER OPERATION
Other operation expenses increased approximately $40 million (17.5%) in 1996,
as compared to 1995. This increase was due to a number of factors, including
an increase related to the ongoing level and amortization of DSM expenses and
an increase in production expenses associated with the operations of the Clean
Coal Project, all of which are being recovered in revenues pursuant to the
February 1995 and September 1996 Orders. Charges related to voluntary early
retirement and severance programs and increased transmission costs also
contributed to the higher level of other operation expenses.
In 1995, other operation expenses increased $15 million (7.2%), as compared to
1994. This increase was due to a number of factors, including the recognition
of postretirement benefit costs on an accrual basis, an increase in the
ongoing level of DSM expenses, and the amortization of deferred postretirement
benefit costs, deferred Merger Costs, and deferred DSM costs, all of which are
being recovered in revenues pursuant to the February 1995 Order. These
increases were partially offset by charges of $10 million in 1994 for
severance benefits to former officers of PSI which cannot be recovered from
customers under the merger savings sharing mechanisms authorized by the IURC.
In addition, emphasis on achieving merger savings and other cost reductions
also partially offset the increase in other operation expenses.
Other operation expenses increased $26 million (14.2%) in 1994, as compared to
1993, due to a number of factors including the previously discussed charges of
$10 million and fuel litigation expenses of $8 million.
MAINTENANCE
An increase of $10 million (11.7%) in maintenance costs as compared to 1995 is
primarily attributable to increased maintenance associated with the Clean Coal
Project which began commercial operation in November 1995. Increased
transmission and distribution costs also contributed to the higher level of
maintenance expenses.
Maintenance costs decreased $7 million (7.1%) in 1995, as compared to 1994,
primarily due to improved scheduling of routine maintenance on generating
units and lower maintenance costs on transmission and distribution facilities.
Increased maintenance on a number of PSI'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 when compared to 1993.
DEPRECIATION
In 1995, depreciation expense decreased $17 million (12.3%), when compared to
1994, due in large part to the adoption of lower depreciation rates effective
in March 1995. This decrease was partially offset by the effect of additions
to utility plant.
Additions to electric utility plant led to increases in depreciation expense
of $11 million (8.6%) in 1994 as compared to 1993.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect the deferral of
depreciation on certain major projects, primarily environmental in nature,
from the in-service date until the related projects are reflected in retail
rates, net of amortization of these deferrals as they are recovered. (See
Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $6 million (11.9%) in 1995, as
compared to 1994, primarily due to increased property taxes resulting from a
greater investment in taxable property.
Other Income and Expenses - Net
ALLOWANCE FOR EQUITY FUNDS USED DURING CONSTRUCTION
In 1995, allowance for equity funds used during construction decreased $4
million (95.9%), as compared to 1994, primarily due to a decrease in the
average balance of CWIP.
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.
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on
certain major projects, primarily environmental in nature, from the in-service
date until the related projects are reflected in retail rates. (See Note 1(h)
of the "Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
Interest
INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased $4 million (5.1%) in 1996, as compared to
1995, due to the redemption of $135 million of long-term debt during the
period from August 1995 through December 1996.
ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION
Allowance for borrowed funds used during construction decreased $2 million
(44.8%) in 1996, as compared to 1995. This decrease is primarily attributable
to a decrease in the average balance of CWIP resulting from the Clean Coal
Project being completed at the end of 1995.
Allowance for borrowed funds used during construction decreased $5 million
(55.0%) in 1995, as compared to 1994, primarily as a result of a decrease in
the average balance of CWIP which was partially offset by an increase in the
debt component of the AFUDC rate.
The Union Light, Heat and Power Company
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF INCOME
1996 1995 1994
(in thousands)
Operating Revenues
Electric $190 900 $187 180 $177 564
Gas 76 868 70 288 71 971
267 768 257 468 249 535
Operating Expenses
Electricity purchased from parent
company for resale 143 839 142 308 134 887
Gas purchased 41 185 36 745 40 508
Other operation 30 934 30 712 32 289
Maintenance 4 997 4 580 5 473
Depreciation 11 909 11 438 10 644
Income taxes (Note 11) 9 834 7 887 5 342
Taxes other than income taxes 4 036 3 968 4 002
246 734 237 638 233 145
Operating Income 21 034 19 830 16 390
Other Income and Expenses - Net
Allowance for equity funds used
during construction (8) 71 78
Income taxes (Note 11) (352) (44) 56
Other - net (1 417) 6 236
(1 777) 33 370
Income Before Interest 19 257 19 863 16 760
Interest
Interest on long-term debt 4 016 7 161 8 161
Other interest 703 728 395
Allowance for borrowed funds used
during construction (58) (198) (183)
4 661 7 691 8 373
Net Income $ 14 596 $ 12 172 $ 8 387
<FN>
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
BALANCE SHEETS
ASSETS
December 31
1996 1995
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $195 053 $188 508
Gas 148 203 140 604
Common 19 285 19 068
362 541 348 180
Accumulated depreciation 122 310 112 812
240 231 235 368
Construction work in progress 9 050 7 863
Total utility plant 249 281 243 231
Current Assets
Cash and temporary cash investments 1 197 1 750
Notes receivable from affiliated companies 100 -
Accounts receivable less accumulated provision
for doubtful accounts of $1,024 in 1996 and
$1,035 in 1995 (Note 6) 12 763 37 895
Accounts receivable from affiliated companies 620 -
Materials, supplies, and fuel - at average cost
Gas stored for current use 6 351 4 513
Other materials and supplies 716 1 215
Property taxes applicable to subsequent year 2 600 2 350
Prepayments and other 370 485
24 717 48 208
Other Assets
Regulatory assets (Note 1(f))
Deferred merger costs 5 218 1 785
Unamortized costs of reacquiring debt 3 764 2 526
Other 2 357 2 548
Other 5 146 1 499
16 485 8 358
$290 483 $299 797
<FN>
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
CAPITALIZATION AND LIABILITIES
December 31
1996 1995
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $15.00 par value;
authorized shares - 1,000,000;
outstanding shares - 585,333 in 1996
and 1995 $ 8 780 $ 8 780
Paid-in capital 18 839 18 839
Retained earnings 92 484 82 863
Total common stock equity 120 103 110 482
Long-term Debt (Note 4) 44 617 54 377
Total capitalization 164 720 164 859
Current Liabilities
Long-term debt due within one year (Note 4) - 15 000
Notes payable to affiliated companies 30 649 23 043
Accounts payable 12 018 11 814
Accounts payable to affiliated companies 16 771 21 665
Accrued taxes 1 014 1 993
Accrued interest 1 284 1 549
Other 5 248 4 748
66 984 79 812
Other Liabilities
Deferred income taxes (Note 11) 33 463 23 728
Unamortized investment tax credits 4 797 5 079
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 12 983 12 202
Income taxes refundable through rates 5 121 4 717
Other 2 415 9 400
58 779 55 126
Commitments and Contingencies (Note 12)
$290 483 $299 797
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 1993 $8 780 $18 839 $69 327 $ 96 946
Net income 8 387 8 387
Dividends on common stock (3 511) (3 511)
Balance December 31, 1994 8 780 18 839 74 203 101 822
Net income 12 172 12 172
Dividends on common stock (3 512) (3 512)
Balance December 31, 1995 8 780 18 839 82 863 110 482
Net income 14 596 14 596
Dividends on common stock (4 975) (4 975)
Balance December 31, 1996 $8 780 $18 839 $92 484 $120 103
<FN>
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CASH FLOWS
1996 1995 1994
(in thousands)
Operating Activities
Net income $ 14 596 $ 12 172 $ 8 387
Items providing (using) cash currently:
Depreciation 11 909 11 438 10 644
Deferred income taxes and investment
tax credits - net 9 857 652 2 042
Allowance for equity funds used during
construction 8 (71) (78)
Regulatory assets (1 500) 170 (1 615)
Changes in current assets and current
liabilities
Accounts and notes receivable, net
of reserves on receivables sold 20 758 (4 003) 8 801
Materials, supplies, and fuel (1 339) 1 894 1 043
Accounts payable (4 690) 11 824 (2 377)
Accrued taxes and interest (1 244) (1 457) 3 307
Other items - net (6 804) 4 262 2 780
Net cash provided by operating activities 41 551 36 881 32 934
Financing Activities
Issuance of long-term debt - 14 704 -
Redemption of long-term debt (26 083) (37 036) -
Change in short-term debt 7 606 8 543 (10 500)
Dividends on common stock (4 975) (3 512) (3 511)
Net cash used in financing activities (23 452) (17 301) (14 011)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (18 652) (18 901) (20 329)
Net cash used in investing activities (18 652) (18 901) (20 329)
Net increase (decrease) in cash and temporary
cash investments (553) 679 (1 406)
Cash and temporary cash investments at beginning
of period 1 750 1 071 2 477
Cash and temporary cash investments at end of
period $ 1 197 $ 1 750 $ 1 071
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $ 4 667 $ 8 121 $ 8 281
Income taxes 1 240 7 727 4 714
<FN>
The accompanying notes are an integral part of these financial statements.
RESULTS OF OPERATIONS - ULH&P
Kwh Sales
In 1996, ULH&P's total kwh sales increased 5.8% as compared to 1995,
reflecting increased sales to all customer classes. The increase in retail
sales, which reflects a higher average number of residential and commercial
customers, was partially offset by the return to more normal weather in 1996.
The increased industrial sales primarily reflect growth in the food products
sector.
ULH&P's total kwh sales in 1995, as compared to 1994, increased 7.2%
reflecting increased sales to all customer classes. The increase in
residential and commercial kwh sales was due to warmer weather during the 1995
summer cooling season and colder weather during the fourth quarter of 1995 and
an increase in the average number of customers. The increased industrial
sales primarily reflect growth in the primary metals sector.
Total kwh sales increased 2.8% in 1994, as compared to 1993, primarily due to
increased retail sales to commercial and industrial customers. Industrial
sales reflected a higher level of economic activity, including growth in the
primary metals, industrial machinery, food products, and rubber and plastic
products sectors. The increase in commercial sales was due, in part, to new
customers. A decrease in residential sales resulted from the milder weather
experienced during the third and fourth quarters of 1994.
ULH&P currently forecasts a 3% annual compound growth rate in kwh sales over
the 1997 through 2001 period. This forecast does not reflect the effects of
DSM programs and excludes any potential new off-system, long-term firm power
sales.
Mcf Sales and Transportation
Mcf gas sales and transportation volumes increased 6.6%, as compared to 1995.
Colder weather in the first quarter of 1996, cooler than normal weather early
in the second quarter of 1996, and increases in the average number of
customers led to increased sales to residential and commercial customers. This
increase was partially offset by a decrease in industrial sales as customers
continued to purchase gas directly from suppliers using transportation
services provided by ULH&P. The increase in transportation volumes mainly
reflects demand for gas transportation services in the chemicals and primary
metals sectors.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. The colder weather during the fourth quarter of 1995 primarily
attributed to the increase in residential and commercial sales. These
increases were partially offset by a decline in industrial sales resulting
from customers electing to purchase directly from suppliers, creating
additional demand for transportation services. The increased transportation
volumes mainly reflect industrial demand for gas transportation services in
the paper products sector.
The milder weather experienced in 1994 contributed to a decrease in
residential gas sales volumes and led to the decrease in total Mcf sales and
transportation of 4.3%, as compared to 1993. The increase in gas
transportation more than offset the decrease in industrial sales volumes and
was attributable to additional demand for gas transportation services by
industrial customers mainly in the primary metals, paper products, and food
products sectors.
Operating Revenues
ELECTRIC OPERATING REVENUES
Electric operating revenues increased $3.7 million (2.0%) in 1996, $9.6
million (5.4%) in 1995, and $1.9 million (1.1%) in 1994. These increases
reflect higher kwh sales, as previously discussed. Partially offsetting the
1996 increase was a lower average cost of electricity purchased due, in part,
to an order issued by the Kentucky Public Service Commission (KPSC) on July 3,
1996 (July 1996 Order). The July 1996 Order authorized a decrease in electric
rates, retroactive to July 3, 1995, reflecting a reduction in the cost of
electricity purchased from CG&E.
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and utilizing ULH&P facilities to transport the gas (see the "Mcf
Sales and Transportation" section) continues to put downward pressure on gas
operating revenues. When ULH&P sells gas, the sales price reflects the cost
of gas purchased by ULH&P to support the sale plus the costs to deliver the
gas. When gas is transported, ULH&P does not incur any purchased gas costs
but delivers gas the customer has purchased from other sources. Since
providing transportation services does not necessitate recovery of gas
purchased costs, the revenue per Mcf transported is less than the revenue per
Mcf sold. As a result, a higher relative volume of gas transported to gas
sold translates into lower gas operating revenues.
Gas operating revenues increased $6.6 million (9.4%) in 1996, as compared to
1995. The increase was primarily attributable to the operation of the fuel
adjustment clause reflecting an increase in the cost of gas purchased and an
increase in total volumes sold and transported.
In 1995, gas operating revenues declined $1.7 million (2.3%), as compared to
1994 as a result of the aforementioned trend toward increased transportation
services and the operation of fuel adjustment clauses reflecting a lower
average cost of gas purchased.
Gas operating revenues decreased $3.8 million (5.0%) in 1994, as compared to
1993, primarily as a result of a decline in total volumes sold and transported
of 4.3%. This decrease was partially offset by the effect of a gas rate
increase which became effective in mid-1993.
Operating Expenses
ELECTRICITY PURCHASED FROM PARENT COMPANY FOR RESALE
Electricity purchased increased $7.4 million (5.5%) in 1995, as compared to
1994, due to an increase in volumes purchased.
GAS PURCHASED
Gas purchased increased $4.4 million (12.1%) in 1996, as compared to 1995, due
to an increase in volumes purchased and a higher average cost per Mcf of gas
purchased, as previously discussed.
In 1995, gas purchased expense decreased $3.8 million (9.3%) from 1994
primarily due to a 13.7% decrease in the average cost per Mcf of gas
purchased.
Gas purchased expense in 1994 decreased $2.9 million (6.6%) due to a 5.2%
decrease in volumes purchased.
OTHER OPERATION
In 1995, other operation expense decreased $1.6 million (4.9%), as compared to
1994, due, in part, to decreased gas and electric distribution expenses and
decreased gas production expenses.
Other operation expense in 1994 increased $1.9 million (6.2%), as compared to
1993, due primarily to increased gas and electric distribution expenses and
increased wages and benefits.
MAINTENANCE
Maintenance expenses increased $.4 million (9.1%) as compared to 1995,
primarily as a result of increased transmission and distribution costs.
Maintenance expense decreased $.9 million (16.3%) and $.8 million (12.7%) in
1995 and 1994, respectively, primarily as a result of reduced maintenance
costs on gas and electric distribution facilities.
DEPRECIATION
Depreciation expense increased $.8 million (7.5%) in 1995, as compared to
1994, primarily due to additions to electric and gas plant in service.
The increase in 1994 of $.8 million (8.5%) was due to increases in depreciable
plant in service and a full year's effect of the adoption of higher
depreciation rates on gas and common plant in accordance with a KPSC rate
order issued in 1993.
OTHER INCOME AND EXPENSES - NET
Other - Net
The decrease in other - net of $1.4 million in 1996, as compared to 1995, is
primarily attributable to expenses associated with the sales of accounts
receivables in 1996.
INTEREST AND OTHER CHARGES
Interest on Long-term Debt
Interest on long-term debt decreased $3.1 million (43.9%) as compared to 1995
due to the redemption of $25 million and $35 million of long-term debt in 1996
and 1995, respectively.
<PAGE.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Cinergy, CG&E, PSI, and ULH&P
(a) Consolidation Policy The accompanying Financial Statements include the
accounts of Cinergy Corp., a Delaware corporation (Cinergy or Company), and
its wholly-owned subsidiaries. Investments in business entities in which the
Company does not have control, but has the ability to exercise significant
influence over operating and financial policies (generally, 20% to 50%
ownership) are accounted for using the equity method. All significant
intercompany transactions and balances have been eliminated.
Cinergy, CG&E, PSI, and ULH&P
(b) Nature of Operations Cinergy is a registered holding company under the
Public Utility Holding Company Act of 1935 (PUHCA). Cinergy's subsidiaries
are The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI),
Cinergy Investments, Inc. (Investments), and Cinergy Services, Inc.
(Services). CG&E, an Ohio combination electric and gas utility, and its five
wholly-owned utility subsidiaries (including The Union Light, Heat and Power
Company, a Kentucky combination electric and gas utility (ULH&P)) are
primarily engaged in the production, transmission, distribution, and sale of
electric energy and/or the sale and transportation of natural gas in the
southwestern portion of Ohio and adjacent areas in Kentucky and Indiana. PSI,
an Indiana electric utility and previously PSI Resources, Inc.'s (Resources)
utility subsidiary, is engaged in the production, transmission, distribution,
and sale of electric energy in north central, central, and southern Indiana.
Investments, a Delaware corporation, is a non-utility subholding company that
was formed to hold and operate Cinergy's non-utility businesses and interests.
Investments' principal activities include investments in Midlands Electricity
plc (Midlands) and Trigen-Cinergy Solutions LLC (Trigen-Cinergy) (see Note
1(e) for a further discussion of these investments). Services, a Delaware
corporation, is the service company for the Cinergy system, providing member
companies with a variety of administrative, management, and support services.
The majority of Cinergy's operating revenues are derived from the sale of
electricity and the sale and transportation of natural gas.
Cinergy, CG&E, PSI, and ULH&P
(c) Management's Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities. Estimates are also required with respect to the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. (See
Note 12.)
Cinergy, CG&E, PSI, and ULH&P
(d) Merger Cinergy was created in the October 1994 merger of Resources and
CG&E. At merger consummation, each outstanding share of common stock of
Resources and CG&E was exchanged for 1.023 shares and one share, respectively,
of Cinergy common stock, resulting in the issuance of approximately 148
million shares of Cinergy common stock, par value $.01 per share. The
outstanding preferred stock and debt securities of CG&E, its utility
subsidiaries, and PSI were not affected by the merger. The merger was
accounted for as a pooling of interests, and the Financial Statements, along
with the related notes, are presented as if the merger was consummated as of
the beginning of the earliest period presented.
