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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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission Registrant, 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% 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 each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that such
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 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, 1998, the aggregate market value of the voting and nonvoting
common equity of Cinergy Corp. held by nonaffiliates was $5.4 billion.
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, 1998, shares of Common Stock outstanding for each registrant
were as listed:
Company Shares Cinergy Corp., par value $.01 per share 157,764,020
The Cincinnati Gas & Electric Company, par value $8.50 per share 89,663,086
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 16, 1998, and the Information
Statement of PSI Energy, Inc. dated March 23, 1998, 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 . . . . . . . . . . . . . . . . . . . . . .
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . .
ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . .
PSI. . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments. . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . .
Customer, Sales, and Revenue Data. . . . . . . . . . . .
Financial Information by Business Segment. . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Matters . . . . . . . . . . . . . . . . . . .
Power Supply . . . . . . . . . . . . . . . . . . . . . .
Fuel Supply. . . . . . . . . . . . . . . . . . . . . . .
Gas Supply . . . . . . . . . . . . . . . . . . . . . . .
Competition. . . . . . . . . . . . . . . . . . . . . . .
Capital Requirements . . . . . . . . . . . . . . . . . .
Environmental Matters. . . . . . . . . . . . . . . . . .
Employees. . . . . . . . . . . . . . . . . . . . . . . .
2 Properties . . . . . . . . . . . . . . . . . . . . . . . .
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . .
PSI. . . . . . . . . . . . . . . . . . . . . . . . . . .
ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . .
Other Utility Subsidiaries . . . . . . . . . . . . . . .
3 Legal Proceedings
WVPA Settlement Agreement. . . . . . . . . . . . . . . .
Manufactured Gas Plant Claims. . . . . . . . . . . . . .
Skinner Landfill Remediation . . . . . . . . . . . . . .
United Scrap Lead Site . . . . . . . . . . . . . . . . .
Enertech Litigation. . . . . . . . . . . . . . . . . . .
4 Submission of Matters to a Vote of Security Holders. . . .
Executive Officers of the Registrant . . . . . . . . . . .
PART II
5 Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . .
6 Selected Financial Data. . . . . . . . . . . . . . . . . .
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . .
Index to Financial Statements and Financial Statement
Schedules. . . . . . . . . . . . . . . . . . . . . . . .
7A Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . . .
8 Financial Statements and Supplementary Data. . . . . . . .
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . .
PART III
10 Directors and Executive Officers of the Registrant . . . .
11 Executive Compensation . . . . . . . . . . . . . . . . . .
12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . .
13 Certain Relationships and Related Transactions . . . . . .
PART IV
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Financial Statements and Schedules . . . . . . . . . .
Reports on Form 8-K. . . . . . . . . . . . . . . . . .
Exhibits . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . .
PART I
ITEM 1. BUSINESS
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). Following the
merger, Cinergy became the parent holding company of PSI Energy, Inc. (PSI),
previously Resources' utility subsidiary, CG&E, Cinergy Investments, Inc.
(Investments), and Cinergy Services, Inc. (Services).
Cinergy's two utility subsidiaries, CG&E and PSI, account for the majority of
Cinergy's revenues and total assets.
Cinergy, CG&E, and ULH&P
CG&E
CG&E, an Ohio corporation, is a combination electric and gas public utility
company with five wholly-owned utility subsidiaries, The Union Light, Heat and
Power Company (ULH&P), Miami Power Corporation, an Indiana corporation (Miami),
The West Harrison Gas and Electric Company (West Harrison), an Indiana
corporation, KO Transmission Company (KO Transmission), and Lawrenceburg Gas
Company (Lawrenceburg), an Indiana corporation. In addition, CG&E has one
wholly-owned non-utility subsidiary, Tri-State Improvement Company (Tri-State).
CG&E and its utility subsidiaries are engaged in the production, transmission,
distribution, and sale of electric energy and/or the sale and transportation of
natural gas in the southwestern portion of Ohio and adjacent areas in Kentucky
and Indiana. The area served with electricity, gas, or both covers approximately
3,000 square miles, has an estimated population of two million people, and
includes the cities of Cincinnati and Middletown in Ohio, Covington and Newport
in Kentucky, and Lawrenceburg in Indiana.
KO Transmission, a Kentucky corporation, acquired an interest in an interstate
natural gas pipeline in June 1996, to which CG&E was entitled as a result of a
settlement with the Columbia Gas Transmission Corp. KO Transmission is engaged
in the transportation of natural gas in interstate commerce between Kentucky and
Ohio.
Tri-State, an Ohio corporation, is devoted to acquiring and holding property in
Ohio, Kentucky, and Indiana for substations, electric and gas rights of way,
office space, and other uses in CG&E's and its subsidiaries' operations.
ULH&P
ULH&P, a Kentucky corporation, is engaged in the transmission, distribution, and
sale of electric energy and the sale and transportation of natural gas in
northern Kentucky. The area served with electricity, gas, or both covers
approximately 500 square miles, has an estimated population of 319 thousand
people, and includes the cities of Covington and Newport in Kentucky.
Cinergy and PSI
PSI
PSI, an Indiana corporation, is engaged in the production, transmission,
distribution, and sale of electric energy in north central, central, and
southern Indiana. It serves an estimated population of 2.1 million people
located in 69 of the state's 92 counties including the cities of Bloomington,
Columbus, Kokomo, Lafayette, New Albany, and Terre Haute.