Resources' and CG&E's consolidated operating revenues and net income for the
nine months ended September 30, 1994, were as follows:
Resources CG&E Eliminations(i) Cinergy
(in millions)
Nine months ended September
30, 1994 (unaudited)
Operating revenues $844(ii) $1 363 $(7) $2 200(ii)
Net income 60 146 - 206
(i) Eliminations of intercompany sales of electric power.
(ii) Reflects reclassifications from previously reported amounts to conform
to the 1996 presentation.
Cinergy
(e) Investment in Unconsolidated Subsidiaries
(i) Midlands In May 1996, Cinergy and GPU, Inc. (GPU), a Pennsylvania
corporation, entered into a 50%/50% joint venture agreement and formed Avon
Energy Partners Holdings (Avon Energy), incorporated in London, England. Avon
Energy, through a wholly-owned subsidiary, immediately began acquiring the
outstanding common stock of Midlands, a United Kingdom (U.K.) regional
electric company. During the third quarter of 1996, Avon Energy completed the
acquisition of substantially all of the outstanding common stock of Midlands.
The total consideration paid by Avon Energy was approximately 1.7 billion
pounds sterling ($2.6 billion at then existing currency exchange rates). The
funds for the acquisition were obtained from Cinergy's and GPU's investment in
Avon Energy of approximately 330 million pounds sterling each ($500 million
each), with the remainder being obtained by Avon Energy through the issuance
of non-recourse debt. Cinergy has used dollar denominated debt to fund its
entire investment in Avon Energy. As a result of the allocation of the
purchase price, Avon Energy has recorded goodwill of approximately 1.4 billion
pounds sterling ($2 billion) in connection with its acquisition of Midlands.
The goodwill is being amortized on a straight-line basis over 40 years. (See
Note 12(g) regarding a contingency with respect to the investment in
Midlands.)
Cinergy accounts for its investment in Avon Energy using the equity method of
accounting. For the year ended December 31, 1996, Cinergy's 50% share of the
equity in earnings of Avon Energy was approximately $25 million.
The pro forma financial information presented below assumes 100% of Midlands
was acquired on the first day of the indicated period. The pro forma
adjustments include recognition of equity in the estimated earnings of Avon
Energy, an adjustment for interest expense on debt associated with Cinergy's
investment in Avon Energy, and related income taxes. The estimated earnings
of Avon Energy include the historical earnings of Midlands prior to its
acquisition by Avon Energy, adjusted for the estimated effect of purchase
accounting (including the amortization of goodwill) and conversion to United
States (U.S.) GAAP, interest expense on debt issued by Avon Energy associated
with the acquisition, and related income taxes. The equity in earnings of
Avon Energy has been converted from pounds sterling to dollars using the
average exchange rate for 1996 of $1.53/ and 1995 of $1.58/ .
Year Ended Year Ended
December 31, 1996 December 31, 1995
Net Earnings Net Earnings
Income Per Share(1) Income Per Share(1)
(in millions, except per share amounts)
Cinergy $335 $2.00(2) $347 $2.22
Pro forma adjustments:
Equity in earnings
of Avon Energy 20 50
Interest expense (14) (34)
Income taxes 6 16
Pro forma results $347 $2.08 $379 $2.42
(1) Based on the average number of common shares outstanding for the period.
(2) Earnings per share after a charge of $.12 per share for the cost of
reacquiring preferred stock of CG&E through a tender offer.
The following selected financial information for Avon Energy was prepared from
Avon Energy's books and records, which are maintained in accordance with U.K.
GAAP and denominated in pounds sterling. This selected financial information
has been converted to U.S. GAAP and dollars.
Assets December 31, 1996
(in millions)
Property, plant, and equipment $1 586
Current assets 651
Other assets 2 564
Total assets $4 801
Capitalization and Liabilities
Total common shareholders' equity $1 184
Long-term debt 1 834
Current liabilities 1 783
Total capitalization and
liabilities $4 801
Cinergy's investment in Avon Energy $ 593
Year Ended December 31, 1996
(in millions)
Operating revenues $1 132
Operating profit 101
Net income $ 50
Cinergy's equity in earnings of Avon Energy $ 25
(ii) Trigen-Cinergy In December 1996, Cinergy and Trigen Energy Corporation,
a Delaware corporation, formed a joint venture, Trigen-Cinergy. The joint
venture company will build, own, and operate cogeneration and trigeneration
facilities for industrial plants, office buildings, shopping centers,
hospitals, universities, and other major energy users that can benefit from
combined heat and power production economies. It will also provide energy and
asset management services, including fuel procurement, ancillary to the joint
venture company's activities.
Cinergy, CG&E, PSI, and ULH&P
(f) Regulation Cinergy, its utility subsidiaries (CG&E, together with its
subsidiaries, and PSI), and certain of its non-utility subsidiaries are
subject to regulation by the Securities and Exchange Commission (SEC) under
the PUHCA. Cinergy's utility subsidiaries are also subject to regulation by
the Federal Energy Regulatory Commission (FERC) and the state utility
commissions of Ohio, Kentucky, and Indiana. The accounting policies of
Cinergy's utility subsidiaries conform to the accounting requirements and
ratemaking practices of these regulatory authorities and to GAAP, including
the provisions of Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (Statement 71).
Under the provisions of Statement 71, regulatory assets represent probable
future revenue associated with deferred costs to be recovered from customers
through the ratemaking process. The following regulatory assets of PSI and
CG&E and its utility subsidiaries are reflected in the Balance Sheets as of
December 31:
1996 1995__ _______
PSI CG&E 1/ Cinergy PSI CG&E 1/ Cinergy
(in millions)
Amounts due from customers -
income taxes $ 33 $344 $ 377 $ 27 $397 $ 424
Post-in-service carrying
costs and deferred
operating expenses 45 141 186 39 148 187
Coal contract buyout costs 138 - 138 - - -
Deferred demand-side
management (DSM) costs 102 33 135 110 19 129
Phase-in deferred return
and depreciation - 95 95 - 100 100
Deferred merger costs 76 18 94 42 15 57
Unamortized costs of
reacquiring debt 32 39 71 34 40 74
Coal gasification
services expenses 25 - 25 - - -
Other 28 20 48 34 41 75
Total $479 $690 $1 169 $286 $760 $1 046
1/ Includes $11 million and $7 million related to ULH&P at December 31, 1996
and 1995, respectively.
PSI has previously received regulatory orders authorizing the recovery of $408
million of its total regulatory assets at December 31, 1996. CG&E has
previously received regulatory orders authorizing the recovery of $651 million
(including $4 million for UHL&P) of its total regulatory assets at December
31, 1996. Both PSI and CG&E (including ULH&P) will request recovery of
additional amounts in future proceedings, which could include proceedings, if
any, related to transition to customer choice in each applicable jurisdiction.
See Note 1(g), (h), (i), (j), (k), (l), (m), and (n) for additional
information regarding amounts due from customers - income taxes, post-in-
service carrying costs and deferred operating expenses, coal contract buyout
costs, deferred DSM costs, phase-in deferred return and depreciation, deferred
merger costs, costs of reacquiring debt, and coal gasification services
expenses, respectively.
Certain criteria must be met for the continued application of the provisions
of Statement 71, including regulated rates designed to recover the specific
utility's costs. Failure to satisfy the criteria in Statement 71 would
eliminate the basis for recognition of regulatory assets.
The provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of (Statement 121), became effective in January 1996 for
Cinergy. Statement 121, which addresses the identification and measurement of
asset impairments for all enterprises, is particularly relevant for electric
utilities as a result of the potential for deregulation of the generation
component of the business. Statement 121 requires the recognition of
impairment losses on long-lived assets when book values exceed expected future
cash flows. In addition, Statement 121 imposes a stricter criterion for
recognition of regulatory assets by requiring that future recovery be probable
at each balance sheet date.
Based on Cinergy's current regulatory orders and the regulatory environment in
which it currently operates, the recognition of its regulatory assets as of
December 31, 1996, is fully supported. In addition, the application of the
provisions of Statement 121 did not have an effect on reported amounts for
regulatory assets and long-lived assets at December 31, 1996.
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," including the
potential for customer choice legislation discussed below, could result in
Cinergy discontinuing the application of Statement 71 for its generation,
transmission, and/or distribution businesses. As a result, regardless of
whether such previously deferred costs would be recoverable (i.e., covered by
revenues) in a competitive environment, Cinergy would be required to write-off
the portion of any regulatory asset for which sufficient regulatory assurance
of future recovery no longer exists. In addition, the outcome of applying the
provisions of Statement 121 could change significantly as a result of future
competitive pressures and the effect on Cinergy of the restructuring of the
electric utility industry.
In January 1997, customer choice legislation was introduced in the Indiana
legislature. Under the proposed legislation, there would be a transition
period from October 1, 1999, through June 30, 2004, during which customers
would have the right to choose their electric supplier. Those customers not
selecting a supplier would continue to buy their electric power from the
franchise utility at a total "bundled" price. The total bundled price would
be frozen at the rate in effect as of July 1, 1999, subject to certain
adjustments during the transition period, including limited adjustments for
specific material cost changes and a downward trending of the retail electric
production component of the total frozen price to the current statewide
average. Trending of the frozen price would not be applicable to those
utilities, such as PSI, whose retail electric production price is currently
below the statewide average. Those customers choosing a supplier would pay
that supplier's open market price for power and would pay the franchise
utility the portion of the bundled price applicable to transmission and
distribution services, and an access charge (designed to compensate the
franchise utility for its loss in revenues, if any, during the transition
period, after giving effect to the revenues which would be realized by the
franchise utility from sales of the power in the open market). After June 30,
2004, all customers would continue to have the right to choose their supplier
and would continue to pay the franchise utility for transmission and
distribution services which would continue to be regulated as to price by the
Indiana Utility Regulatory Commission (IURC). The access charge would no
longer be paid by any customer.
The proposed legislation provides for each utility to file a transition plan
with the IURC which would include, among other things, a proposed amortization
period for regulatory asset balances as of the beginning of the transition
period. Recovery of regulatory assets during the transition period would be
included in retail rates as a charge for transmission and distribution
services. However, any regulatory assets, as well as other stranded costs, at
the end of the transition period which are applicable to retail electric
production, would be the responsibility of the shareholders.
Customer choice legislation has also been introduced during 1997 in the Ohio
legislature. The proposed legislation is similar to legislation introduced in
1996 which is discussed in the "Competitive Pressures" section of "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Although Cinergy is aggressively pursuing customer choice legislation in
Indiana and Ohio, the time frame for passage of legislation providing for
customer choice is uncertain due to the complex issues and numerous
stakeholder interests involved.
Cinergy, CG&E, PSI, and ULH&P
(g) 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 PSI,
CG&E, and CG&E's utility subsidiaries. Deferred income taxes not reflected in
rates charged to customers are recovered from customers as paid. The future
revenues associated with these amounts are reflected in the accompanying
Financial Statements as a regulatory asset. Conversely, to the extent
deferred income taxes recovered in rates exceed amounts payable in future
periods, such amounts are reflected in the accompanying Financial Statements
as "Income taxes refundable through rates" on the basis of their probable
repayment in future years.
Cinergy, CG&E, and PSI
(h) Post-in-service Carrying Costs and Deferred Operating Expenses CG&E
received various orders from the Public Utilities Commission of Ohio (PUCO)
which permitted the deferral of carrying costs and non-fuel operating expenses
(including depreciation) for the Wm. H. Zimmer Generating Station (Zimmer) and
Woodsdale Generating Station (Woodsdale) units. Effective with the dates of
the PUCO's orders reflecting the units in customer rates, the deferrals of
post-in-service carrying costs are being recovered over the lives of the
applicable units and the deferred non-fuel operating expenses are being
recovered over a 10-year period.
PSI received authority from the IURC for the accrual of the debt component of
carrying costs (to the extent not recovered currently in retail rates) and the
deferral of depreciation expense on certain major projects, primarily
environmental in nature, including a 262-megawatt clean coal power generating
facility located at the Wabash River Generating Station (Clean Coal Project)
and a scrubber at Gibson Generating Station (Gibson). In a February 1995
order (February 1995 Order) and a September 1996 order (September 1996 Order),
the IURC authorized the recovery of deferred costs incurred prior to August
31, 1995, over the remaining lives of the related assets. Deferrals incurred
after this date will be requested for recovery in future proceedings, which
could include proceedings, if any, related to transition to customer choice.
Cinergy and PSI
(i) Coal Contract Buyout Costs In August 1996, PSI entered into a coal
supply agreement with Eagle Coal Company (Eagle) for the supply of
approximately three million tons of coal per year. The agreement, which
terminates December 31, 2000, provides for a buyout fee of $179 million
(including interest) to be included in the price of coal to PSI over the term
of the contract. This fee represents the costs to Eagle of the buyout of the
coal supply agreement between PSI and Exxon Coal and Minerals Company. The
retail jurisdictional portion of the buyout charge, excluding the portion
applicable to joint owners, will be recovered through the quarterly fuel
adjustment clause, with carrying costs on unrecovered amounts, through
December 2002. PSI has also filed a petition at the FERC for recovery of the
wholesale jurisdictional portion of the buyout costs through the wholesale
fuel adjustment clause. Generally, the FERC will allow recovery if the
utility can demonstrate there will be net benefits to customers during the
buyout cost recovery period. The FERC is expected to issue an order on PSI's
petition during 1997. PSI cannot predict what action the FERC may take with
respect to this petition.
Cinergy, CG&E, PSI, and ULH&P
(j) DSM A settlement agreement between PSI and certain intervenors in a
proceeding established to review PSI's current and proposed DSM programs was
approved by the IURC in December 1996. The settlement agreement allows PSI to
recover $35 million per year over the next four years, which is designed to
recover all previously incurred, but as yet unrecovered, DSM costs and all
costs related to satisfying remaining commitments associated with a previous
DSM settlement agreement, together with carrying costs thereon, through a non-
bypassable charge in PSI's retail rates. The new agreement also authorizes
PSI to spend up to $8 million annually on ongoing DSM programs through the
year 1999 and to collect such amounts currently in retail rates.
Additionally, in December 1996, the PUCO issued an order applicable to CG&E's
DSM programs. The order requires CG&E to spend up to one-half of the annual
$5 million currently included in retail rates on PUCO-sanctioned low-income
residential programs. The remaining portion of the $5 million is to be
applied to the recovery of DSM cost deferrals. CG&E's participation in the
low-income programs will be a factor considered by the PUCO in setting future
rates of return and approving competitive transition plans.
In addition, the Kentucky Public Service Commission (KPSC) has authorized
concurrent recovery of costs related to various DSM programs of ULH&P.
Cinergy and CG&E
(k) Phase-in Deferred Return and Depreciation In the first three years of a
rate phase-in plan for Zimmer, included in a May 1992 order (May 1992 Order)
by the PUCO, rates charged to customers did not fully recover depreciation
expense and return on investment. In accordance with the provisions of the
May 1992 Order, this deficiency has been recognized as a regulatory asset and
is being recovered over a seven-year period which began in May 1995.
Cinergy, CG&E, PSI, and ULH&P
(l) Merger Costs CG&E and its utility subsidiaries have deferred the non-
PUCO jurisdictional portion of merger transaction costs and costs to achieve
merger savings (collectively, Merger Costs) incurred through December 31,
1996, for future recovery in customer rates.
In accordance with the February 1995 Order and the September 1996 Order, PSI
has deferred Merger Costs incurred through October 31, 1996, and is recovering
approximately $40 million of these deferrals in retail rates over a 10-year
period. The September 1996 Order also provides for a "true-up" in a future
regulatory proceeding to reflect recovery of the difference between the costs
being recovered in retail rates and the actual costs incurred through October
31, 1996.
CG&E and PSI completed voluntary workforce reduction and severance programs in
1996 and 1994. The pretax costs of these programs and the related accounting
were as follows:
1996 Programs 1994 Programs
(in millions)
CG&E 1/ PSI CG&E 1/ PSI
Costs expensed $30 $ 5 $15 $ -
Costs deferred 9 33 2 11
$39 $38 $17 $11
1/ Includes $2 million and $1 million related to ULH&P for the 1996 Programs
and 1994 Programs, respectively.
The above amounts reflect approximately $61 million ($31 million for CG&E and
$30 million for PSI) and $16 million (for CG&E) for 1996 and 1994,
respectively, of costs associated with additional pension benefits further
discussed in Note 9.
Cinergy, CG&E, PSI, and ULH&P
(m) Debt Discount, Premium, and Issuance Expenses and Costs of Reacquiring
Debt Debt discount, premium, and issuance expenses on outstanding long-term
debt of Cinergy's utility subsidiaries are amortized over the lives of the
respective issues.
In accordance with established ratemaking practices, Cinergy's utility
subsidiaries have deferred costs (principally call premiums) from the
reacquisition of long-term debt and are amortizing such amounts over periods
ranging from one to 24 years (five to 24 years for CG&E and its subsidiaries,
one to 16 years for PSI, and 12 to 24 years for ULH&P).
Cinergy and PSI
(n) Coal Gasification Services Expenses In November 1995, upon commercial
operation of the Clean Coal Project, PSI and Destec Energy, Inc. (Destec)
began a 25-year contractual agreement for the provision of coal gasification
services. The agreement requires PSI to pay Destec a base monthly fee
including certain monthly operating expenses. Over the next five years (1997
through 2001), the base monthly fees and expenses are expected to total $186
million. PSI received authorization in the September 1996 Order for the
inclusion of the costs of the Clean Coal Project in retail rates. PSI also
received authorization to defer, for subsequent recovery in retail rates, the
base monthly fees and expenses incurred prior to the effective date of the
September 1996 Order.
Cinergy, CG&E, PSI, and ULH&P
(o) Utility Plant Utility plant is stated at the original cost of
construction, which includes an allowance for funds used during construction
(AFUDC) and a proportionate share of overhead costs. Construction overhead
costs include salaries, payroll taxes, fringe benefits, and other expenses.
Substantially all utility plant is subject to the lien of each applicable
company's first mortgage bond indenture.