PSI Energy Argentina, Inc. (PSI Energy Argentina), a wholly-owned subsidiary of
PSI and an Indiana corporation, was formed to invest in foreign utility
companies. PSI Energy Argentina is a member of a multinational consortium which
has controlling ownership of Edesur S.A. (Edesur). Edesur is an
electricity-distribution network serving the southern half of Buenos Aires,
Argentina. Edesur provides distribution services to 2.1 million customers. PSI
Energy Argentina owns a small equity interest in this project and provides
operating and consulting services.
South Construction Company, Inc. (South Construction), a wholly-owned subsidiary
of PSI and an Indiana corporation, has been used solely to hold legal title to
real estate and interests in real estate which are either not used and useful in
the conduct of PSI's business (such as undeveloped real estate of PSI abutting a
PSI office building) or which have some defect in title which is unacceptable to
PSI. Most of the real estate to which South Construction acquires title relates
to PSI's utility business.
Cinergy
Investments
Investments, a Delaware corporation, is a non-utility subholding company that
was formed to operate Cinergy's domestic non-utility and international
businesses and interests. Investments holds the following non-utility
subsidiaries and interests, which are more fully described below: Cinergy-
Cadence, Inc.; Cinergy Capital & Trading, Inc. (Capital & Trading); Cinergy
Communications, Inc. (Communications); Cinergy Engineering, Inc. (Engineering);
Cinergy Global Power, Inc. (Cinergy Global); Cinergy Resources, Inc. (CRI);
Cinergy Supply Network, Inc. (Supply); Cinergy Solutions, Inc. (Solutions);
Cinergy Technology, Inc. (Technology); Cinergy UK, Inc. (Cinergy UK); and
Enertech Associates, Inc. (Enertech).
Cinergy-Cadence, Inc., an Indiana corporation, is dedicated solely to holding
Investment's one-third ownership interest in Cadence Network LLC (Cadence).
Cadence was formed in the third quarter of 1997 as a joint venture with New
Century Energies, Inc. and Florida Progress Corporation to provide a single
source for both energy management services and products designed to lower energy
costs for national customers that operate in multiple locations across the
country. These services include consolidated billing, bill auditing, and usage
analysis. Cadence commenced operations in the third quarter of 1997.
Capital & Trading, an Indiana corporation, was formed to engage in the business
of marketing power, electricity futures, and trading related energy products and
services and to provide consulting services in the wholesale power-related
markets. In June 1997, Capital & Trading acquired the assets and personnel of
Greenwich Energy Partners, which specialized in energy risk management,
marketing, and proprietary arbitrage trading.
Communications, a Delaware corporation, is an exempt telecommunications company
engaged or planning to be engaged in a variety of telecommunications activities
including, but not limited to: right-of-way leasing, fiber installation, and
radio tower construction and leasing.
Engineering, an Ohio corporation, provides engineering designs and engineering
technical support in connection with various energy-related projects and
proposals.
Cinergy Global, a Delaware corporation, holds substantially all of the equity of
MPII (Zambia) B.V., a Netherlands company, which in turn, holds a 39% equity
interest in Copperbelt Energy Corporation PLC (CEC), a corporation organized
under the laws of the Republic of Zambia. CEC holds certain electric generation,
transmission, and distribution assets formerly held by the Republic of Zambia
through the Power Division of Zambia Consolidated Copper Mines Limited.
Cinergy Global also owns all of the equity of MPI International Limited (MPI
International), a United Kingdom (UK) company. During the third quarter of 1997,
MPI International assumed ownership of all of the projects in development and
all future projects of Midlands Power International, a subsidiary of Midlands
Electricity plc (Midlands) which is discussed below. Cinergy Global, through MPI
International, will acquire and/or develop energy projects throughout the world.
CRI, a Delaware corporation, was formed to hold CG&E's interest in U.S. Energy
Partners, a gas marketing partnership that was dissolved effective September 1,
1995. Upon dissolution, CRI took its portion of the partnership assets to
continue in the gas marketing business. CRI competes with traditional, regulated
local distribution companies by offering "merchant service" (i.e., acquiring
natural gas for resale to end-use customers) and brokers gas to industrial and
large commercial customers.
Recently, CRI expanded its business to include retail marketing of electricity.
CRI is participating in a pilot program in Pennsylvania under which electric
customers throughout the state will have the right to choose their electricity
supplier. CRI began delivering power to Pennsylvania customers in December 1997.
Solutions, a Delaware corporation, was formed to market an array of
energy-related products and services and develop, acquire, own, and operate
certain energy-related projects. Solutions holds a 50% interest in
Trigen-Cinergy Solutions LLC, a Delaware limited liability company
(Trigen-Cinergy). Trigen- Cinergy was formed to build, own, and operate
cogeneration and trigeneration facilities for industrial plants, office
buildings, shopping centers, hospitals, universities, and other major energy
users that can benefit from combined heat and power production economies.
Trigen-Cinergy will also provide energy and asset management services, including
fuel procurement, ancillary to its activities.