Cinergy, CG&E, PSI, and ULH&P
(p) AFUDC Cinergy's utility subsidiaries capitalize AFUDC, a non-cash income
item, which is defined in the regulatory system of accounts prescribed by the
FERC as including "the net cost for the period of construction of borrowed
funds used for construction purposes and a reasonable rate on other funds when
so used." AFUDC accrual rates were as follows and are compounded semi-
annually:
1996 1995 1994_
Cinergy average 7.1% 7.9% 6.9%
CG&E and its utility
subsidiaries average 8.7 8.8 9.1
ULH&P average 8.8 7.0 5.9
PSI average 5.4 7.0 6.4
Cinergy, CG&E, PSI, and ULH&P
(q) Depreciation and Maintenance Provisions for depreciation are determined
by using the straight-line method applied to the cost of depreciable plant in
service. The rates are based on periodic studies of the estimated service
lives and net cost of removal of the properties. The average depreciation
rates for utility plant are:
1996 1995 1994_
PSI 3.0% 3.1% 3.8%
CG&E and its utility subsidiaries
Electric 2.9 2.9 2.9
Gas 2.8 2.8 2.8
Common 3.0 3.4 3.4
ULH&P
Electric 3.3 3.3 3.3
Gas 3.1 3.1 3.1
Common 5.1 5.1 5.1
In accordance with the February 1995 Order, revised depreciation rates for PSI
were implemented in March 1995. This change, excluding the effect of
additions to utility plant, resulted in a decrease in annual depreciation
expense of approximately $30 million.
For Cinergy's utility subsidiaries, maintenance and repairs of property units
and replacements of minor items of property are charged to maintenance
expense. The costs of replacements of property units are capitalized. The
original cost of the property retired and the related costs of removal, less
salvage recovered, are charged to accumulated depreciation.
Cinergy, CG&E, PSI, and ULH&P
(r) Operating Revenues and Fuel Costs Cinergy's utility subsidiaries
recognize revenues for electric and gas service rendered during the month,
which include revenues for sales unbilled at the end of each month. The costs
of electricity and gas purchased and the cost of fuel used in electric
production are expensed as recovered through revenues, and any portion of
these costs recoverable or refundable in future periods is deferred in the
accompanying Balance Sheets. PSI's recovery of fuel costs is subject to a
determination that such recovery will not result in PSI earning a return in
excess of that allowed in the September 1996 Order. This earnings test is in
accordance with the settlement agreement approved in the February 1995 Order
and the Indiana statute in effect at the time of the settlement agreement.
Cinergy, CG&E, and ULH&P
(s) Order 636 In 1992, the FERC issued order 636 (Order 636) which
restructured operations between interstate gas pipelines and their customers
for gas sales and transportation services. Order 636 also allowed pipelines
to recover from customers, including CG&E and its utility subsidiaries,
transition costs incurred in complying with the order. In July 1994, the PUCO
issued an order approving a stipulation between CG&E and its residential and
industrial customer groups providing for recovery of these pipeline transition
costs. CG&E is presently recovering its Order 636 transition costs pursuant
to a PUCO-approved tariff. CG&E's utility subsidiaries, including ULH&P,
recover such costs through their gas cost recovery mechanisms. These costs
are deferred as incurred by CG&E and its utility subsidiaries and amortized as
recovered from customers.
Cinergy, CG&E, PSI, and ULH&P
(t) Statements of Cash Flows All temporary cash investments with maturities
of three months or less, when acquired, are reported as cash equivalents. See
Notes 3(b) and 8(a)(i) for information concerning non-cash financing and
investing transactions during 1996.
Cinergy
(u) Translation of Foreign Currency All assets and liabilities reported in
the balance sheets of foreign subsidiaries whose functional currency is other
than the U.S. dollar are translated at year end exchange rates; income and
expense are translated at the average exchange rate prevailing during the
month the respective transactions occur. Translation gains and losses are
accumulated as a separate component of common stock equity.
Cinergy, CG&E, PSI, and ULH&P
(v) Reclassification Certain amounts in the 1994 and 1995 Financial
Statements have been reclassified to conform to the 1996 presentation.
2. Common Stock
(a) Changes in Common Stock Outstanding
Cinergy
The following table reflects the shares of Cinergy common stock reserved for
issuance at December 31, 1996, and shares issued in 1996, 1995, and 1994 for
the Company's stock-based plans, including previous plans of Resources and
CG&E. Shares issued prior to merger consummation have been adjusted for
Resources' merger conversion ratio of 1.023.
Shares
Reserved at Shares Issued
Dec. 31, 1996 1996 1995 1994
401(k) Savings Plans 6 469 373 - 1 222 379 1 458 631
Dividend Reinvestment and
Stock Purchase Plan 1 798 486 - 935 711 1 127 881
Directors' Deferred
Compensation Plan 200 000 - - 77
Performance Shares Plan 771 301 492 28 207 27 116
Employee Stock Purchase
and Savings Plan 1 932 384 - 1 010 140 039
Stock Option Plan 4 580 996 15 007 403 997 25 575
1996 Long-term Incentive
Compensation Plan 7 000 000 - - -
In addition to the issuances of common stock shown in the above table,
Resources issued 1,118,671 shares of common stock in 1993 to the trustee of
its two Master Trust Agreements as required as a result of the announcement of
the merger. Prior to consummation of the merger in October 1994, Resources
issued an additional 16,518 shares to the trustee and distributed 98,400
shares (reflected in the above table as shares issued in 1994) to participants
of certain benefit plans. As a result of the merger consummation, in December
1994, Cinergy retired the remaining 1,036,789 shares held by the trustee.
In December 1994, Cinergy publicly issued 7,089,000 shares of common stock
under a shelf registration statement for the sale of up to eight million
shares. In addition, upon consummation of the merger, Cinergy awarded five
shares of common stock to all non-officer employees for additional issuances
under this shelf registration statement of 43,605 shares and 10 shares in 1994
and 1995, respectively.
Cinergy retired 6,511 and 119,211 shares of common stock in 1996 and 1995
respectively, primarily representing shares tendered as payment for the
exercise of previously granted stock options.
CG&E
CG&E issued 1,601,003 shares of common stock in 1994 (prior to the merger) for
its stock-based compensation and dividend reinvestment plans. After merger
consummation, the common stock issued to CG&E's 401(k) Savings Plans is
Cinergy common stock rather than CG&E common stock, and CG&E's Dividend
Reinvestment and Stock Purchase Plan was merged into and replaced by Cinergy's
Dividend Reinvestment and Stock Purchase Plan.
ULH&P
All of ULH&P's common stock is held by CG&E.
Cinergy, CG&E, and PSI
(b) Dividend Restrictions Cinergy owns all of the common stock of CG&E and
PSI. The ability of Cinergy to pay dividends to holders of its common stock
is principally dependent on the ability of CG&E and PSI to pay common
dividends to Cinergy. CG&E and PSI cannot purchase or otherwise acquire for
value or pay dividends on their common stock if dividends are in arrears on
their preferred stock. The amount of common stock dividends that each company
can pay also may be limited by certain capitalization and earnings
requirements. Currently, these requirements do not impact the ability of
either company to pay dividends on common stock.
Cinergy
(c) Stock-based Compensation Plans Cinergy has four stock-based compensation
plans, the Stock Option Plan, the Performance Shares Plan, the Employee Stock
Purchase and Savings Plan, and the 1996 Long-term Incentive Compensation Plan.
The Stock Option Plan, the Performance Shares Plan, and the Employee Stock
Purchase and Savings Plan succeeded similar plans of Resources. Accordingly,
information reported in the ensuing sections has been adjusted for Resources'
merger conversion ratio of 1.023 as appropriate. Effective January 1, 1997,
Cinergy implemented the 1996 Long-term Incentive Compensation Plan and ceased
accrual of incentive compensation under the Performance Shares Plan as of
December 31, 1996. No stock-based awards were made under the 1996 Long-term
Incentive Compensation Plan as of December 31, 1996.
Cinergy accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
under which stock option-type awards are recorded at intrinsic value. For
1996, 1995, and 1994, compensation cost related to Cinergy's stock-based
compensation plans, before income taxes, recognized in the Consolidated
Statements of Income was $2 million, $1 million, and $1 million, respectively.
Net income and earnings per share for 1996 and 1995, assuming compensation
cost for these plans had been determined at fair value, consistent with the
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (Statement 123), would have been as follows:
1996 1995
(in millions, except per share amounts)
Net income - as reported $335 $347
- pro forma $334 $346
Earnings per share - as reported $2.00 $2.22
- pro forma $1.99 $2.21
In accordance with the provisions of Statement 123, in estimating the pro
forma amounts, the fair value method of accounting was not applied to options
granted prior to January 1, 1995. As a result, the pro forma effect on net
income and earnings per share may not be representative of future years. In
addition, the pro forma amounts reflect certain assumptions used in estimating
fair values. These fair value assumptions are described under each applicable
plan discussion below.
(i) Stock Option Plan The Cinergy Stock Option Plan is designed to align
executive compensation with shareholder interests. Under the Stock Option
Plan, incentive and non-qualified stock options, stock appreciation rights
(SARs), and SARs in tandem with stock options may be granted to key employees,
officers, and outside directors. Options are granted at the fair market value
of the shares on the date of grant. Options vest over five years at a rate of
20% per year and expire 10 years from the date of grant. All options granted
prior to November 1993, but not previously vested, became vested upon approval
of the merger by Resources' shareholders. The total number of shares of
common stock available under the Stock Option Plan may not exceed 5,000,000
shares. No stock options may be granted under the plan after October 24,
2004.
Stock Option Plan activity for 1996, 1995, and 1994 is summarized as follows
(no SARs have been granted under this plan):
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
Outstanding, beginning of year 3 652 956 $22.47 2 409 453 $19.74 1 047 528 $15.45
Granted 220 000 29.75 1 672 500 24.91 1 387 500 22.88
Exercised (604 706) 18.87 (403 997) 16.16 (25 575) 13.96
Forfeited - - (25 000) 24.31 ____- -
Outstanding, end of year 3 268 250 $23.93 3 652 956 22.47 2 409 453 $19.74
Exercisable, end of year 897 750 $20.93 895 456 $17.47 1 021 953 $15.48
Weighted average fair value of
options granted during the year $3.07 $2.41 $1.94
The fair values of options granted were estimated as of the date of grant
using a Black-Scholes option pricing model. The weighted averages for the
assumptions used in determining the fair values of options granted were as
follows:
1996 1995 1994
Risk-free interest rate 6.3% 7.3% 7.5%
Expected dividend yield 5.8% 6.9% 7.4%
Expected lives 6.5 yrs. 6.5 yrs. 6.5 yrs.
Expected common stock variance 1.8% 1.8% 1.7%
Price ranges, along with certain other information, for options outstanding
under the Stock Option Plan at December 31, 1996, are as follows:
Outstanding Exercisable
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Contractual Exercise
Price Range Number Price Life Number Price
$13.14 - $17.35 313 650 $15.36 2.9 yrs. 313 650 $15.36
$22.88 - $25.19 2 519 600 $23.69 8.0 yrs. 291 751 $22.87
$28.44 - $31.56 435 000 $29.29 9.0 yrs. 292 349 $24.99
(ii) Performance Shares Plan Cinergy's Performance Shares Plan is a long-
term incentive plan developed to reward officers and other key employees for
achieving corporate and individual goals. Under the Performance Shares Plan,
participants are granted contingent shares of common stock. A percentage of
these contingent shares is earned with respect to each participant based on
the level of goal attainment at the completion of a performance cycle.
Performance cycles consist of overlapping four-year periods, beginning every
two years. Previous performance cycles of Resources became performance cycles
under the Cinergy Performance Shares Plan. Awards earned under the
Performance Shares Plan are paid in two installments: one-half of the award
is paid in the year immediately following the end of the performance cycle and
one-half of the award is paid in the subsequent year. The most recently
commenced four-year performance cycle under the Performance Shares Plan began
January 1, 1996, and was scheduled to end December 31, 1999. As previously
discussed, Cinergy implemented the 1996 Long-term Incentive Compensation Plan
effective January 1, 1997, and ceased accrual of incentive compensation under
the Performance Shares Plan as of December 31, 1996. The total number of
shares of common stock available under this plan may not exceed 800,000
shares.
The following table provides certain information regarding contingent shares
granted under the Performance Shares Plan for the performance cycle which
began January 1, 1996:
1996_
Number of contingent shares granted 166 280
Fair value at date of grant (dollars in thousands) $3 508
Weighted average per share amounts $24.47
The fair values of contingent shares and weighted average per share amounts
are measured at the market price of a share of common stock as if it were
vested and issued on the date of grant, adjusted for expected forfeitures and
the estimated present value of dividends foregone during the related
performance cycle.
(iii) Employee Stock Purchase and Savings Plan Cinergy's Employee Stock
Purchase and Savings Plan allows essentially all full-time, regular employees
to purchase shares of common stock pursuant to a stock option feature. Under
the Employee Stock Purchase and Savings Plan, after-tax funds are withheld
from a participant's compensation during a 26-month offering period and are
deposited in an interest-bearing account. At the end of the offering period,
participants may apply amounts deposited in the account, plus interest, toward
the purchase of shares of common stock at a purchase price equal to the fair
market value of a share of common stock on the first date of the offering
period, less five percent. Any funds not applied toward the purchase of
shares are returned to the participant. A participant may elect to terminate
participation in the plan at any time. Participation also will terminate if
the participant's employment with Cinergy ceases. Upon termination of
participation, all funds, including interest, are returned to the participant
without penalty. The most recently completed offering period ended December
31, 1996. The purchase price under this offering was $21.7312. A new
offering period began January 1, 1997, and will end February 28, 1999. The
purchase price under this offering is $31.825. The total number of shares of
common stock available under the Employee Stock Purchase and Savings Plan may
not exceed 2,000,000.
Employee Stock Purchase and Savings Plan activity for 1996, 1995, and 1994 is
summarized as follows:
1996 1995 1994_______
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
Outstanding, beginning of year 490 787 $21.73 217 604 $21.73 175 299 $17.64
Granted - - 328 362 21.73 219 335 21.73
Exercised (414 284) 21.73 (1 010) 21.73 (140 039) 17.65
Forfeited (76 503) 21.73 (54 169) 21.73 (36 991) 17.83
Outstanding, end of year - $ - 490 787 $21.73 217 604 $21.73
Weighted average fair value of
options granted during the year $ - $2.42 $1.97
The fair values of options granted were estimated as of the date of grant
using a Black-Scholes option pricing model. The weighted averages for the
assumptions used in determining the fair values of options granted were as
follows:
1995 1994
Risk-free interest rate 7.7% 6.8%
Expected dividend yield 7.3% 7.4%
Expected lives 2.0 yrs. 2.2 yrs.
Expected common stock variance 1.7% 1.7%
(iv) 1996 Long-term Incentive Compensation Plan In 1996, Cinergy adopted
and shareholders approved a new incentive compensation plan, the 1996 Long-
term Incentive Compensation Plan. Under the 1996 Long-term Incentive
Compensation Plan, certain key employees may be granted stock options, SARs,
restricted stock, cash awards, performance shares, performance awards,
dividend equivalents, and other stock-based awards. As previously mentioned,
no stock-based awards were made under the 1996 Long-term Incentive
Compensation Plan as of December 31, 1996; however, in January 1997, 348,056
performance-based restricted shares subject to specified target performance
objectives and 330,100 stock options at an option price of $33.50 per share
were granted to certain key employees. Stock options awarded under the 1996
Long-term Incentive Compensation Plan are granted at the fair market value of
the shares on the date of grant and may not have a purchase term of more than
10 years from the date of grant. The number of shares of common stock to be
awarded under the 1996 Long-term Incentive Compensation Plan is limited in the
aggregate to 7,000,000 shares.
3. Preferred Stock of Subsidiaries
Cinergy, CG&E, and PSI
(a) Schedule of Cumulative Preferred Stock
December 31
CG&E 1996 1995
Authorized 6,000,000 shares (dollars in thousands)
Not subject to mandatory redemption
Par value $100 per share - outstanding
4% Series 169,835 shares in 1996 and 270,000 shares
in 1995 $ 16 984 $ 27 000
4 3/4% Series 41,621 shares in 1996 and 130,000 shares in 1995 4 162 13 000
Total 21 146 40 000
Subject to mandatory redemption
Par value $100 per share - outstanding
7 7/8% Series 800,000 shares in 1995 - 80 000
7 3/8% Series 800,000 shares in 1995 ____-___ 80 000
Total - 160 000
PSI
Not subject to mandatory redemption
Par value $25 per share - authorized 5,000,000 shares - outstanding
4.32% Series 169,162 shares in 1996 and 1995 4 229 4 229
4.16% Series 148,763 shares in 1996 and 1995 3 719 3 719
7.44% Series 3,408,712 shares in 1996 and 4,000,000 shares in 1995 85 218 100 000
Par value $100 per share - authorized 5,000,000 shares - outstanding
3 1/2% Series 40,567 shares in 1996 and 40,843 shares in 1995 4 056 4 085
6 7/8% Series 600,000 shares in 1996 and 1995 60 000 60 000
7.15% Series 158,640 shares in 1996 and 1995 15 864 15 864
Total 173 086 187 897
Total - Cinergy
Total not subject to mandatory redemption $194 232 $227 897
Total subject to mandatory redemption $ - $160 000
Cinergy, CG&E, and PSI
(b) Changes in Cumulative Preferred Stock Outstanding Changes in cumulative
preferred stock outstanding during 1996, 1995, and 1994, were as follows:
Shares Par
Retired Value_
(dollars in
thousands)
1996
Not subject to mandatory redemption
Par value $100 per share
CG&E
4% Series 100 165 $10 016
4 3/4% Series 88 379 8 838
PSI
3 1/2% Series 276 29
Par value $25 per share
PSI
7.44% Series 591 288 14 782
Subject to mandatory redemption
Par value $100 per share
CG&E
7 7/8% Series 800 000 80 000
7 3/8% Series 800 000 80 000
1995
Not subject to mandatory redemption
Par value $100 per share
CG&E
7.44 % Series 400 000 $40 000
PSI
3 1/2% Series 329 32
Subject to mandatory redemption
Par value $100 per share
CG&E
9.15 % Series 500 000 50 000
1994
Not subject to mandatory redemption
Par value $100 per share
CG&E
9.28 % Series 400 000 $40 000
PSI
3 1/2% Series 598 60
Cinergy and CG&E
During the third quarter of 1996, Cinergy commenced an offer to purchase any
and all outstanding shares of preferred stock of CG&E. Cinergy purchased
1,788,544 shares of preferred stock and made a capital contribution to CG&E of
all the shares it acquired and CG&E canceled the shares. The cost of
reacquiring the preferred stock, totaling $18 million, represents the
difference between the par value of the preferred stock purchased and the
price paid (including fees paid to tender agents) and is reflected as a charge
to "Retained Earnings" in the Consolidated Statements of Changes in Common
Stock Equity and as a deduction from "Net Income" in the Consolidated
Statements of Income for purposes of determining net income and earnings per
share applicable to common stock for Cinergy. The 4 3/4% Series no longer
meets listing requirements of the New York Stock Exchange (NYSE) and has been
delisted.