Solutions also holds a 51% interest in Trigen-Cinergy Solutions of Cincinnati
LLC, an Ohio limited liability company (Trigen-Cinergy Cincinnati), which was
formed in the third quarter of 1997. Effective August 1997, Cinergy Cooling
Corp. was merged with and into Trigen-Cinergy Cincinnati, with Trigen-Cinergy
Cincinnati being the surviving company jointly owned by Solutions (51%) and
Trigen Solutions, Inc. (49%). Trigen-Cinergy Cincinnati has an exclusive
franchise from the City of Cincinnati which permits it to maintain and operate a
chilled water system in the downtown business district of Cincinnati, Ohio.
Supply, a Delaware corporation, was formed in January 1998 to broker
transmission and distribution materials and services and to provide underground
utility facilities location services.
Technology, an Indiana corporation, was created to manage certain existing
technology-related investments of Cinergy, assess the market potential for
technology-related product and service development opportunities, and form key
alliances for technology-related product development.
Cinergy UK, a Delaware corporation, was formed to hold Cinergy's 50% interest in
Avon Energy Partners Holdings, a UK unlimited liability company, and its wholly
owned subsidiary, Avon Energy Partners PLC, a UK limited liability company
(collectively, Avon Energy). During 1996, Avon Energy acquired all of the
outstanding common stock of Midlands, a UK regional electric company. Midlands
primarily distributes and supplies electricity to over 2.2 million industrial,
commercial, and residential customers. In addition, Midlands, together with its
subsidiaries, generates power, supplies natural gas to retail customers, and
performs electrical contracting services. (See Note 1(e) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
Enertech was incorporated in Ohio in 1992 as a vehicle for CG&E to offer utility
management consulting services and to pursue investment opportunities in
energy-related areas, including demand-side management (DSM) services,
consulting, energy and fuel brokering, engineering services, construction and/or
operation of generation, cogeneration, independent power production facilities,
and project development. In July 1994, Enertech acquired Beheer-En
Belegginsmaatschappij Bruwabel B.V. (Bruwabel) and its subsidiaries for the
purpose of pursuing design, engineering, and development work involving energy
privatization projects, primarily in the Czech Republic. In June 1996,
Investments sold what remained of its investment in Bruwabel and its
subsidiaries and their assets, including the Vytopna Kromeriz Heating Plant
which was acquired by Power Development s.r.o. in 1995. (See Note 12(d) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
PSI Recycling, Inc. (Recycling) was an Indiana corporation which recycled metal
from CG&E and paper, metal, and other materials from PSI, its largest single
supplier, and other sources. Investments sold the assets of Recycling in August
1996. Recycling was dissolved effective December 31, 1997.
Power Equipment Supply Co. (PESCO) was incorporated in Indiana to sell equipment
and parts from a PSI generating plant which was canceled, the Marble Hill
Nuclear Project. PESCO also purchased equipment for resale, brokered equipment,
and sold equipment on consignment for others. PESCO discontinued operations in
early 1996 and was dissolved effective December 31, 1997.
CGE ECK, Inc., a Delaware corporation (CGE ECK), was created to hold CG&E's
one-third interest in a Czech electric utility company, ECK s.r.o. After the
Cinergy merger, CGE ECK reduced its ownership interest in ECK s.r.o. In mid-
1997, CGE ECK sold what remained of its interest in ECK s.r.o. and was dissolved
effective December 31, 1997.
Cinergy, CG&E, PSI, and ULH&P
Services
Services, a Delaware corporation, is the service company for the Cinergy system,
providing member companies with a variety of administrative, management, and
support services.
Cinergy, CG&E, PSI, and ULH&P
Customer, Sales, and Revenue Data
The number of customers served at year-end and the percent of operating revenues
derived from the sale of electricity and the sale and transportation of natural
gas for each registrant for 1997 are as follows:
Operating
Customers Revenues
Registrant Electric Gas Electric Gas
Cinergy and subsidiaries 1 412 552 456 651 88% 11%
CG&E and subsidiaries 737 502 456 651 79% 20%
PSI 675 052 N/A 98% N/A
ULH&P 117 835 77 944 70% 29%
Cinergy's utilities' service territory spans 86 counties in Ohio, Indiana, and
Kentucky and includes approximately 840 cities, towns, unincorporated
communities, and adjacent rural areas, including municipal utilities and rural
electric cooperatives.
The service territory of CG&E and its utility subsidiaries, including ULH&P, is
heavily populated and characterized by a stable residential customer base and a
diverse mix of industrial customers. CG&E's and its utility subsidiaries'
service territory spans 19 counties in Ohio, Indiana, and Kentucky (of which
ULH&P serves six counties in Kentucky) and includes approximately 130 (44 for
ULH&P) cities, towns, unincorporated communities, and adjacent rural areas,
including municipal utilities and rural electric cooperatives. The area served
by PSI is a residential, agricultural, and widely diversified industrial
territory. PSI's service territory includes approximately 710 cities, towns,
unincorporated communities, and adjacent rural areas, including municipal
utilities and rural electric cooperatives. No one customer accounts for more
than 6% of operating revenues for PSI, 5% of electric or gas operating revenues
for CG&E and its utility subsidiaries, or 10% of electric or gas operating
revenues for ULH&P. Sales of electricity and gas sales and transportation are
affected by seasonal weather patterns, and, therefore, operating revenues and
associated operating expenses are not distributed evenly during the year.