Cinergy, CG&E, PSI, and ULH&P
4. Long-term Debt
(a) Schedule of Long-term Debt (excluding amounts due within one year)
December 31
1996 1995
CG&E and Subsidiaries (dollars in thousands)
CG&E
First Mortgage Bonds
5 7/8% Series due July 1, 1997 $ - $ 30 000
6 1/4% Series due September 1, 1997 - 100 000
5.80% Series due February 15, 1999 110 000 110 000
7 3/8% Series due May 1, 1999 50 000 50 000
7 3/8% Series due November 1, 2001 60 000 60 000
7 1/4% Series due September 1, 2002 100 000 100 000
8 1/8% Series due August 1, 2003 60 000 60 000
6.45% Series due February 15, 2004 110 000 110 000
8.95% Series due December 15, 2021 100 000 100 000
8 1/2% Series due September 1, 2022 100 000 100 000
7.20% Series due October 1, 2023 300 000 300 000
5.45% Series due January 1, 2024 (Pollution Control) 46 700 46 700
5 1/2% Series due January 1, 2024 (Pollution Control) 48 000 48 000
Total first mortgage bonds 1 084 700 1 214 700
Pollution Control Notes
Variable rate due August 1, 2013 and December 1, 2015 100 000 100 000
Variable rate due September 1, 2030 84 000 84 000
6.50% due November 15, 2022 12 721 12 721
Total pollution control notes 196 721 196 721
Other Long-term Debt
6.90% Debentures due June 1, 2025
(Redeemable at the option of the holders on June 1, 2005) 150 000 150 000
8.28% Junior subordinated debentures due July 1, 2025 100 000 100 000
Total other long-term debt 250 000 250 000
Unamortized Premium and Discount - Net (12 130) (14 348)
Total - CG&E 1 519 291 1 647 073
ULH&P
First Mortgage Bonds
6 1/2% Series due August 1, 1999 20 000 20 000
8% Series due October 1, 2003 10 000 10 000
9 1/2% Series due December 1, 2008 - 10 000
Total first mortgage bonds 30 000 40 000
Other Long-term Debt
7.65% Debentures due July 15, 2025 15 000 15 000
Unamortized Premium and Discount - Net (383) (623)
Total - ULH&P 44 617 54 377
Lawrenceburg Gas Company (Lawrenceburg)
First Mortgage Bonds
9 3/4% Series due October 1, 2001 1 200 1 200
Total - CG&E and subsidiaries $1 565 108 $1 702 650
PSI
First Mortgage Bonds
Series S, 7%, due January 1, 2002 $ 26 429 $ 26 429
Series Y, 7 5/8%, due January 1, 2007 24 140 24 140
Series BB, 6 5/8%, due March 1, 2004 (Pollution Control) - 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 TT, 7 3/8%, due March 15, 2012 (Pollution Control) 10 000 10 000
Series UU, 7 1/2%, due March 15, 2015 (Pollution Control) 14 250 14 250
Series YY, 5.60%, due February 15, 2023 (Pollution Control) 29 945 29 945
Series ZZ, 5 3/4%, due February 15, 2028 (Pollution Control) 50 000 50 000
Series AAA, 7 1/8%, due February 1, 2024 50 000 50 000
Total first mortgage bonds 262 764 267 764
Secured Medium-term Notes
Series A, 6.65% to 8.88%, due January 3, 1997 to June 1, 2022 290 000 300 000
Series B, 5.22% to 8.26%, due September 17, 1998
to August 22, 2022 230 000 230 000
(Series A and B, 7.66% weighted average interest rate
and 15 year weighted average remaining life)
Total secured medium-term notes 520 000 530 000
Pollution Control Notes
5 3/4%, due December 15, 1997 to December 15, 2003 - 19 200
Variable rate due January 1, 2014 and March 1, 2019 24 600 -___
Total pollution control notes 24 600 19 200
Other Long-term Debt
Series 1994A Promissory Note, non-interest bearing,
due January 3, 2001 19 825 19 825
6.25%, due December 15, 2005
(Notes are callable and/or putable on December 15, 1998) 50 000 -
6.35% Debentures due November 15, 2006
(Redeemable in whole or in part at the option of the
holders on November 15, 2000) 100 000 -___
Total other long-term debt 169 825 19 825
Unamortized Premium and Discount - Net (7 319) (8 673)
Total - PSI $ 969 870 $ 828 116
Total - Cinergy
First Mortgage Bonds $1 378 664 $1 523 664
Secured Medium-term Notes 520 000 530 000
Pollution Control Notes 221 321 215 921
Other Long-term Debt 434 825 284 825
Unamortized Premium and Discount - Net (19 832) (23 644)
Total long-term debt $2 534 978 $2 530 766
(b) Mandatory Redemption and Other Requirements Long-term debt maturities
for the next five years are as follows:
Cinergy and CG&E and
Subsidiaries Subsidiaries PSI ULH&P
(in millions)
1997 $140 $130 $ 10 $ -
1998 35 - 35 -
1999 186 180 6 20
2000 31 - 31 -
2001 100 61 39 -
$492 $371 $121 $20
Maintenance and replacement fund provisions contained in CG&E's, PSI's, and
ULH&P's first mortgage bond indentures require cash payments, bond
retirements, or pledges of unfunded property additions each year based on an
amount related to the net revenues of the respective company.
5. Notes Payable
Cinergy, CG&E, PSI, and ULH&P
Cinergy's subsidiaries had regulatory authority to borrow up to $838 million
($438 million for CG&E and its subsidiaries, including $35 million for ULH&P,
and $400 million for PSI) as of December 31, 1996. In connection with this
authority, unsecured lines of credit (Committed Lines) have been established
which permit borrowings of up to $280 million ($80 million for CG&E and $200
million for PSI), of which $181 million ($65 million for CG&E and $116 million
for PSI) remained unused at December 31, 1996. CG&E and PSI also have the
capability to issue commercial paper which must be supported by Committed
Lines of the respective company. Neither CG&E nor PSI issued commercial paper
in 1996 and none remained outstanding as of December 31, 1996. Additionally,
pursuant to this authority, additional short-term borrowings with various
banks are arranged on an "as offered" basis (Uncommitted Lines).
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. Commitment fees for the Committed Lines
were immaterial during the 1994 through 1996 period.
To better manage cash and working capital requirements, Cinergy's utility
subsidiaries, including CG&E, PSI, and ULH&P, participate in a money pooling
arrangement. Under this money pooling arrangement, Cinergy system companies
with surplus short-term funds, whether from internal or external sources,
provide short-term loans to other system companies at rates that reflect (1)
the actual costs of the external borrowing and/or (2) the costs of the
internal funds which are set at the 30-day Federal Reserve "AA" industrial
commercial paper rate. The SEC's approval of the money pool, pursuant to the
PUHCA, extends through May 31, 1997. (See Note 16 for an event subsequent to
the date of the auditor's report.)
Additionally, Cinergy has established a $600 million credit facility, which
expires in May 2001, of which $91 million remained unused as of December 31,
1996. This new credit facility was established, in part, to fund the
acquisition of Midlands through Avon Energy and its wholly-owned subsidiary
($500 million has been designated for this purpose) with the remaining portion
available for general corporate purposes. The prior $100 million credit
facility, which would have expired in September 1997, has been terminated.
In addition, Cinergy U.K., a subsidiary of Investments, which holds Cinergy's
50% investment in Avon Energy, entered into a $40 million non-recourse credit
agreement, of which $27 million is outstanding as of December 31, 1996. This
new credit agreement was also used to fund the acquisition of Midlands.
The weighted average interest rates on short-term borrowings outstanding at
December 31, 1996 and 1995, were as follows:
1996 1995_
Cinergy and subsidiaries 5.96% 5.97%
CG&E 5.98 -
PSI 5.97 5.97
Cinergy, CG&E, PSI, and ULH&P
6. Sale of Accounts Receivable
In January 1996, CG&E, PSI, and ULH&P entered into an agreement to sell, on a
revolving basis, undivided percentage interests in certain of their accounts
receivable up to an aggregate maximum of $350 million, of which $246 million
has been sold as of December 31, 1996. Of this amount, $164 million, has been
sold by CG&E, including $23 million sold by ULH&P, and $82 million has been
sold by PSI. Accounts receivable on the Consolidated Balance Sheets of
Cinergy, CG&E, and PSI and the Balance Sheet of ULH&P are net of the amounts
sold at December 31, 1996. PSI had a similar agreement, which expired in
January 1996, to sell up to $90 million of its accounts receivable. Accounts
receivable on the Consolidated Balance Sheets of Cinergy and PSI are net of
$90 million sold at December 31, 1995.
7. Leases
Cinergy, CG&E, PSI, and ULH&P
(a) Operating Leases Cinergy and its subsidiaries have entered into
operating lease agreements covering various facilities and properties,
including office space and computer, communications, and transportation
equipment. Total rental payments on operating leases for each of the past
three years were as follows:
1996 1995 1994
(in millions)
Cinergy and subsidiaries $31 $36 $36
CG&E and subsidiaries 18 22 22
PSI 13 14 14
ULH&P 2 5 5
Future minimum lease payments required under operating leases with remaining,
non-cancelable lease terms in excess of one year as of December 31, 1996, are
as follows:
Cinergy and CG&E and
Subsidiaries Subsidiaries PSI ULH&P*
(in millions, ULH&P in thousands)
1997 $ 31 $12 $11 $24
1998 23 7 8 12
1999 16 6 5 -
2000 10 5 3 -
2001 7 4 2 -
After 2001 19 18 1 -
$106 $52 $30 $36
* Excludes amounts applicable to CG&E's non-cancelable leases allocated to
ULH&P.
Cinergy and CG&E
(b) Capital Lease In November 1996, CG&E entered into a sale-leaseback
agreement for certain equipment at Woodsdale. The lease is a capital lease
with an initial lease term of five years. At the end of the initial lease
term, the lease may be renewed at mutually agreed upon terms or the equipment
may be repurchased by CG&E at the original sale amount. The monthly lease
payment, comprised of interest only, is based on the applicable London
Interbank Offered Rate (LIBOR) and, therefore, the capital lease obligation
will not be amortized over the initial lease term. The property under the
capital lease is depreciated at the same rate as if the property were still
owned by CG&E. CG&E recorded a capital lease obligation of $22 million, which
represented the net book value of the equipment at the beginning of the lease.
8. Financial Instruments
Cinergy, CG&E, and PSI
(a) Financial Derivatives Cinergy has entered into financial derivative
contracts for the purposes described below.
(i) Forward Exchange Hedging Activity Cinergy has hedged its pound
sterling denominated investment in Midlands through forward exchange
contracts. Translation losses on these contracts have been recorded in the
cumulative foreign currency translation adjustment which is reported as a
separate component of common stock equity in the Consolidated Financial
Statements. The contract existing at December 31, 1996, required Cinergy to
exchange 330 million pounds sterling for $500 million. The estimated fair
value ($65 million) of this contract, which is based on the cost that would
have been incurred to terminate the contract at December 31, 1996, has been
reflected in "Current Liabilities - Other" in the Consolidated Balance
Sheets. (See Note 16 for an event subsequent to the date of the auditor's
report.)
(ii) Interest Rate Risk Management Cinergy and its subsidiaries enter
into interest rate swaps to lower funding costs and reduce exposures to
fluctuations in interest rates. Under these interest rate swaps, Cinergy
and its subsidiaries agree with counterparties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate interest
amounts calculated on an agreed notional principal amount. At December 31,
1996, PSI had two interest rate swap agreements outstanding with notional
amounts of $100 million each. One contract, with a four-year term
beginning in November 1996, requires PSI to pay a floating rate and receive
a fixed rate. The second contract, with a six-month term beginning in May
1997, requires PSI to pay a fixed rate and receive a floating rate. In each
case the floating rate is based on the applicable LIBOR. The interest
differential paid or received is recognized in the Consolidated Statements
of Income as a component of interest expense. The fair values of the
interest rate swap agreements at December 31, 1996, were not significant.
Cinergy, CG&E, PSI, and ULH&P
(b) Fair Value of Other Financial Instruments The estimated fair values of
Cinergy's and its subsidiaries' other financial instruments were as follows
(this information does not purport to be a valuation of the companies as a
whole):
December 31 December 31
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value_
(in millions; ULH&P in thousands)
Financial Instruments
Cinergy and Subsidiaries
First mortgage bonds and
other long-term debt (includes
amounts due within one year) $ 2 675 $ 2 676 $ 2 733 $ 2 837
Cumulative preferred stock of
subsidiary - subject to
mandatory redemption - - 160 163
CG&E and Subsidiaries
First mortgage bonds and
other long-term debt (includes
amounts due within one year) $ 1 695 $ 1 688 $ 1 855 $ 1 912
Cumulative preferred stock -
subject to mandatory redemption - - 160 163
PSI
First mortgage bonds and
other long-term debt (includes
amounts due within one year) $ 980 $ 988 $ 878 $ 925
ULH&P
First mortgage bonds and
other long-term debt (includes
amounts due within one year) $44 617 $44 668 $69 377 $72 804
The following methods and assumptions were used to estimate the fair values of
each major class of financial instruments:
Cash and temporary cash investments, restricted deposits, and notes payable
Due to the short period to maturity, the carrying amounts reflected on the
Balance Sheets approximate fair values.
First mortgage bonds and other long-term debt The fair values of long-term
debt issues were estimated based on the latest quoted market prices or, if not
listed on the NYSE, on the present value of future cash flows. The discount
rates used approximate the incremental borrowing costs for similar
instruments.
Cumulative preferred stock - subject to mandatory redemption The aggregate
fair value of preferred stock subject to mandatory redemption was based on the
latest closing prices quoted on the NYSE for each series or, if no trades
occurred during the period, on the present value of future cash flows using
discount rates that approximate the incremental borrowing costs for similar
instruments.
Cinergy, CG&E, PSI, and ULH&P
(c) Concentrations of Credit Risk Credit risk represents the risk of loss
which would occur as a result of nonperformance by counterparties pursuant to
the terms of their contractual obligations with the Company. Concentrations
of credit risk relate to significant customers or counterparties, or groups of
customers or counterparties, possessing similar economic or industry
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The
Company does not have a significant loss exposure to any individual customer
or counterparty.
Concentration of credit risk with respect to Cinergy's trade accounts
receivable from electric and gas retail customers is limited due to Cinergy's
large number of customers and diversified customer base of residential,
commercial, and industrial customers. Sales for resale customers on Cinergy's
electric system include traditional electric cooperatives and municipalities
with which CG&E and PSI have long-standing relationships. Contracts for sales
of electricity for resale outside of Cinergy's system are principally with
other investor owned utilities, electric cooperatives, municipalities, and a
few large power marketers. The majority of these contracts are for terms of
one year or less. While no significant exposure to any one counterparty
exists at December 31, 1996, as discussed in the "Power Marketing and Trading"
section of "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," Cinergy's exposure to credit risk could
increase as the competitive market for electricity expands.
Potential exposure to credit risk also exists from Cinergy's use of financial
derivatives such as forward foreign exchange contracts, currency swaps, and
interest rate swaps. Because these financial instruments are transacted only
with highly rated financial institutions, Cinergy does not anticipate
nonperformance by any of the counterparties.
9. Pension Plans
Cinergy, CG&E, PSI, and ULH&P
The defined benefit pension plans of Cinergy's subsidiaries cover
substantially all employees meeting certain minimum age and service
requirements. Plan benefits are determined under a final average pay formula
with consideration of years of participation, age at retirement, and the
applicable average Social Security wage base or benefit amount.
The funding policies of the operating subsidiaries are to contribute annually
to the plans an amount which is not less than the minimum amount required by
the Employee Retirement Income Security Act of 1974 and not more than the
maximum amount deductible for income tax purposes. Contributions applicable
to the 1996, 1995, and 1994 plan years were $7 million, $18 million, and $4
million, respectively. Of these amounts, CG&E and its subsidiaries
contributed $7 million for each of the 1996 and 1995 plan years. There were
no contributions made for the 1994 plan year by CG&E and its subsidiaries.
PSI's contributions were $11 million and $4 million, for the 1995 and 1994
plan years, respectively. There were no contributions made for the 1996 plan
year by PSI. The plans' assets consist of investments in equity and fixed
income securities.
Cinergy
Cinergy's pension cost for 1996, 1995, and 1994 included the following
components:
1996 1995 1994
(in millions)
Benefits earned during the period $ 21.2 $ 18.5 $ 19.4
Interest accrued on projected
benefit obligations 61.6 61.4 54.9
Actual (return) loss on plans' assets (75.6) (119.3) 8.0
Net amortization and deferral 17.3 61.1 (66.3)
Net periodic pension cost $ 24.5 $ 21.7 $ 16.0
CG&E and ULH&P
CG&E's and its subsidiaries' (including ULH&P's) pension cost for 1996, 1995,
and 1994 included the following components:
1996 1995 1994
(in millions)
Benefits earned during the period $ 11.2 $ 9.8 $ 10.7
Interest accrued on projected
benefit obligations 38.6 38.8 35.1
Actual (return) loss on plans' assets (53.8) (71.9) 5.6
Net amortization and deferral 19.3 35.5 (43.2)
Net periodic pension cost $ 15.3 $ 12.2 $ 8.2
PSI
PSI's pension cost for 1996, 1995, and 1994 included the following components:
1996 1995 1994
(in millions)
Benefits earned during the period $ 10.0 $ 8.7 $ 8.7
Interest accrued on projected
benefit obligation 23.0 22.6 19.8
Actual (return) loss on plan assets (21.8) (47.4) 2.4
Net amortization and deferral (2.0) 25.6 (23.1)
Net periodic pension cost $ 9.2 $ 9.5 $ 7.8
Cinergy, CG&E, PSI, and ULH&P
During 1996 and 1994, CG&E and its subsidiaries (including ULH&P) recognized
an additional $31 million and $16 million, respectively, of accrued pension
cost in accordance with Statement of Financial Accounting Standards No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits (Statement 88). Additionally,
during 1996, PSI recognized an additional $30 million of accrued pension cost
in accordance with Statement 88. These amounts represent the costs associated
with additional benefits extended in connection with voluntary workforce
reduction programs (see Note 1(l)).
1996 1995 1994
Actuarial Assumptions:
For determination of projected benefit
obligations
Discount rate 8.00% 7.50% 8.50%
Rate of increase in future compensation
PSI 5.00 4.50 5.50
CG&E and subsidiaries 5.00 4.50 5.50
For determination of pension cost
Rate of return on plans' assets
PSI 9.00 9.00 9.00
CG&E and subsidiaries 9.00 9.50 9.50
Cinergy
The following table reconciles the plans' funded status with amounts recorded
in the Consolidated Financial Statements. Under the provisions of Statement
of Financial Accounting Standards No. 87, Employers' Accounting for Pensions
(Statement 87), certain assets and obligations of the plans are deferred and
recognized in the Consolidated Financial Statements in subsequent periods.
1996 1995
Plans' Plan's Plans' Plan's
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
(in millions)
Actuarial present value
of benefits
Vested benefits $(423.1) $(241.6) $(376.9) $(227.3)
Non-vested benefits (33.5) (10.1) (35.1) (16.0)
Accumulated benefit
obligations (456.6) (251.7) (412.0) (243.3)
Effect of future
compensation
increases (121.7) (53.3) (120.3) (53.2)
Projected benefit
obligations (578.3) (305.0) (532.3) (296.5)
Plans' assets at fair value 531.6 234.1 500.6 220.0
Projected benefit
obligations in excess of
plans' assets (46.7) (70.9) (31.7) (76.5)
Remaining balance of plans'
net assets existing at
date of initial application
of Statement 87 to be
recognized as a reduction
of pension cost in future
periods (6.7) (3.1) (7.7) (3.4)
Unrecognized net gain
resulting from experience
different from that
assumed and effects of
changes in assumptions (48.4) (28.1) (14.1) (1.3)
Prior service cost not
yet recognized in net
periodic pension cost 33.6 23.2 35.2 16.8
Accrued pension cost at
December 31 $ (68.2) $ (78.9) $ (18.3) $ (64.4)
CG&E and ULH&P
The following table reconciles the plans' funded status with amounts recorded
in the Consolidated Financial Statements of CG&E. Under the provisions of
Statement 87, certain assets and obligations of the plans are deferred and
recognized in the Financial Statements in subsequent periods.
1996 1995
Plan's Plan's Plan's Plan's
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
(in millions)
Actuarial present value
of benefits
Vested benefits $(160.3) $(241.6) $(138.3) $(227.3)
Non-vested benefits (17.0) (10.1) (25.5) (16.0)
Accumulated benefit
obligations (177.3) (251.7) (163.8) (243.3)
Effect of future
compensation
increases (53.2) (53.3) (54.8) (53.2)
Projected benefit
obligations (230.5) (305.0) (218.6) (296.5)
Plans' assets at fair
value 223.3 234.1 209.3 220.0
Projected benefit
obligations in excess of
plans' assets (7.2) (70.9) (9.3) (76.5)
Remaining balance of plans'
net assets existing at
date of initial application
of Statement 87 to be
recognized as a reduction
of pension cost in future
periods (2.4) (3.1) (2.7) (3.4)
Unrecognized net gain
resulting from experience
different from that
assumed and effects of
changes in assumptions (40.1) (28.1) (18.9) (1.3)
Prior service cost not
yet recognized in net
periodic pension cost 16.1 23.2 19.5 16.8
Accrued pension cost at
December 31 $ (33.6) $ (78.9) $ (11.4) $ (64.4)
PSI
The following table reconciles the plan's funded status with amounts recorded
in the Consolidated Financial Statements of PSI. Under the provisions of
Statement 87, certain assets and obligations of the plan are deferred and
recognized in the Consolidated Financial Statements in subsequent periods.
1996 1995
(in millions)
Actuarial present value of benefits
Vested benefits $(262.8) $(238.6)
Non-vested benefits (16.5) (9.6)
Accumulated benefit obligation (279.3) (248.2)
Effect of future compensation
increases (68.5) (65.5)
Projected benefit obligation (347.8) (313.7)
Plan's assets at fair value 308.3 291.3
Projected benefit obligation in
excess of plan's assets (39.5) (22.4)
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 (4.3) (5.0)
Unrecognized net (gain) loss resulting
from experience different from that
assumed and effects of changes in
assumptions (8.3) 4.8
Prior service cost not yet recognized
in net periodic pension cost 17.5 15.7
Accrued pension cost
at December 31 $ (34.6) $ (6.9)
10. Other Postretirement Benefits
Cinergy, CG&E, PSI, and ULH&P
Cinergy provides certain health care and life insurance benefits to retired
employees and their eligible dependents. The health care benefits include
medical coverage, dental coverage, and prescription drugs. The health care
benefits provided are subject to certain limitations, such as deductibles and
co-payments. Additionally, all employees must meet minimum age and service
requirements to be eligible for these postretirement benefits. Prior to
January 1, 1997, CG&E and PSI employees were covered under separate plans.
Effective January 1, 1997, all Cinergy active employees are eligible to
receive essentially the same postretirement health care benefits. Certain
classes of employees, based on age, as well as all retirees, have been
grandfathered under benefit provisions in place prior to January 1, 1997.
Neither CG&E and its subsidiaries nor PSI currently pre-fund their obligations
for these postretirement benefits; however, PSI, in connection with the
settlement which resulted in the February 1995 Order, agreed to begin pre-
funding. Implementation of pre-funding is subject to the outcome of
negotiations with The Office of the Utility Consumer Counselor and approval by
the IURC.
Postretirement benefit cost for 1996, 1995, and 1994 included the following
components:
Cinergy
Health Life
Care Insurance Total
(in millions)
1996
Benefits earned during the period $ 5.7 $ .1 $ 5.8
Interest accrued on Accumulated Post-
retirement Benefit Obligation (APBO) 16.5 2.2 18.7
Net amortization and deferral .3 - .3
Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $30.6 $2.6 $33.2
1995
Benefits earned during the period $ 4.4 $ .1 $ 4.5
Interest accrued on APBO 15.6 2.2 17.8
Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $28.1 $2.6 $30.7
1994
Benefits earned during the period $ 5.2 $ .2 $ 5.4
Interest accrued on APBO 13.8 2.2 16.0
Net amortization and deferral .1 - .1
Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $27.2 $2.7 $29.9
CG&E and ULH&P
Health Life
Care Insurance Total
(in millions)
1996
Benefits earned during the period $ .7 $ .1 $ .8
Interest accrued on APBO 4.9 2.0 6.9
Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $8.2 $2.5 $10.7
1995
Benefits earned during the period $ .4 $ .1 $ .5
Interest accrued on APBO 4.5 2.0 6.5
Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $7.5 $2.5 $10.0
1994
Benefits earned during the period $ .9 $ .1 $ 1.0
Interest accrued on APBO 3.9 2.0 5.9
Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $7.4 $2.5 $ 9.9
PSI
Health Life
Care Insurance Total
(in millions)
1996
Benefits earned during the period $ 5.0 $ - $ 5.0
Interest accrued on APBO 11.6 .2 11.8
Net amortization and deferral .3 - .3
Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $22.4 $ .1 $22.5
1995
Benefits earned during the period $ 4.0 $ - $ 4.0
Interest accrued on APBO 11.1 .2 11.3
Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $20.6 $ .1 $20.7
1994
Benefits earned during the period $ 4.3 $ .1 $ 4.4
Interest accrued on APBO 9.9 .2 10.1
Net amortization and deferral .1 - .1
Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $19.8 $ .2 $20.0
Cinergy, CG&E, PSI, and ULH&P
The following table reconciles the APBO of the health care and life insurance
plans with amounts recorded in the Financial Statements. Under the provisions
of Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions certain obligations of the
plans are deferred and recognized in the Financial Statements in subsequent
periods.
Cinergy
Health Life
Care Insurance Total_
(in millions)
1996
Actuarial present value of benefits
Fully eligible active plan participants $ (13.7) $ (1.6) $ (15.3)
Other active plan participants (49.8) (1.5) (51.3)
Retirees and beneficiaries (118.0) (26.4) (144.4)
Projected APBO (181.5) (29.5) (211.0)
Unamortized transition obligations 75.4 .4 75.8
Unrecognized net loss (gain) resulting from
experience different from that assumed
and effects of changes in assumptions 19.5 (.5) 19.0
Accrued postretirement benefit obligations
at December 31, 1996 $ (86.6) $(29.6) $(116.2)
1995
Actuarial present value of benefits
Fully eligible active plan participants $ (11.7) $ (1.1) $ (12.8)
Other active plan participants (112.0) (2.7) (114.7)
Retirees and beneficiaries (99.2) (26.4) (125.6)
Projected APBO (222.9) (30.2) (253.1)
Unamortized transition obligations 137.1 .7 137.8
Unrecognized prior service cost (.3) - (.3)
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 26.1 .5 26.6
Accrued postretirement benefit obligations
at December 31, 1995 $ (60.0) $(29.0) $ (89.0)
Increasing the health care cost trend rate by one percentage point in each
year would increase the APBO by approximately $21 million and $37 million for
1996 and 1995, respectively, and the aggregate of the service and interest
cost components of the postretirement benefit cost for each of 1996, 1995, and
1994 by approximately $4 million, $3 million, and $4 million, respectively.
CG&E and ULH&P
Health Life
Care Insurance Total_
(in millions)
1996
Actuarial present value of benefits
Fully eligible active plan participants $ (10.8) $ (1.6) $ (12.4)
Other active plan participants (24.2) (1.3) (25.5)
Retirees and beneficiaries (28.7) (23.6) (52.3)
Projected APBO (63.7) (26.5) (90.2)
Unamortized transition obligation 24.5 2.5 27.0
Unrecognized prior service cost - .3 .3
Unrecognized net loss (gain) resulting from
experience different from that assumed
and effects of changes in assumptions 11.5 (1.4) 10.1
Accrued postretirement benefit obligation
at December 31, 1996 $ (27.7) $(25.1) $ (52.8)
1995
Actuarial present value of benefits
Fully eligible active plan participants $ (2.7) $ (.9) $ (3.6)
Other active plan participants (32.0) (2.0) (34.0)
Retirees and beneficiaries (30.5) (24.5) (55.0)
Projected APBO (65.2) (27.4) (92.6)
Unamortized transition obligation 43.4 2.9 46.3
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 4.4 .1 4.5
Accrued postretirement benefit obligation
at December 31, 1995 $ (17.4) $(24.4) $ (41.8)
Increasing the health care cost trend rate by one percentage point in each
year would increase the APBO by approximately $7 million and $13 million for
1996 and 1995 respectively, and the aggregate of the service and interest cost
components of the postretirement benefit cost by approximately $1 million for
1996, 1995, and 1994.
PSI
Health Life
Care Insurance _Total_
(in millions)
1996
Actuarial present value of benefits
Fully eligible active plan participants $ (2.9) $ - $ (2.9)
Other active plan participants (25.6) (.2) (25.8)
Retirees and beneficiaries (89.3) (2.8) (92.1)
Projected APBO (117.8) (3.0) (120.8)
Unamortized transition obligation 50.9 (2.1) 48.8
Unrecognized prior service cost - (.3) (.3)
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 8.0 .9 8.9
Accrued postretirement benefit obligation
at December 31, 1996 $ (58.9) $ (4.5) $ (63.4)
1995
Actuarial present value of benefits
Fully eligible active plan participants $ (9.0) $ (.2) $ (9.2)
Other active plan participants (80.0) (.7) (80.7)
Retirees and beneficiaries (68.7) (1.9) (70.6)
Projected APBO (157.7) (2.8) (160.5)
Unamortized transition obligation 93.7 (2.2) 91.5
Unrecognized prior service cost (.3) - (.3)
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 21.7 .4 22.1
Accrued postretirement benefit obligation
at December 31, 1995 $ (42.6) $ (4.6) $ (47.2)
Increasing the health care cost trend rate by one percentage point in each
year would increase the APBO by approximately $14 million and $24 million for
1996 and 1995, respectively, and the aggregate of the service and interest
cost components of the postretirement benefit cost for each of 1996, 1995, and
1994 by approximately $3 million, $2 million, and $3 million, respectively.
Cinergy, CG&E, PSI, and ULH&P
The following assumptions were used to determine the APBO:
1996 1995 1994___
Discount rate 8.00% 7.50% 8.50%
Health care cost trend rate,
gradually declining to 5%
CG&E and subsidiaries 7.00-9.00% 8.00-11.00% 9.00-12.00%
PSI 7.00-9.00 8.00-10.00 8.00-12.00
Year ultimate trend rates achieved
CG&E and subsidiaries 2004 2002 2002
PSI 2004 2007 2007
11. Income Taxes
Cinergy
Cinergy complies with 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.
The significant components of Cinergy's net deferred income tax liability at
December 31, 1996, and 1995, are as follows:
1996 1995__
(in millions)
Deferred Income Tax Liability
Utility plant $1 042.1 $ 981.8
Unamortized costs of reacquiring debt 23.5 28.8
Deferred operating expenses
and carrying costs 86.2 86.6
Amounts due from customers - income taxes 129.5 143.4
Deferred DSM costs 43.5 47.3
Investment in unconsolidated subsidiary 13.5 -
Other 46.2 36.4
Total deferred income tax liability 1 384.5 1 324.3
Deferred Income Tax Asset
Unamortized investment tax credits 63.9 67.5
Litigation settlement - 29.8
Deferred fuel costs 12.0 13.0
Accrued pension and other benefit costs 60.4 43.3
Other 101.9 49.8
Total deferred income tax asset 238.2 203.4
Net Deferred Income Tax Liability $1 146.3 $1 120.9
CG&E
CG&E and its subsidiaries comply with the provisions of Statement 109.
Statement 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of existing differences between the
financial reporting and tax reporting bases of assets and liabilities.
The significant components of CG&E's net deferred income tax liability at
December 31, 1996, and 1995, are as follows:
1996 1995
(in millions)
Deferred Income Tax Liability
Utility plant $671.6 $663.8
Unamortized costs of reacquiring debt 11.2 14.2
Deferred operating expenses
and carrying costs 73.5 76.2
Amounts due from customers - income taxes 120.7 139.8
Deferred DSM costs 6.0 5.6
Other 40.9 25.5
Total deferred income tax liability 923.9 925.1
Deferred Income Tax Asset
Unamortized investment tax credits 43.9 46.1
Deferred fuel costs 5.8 8.1
Accrued pension and other benefit costs 31.4 28.7
Other 75.7 46.8
Total deferred income tax asset 156.8 129.7
Net Deferred Income Tax Liability $767.1 $795.4
PSI
PSI and its subsidiaries comply with the provisions of Statement 109.
Statement 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of existing differences between the
financial reporting and tax reporting bases of assets and liabilities.
The significant components of PSI's net deferred income tax liability at
December 31, 1996, and 1995, are as follows:
1996 1995_
(in millions)
Deferred Income Tax Liability
Electric utility plant $370.5 $315.7
Unamortized costs of reacquiring debt 12.3 14.6
Amounts due from customers - income taxes 8.8 3.6
Deferred operating expenses
and accrued carrying costs 12.7 12.5
Deferred DSM costs 37.5 41.7
Other 4.9 9.4
Total deferred income tax liability 446.7 397.5
Deferred Income Tax Asset
Unamortized investment tax credits 20.0 21.4
Litigation settlement - 29.8
Accrued pension and other benefit costs 29.0 15.6
Deferred fuel costs 6.2 4.9
Other 18.5 (6.1)
Total deferred income tax asset 73.7 65.6
Net Deferred Income Tax Liability $373.0 $331.9
ULH&P
ULH&P complies with the provisions of Statement of Statement 109. Statement
109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities.
The significant components of ULH&P's net deferred income tax liability at
December 31, 1996, and 1995, are as follows:
1996 1995
(in thousands)
Deferred Income Tax Liability
Utility plant $33 872 $32 104
Unamortized costs of reacquiring debt 996 1 034
Deferred fuel costs 5 459 -
Other 3 732 2 817
Total deferred income tax liability 44 059 35 955
Deferred Income Tax Asset
Unamortized investment tax credits 1 946 2 060
Amounts due to customers - income taxes 2 067 1 904
Deferred fuel costs - 1 822
Accrued pension and other benefit costs 2 482 2 365
Other 4 101 4 076
Total deferred income tax asset 10 596 12 227
Net Deferred Income Tax Liability $33 463 $23 728
Cinergy, CG&E, PSI, and ULH&P
Cinergy and its subsidiaries will participate in the filing of a consolidated
Federal income tax return for the year ended December 31, 1996. 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.