Cinergy, CG&E, and ULH&P
Financial Information by Business Segment
For financial information by business segment, see Note 15 of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary
Data." For a discussion of the potential divestiture of CG&E's, including
ULH&P's, gas operations, see Note 12(f) of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data."
Regulation
Cinergy, CG&E, PSI, and ULH&P
Cinergy, its utility subsidiaries, and certain of its non-utility subsidiaries
are subject to regulation by the Securities and Exchange Commission (SEC) under
the PUHCA with respect to, among other things, issuances and sales of
securities, acquisitions and sales of certain utility properties, acquisitions
and retentions of interests in non-utility businesses, intrasystem sales of
certain goods and services, the method of keeping accounts, and access to books
and records. In addition, the PUHCA generally limits registered holding
companies to a single "integrated" public utility system, which the SEC
traditionally has interpreted to prohibit a registered holding company, with
limited exceptions, from owning both gas and electric properties. (Refer to the
information appearing under the captions "Repeal of the PUHCA" in the
"Competitive Pressures" section and "Potential Divestiture of Gas Operations" in
the "Regulatory Matters" section in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and to Note 1(f) of
the "Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
CG&E, ULH&P, Miami, and PSI are each subject to regulation by the Federal Energy
Regulatory Commission (FERC) under the Federal Power Act with respect to the
classification of accounts, rates for wholesale sales of electricity,
interconnection agreements, and acquisitions and sales of certain utility
properties. In addition, services by KO Transmission are rendered in accordance
with terms and conditions and at rates contained in a gas tariff filed with the
FERC. Transportation of gas between CG&E and ULH&P by KO Transmission is subject
to regulation by the FERC under the Natural Gas Act.
Cinergy, CG&E, and ULH&P
CG&E, as a public utility under the laws of Ohio, is also subject to regulation
by the Public Utilities Commission of Ohio (PUCO) as to retail electric and gas
rates, services, accounts, depreciation, issuance of securities, acquisitions
and sales of certain utility properties, and in other respects as provided by
Ohio law. Rates within municipalities in Ohio are subject to original regulation
by the municipalities. The Ohio Power Siting Board has jurisdiction in Ohio over
the location, construction, and initial operation of new electric generating
facilities and certain electric and gas transmission lines presently used by
CG&E. As to retail rates and other matters, ULH&P is regulated by the Kentucky
Public Service Commission, and West Harrison and Lawrenceburg are regulated by
the Indiana Utility Regulatory Commission (IURC).
Cinergy and PSI
PSI, as a public utility under the laws of Indiana, is also regulated by the
IURC as to its retail rates, services, accounts, depreciation, issuance of
securities, acquisitions and sales of certain utility properties, and in other
respects as provided by Indiana law. Prior to the construction, purchase, or
lease of a facility used for the generation of electricity, a public utility in
Indiana must obtain from the IURC a certificate of public convenience and
necessity.
Cinergy, CG&E, PSI, and ULH&P
Regulatory Matters
Refer to the information appearing under the caption "Regulatory Matters" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Power Supply
Cinergy, CG&E, PSI, and ULH&P
Cinergy and other utilities in an eight-state region are participating in the
East Central Area Reliability Coordination Agreement for the purpose of
coordinating the planning and operation of generating and transmission
facilities to provide for maximum reliability of regional bulk power supply.
(Refer to the information appearing under the caption "Midwest ISO" in the
"Competitive Pressures" section of "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of Cinergy's
involvement in a coalition for operation of a regional transmission system.)
In addition to an intercompany tie between CG&E's and PSI's electric systems,
Cinergy's electric system, which is operated by Services, is interconnected with
the electric systems of Indiana Michigan Power Company, Columbus Southern Power
Company, Ohio Power Company (all doing business as American Electric Power
Company, Inc. (AEP)), Central Illinois Public Service Company, East Kentucky
Power Cooperative, Hoosier Energy Rural Electric Cooperative, Inc., Indianapolis
Power and Light Company, Kentucky Utilities Company, Louisville Gas & Electric
Company (LG&E), Northern Indiana Public Service Company, Southern Indiana Gas
and Electric Company, The Dayton Power and Light Company, and Ohio Valley
Electric Corporation.
Cinergy and PSI
PSI has a power supply relationship with Wabash Valley Power Association, Inc.
(WVPA) and Indiana Municipal Power Agency (IMPA) through power coordination
agreements. WVPA and IMPA are also parties with PSI to a joint transmission and
local facilities agreement.
Cinergy, CG&E, and ULH&P
ULH&P does not own or operate any electric generating facilities. Its
requirements for electric energy are purchased primarily from CG&E at rates
regulated by the FERC.
Fuel Supply
Cinergy
Cinergy purchases approximately 25 million tons of coal annually for use by CG&E
and PSI, which historically would rank Cinergy as the sixth largest utility coal
purchaser in the United States.
Cinergy, CG&E, and PSI
A major portion of the coal required by CG&E and PSI is obtained through both
long- and short-term coal supply agreements, with the remaining requirements
purchased on the spot market. The prices to be paid under most of these
contracts are subject to adjustment. In addition, some of these agreements
include extension options and termination provisions pertaining to coal quality.