A summary of Federal and state income taxes charged (credited) to income and
the allocation of such amounts is as follows:
Cinergy
1996 1995 1994_
(in millions)
Current Income Taxes
Federal $143.4 $175.3 $104.1
State 7.5 10.4 6.5
Total current income taxes 150.9 185.7 110.6
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 61.6 53.8 62.2
Property taxes - - (13.3)
DSM costs (1.9) 12.0 14.5
Pension and other benefit costs (28.2) (21.8) (12.4)
Litigation settlement 26.2 - -
Fuel costs 8.8 .3 (.7)
Other items - net (15.4) (7.5) (11.6)
Total deferred Federal income taxes 51.1 36.8 38.7
State 6.5 1.7 2.7
Total deferred income taxes 57.6 38.5 41.4
Investment Tax Credits - Net (9.8) (10.1) (10.4)
Total Income Taxes $198.7 $214.1 $141.6
Allocated to:
Operating income $218.2 $221.4 $154.5
Other income and expenses - net (19.5) (7.3) (12.9)
$198.7 $214.1 $141.6
CG&E
1996 1995 1994_
(in millions)
Current Income Taxes
Federal $115.5 $102.4 $ 82.3
State 1.5 2.5 1.5
Total current income taxes 117.0 104.9 83.8
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 36.6 33.9 42.9
Property taxes - - (11.3)
Pension and other benefit costs (17.0) (10.7) (8.4)
Fuel costs 10.8 6.3 (1.4)
Other items - net (7.5) (2.6) (2.6)
Total deferred Federal income taxes 22.9 32.1 19.2
State 2.2 .8 .6
Total deferred income taxes 25.1 32.9 19.8
Investment Tax Credits - Net (6.2) (6.0) (6.1)
Total Income Taxes $135.9 $131.8 $ 97.5
Allocated to:
Operating income 145.0 $136.4 $104.1
Other income and expenses - net (9.1) (4.6) (6.6)
$135.9 $131.8 $ 97.5
PSI
1996 1995 1994
(in millions)
Current Income Taxes
Federal $41.3 $71.4 $22.0
State 6.0 7.5 5.5
Total current income taxes 47.3 78.9 27.5
Deferred Income Taxes
Federal
Depreciation and other electric utility
plant-related items 25.0 19.9 19.2
DSM costs (2.5) 8.4 12.6
Pension and other benefit costs (11.2) (11.1) (1.8)
Litigation settlement 26.2 - -
Fuel costs (2.0) (6.0) .7
Other items - net (6.3) (3.0) (4.4)
Total deferred Federal income taxes 29.2 8.2 26.3
State 4.3 1.1 2.2
Total deferred income taxes 33.5 9.3 28.5
Investment Tax Credits - Net (3.6) (4.1) (4.3)
Total Income Taxes $77.2 $84.1 $51.7
Allocated to:
Operating income $73.2 $85.0 $50.4
Other income and expenses - net 4.0 (.9) 1.3
$77.2 $84.1 $51.7
ULH&P
1996 1995 1994_
(in thousands)
Current Income Taxes
Federal $ 416 $5 955 $2 746
State (87) 1 324 498
Total current income taxes 329 7 279 3 244
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 1 506 1 382 1 727
Pension and other benefit costs (277) (381) (349)
Fuel costs 6 111 (534) 23
Uncollectible accounts - net (119) (16) 300
Unamortized costs of reacquiring debt 458 808 -
Other items - net 410 (540) (20)
Total deferred Federal income taxes $ 8 089 719 1 681
State
Depreciation and other utility plant-
related items 425 390 656
Fuel costs 1 570 (137) -
Other items - net 55 (35) (8)
Total deferred state income taxes 2 050 218 648
Total deferred income taxes 10 139 937 2 329
Investment Tax Credits - Net (282) (285) (287)
Total Income Taxes $10 186 $7 931 $5 286
Allocated to:
Operating income $ 9 834 $7 887 $5 342
Other income and expenses - net 352 44 (56)
$10 186 $7 931 $5 286
Cinergy, CG&E, PSI, and ULH&P
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 Statements of Income for each registrant as
follows:
Cinergy
1996 1995 1994_
(in millions)
Statutory Federal income tax provision $181.8 $192.2 $113.2
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (9.8) (10.1) (10.4)
Depreciation and other utility plant-
related differences 14.1 9.0 13.5
Preferred dividend requirements of
subsidiaries 8.5 10.8 12.4
Foreign tax credit (11.1) - -
Other - net 1.2 .1 3.7
Federal income tax expense $184.7 $202.0 $132.4
CG&E
Statutory Federal income tax provision $125.8 $127.6 $88.8
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (6.2) (6.0) (6.1)
Depreciation and other utility plant-
related differences 11.7 9.0 8.2
Preferred dividends - 6.2 7.8
Other - net .9 (8.3) (3.3)
Federal income tax expense $132.2 $128.5 $95.4
PSI
1996 1995 1994
(in millions)
Statutory Federal income tax provision $ 67.4 $ 77.5 $ 44.2
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (3.6) (4.1) (4.3)
Other - net 3.1 2.1 4.1
Federal income tax expense $ 66.9 $ 75.5 $ 44.0
ULH&P
1996 1995 1994_
(in thousands)
Statutory Federal income tax provision $7 987 $6 496 $4 385
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (283) (285) (287)
Depreciation and other utility plant-
related differences 358 219 138
Other - net 161 (41) (96)
Federal income tax expense $8 223 $6 389 $4 140
12. Commitments and Contingencies
(a) Construction
Cinergy, CG&E, PSI, and ULH&P
Cinergy will have commitments in connection with its forecasted construction
programs. Aggregate expenditures for Cinergy's construction program for the
1997 through 2001 period are currently forecasted to be $1.7 billion. Of
these projected expenditures, approximately $817 million relates to CG&E and
its subsidiaries, including $111 million for ULH&P, and $908 million relates
to PSI.
(b) Manufactured Gas Plant (MGP) Sites
Cinergy, CG&E, PSI, and ULH&P
(i) General Prior to the 1950s, gas was produced at MGP sites through a
process that involved the heating of coal and/or oil. The gas produced from
this process was sold for residential, commercial, and industrial uses.
Cinergy and PSI
(ii) PSI Coal tar residues, related hydrocarbons, and various metals
associated with MGP sites have been found at former MGP sites in Indiana,
including, but not limited to, Shelbyville and Lafayette, two sites previously
owned by PSI. PSI has identified at least 21 MGP sites which it or its
predecessors previously owned, including 19 it sold in 1945 to Indiana Gas and
Water Company, Inc. (now Indiana Gas Company, Inc. (IGC)), including the
Shelbyville and Lafayette sites. IGC has informed PSI of the basis for its
claim that PSI, as a Potentially Responsible Party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
should contribute to IGC's response costs related to investigating and
remediating contamination at 18 of the 19 MGP sites which PSI sold to IGC
(excluding the Shelbyville site).
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 PSI. Without admitting liability, PSI and IGC have
conducted an investigation and remediation activities at the Shelbyville site.
Recently, PSI and IGC submitted a proposed agreed order to IDEM relative to
the Shelbyville site, which, if accepted by IDEM, will result in a
determination of whether the activities previously undertaken at the site are
sufficient to adequately protect human health and the environment. PSI and
IGC are sharing the costs of the Shelbyville site, and based upon
environmental investigations and remediation completed to date, PSI believes
that any further required investigation and remediation for this site will not
have a material adverse effect on its financial condition or results of
operations.
In 1992, the IDEM issued an order to IGC, naming IGC as a PRP as defined in
the CERCLA, which requires investigation and remediation of the Lafayette MGP
site. IGC entered into an agreed order with the IDEM for the removal of MGP
contamination at that site.
During 1995, PSI received notification from Northern Indiana Public Service
Company (NIPSCO) alleging PSI is a PRP under the CERCLA with respect to
contamination associated with MGP sites previously owned and/or operated by
both PSI and NIPSCO (or their predecessors). The notification included seven
sites, five of which PSI acquired from NIPSCO and subsequently sold to IGC.
The other two sites are located in Goshen and Warsaw, Indiana. Recently,
NIPSCO demanded that PSI reimburse NIPSCO for its costs incurred to date
(approximately $400,000) for investigating the Goshen MGP site as well as
costs to be incurred by NIPSCO for remediation of that site, estimated by
NIPSCO to be as high as $3 million. PSI is investigating this claim.
PSI has placed its insurance carriers on notice of IGC's and NIPSCO's claims.
IGC and PSI have entered into negotiations regarding IGC's claim; however, it
is premature, at this time, to predict the nature, extent, and ultimate costs
of, or PSI's responsibility for, environmental investigations and remediations
at MGP sites owned or previously owned by PSI. Information available to PSI
regarding the current status of investigation and/or remediation at the sites
identified in IGC's claim indicates PSI's potential exposure to probable and
reasonably estimable liabilities associated with these MGP sites would not be
material to its financial condition or results of operations. However,
further investigation and remediation activities at these sites and the
additional sites identified in NIPSCO's claim may indicate that the potential
liability for MGP sites could be material.
In May 1995, the IURC denied IGC's request for recovery of costs incurred in
complying with Federal, state, and local environmental regulations related to
MGP sites in which IGC has an interest, including sites acquired from PSI.
IGC appealed this decision, which IGC contended was contrary to decisions made
by other state utility commissions with respect to this issue. In January
1997, the Indiana Court of Appeals (Court of Appeals) affirmed the IURC's
decision denying IGC's request for recovery of MGP costs. IGC has petitioned
the Indiana Supreme Court to review the Court of Appeals decision. The IURC
granted PSI's motion establishing a sub-docket to PSI's last retail rate
proceeding, in which the IURC issued an order in September 1996, to consider
its request for rate recovery of any MGP site-related costs it may incur. PSI
is unable to predict the extent to which it will be able to recover through
rates any MGP site investigation and remediation costs ultimately incurred.
Cinergy, CG&E, and ULH&P
(iii) CG&E and its Utility Subsidiaries Lawrenceburg, a wholly-owned
subsidiary of CG&E, also has a MGP site. In May 1995, Lawrenceburg and the
IDEM reached an agreement to include the Lawrenceburg MGP site in the IDEM's
voluntary cleanup program. Lawrenceburg implemented a remediation plan, and,
on September 20, 1996, received a certificate of completion on the cleanup
from the IDEM. The total costs incurred for the cleanup program in 1995 and
1996 and expected to be incurred in 1997, are approximately $280,000.
CG&E and its utility subsidiaries are aware of other potential sites where MGP
activities may have occurred at some time in the past. None of these sites is
known to present a risk to the environment. Except for the Lawrenceburg site,
neither CG&E nor its utility subsidiaries have undertaken responsibility for
investigating other potential MGP sites.
Cinergy and CG&E
(c) United Scrap Lead Site The United States Environmental Protection Agency
(EPA) alleges that CG&E is a PRP under the CERCLA liable for cleanup of the
United Scrap Lead site in Troy, Ohio. CG&E was one of approximately 200
companies so named. CG&E believes it is not a PRP and should not be
responsible for cleanup of the site. Under the CERCLA, CG&E could be jointly
and severally liable for costs incurred in cleaning up the site, estimated by
the EPA to be $27 million, of which CG&E estimates its portion to be
immaterial to its financial condition or results of operations.
Cinergy, CG&E, and PSI
(d) Enertech Associates, Inc. (Enertech) Litigation On October 25, 1995, a
suit was filed in the Federal District Court for the Southern District of Ohio
by three former employees of Enertech, formerly named Power International,
Inc., a subsidiary of Investments, naming as defendants Enertech, Cinergy,
Investments, CG&E, PSI, James E. Rogers, and William J. Grealis. (Mr. Rogers
and/or Mr. Grealis are officers and/or directors of the foregoing companies.)
The lawsuit, which stems from the termination of employment of the three
former employees, alleges that they entered into employment contracts with
Enertech based on the opportunity to participate in potential profits from
future investments in energy projects in central and eastern Europe. The suit
alleges causes of action based upon, among other theories, breach of contract
related to the events surrounding the termination of their employment and
fraud and misrepresentation related to the level of financial support for
future projects. The suit alleges compensatory damages of $154 million based
upon assumed future success of potential future investments and punitive
damages of three times that amount. All defendants are vigorously defending
against the charges based upon meritorious defenses. Cinergy, CG&E, and PSI
are currently unable to predict the outcome of this litigation.
Cinergy and PSI
(e) Wabash Valley Power Association, Inc. (WVPA) In February 1989, PSI and
WVPA entered into a settlement agreement to resolve all claims related to
Marble Hill, a nuclear project canceled in 1984. Implementation of the
settlement agreement was contingent upon a number of events, including the
conclusion of WVPA's bankruptcy proceeding and certain regulatory approvals.
In December 1996, following the resolution of issues associated with WVPA's
bankruptcy proceeding, PSI, on behalf of itself and its officers, paid $80
million on behalf of WVPA to the Rural Utilities Service (RUS) 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. On January 2, 1997, an
order dismissing the WVPA litigation against PSI and its officers with
prejudice was entered by the United States District Court for the Southern
District of Indiana.
In accordance with the terms of the settlement agreement, PSI will enter into
a take-or-pay power supply agreement for the sale of firm power to WVPA. The
difference between revenues received from WVPA and costs of the power supplied
under the power supply agreement (the Margin) will be paid annually to the RUS
and CFC to satisfy a $90 million obligation. To the extent the Margin is
insufficient to satisfy the obligation, the deficiency would be recognized as
a loss by PSI. Implementation of the take-or-pay power supply agreement is
subject to completion of negotiations with the RUS regarding the rate of
interest and other payment terms and approval by the FERC of the power supply
agreement.
Cinergy, CG&E, and ULH&P
(f) Potential Divestiture of Gas Operations Under the PUHCA, the divestiture
of CG&E's gas operations may be required. In its order approving the merger,
the SEC reserved judgment over Cinergy's ownership of the gas operations for a
period of three years. In June 1995, the SEC endorsed recommendations for
reform/repeal of the PUHCA, including allowing registered holding companies to
own combination electric and gas utility companies, provided the affected
states agree. It is expected that legislation addressing repeal of the PUHCA
and industry restructuring will be introduced in Congress during 1997.
Regardless of the outcome of the proposals to reform/repeal the PUHCA, Cinergy
believes it has a justifiable basis for retention of its gas operations and
will continue its pursuit of SEC approval. If divestiture is ultimately
required, the SEC has historically allowed companies sufficient time to
accomplish divestitures in a manner that protects shareholder value. (See
Note 15 for financial information by business segment.)
Cinergy
(g) Windfall Profits Levy As of December 31, 1996, a contingency involving
Midlands, which existed as of the date of its acquisition by Avon Energy,
remains unresolved. Certain members of the British Parliament are calling for
a windfall profits levy against businesses which had previously been owned and
operated by the government. The manner in which this levy would be calculated
and paid, as well as which privatized companies would be included in such a
levy remain unclear, although it is almost certain that companies such as
Midlands would be included. Because of the uncertainty surrounding this
issue, as of December 31, 1996, no liability for the levy has been recorded by
either Midlands or Avon Energy.
General elections in Great Britain are required to be held no later than May
1997. If those individuals calling for the windfall profits levy gain control
of government in the general elections, it is probable that Midlands and Avon
Energy will have sufficient information to determine the form of the levy,
quantify the amount, and determine the appropriate accounting treatment during
the second quarter of 1997. Although the total amount to be raised by such a
levy has not been quantified by those suggesting it, estimates of the amount
made by members of the British press and financial community have ranged from
3 billion to 5 billion pounds sterling (approximately $5 billion to $9
billion). These same estimates have indicated Midlands' apportionment to be
in the range of 60 million to 210 million pounds sterling (approximately $100
million to $350 million), depending on the manner in which the levy is
calculated and which companies are included in the levy.
Cinergy, CG&E, and PSI
13. Jointly Owned Plant
PSI is a joint owner of Gibson Unit 5 with WVPA and the Indiana Municipal
Power Agency (IMPA). Additionally, PSI is a co-owner with WVPA and IMPA of
certain transmission property and local facilities. These facilities
constitute part of the integrated transmission and distribution systems which
are operated and maintained by PSI. CG&E, Columbus Southern Power Company,
and The Dayton Power and Light Company have constructed electric generating
units and related transmission facilities on varying common ownership bases.
The Consolidated Statements of Income reflect PSI's and CG&E's portions of all
operating costs associated with the commonly owned facilities.
PSI's and CG&E's investments in jointly owned plant are as follows:
1996
Utility Plant Accumulated Construction
Share in Service Depreciation Work in Progress
(dollars in millions)
PSI
Production
Gibson (Unit 5) 50.05% $ 206 $ 92 $ 1
Transmission and local
facilities 94.22 1 824 635 43
CG&E
Production
Miami Fort Station
(Units 7 and 8) 64 208 111 1
W.C. Beckjord Station
(Unit 6) 37.5 41 24 -
J.M. Stuart Station 39 269 11 4
Conesville Station
(Unit 4) 40 72 35 2
Zimmer 46.5 1 215 204 2
East Bend Station 69 331 157 1
Killen Station 33 186 81 -
Transmission Various 62 30 -
14. Quarterly Financial Data (unaudited)
Cinergy
Operating Operating Net Earnings
Quarter Ended Revenues Income Income Per Share
(in millions, except per share amounts)
1996
March 31 $ 884 $169 $110 $ .70
June 30 717 113 56(a) .35(a)
September 30 766 150 98 .51(b)
December 31 876 126 71(a) .44(a)
Total $3 243 $558 $335(a) $2.00(a)(b)
1995
March 31 $ 808 $163 $102 $ .65
June 30 666 120 60 .39
September 30 765 169 109 .69
December 31 784 135 76 .49
Total $3 023 $587 $347 $2.22
(a) In 1996, Cinergy recognized charges to earnings of approximately $55
million ($38 million, net of taxes or 24 cents per share) primarily for
charges related to voluntary early retirement and severance programs and
disallowances associated with the PUCO's December 1996 Order in CG&E's
gas rate proceeding. Of these charges, approximately $11 million, net of
taxes or 7 cents per share, was recognized in the second quarter, and
approximately $27 million, net of taxes or 17 cents per share, was
recognized in the fourth quarter. Of the total $55 million charge, $41
million is reflected in "Operating Expenses - Other operation" and $14
million is reflected in "Other Income and Expenses - Net."
(b) In the third quarter of 1996, Cinergy incurred costs of $18 million
or 12 cents per share related to the reacquisition of 90% of CG&E's
preferred stock through a tender offer. (See Note 3(b).)
CG&E
Operating Operating Net
Quarter Ended Revenues Income Income
(in millions)
1996
March 31 $ 575 $120 $ 92
June 30 437 69(a) 39(a)
September 30 431 90 62
December 31 533 73(a) 34(a)
Total $1 976 $352 $227
1995
March 31 $ 525 $109 $ 77
June 30 393 71 40
September 30 435 98 69
December 31 495 82 50
Total $1 848 $360 $236
(a) In 1996, CG&E recognized charges to earnings of approximately $50
million ($35 million, net of taxes) primarily for charges related to
voluntary early retirement and severance programs and disallowances
associated with the PUCO's December 1996 Order in CG&E's gas rate
proceeding. Of these charges, approximately $10 million, net of taxes,
was recognized in the second quarter, and approximately $25 million, net
of taxes, was recognized in the fourth quarter. Of the total $50 million
charge, $36 million is reflected in "Operating Expenses - Other
operation" and $14 million is reflected in "Other Income and Expenses -
Net."
PSI
Operating Operating Net
Quarter Ended Revenues Income Income
(in millions)
1996
March 31 $ 328 $ 50 $ 27
June 30 290 44(a) 25(a)
September 30 348 61 43
December 31 366 51(a) 31(a)
Total $1 332 $206 $126
1995
March 31 $ 299 $ 53 $ 33
June 30 290 49 29
September 30 343 70 50
December 31 316 55 34
Total $1 248 $227 $146
(a) In 1996, PSI recognized charges to earnings of approximately $5
million ($3 million, net of taxes) primarily for charges related to
voluntary early retirement and severance programs. Of these charges,
approximately $1 million, net of taxes, was recognized in the second
quarter, and approximately $2 million, net of taxes, was recognized in
the fourth quarter. The $5 million charge is reflected in "Operating
Expenses - Other operation."