The coal delivered under these contracts is primarily from mines located in
Indiana, Illinois, Pennsylvania, and West Virginia for PSI and West Virginia,
Ohio, Kentucky, and Pennsylvania for CG&E.
CG&E and PSI monitor alternative sources to assure a continuing availability of
economical fuel supplies. The companies intend to maintain the practice of
purchasing a portion of their coal requirements on the spot market and will
continue to investigate the least cost coal options in connection with their
compliance with the Clean Air Act Amendments of 1990. (See the information
appearing under the caption "Environmental Issues" in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
The companies believe they will be able to obtain sufficient coal to meet future
generating requirements. However, both CG&E and PSI are unable to predict the
extent to which coal availability and price may ultimately be affected by future
environmental requirements. Presently, CG&E and PSI expect the cost of coal to
rise in the long run as the supply of more accessible and higher-grade coal
diminishes and as mining, transportation, and other related costs continue an
upward trend.
Cinergy, CG&E, and ULH&P
Gas Supply
In 1997, CG&E and its utility subsidiaries, including ULH&P, purchased 44% of
their natural gas supply from firm supply agreements, with remaining volumes
purchased in the spot market. These firm contracts feature dual levels of gas
supply: base load for continuous supply for CG&E's and its utility subsidiaries'
core requirements, and "swing" load, which is gas available on a daily basis to
accommodate changes in demand. CG&E pays reservation charges for firm base and
swing supplies. These charges guarantee delivery from the supplier during
extreme weather and protect the supplier from fluctuations in daily prices
associated with swing supplies.
As the trend of customers purchasing gas directly from gas marketers (suppliers)
and using CG&E's facilities for transportation increases, CG&E and its
subsidiaries seek to minimize contract commitment costs to firm suppliers, and
reduce the amount of reservation charges paid to suppliers for firm supply.
Accordingly, CG&E and its subsidiaries anticipate purchasing approximately 50%
of their gas supply in the spot market and 50% from firm supply agreements in
1998.
Gas purchased by CG&E and its subsidiaries is transported on interstate
pipelines either directly to CG&E's and its subsidiaries' distribution systems,
or it is injected into pipeline storage facilities for withdrawal and delivery
in the future. Most of CG&E's and its utility subsidiaries' gas supplies
originate from the Gulf of Mexico coastal area of Texas and Louisiana. CG&E and
its subsidiaries have also obtained a limited supply originating from the
Appalachian region and the mid-continent (Arkansas - Oklahoma) basin, and from
methane gas recovered from an Ohio landfill. Over the long-term, natural gas is
expected to retain its price competitiveness with alternative fuels. However,
weather conditions, supply, demand, and storage inventories can cause
significant price fluctuations.
Cinergy, CG&E, PSI, and ULH&P
Competition
Refer to the information appearing under the caption "Competitive Pressures" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Cinergy, CG&E, PSI, and ULH&P
Capital Requirements
Refer to the information appearing under the caption "Capital Requirements" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Cinergy, CG&E, and PSI
Environmental Matters
Environmental compliance construction expenditures for 1998 for Cinergy and its
subsidiaries are forecasted to be as follows:
Registrant Expenditures
(in thousands)
CG&E and subsidiaries $3 742
PSI 3 387
Cinergy and subsidiaries $7 129
In addition, refer to the information appearing under the caption "Environmental
Issues" in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Employees
Cinergy
The number of employees of Cinergy and its subsidiaries at December 31, 1997,
was 7,609, of whom 4,312 belonged to bargaining units. These bargaining unit
employees were represented by labor agreements between CG&E and its
subsidiaries, including ULH&P, or PSI and the applicable union organization. Of
Cinergy's total employees, 2,825 employees were represented by the International
Brotherhood of Electrical Workers (IBEW), 407 were represented by the United
Steelworkers of America (USWA), and 1,080 were represented by the Independent
Utilities Union (IUU).
Employees assigned to Services at December 31, 1997, totaled 3,028, of whom 831
belonged to bargaining units. These bargaining unit employees were represented
by the labor agreements previously discussed. Of Services' total employees, 540
were represented by the IUU, 1 was represented by the USWA, and 290 were
represented by the IBEW (112 were represented by the agreement with PSI and 178
were represented by the agreement with CG&E).
Employees assigned to Cinergy Resources at December 31, 1997, totaled 13
non-union employees.
Cinergy and CG&E
The number of employees of CG&E and its subsidiaries at December 31, 1997, was
2,537, of whom CG&E employed 2,292, ULH&P employed 236, and Lawrenceburg
employed 9.
CG&E and its subsidiaries have collective bargaining agreements with several
union organizations. Of CG&E's and its subsidiaries' total employees, 540 were
represented by the IUU, 406 were represented by the USWA, and 1,177 were
represented by the IBEW. The current contract between CG&E and the IUU will
expire in April 2001. CG&E and its subsidiaries have a contract with the USWA
expiring May 15, 2002. The IBEW contract expires April 1, 2001.
Cinergy and PSI
The number of employees of PSI at December 31, 1997, was 2,030, of whom 1,358
were represented by the IBEW.
PSI's collective bargaining agreement with the IBEW will expire at the end of
April 1999.