15. Financial Information by Business Segment
Cinergy
Operating
Operating Operating Income Provision for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in millions)
1996
Electric $2 769 $520 $204 $260 $276
Gas 474 38 14 23 32
Total $3 243 $558 $218 $283 $308
1995
Electric $2 612 $548 $209 $258 $286
Gas 411 39 12 22 36
Total $3 023 $587 $221 $280 $322
1994
Electric $2 446 $416 $146 $274 $432
Gas 442 28 8 20 42
Total $2 888 $444 $154 $294 $474
December 31
1996 1995 1994_
(in millions)
Property, Plant, and Equipment - net
Electric $5 737 $5 718 $5 680
Gas 553 532 519
6 290 6 250 6 199
Other Corporate Assets 2 559 1 970 1 951
Total Assets $8 849 $8 220 $8 150
For a discussion of the potential divestiture of CG&E's, including ULH&P's,
gas operations, see Note 12(f).
CG&E
Operating
Operating Operating Income Provision for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in millions)
1996
Electric $1 502 $314 $131 $138 $109
Gas 474 38 14 23 32
Total $1 976 $352 $145 $161 $141
1995
Electric $1 437 $321 $124 $137 $101
Gas 411 39 12 22 36
Total $1 848 $360 $136 $159 $137
1994
Electric $1 346 $263 $ 96 $137 $138
Gas 442 28 8 20 42
Total $1 788 $291 $104 $157 $180
CG&E Continued
December 31
1996 1995 1994_
(in millions)
Property, Plant, and Equipment - net
Electric $3 205 $3 244 $3 277
Gas 553 532 519
3 758 3 776 3 796
Other Corporate Assets 1 209 1 421 1 386
Total Assets $4 967 $5 197 $5 182
For a discussion of the potential divestiture of CG&E's, including ULH&P's,
gas operations, see Note 12(f).
ULH&P
Operating
Operating Operating Income Provision for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in thousands)
1996
Electric $190 900 $12 558 $5 644 $ 6 935 $ 9 571
Gas 76 868 8 476 4 190 4 974 9 073
Total $267 768 $21 034 $9 834 $11 909 $18 644
1995
Electric $187 180 $11 425 $4 500 $ 6 679 $10 909
Gas 70 288 8 405 3 387 4 759 8 063
Total $257 468 $19 830 $7 887 $11 438 $18 972
1994
Electric $177 564 $ 9 736 $3 007 $ 6 213 $12 127
Gas 71 971 6 654 2 335 4 431 8 277
Total $249 535 $16 390 $5 342 $10 644 $20 404
December 31
1996 1995 1994
(in thousands)
Property, Plant, and Equipment - net
Electric $142 490 $138 482 $134 508
Gas 106 791 104 749 102 340
249 281 243 231 236 848
Other Corporate Assets 41 202 56 566 50 280
Total Assets $290 483 $299 797 $287 128
For a discussion of the potential divestiture of ULH&P's gas operations, see
Note 12(f).
16. Subsequent Events (unaudited)
(a) Money Pool In March 1997, Cinergy's utility subsidiaries, including CG&E,
PSI, and ULH&P and other Cinergy system companies, which participate in the
money pooling arrangement, filed an application with the SEC under the PUHCA
requesting reauthorization of the money pool through December 31, 2002. (See
Note 5.)
(b) Forward Exchange Hedging Activity In February 1997, Cinergy entered into
a five year currency swap for the purpose of hedging its pound sterling
denominated investment in Midlands. This transaction closed out the forward
exchange contract in existence at December 31, 1996. (See Note 8(a)(i).)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Cinergy, CG&E, PSI, and ULH&P
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
Board of Directors
Cinergy
Reference is made to Cinergy Corp.'s, a Delaware corporation (Cinergy or
Company) 1997 Proxy Statement with respect to identification of directors and
their current principal occupations.
CG&E
The directors of The Cincinnati Gas & Electric Company (CG&E) at February 28,
1997, included:
Jackson H. Randolph Mr. Randolph, age 66, is Chairman of CG&E. He has served
as a director of CG&E since 1983, and his current term as director expires
April 16, 1997.
James E. Rogers Mr. Rogers, age 49, is Vice Chairman and Chief Executive
Officer of CG&E. He has served as a director of CG&E since October 24, 1994,
and his current term as director expires April 16, 1997.
William J. Grealis Mr. Grealis, age 51, is President of CG&E. He has served
as a director of CG&E since September 1, 1995, and his current term expires
April 16, 1997.
PSI
Reference is made to PSI Energy, Inc.'s (PSI) 1997 Information Statement with
respect to identification of directors and their current principal
occupations.
ULH&P
Omitted pursuant to Instruction I(2)(c).
Executive Officers
Cinergy, CG&E, and PSI
The information included in Part I of this report on pages 17 through 19 under
the caption "Executive Officers of the Registrants" is referenced in reliance
upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K.
ULH&P
Omitted pursuant to Instruction I(2)(c).
ITEM 11. EXECUTIVE COMPENSATION
Cinergy
Reference is made to Cinergy's 1997 Proxy Statement with respect to executive
compensation.
CG&E
Reference is made to Cinergy's 1997 Proxy Statement with respect to executive
compensation, except as to information pertaining to the compensation of
directors and to the performance graph, which information is set forth below.
Compensation of Directors
Directors who are not employees (the "non-employee directors") receive an
annual retainer fee of $8,000 plus a fee of $1,000 for each CG&E board of
directors' meeting attended; however, any non-employee director of CG&E who
also serves as a non-employee director of Cinergy or any of its affiliates
shall neither receive such annual retainer fee, nor any compensation for
attendance at any CG&E board meeting that is held concurrently or consecutively
with a meeting of the board of directors of Cinergy. Directors who are also
employees of Cinergy or any of its subsidiaries (Messrs. Randolph, Rogers, and
Grealis) will receive no remuneration for their services as directors.
Under Cinergy's Directors' Deferred Compensation Plan, each non-employee
director of Cinergy or any of its subsidiaries may defer fees and have them
accrued either in cash or in units representing shares of Cinergy common stock.
If deferred in such units, the stock will be distributed to the director at the
time of retirement from the appropriate board. Amounts deferred in cash will
be paid at the same time.
Under Cinergy's Retirement Plan for Directors, non-employee directors with
five or more years of service will receive annual retirement compensation in
an amount equal to the annual Cinergy board retainer fee in effect at the time
of termination of service as a director, plus the product of the fee paid for
attendance at a Cinergy board meeting multiplied by five. Retirement
compensation is paid for as many years as the director served on the Cinergy
board. This plan covers non-employee directors serving on the boards of
directors of Cinergy, Services, CG&E, or PSI. Prior service by non-employee
directors of CG&E, PSI, or Resources is credited under this plan.
Performance Graph
The following line graph compares the cumulative total shareholder return of
the common stock of CG&E with the cumulative total returns during the same
time period of the Standard & Poor's (S&P) Electric Utilities Index and the
S&P 500 Stock Index. The graph tracks performance from January 1, 1992,
through October 24, 1994, the final trading date of CG&E's common stock. The
graph assumes a $100 investment on January 1, 1992, and reinvestment of all
dividends.
[Omitted is a line graph illustrating the following data.]
1/1/92 1/1/93 1/1/94 10/24/94
CG&E Common Stock $100.00 $ 99.50 $117.20 $103.10
S&P Electric Utilities Index $100.00 $105.90 $119.20 $ 98.40
S&P 500 Stock Index $100.00 $107.60 $118.40 $119.50
PSI
Reference is made to PSI's 1997 Information Statement with respect to
executive compensation.
ULH&P
Omitted pursuant to Instruction I(2)(c).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Cinergy
Reference is made to Cinergy's 1997 Proxy Statement with respect to security
ownership of certain beneficial owners and management.
CG&E
Cinergy owns all the outstanding shares of common stock of CG&E. Pursuant to
Section 13(d) of the Securities Exchange Act of 1934, a beneficial owner of a
security is any person who directly or indirectly has or shares voting or
investment power over such security. No person or group is known by management
of CG&E to be the beneficial owner of more than 5% of CG&E's class of
cumulative preferred stock as of December 31, 1996.
CG&E's directors and executive officers did not beneficially own any shares of
any series of the class of CG&E's cumulative preferred stock as of December
31, 1996. The beneficial ownership of Cinergy's common stock held by each
director and named executive officer as of December 31, 1996 is set forth in
the following table.
Amount and Nature
Name of Beneficial Owner(1) of Beneficial Ownership (2)
William J. Grealis 22,710 shares
J. Wayne Leonard 96,651 shares
Jackson H. Randolph 129,893 shares
James E. Rogers 218,171 shares
Larry E. Thomas 88,441 shares
All directors and executive 736,563 shares (2)
officers as a group (representing 0.47% of the class)
(1) No individual listed beneficially owned more than 0.14% of the
outstanding shares of Cinergy common stock.
(2) Includes shares which there is a right to acquire within 60 days
pursuant to the exercise of stock options in the following amounts: Mr.
Grealis - 15,887; Mr. Leonard - 77,611; Mr. Randolph - 50,000; Mr.
Rogers - 95,629; Mr. Thomas - 54,104; and all directors and executive
officers as a group - 414,861.
PSI
Reference is made to PSI's 1997 Information Statement with respect to security
ownership of certain beneficial owners and management.
ULH&P
Omitted pursuant to Instruction I(2)(c).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Cinergy, CG&E, and PSI
None.
ULH&P
Omitted pursuant to Instruction I(2)(c).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
Cinergy, CG&E, PSI, and ULH&P
Refer to the page captioned "Index to Financial Statements and Financial
Statement Schedules", pages 48 and 49 of this report, for an index of the
financial statements and financial statement schedules included in this
report.
(b) Reports on Form 8-K.
Cinergy, CG&E, PSI, and ULH&P
None
Copies of the documents listed below which are identified with an asterisk (*)
have heretofore been filed with the SEC and are incorporated herein by
reference and made a part hereof. Exhibits identified with a pound sign (#)
are being filed herewith by the registrant identified in the exhibit
discussion below and are incorporated herein by reference with respect to any
other designated registrant. Exhibits not so identified are filed herewith
Exhibit
Designation Nature of Exhibit_______________
Cinergy
3-a *Certificate of Incorporation of Cinergy Corp.,
a Delaware corporation (Cinergy or Company).
(Exhibit to Cinergy's 1993 Form 10-K in File No.
1-11377.)
3-b *By-laws of Cinergy as amended January 25, 1996.
(Exhibit to Cinergy's Form U-1 Declaration filed
February 23, 1996, in File No. 70-8807.)
Exhibit
Designation Nature of Exhibit_______________
CG&E
3-c *Amended Articles of Incorporation of The
Cincinnati Gas & Electric Company (CG&E) effective
October 23, 1996. (Exhibit to CG&E's September
30, 1996, Form 10-Q in File No. 1-1232.)
3-d *Regulations of CG&E as amended, adopted April
25, 1996. (Exhibit to CG&E's March 31, 1996, Form
10-Q in File No. 1-1232.)
PSI
3-e *Amended Articles of Consolidation of PSI
Energy, Inc. (PSI), as amended to April 20, 1995.
(Exhibit to PSI's June 30, 1995, Form 10-Q in
File No. 1-3543.)
3-f *By-laws of PSI, as amended October 22, 1996.
(Exhibit to PSI's September 30, 1996, Form 10-Q in
File No. 1-3543.)
ULH&P
3-g *Restated Articles of Incorporation made
effective May 7, 1976. (Exhibit to The Union
Light, Heat and Power Company's (ULH&P) Form 8-K,
May 1976.)
3-h *By-laws of ULH&P as amended, adopted May 8,
1996. (Exhibit to ULH&P's March 31, 1996,
1997. Form 10-Q in File No. 2-7793.)
Cinergy and PSI
4-a *Original Indenture (First Mortgage Bonds) dated
September 1, 1939, between PSI 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 PSI
and The First National Bank of Chicago dated
January 1, 1972. (Exhibit to File No. 2-42545.)
4-c *Twenty-third Supplemental Indenture between PSI
and The First National Bank of Chicago dated
January 1, 1977. (Exhibit to File No. 2-57828.)
Exhibit
Designation Nature of Exhibit_______________
4-d *Twenty-fifth Supplemental Indenture between PSI
and The First National Bank of Chicago dated
September 1, 1978. (Exhibit to File No. 2-62543.)
4-e *Twenty-seventh Supplemental Indenture between
PSI and The First National Bank of Chicago dated
March 1, 1979. (Exhibit to File No. 2-63753.)
4-f *Thirty-fifth Supplemental Indenture between PSI
and The First National Bank of Chicago dated March
30, 1984. (Exhibit to PSI's 1984 Form 10-K in
File No. 1-3543.)
4-g *Thirty-ninth Supplemental Indenture between PSI
and The First National Bank of Chicago dated March
15, 1987. (Exhibit to PSI's 1987 Form 10-K in
File No. 1-3543.)
4-h *Forty-first Supplemental Indenture between PSI
and The First National Bank of Chicago dated June
15, 1988. (Exhibit to PSI's 1988 Form 10-K in
File No. 1-3543.)
4-i *Forty-second Supplemental Indenture between PSI
and The First National Bank of Chicago dated
August 1, 1988. (Exhibit to PSI's 1988 Form 10-K
in File No. 1-3543.)
4-j *Forty-fourth Supplemental Indenture between PSI
and The First National Bank of Chicago dated March
15, 1990. (Exhibit to PSI's 1990 Form 10-K in
File No. 1-3543.)
4-k *Forty-fifth Supplemental Indenture between PSI
and The First National Bank of Chicago dated March
15, 1990. (Exhibit to PSI's 1990 Form 10-K in
File No. 1-3543.)
4-l *Forty-sixth Supplemental Indenture between PSI
and The First National Bank of Chicago dated June
1, 1990. (Exhibit to PSI's 1991 Form 10-K in File
No. 1-3543.)
4-m *Forty-seventh Supplemental Indenture between
PSI and The First National Bank of Chicago dated
July 15, 1991. (Exhibit to PSI's 1991 Form 10-K
in File No. 1-3543.)
4-n *Forty-eighth Supplemental Indenture between PSI
and The First National Bank of Chicago dated July
15, 1992. (Exhibit to PSI's 1992 Form 10-K in
File No. 1-3543.)
Exhibit
Designation Nature of Exhibit_______________
4-o *Forty-ninth Supplemental Indenture between
PSI and The First National Bank of Chicago
dated February 15, 1993. (Exhibit to PSI's
1992 Form 10-K in File No. 1-3543.)
4-p *Fiftieth Supplemental Indenture between PSI and
The First National Bank of Chicago dated February
15, 1993. (Exhibit to PSI's 1992 Form 10-K in
File No. 1-3543.)
4-q *Fifty-first Supplemental Indenture between PSI and
The First National Bank of Chicago dated February
1, 1994. (Exhibit to PSI's 1993 Form 10-K in File
No. 1-3543.)
4-r *Indenture (Secured Medium-term Notes, Series
A), dated July 15, 1991, between PSI and The First
National Bank of Chicago, as Trustee. (Exhibit to
PSI's Form 10-K/A, Amendment No. 2, dated July 15,
1993, in File No. 1-3543.)
4-s *Indenture (Secured Medium-term Notes, Series
B), dated July 15, 1992, between PSI and The First
National Bank of Chicago, as Trustee. (Exhibit to
PSI's Form 10-K/A, Amendment No. 2, dated July 15,
1993, in File No. 1-3543.)
4-t *Loan Agreement between PSI and the City of
Princeton, Indiana dated as of November 7, 1996.
(Exhibit to PSI's September 30, 1996, Form 10-Q in
File No. 1-3543.)
4-u #Loan Agreement between PSI and the City of
Princeton, Indiana dated as of February 1, 1997.
(Exhibit to Cinergy's 1996 Form 10-K in File No.
1-11377.)
4-v #Indenture dated November 15, 1996, between PSI
and The Fifth Third Bank, as Trustee. (Exhibit to
Cinergy's 1996 Form 10-K in File No. 1-11377.)
4-w #First Supplemental Indenture (6.35% due 2006)
dated November 15, 1996, between PSI and The Fifth
Third Bank, as Trustee. (Exhibit to Cinergy's 1996
Form 10-K in File No. 1-11377.)
4-x #Second Supplemental Indenture (6.25% due 2005)
dated December 15, 1996, between PSI and The Fifth
Third Bank, as Trustee. (Exhibit to Cinergy's 1996
Form 10-K in File No. 1-11377.)
Exhibit
Designation Nature of Exhibit_______________
4-y *Original Indenture (First Mortgage Bonds) between
CG&E and The Bank of New York (as Trustee) dated
as of August 1, 1936. (Exhibit to CG&E's
Registration Statement No. 2-2374.)
4-z *Tenth Supplemental Indenture between CG&E and The
Bank of New York dated as of July 1, 1967.
(Exhibit to CG&E's Registration Statement No. 2-
26549.)
4-aa *Eleventh Supplemental Indenture between CG&E and
The Bank of New York dated as of May 1, 1969.
(Exhibit to CG&E's Registration Statement No. 2-
32063.)
4-bb *Thirteenth Supplemental Indenture between CG&E
and The Bank of New York dated as of November 1,
1971. (Exhibit to CG&E's Registration Statement
No. 2-41974.)
4-cc *Fourteenth Supplemental Indenture between CG&E
and The Bank of New York dated as of November 2,
1972. (Exhibit to CG&E's Registration Statement
No. 2-60961.)
4-dd *Fifteenth Supplemental Indenture between CG&E
and The Bank of New York dated as of August 1,
1973. (Exhibit to CG&E's Registration Statement
No. 2-60961.)
4-ee *Thirty-second Supplemental Indenture between
CG&E and The Bank of New York dated as of December
15, 1991. (Exhibit to CG&E's Registration
Statement No. 33-45115.)
4-ff *Thirty-third Supplemental Indenture between
CG&E and The Bank of New York dated as of
September 1, 1992. (Exhibit to CG&E's
Registration Statement No. 33-53578.)
4-gg *Thirty-fourth Supplemental Indenture between
CG&E and The Bank of New York dated as of October
1, 1993. (Exhibit to CG&E's September 30, 1993,
Form 10-Q in File No. 1-1232.)