Cinergy and ULH&P
The number of employees of ULH&P at December 31, 1997, was 236, of whom 209
belonged to bargaining units. These bargaining unit employees were represented
by the same labor agreements between CG&E and the applicable union organization.
Of ULH&P's total employees, 61 employees were represented by the IBEW, 91 were
represented by the USWA, and 57 were represented by the IUU.
The current contract between ULH&P and the IUU will expire in April 2001. ULH&P
has agreements with the USWA and IBEW that will expire May 15, 2002, and April
1, 2001, respectively.
ITEM 2. PROPERTIES
Cinergy, CG&E, PSI, and ULH&P
Substantially all utility plant is subject to the lien of each applicable
company's first mortgage bond indenture.
In addition to the information discussed herein, refer to Note 13 of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data."
Cinergy, CG&E, and PSI
At December 31, 1997, the Cinergy utility subsidiaries owned electric generating
plants, or portions thereof in the case of jointly owned plants, with net
capabilities (winter ratings) as shown in the following table:
Net
Percent Principal Capability
Plant Name Location Ownership Fuel Source megawatts (mw)
CG&E
Steam Electric Generating Plants:
Miami Fort Station (Units 5&6) North Bend, Ohio 100.00% Coal 243
Miami Fort Station (Units 7&8) North Bend, Ohio 64.00 Coal 640
W.C. Beckjord Station (Units 1-5) New Richmond, Ohio 100.00 Coal 704
W.C. Beckjord Station (Unit 6) New Richmond, Ohio 37.50 Coal 158
J.M. Stuart Station Aberdeen, Ohio 39.00* Coal 913
Killen Station Adams County, Ohio 33.00* Coal 198
Conesville Station Conesville, Ohio 40.00* Coal 312
William H. Zimmer Generating
Station Moscow, Ohio 46.50 Coal 605
East Bend Station Boone County, Kentucky 69.00 Coal 414
Combustion Turbines:
Dicks Creek Station Middletown, Ohio 100.00 Gas 172
Miami Fort Gas Turbine Station North Bend, Ohio 100.00 Oil 78
W.C. Beckjord Gas Turbine Station New Richmond, Ohio 100.00 Oil 245
Woodsdale Generating Station Butler County, Ohio 100.00 Gas 564
PSI
Steam Electric Generating Plants:
Gibson Generating Station:
(Units 1-4) Princeton, Indiana 100.00 Coal 2,532
(Unit 5) Princeton, Indiana 50.05 Coal 313
Wabash River Station Terre Haute, Indiana 100.00 Coal 668
Cayuga Station Cayuga, Indiana 100.00 Coal 1,005
R.A. Gallagher Station New Albany, Indiana 100.00 Coal 560
Edwardsport Station Edwardsport, Indiana 100.00 Coal 160
Noblesville Station Noblesville, Indiana 100.00 Coal 90
Combustion Turbines:
Cayuga Combustion Turbine Cayuga, Indiana 100.00 Gas 120
Wabash River Coal Gasification
Project Terre Haute, Indiana 100.00 Coal 262
Internal Combustion Units:
Connersville Peaking Station Connersville, Indiana 100.00 Oil 98
Miami-Wabash Peaking Station Wabash, Indiana 100.00 Oil 104
Cayuga Peaking Units Cayuga, Indiana 100.00 Oil 11
Wabash River Peaking Units Terre Haute, Indiana 100.00 Oil 8
Hydroelectric Generating Station:
Markland Generating Station Markland Dam, Ohio
River 100.00 Water 45
* Station is not operated by CG&E.
Cinergy and CG&E
CG&E
CG&E's 1997 peak load (exclusive of off-system transactions), which occurred on
July 28, was 4,638 mw. For the period 1998 through 2007, peak load and
kilowatt-hour (kwh) sales are each forecasted to have annual growth rates of 2%.
These forecasts reflect CG&E's load growth, alternative fuel choices, population
growth, and housing starts. These forecasts exclude non-firm power transactions
and any potential off-system, long-term firm power sales.
As of December 31, 1997, CG&E's transmission system consisted of 388 circuit
miles of 345,000 volt line, 618 circuit miles of 138,000 volt line, 523 circuit
miles of 69,000 volt line, and 116 circuit miles of lesser volt line, all within
the states of Ohio and Kentucky. In addition, as of December 31, 1997, CG&E's
distribution system consisted of 14,736 circuit miles, all within the state of
Ohio. As of the same date, CG&E's transmission substations had a combined
capacity of 14,845,106 kilovolt-amperes, and the distribution substations had a
combined capacity of 5,951,348 kilovolt-amperes. A portion of CG&E's total
transmission system is jointly owned, primarily in connection with its jointly
owned electric generating units.
During 1997, almost all of the electricity generated by units owned by CG&E or
in which it has an ownership interest was produced by coal-fired generating
units. Those units generate most of the electric requirements of CG&E and its
utility subsidiaries.
CG&E owns two propane/air peakshaving plants. Associated with these plants are
two underground caverns, one with a seven million gallon capacity and one with
an eight million gallon capacity. Both plants and storage caverns are located in
Ohio and are used primarily to augment CG&E's supply of natural gas during
periods of peak demand and emergencies. CG&E also owns natural gas distribution
systems consisting of 5,718 miles of mains and service lines in southwestern
Ohio.
Cinergy and PSI
PSI
PSI's 1997 peak load (exclusive of off-system transactions), which occurred on
July 14, was 5,313 mw. For the period 1998 through 2007, peak load and kwh sales
are each forecast to have annual growth rates of 2%. These forecasts reflect
PSI's load growth, alternative fuel choices, population growth, and housing
starts. These forecasts exclude non-firm power transactions and any potential
off-system, long-term firm power sales.
As of December 31, 1997, PSI's transmission system consisted of 719 circuit
miles of 345,000 volt line, 656 circuit miles of 230,000 volt line, 1,595
circuit miles of 138,000 volt line, and 2,429 circuit miles of 69,000 volt line,
all within the state of Indiana. In addition, as of December 31, 1997, PSI's
distribution system consisted of 19,707 circuit miles, all within the state of
Indiana. As of the same date, PSI's transmission substations had a combined
capacity of 21,700,155 kilovolt-amperes, and the distribution substations had a
combined capacity of 6,322,409 kilovolt-amperes.
During 1997, almost all of PSI's kwh production was obtained from coal-fired and
hydroelectric generation.
Cinergy, CG&E, and ULH&P
ULH&P
As of December 31, 1997, ULH&P owned 105 circuit miles of 69,000 volt electric
transmission line, an electric distribution system consisting of 2,516 circuit
miles, and a gas distribution system consisting of 1,307 miles of mains and
service lines in northern Kentucky. ULH&P also owns a propane/air peakshaving
plant, a seven million gallon capacity underground cavern for the storage of
liquid propane, and related liquid propane feeder lines, located in northern
Kentucky and adjacent to one of the gas lines that transports natural gas to
CG&E. The propane/air plant and cavern are used primarily to augment CG&E's and
ULH&P's supply of natural gas during periods of peak demand and emergencies.
Cinergy and CG&E
Other Utility Subsidiaries
As of December 31, 1997, Lawrenceburg owned a gas distribution system consisting
of 172 miles of mains and service lines in Indiana adjacent to the western part
of CG&E's service area. Lawrenceburg is connected with and sells gas at
wholesale to the city of Aurora, Indiana, and is also connected within Indiana
with the lines of Texas Gas Transmission Corporation and Texas Eastern
Transmission Corporation.
As of December 31, 1997, West Harrison owned a small electric distribution
system consisting of 10 circuit miles in Indiana adjacent to CG&E's service
area. As of the same date, Miami owned 40 miles of 138,000 volt transmission
line connecting the lines of LG&E with those of CG&E.
As of December 31, 1997, KO Transmission owned a 32.67% interest in a 90-mile
interstate natural gas pipeline and a 100% interest in a 2 1/4 mile natural gas
pipeline. KO Transmission transports gas from southeast Kentucky northward to
the service territories of CG&E and ULH&P, their primary customers.
ITEM 3. LEGAL PROCEEDINGS
Cinergy and PSI
WVPA Settlement Agreement
See Note 12(e) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
Manufactured Gas Plant Claims
See Note 12(b)(ii) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
Cinergy and CG&E
Skinner Landfill Remediation
In the first quarter of 1998, CG&E was notified, by the Allocator in a
Court-mandated alternative dispute resolution (ADR) proceeding, that it had been
identified as a potentially responsible party (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) with respect to
the Skinner Landfill Superfund Site, which is located approximately 15 miles
north of Cincinnati, Ohio. In March 1997, the Plaintiffs from the underlying
CERCLA litigation brought suit in the United States District Court for the
Southern District of Ohio, Western Division (the Court), against over 80 PRPs.
In August 1997, the Court entered an order staying the litigation and requiring
all parties to engage in a non-binding, confidential ADR process. The Allocator,
which has been given authority by the Court to identify other parties that may
be responsible for response costs, has informed CG&E that it was identified by a
site owner, operator, or worker as one that had arranged for the disposal of
waste at the landfill and has concluded that a reasonable basis exists for
CG&E's participation in the ADR process. The plaintiffs claim to have expended
almost $2 million in initial response actions at the site and the Allocator has
indicated that the present value of the total site response costs is estimated
at approximately $14 million. CG&E is currently participating in the ADR
process. Based on information currently available, any potential liability
allocated to CG&E would not be material to its financial condition or results of
operations.
United Scrap Lead Site
See Note 12(c) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
Cinergy, CG&E, and PSI
Enertech Litigation
See Note 12(d) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
ULH&P
ULH&P has no material pending legal proceedings.
Cinergy, CG&E, PSI, and ULH&P
In addition to the above litigation, see "Regulatory Matters" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Notes 12(b), 12(c), and 12(f) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cinergy, CG&E, and PSI
None.
ULH&P
Omitted pursuant to instruction I(2)(c).