Exhibit
Designation Nature of Exhibit_______________
4-hh *Thirty-fifth Supplemental Indenture between
CG&E and The Bank of New York dated as of January
1, 1994. (Exhibit to CG&E's Registration
Statement No. 33-52335.)
4-ii *Thirty-sixth Supplemental Indenture between
CG&E and The Bank of New York dated as of February
15, 1994. (Exhibit to CG&E's Registration
Statement No. 33-52335.)
4-jj #Thirty-seventy Supplemental Indenture between
CG&E and The Bank of New York dated as of October
4, 1996. (Exhibit to Cinergy's 1996 Form 10-K in
File No. 1-11377.)
4-kk *Loan Agreement between CG&E and County of
Boone, Kentucky dated as of February 1, 1985.
(Exhibit to CG&E's 1984 Form 10-K in File No. 1-
1232.)
4-ll *Loan Agreement between CG&E and State of Ohio
Air Quality Development Authority dated as of
December 1, 1985. (Exhibit to CG&E's 1985 Form
10-K in File No. 1-1232.)
4-mm *Loan Agreement between CG&E and State of Ohio
Air Quality Development Authority dated as of
December 1, 1985. (Exhibit to CG&E's 1985 Form
10-K in File No. 1-1232.)
4-nn *Repayment Agreement between CG&E and The Dayton
Power and Light Company dated as of December 23,
1992. (Exhibit to CG&E's 1992 Form 10-K in File
No. 1-1232.)
4-oo *Loan Agreement between CG&E and State of Ohio
Water Development Authority dated as of January 1,
1994. (Exhibit to CG&E's 1993 Form 10-K in File
No. 1-1232.)
4-pp *Loan Agreement between CG&E and State of Ohio
Air Quality Development Authority dated as of
January 1, 1994. (Exhibit to CG&E's 1993 Form 10-
K in File No. 1-1232.)
4-qq *Loan Agreement between CG&E and County of
Boone, Kentucky dated as of January 1, 1994.
(Exhibit to CG&E's 1993 Form 10-K in File No. 1-
1232.)
Exhibit
Designation Nature of Exhibit_______________
4-rr *Original Indenture (Unsecured Debt Securities)
between CG&E and The Fifth Third Bank dated as of
May 15, 1995. (Exhibit to CG&E's Form 8-A dated
July 24, 1995, in File No. 1-1232.)
4-ss *First Supplemental Indenture between CG&E and
The Fifth Third Bank dated as of June 1, 1995.
(Exhibit to CG&E's June 30, 1995, Form 10-Q in
File No. 1-1232.)
4-tt *Second Supplemental Indenture between CG&E and
The Fifth Third Bank dated as of June 30, 1995.
(Exhibit to CG&E's Form 8-A dated July 24, 1995,
in File No. 1-1232.)
4-uu *Loan Agreement between CG&E and the State of
Ohio Air Quality Development Authority dated as of
September 13, 1995. (Exhibit to CG&E's September
30, 1995, Form 10-Q in File No. 1-1232.)
4-vv *Loan Agreement between CG&E and the State of
Ohio Air Quality Development Authority dated as
of September 13, 1995. (Exhibit to CG&E's
September 30, 1995, Form 10-Q in File No.
1-1232.)
Cinergy, CG&E, and ULH&P
4-ww *Original Indenture (First Mortgage Bonds)
between ULH&P and The Bank of New York dated as of
February 1, 1949. (Exhibit to ULH&P's
Registration Statement No. 2-7793.)
4-xx *Fifth Supplemental Indenture between ULH&P and
The Bank of New York dated as of January 1, 1967.
(Exhibit to CG&E's Registration Statement No. 2-
60961.)
4-yy *Seventh Supplemental Indenture between ULH&P
xand The Bank of New York dated as of October 1,
1973. (Exhibit to CG&E's Registration Statement
No. 2-60961.)
4-zz *Eighth Supplemental Indenture between ULH&P and
The Bank of New York dated as of December 1, 1978.
(Exhibit to CG&E's Registration Statement No. 2-
63591.)
Exhibit
Designation Nature of Exhibit_______________
4-aaa *Thirteenth Supplemental Indenture between ULH&P
and The Bank of New York dated as of August 1,
1992. (Exhibit to ULH&P's 1992 Form 10-K in File
No. 2-7793.)
4-bbb *Original Indenture (Unsecured Debt
Securities) between ULH&P and the Fifth Third
Bank dated as of July 1, 1995. (Exhibit to
ULH&P's June 30, 1995, Form 10-Q in File No. 2-
7793)
4-ccc *First Supplemental Indenture between ULH&P
and The Fifth Third Bank dated as of July 15,
(Exhibit to ULH&P's June 30, 1995, Form 10-Q
in File No. 2-7793.)
Cinergy, CG&E, and PSI
10-a *+Amended and Restated Employment Agreement
dated October 24, 1994, among CG&E, Cinergy Corp.
(an Ohio corporation), Cinergy (a Delaware
corporation), PSI Resources, Inc., PSI, and
Jackson H. Randolph. (Exhibit to Cinergy's 1994
Form 10-K in File No. 1-11377.)
10-b *+Amended and Restated Employment Agreement
dated July 2, 1993, among PSI Resources, Inc.,
PSI, 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-c *+First Amendment to Amended and Restated
Employment Agreement dated December 12, 1995,
retroactively effective to October 24, 1994,
amended and restated July 2, 1993, among Cinergy,
Cinergy Services, Inc. (Services), CG&E, PSI, and
James E. Rogers. (Exhibit to Cinergy's, 1995 Form
10-K in File No. 1-11377.)
10-d *+Employment Agreement dated January 1, 1995,
among Cinergy, CG&E, Services, Investments, PSI,
and William J. Grealis. (Exhibit to Cinergy's 1994
Form 10-K in File No. 1-11377.)
10-e *+Employment Agreement dated October 24, 1994,
among Cinergy, Services, CG&E, PSI, and Larry E.
Thomas. (Exhibit to Cinergy's 1995 Form 10-K in
File No. 1-11377.)
Exhibit
Designation Nature of Exhibit_______________
10-f *+First Amendment to Employment Agreement dated
October 24, 1994, among Cinergy, Services, CG&E,
PSI, and Larry E. Thomas. (Exhibit to Cinergy's
1995 Form 10-K in File No. 1-11377.)
10-g *+Employment Agreement dated October 24, 1994,
among Cinergy, Services, CG&E, PSI, and J. Wayne
Leonard. (Exhibit to Cinergy's 1995 Form 10-K in
File No. 1-11377.)
10-h *+First Amendment to Employment Agreement dated
October 24, 1994, among Cinergy, Services, CG&E,
PSI, and J. Wayne Leonard. (Exhibit to Cinergy's
1995 Form 10-K in File No. 1-11377.)
10-I *+Employment Agreement dated October 24, 1994,
among Cinergy, Services, CG&E, PSI, and Cheryl M.
Foley. (Exhibit to Cinergy's, 1995 Form 10-K in
File No. 1-11377.)
10-j *+First Amendment to Employment Agreement dated
October 24, 1994, among Cinergy, Services, CG&E,
PSI, and Cheryl M. Foley. (Exhibit to Cinergy's
1995 Form 10-K in File No. 1-11377.)
10-k #+Employment Agreement dated June 1, 1996, among
Cinergy, Services, CG&E, PSI, and Elizabeth K.
Lanier. (Exhibit to Cinergy's 1996 Form 10-K in
File No. 1-11377.)
Cinergy and PSI
10-l #PSI Union Employees' 401(k) Savings Plan,
amended and restated December 17, 1996, with
various effective dates. (Exhibit to Cinergy's
1996 Form 10-K in File No. 1-11377.)
10-m #PSI Employees' 401(k) Savings Plan, amended and
restated December 17, 1996, with various effective
dates. (Exhibit to Cinergy's 1996 Form 10-K in
File No. 1-11377.)
10-n *+First Amendment to the PSI Union Employees'
401(k) Savings Plan, dated December 31, 1995.
(Exhibit to Cinergy's 1995 Form 10-K in File No.
1-11377.)
Exhibit
Designation Nature of Exhibit_______________
10-o *+First Amendment to the PSI Employees' 401(k)
Savings Plan, dated December 31, 1995. (Exhibit to
Cinergy's 1995 Form 10-K in File No. 1-11377.)
10-p *+Employment Agreement dated October 4, 1993,
among Cinergy, PSI, and John M. Mutz. (Exhibit to
PSI Resources, Inc.'s September 30, 1993, Form 10-
Q, File No. 1-9941.)
10-q +First Amendment to Employment Agreement dated
August 30, 1996, among Cinergy, PSI, and John M.
Mutz.
10-r *+Deferred Compensation Agreement, effective as
of January 1, 1992, between Cinergy and James E.
Rogers, Jr. (Exhibit to PSI's Form 10-K/A in File
No. 1-3543, Amendment No. 1, dated April 29,
1993.)
10-s *+Split Dollar Life Insurance Agreement,
effective as of January 1, 1992, between Cinergy
and James E. Rogers, Jr. (Exhibit to PSI's Form
10-K/A in File No. 1-3543, Amendment No. 1, dated
April 29, 1993.)
10-t *+First Amendment to Split Dollar Life Insurance
Agreement between Cinergy and James E. Rogers,
Jr. dated December 11, 1992. (Exhibit to PSI's
Form 10-K/A in File No. 1-3543, Amendment No. 1,
dated April 29, 1993.)
10-u *+PSI Supplemental Retirement Plan amended and
restated December 16, 1992, retroactively
effective January 1, 1989. (Exhibit to PSI's 1992
Form 10-K in File No. 1-3543.)
10-v *+PSI Excess Benefit Plan, formerly named the
Supplemental Pension Plan, amended and restated
December 16, 1992, retroactively effective January
1, 1989. (Exhibit to PSI's 1992 Form 10-K in File
No. 1-3543.)
Cinergy and CG&E
10-w #CG&E Deferred Compensation and Investment Plan,
as amended, retroactively effective January 1,
1995. (Exhibit to Cinergy's 1996 Form 10-K in
File No. 1-11377.)
Exhibit
Designation Nature of Exhibit_______________
10-x #CG&E Savings Incentive Plan, amended,
retroactively effective January 1, 1995. (Exhibit
to Cinergy's 1996 Form 10-K in File No. 1-11377.)
10-y *+Deferred Compensation Agreement between
Jackson H. Randolph and Cinergy dated January 1,
1992. (Exhibit to CG&E's 1992 Form 10-K in File
No. 1-1232.)
10-z *+Supplemental Executive Retirement Income Plan
between CG&E and certain executive officers.
(Exhibit to CG&E's 1988 Form 10-K in File No. 1-
1232.)
10-aa *+Amendment to Supplemental Executive Retirement
Income Plan between CG&E and certain executive
officers. (Exhibit to CG&E's 1992 Form 10-K in
File No 1-1232.)
10-bb *+Amended and Restated Supplemental Retirement
Income Plan between CG&E and Jackson H. Randolph.
(Exhibit to Cinergy's, 1995 Form 10-K in File No.
1-11377.)
10-cc *+Amendment to Executive Severance Agreement
between CG&E and certain executive officers.
(Exhibit to CG&E's 1992 Form 10-K in File No. 1-
1232.)
10-dd *+Executive Severance Agreement between CG&E and
certain executive officers. (Exhibit to CG&E's
1989 Form 10-K in File No. 1-1232.)
Cinergy
10-ee *+Cinergy Stock Option Plan, amended October 22,
1996, effective November 1, 1996. (Exhibit to
Cinergy's September 30, 1996, Form 10-Q in File
No. 1-11377.)
10-ff *+Cinergy Performance Shares Plan, amended
October 22, 1996, effective November 1, 1996.
(Exhibit to Cinergy's September 30, 1996, Form 10-
Q in File No. 1-11377.)
10-gg +Cinergy Annual Incentive Plan, amended January
25, 1996, effective January 1, 1996.
Exhibit
Designation Nature of Exhibit_______________
10-hh *Cinergy Employee Stock Purchase and Savings
Plan, adopted October 18, 1994, effective October
24, 1994. (Exhibit to Cinergy's Form S-8, filed
October 19, 1994.)
10-ii *Amendment to Cinergy's Employee Stock Purchase
and Savings Plan, adopted April 26, 1996.
(Exhibit to Cinergy's June 30, 1996 Form 10-Q in
File No. 1-11377.)
10-jj *Amendment to Cinergy's Employee Stock Purchase
and Savings Plan, adopted October 22, 1996.
(Exhibit to Cinergy's September 30, 1996, Form 10-
Q in File No. 1-11377.)
10-kk *+Cinergy Directors' Deferred Compensation Plan,
adopted October 18, 1994, effective October 24,
1994. (Exhibit to Cinergy's Form S-8, filed
October 19, 1994.)
10-ll *+Amendment to Cinergy's Directors' Deferred
Compensation Plan, adopted October 22, 1996.
(Exhibit to Cinergy's September 30, 1996, Form
10-Q in File No. 1-11377.)
10-mm *+Cinergy Retirement Plan for Directors, adopted
October 18, 1994, effective October 24, 1994.
(Exhibit to Cinergy's 1994 Form 10-K in File No.
1-11377.)
10-nn *+Cinergy Executive Supplemental Life Insurance
Program adopted October 18, 1994, effective
October 24, 1994, consisting of Defined Benefit
Deferred Compensation Agreement, Executive
Supplemental Life Insurance Program Split Dollar
Agreement I, and Executive Supplemental Life
Insurance Program Split Dollar Agreement II.
(Exhibit to Cinergy's 1994 Form 10-K in File No.
1-11377.)
10-oo *+Split Dollar Insurance Agreement, effective as
of May 1, 1993, between Cinergy and Jackson H.
Randolph. (Exhibit to Cinergy's 1994 Form 10-K in
File No. 1-11377.)
10-pp *+Cinergy's 1996 Long-Term Incentive
Compensation Plan, adopted April 26, 1996.
(Exhibit to Cinergy's Schedule 14A Definitive
Proxy Statement filed March 13, 1996, in File No.
1-11377.)
Exhibit
Designation Nature of Exhibit_______________
10-qq *+Amendment to Cinergy's 1996 Long-Term
Incentive Compensation Plan, adopted October 22,
1996, (Exhibit to Cinergy's September 30, 1996,
Form 10-Q in File No. 1-11377.)
10-rr +Cinergy's 401(k)Excess Plan, adopted
December 17, 1996.
10-ss +Cinergy's Nonqualified Deferred Incentive
Compensation Plan, adopted December 17,
1996.
Cinergy
21 Subsidiaries of Cinergy
Cinergy, CG&E, PSI, and ULH&P
23 Consent of Independent Public Accountants.
24 Power of Attorney.
27 Financial Data Schedules (included in
electronic submission only).
+ Management contract, compensation plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.
CINERGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
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
1996 $94 409 $22 341 $ 9 503 $115 635 $ - $10 618
1995 $90 547 $33 921 $(8 489) $ 21 570 $ - $94 409 1/
1994 $93 735 $31 145 $15 010 $ 49 343 $ - $90 547 2/
<FN>
1/ Includes $84,049 for the WVPA Marble Hill receivable. See Note 12(e) of the "Notes to Financial Statements" in
"Item 8. Financial Statements and Supplementary Data."
2/ Includes $80,832 for the WVPA Marble Hill receivable. See Note 12(e) of the "Notes to Financial Statements" in
"Item 8. Financial Statements and Supplementary Data."
THE CINCINNATI GAS AND ELECTRIC COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
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
1996 $9 615 $17 297 $ 6 669 $24 403 $ - $9 178
1995 $8 999 $27 623 $(8 496) $18 511 $ - $9 615
1994 $14 906 $25 598 $15 010 $46 515 $ - $8 999
PSI ENERGY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
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
1996 $84 517 $5 041 $2 834 $91 123 $ - $ 1 269
1995 $81 272 $6 100 $ 7 $ 2 862 $ - $84 517 1/
1994 $78 567 $5 495 $ - $ 2 790 $ - $81 272 2/
<FN>
1/ Includes $84,049 for the WVPA Marble Hill receivable. See Note 12(e) of the "Notes to Financial Statements" in "Item
8. Financial Statements and Supplementary Data."
2/ Includes $80,832 for the WVPA Marble Hill receivable. See Note 12(e) of the "Notes to Financial Statements" in "Item
8. Financial Statements and Supplementary Data."
THE UNION LIGHT, HEAT AND POWER COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996
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
1996 $1 035 $1 862 $1 577 $3 450 $ - $1 024
1995 $ 457 $3 010 $ - $2 432 $ - $1 035
1994 $1 609 $2 502 $ 11 $3 665 $ - $ 457
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company,
PSI Energy, Inc., and The Union Light, Heat and Power Company have each duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CINERGY CORP.
THE CINCINNATI GAS & ELECTRIC COMPANY
PSI ENERGY, INC.
THE UNION LIGHT, HEAT AND POWER COMPANY
Registrants
Dated: March 27, 1997
By James E. Rogers
Vice 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 Registrants and in the capacities and on the dates indicated.
Signature Title Date
Cinergy, CG&E, PSI, and ULH&P
Jackson H. Randolph Chairman
Cinergy
Neil A. Armstrong Director
Phillip R. Cox Director
Kenneth M. Duberstein Director
George C. Juilfs Director
Melvin Perelman Director
Thomas E. Petry Director
John J. Schiff, Jr. Director
Philip R. Sharp Director
Dudley S. Taft Director
Oliver W. Waddell Director
Cinergy and PSI
James K. Baker Director
Michael G. Browning Director
John A. Hillenbrand II Director
Van P. Smith Director
CG&E and ULH&P
William J. Grealis President and Director
PSI
John M. Mutz President and Director
ULH&P
Cheryl M. Foley Vice President, General Counsel,
Secretary, and Director
Larry E. Thomas Group Vice President and Director
Cinergy, CG&E, PSI, and ULH&P
James E. Rogers Vice Chairman, Chief March 27, 1997
Attorney-in-fact for all Executive Officer, and Director
the foregoing persons President of Cinergy
(Principal Executive Officer)
J. Wayne Leonard Group Vice President and March 27, 1997
Chief Financial Officer
Director of ULH&P
(Principal Financial Officer)
Charles J. Winger Comptroller March 27, 1997
(Principal Accounting Officer)