EXECUTIVE OFFICERS OF THE REGISTRANTS (at February 28, 1998)
Age at
Dec. 31,
Name 1997 Office & Date Elected or in Job
Cinergy, CG&E, and PSI
Jackson H. Randolph 67 Chairman of Cinergy, CG&E, and
PSI - 1995
Chairman and Chief Executive Officer
of Cinergy, CG&E, and PSI - 1994
Chairman, President, and Chief Executive
Officer of CG&E - 1993
James E. Rogers 50 Vice Chairman, President, and Chief
Executive Officer of Cinergy - 1995
Vice Chairman and Chief Executive
Officer of CG&E and PSI - 1995
Vice Chairman, President, and Chief
Operating Officer of Cinergy - 1994
Vice Chairman and Chief Operating
Officer of CG&E and PSI - 1994
Chairman and Chief Executive Officer
of Resources - 1993
Cheryl M. Foley 50 Vice President, General Counsel, and
Secretary of CG&E - 1995
Vice President, General Counsel, and
Secretary of Cinergy - 1994
Vice President, General Counsel, and
Secretary of PSI and Resources - 1991
Donald B. Ingle, Jr. 48 Vice President of Cinergy, CG&E, and PSI 1/
- 1997
President, Energy Services Business Unit
(ESBU) of Cinergy 1/ - 1997
Contract Consultant - Investments - 1995
President and Chief Executive Officer -
CornerStone Industries, Inc. 3/ - 1992
Elizabeth K. Lanier 2/ 46 Vice President and Chief of Staff of
Cinergy, CG&E, and PSI - 1996
Partner - Frost & Jacobs 3/ - 1984
J. Wayne Leonard 47 Vice President of Cinergy, CG&E, and PSI 4/
- 1997
President, Energy Commodities Business Unit
of Cinergy - 1996
Group Vice President and Chief
Financial Officer of CG&E and PSI - 1995
Group Vice President and Chief Financial
Officer of Cinergy - 1994
Senior Vice President and Chief Financial
Officer of PSI and Resources - 1992
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1997 Office & Date Elected or in Job
Madeleine W. Ludlow 43 Vice President and Chief Financial Officer
of Cinergy, CG&E, and PSI 4/ - 1997
Vice President - Enterprise Diversified
Holdings Incorporated (EDHI), a subsidiary
of Public Service Enterprise Group
Incorporated 3/ - 1996
Vice President and Treasurer - EDHI 3/ -
1992
William L. Sheafer 54 Vice President and Treasurer of Cinergy,
CG&E, and PSI - 1997
Treasurer of Cinergy and PSI - 1994
Treasurer of CG&E - 1987
John P. Steffen 45 Vice President and Comptroller of Cinergy,
CG&E, and PSI - 1998
Comptroller of Cinergy, CG&E, and PSI 5/ -
1997
Assistant Comptroller of CG&E - 1995
Assistant Comptroller of Cinergy and PSI -
1994
Assistant Controller of CG&E - 1991
Larry E. Thomas 52 Vice President of Cinergy, CG&E, and PSI -
1997
President, Energy Delivery Business Unit
of Cinergy - 1996
Group Vice President and Chief
Transformation Officer of Cinergy, CG&E,
and PSI - 1995
Group Vice President, Reengineering and
Operations Services of CG&E and
PSI - 1995
Group Vice President, Reengineering
and Operations Services of Cinergy - 1994
Senior Vice President and Chief Operations
Officer of PSI - 1992
Cinergy and CG&E
William J. Grealis 6/ 52 President, ESBU of Cinergy 1/ - 1996
Vice President of Cinergy - 1995
President of CG&E - 1995
President of Investments - 1995
President, Gas Business Unit of CG&E - 1995
Partner - Akin, Gump, Strauss, Hauer
& Feld 3/ - 1978
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1997 Office & Date Elected or in Job
Cinergy and PSI
John M. Mutz 7/ 62 Vice President of Cinergy - 1995
President of PSI - 1994
President of Resources - 1993
Cinergy
John Bryant 51 Vice President of Cinergy - 1998
Managing Director of MPI International
Limited, Cinergy's international project
development subsidiary - 1997
Executive Generation Director - Midlands -
1996
Generation Director - Midlands - 1992
J. Joseph Hale, Jr. 48 Vice President of Cinergy - 1996
General Manager, Marketing
Operations of CG&E - 1995
President of Cinergy Foundation, Inc. 8/ -
1992
M. Stephen Harkness 49 Vice President of Cinergy - 1996
Executive Vice President and Chief
Operating Officer of Trigen-Cinergy 9/ -
1996
General Manager, Corporate Development
and Financial Services of Cinergy - 1994
Jerry W. Liggett 56 Vice President of Cinergy - 1996
Senior Manager, Human Resources
Strategy of Cinergy - 1995
General Manager, Employee Relations,
Compensation & Benefits of Cinergy - 1995
Executive Director, Human Resources
of PSI and Resources - 1990
Michael M. Sample 45 Vice President of Cinergy - 1996
General Manager, International
Investments of Cinergy - 1994
Vice President, Government Affairs
of PSI and Resources - 1991
Charles J. Winger 52 Vice President of Cinergy - 1997
Vice President and Comptroller of Cinergy,
CG&E, and PSI 5/ - 1997 Comptroller of CG&E
- 1995 Comptroller of Cinergy - 1994
Comptroller of Resources - 1988
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
ULH&P
Omitted pursuant to instruction I(2)(c).
Cinergy, CG&E, and PSI
None of the officers are related in any manner. Executive officers of Cinergy
are elected to the offices set opposite their respective names until the next
annual meeting of the Board of Directors and until their successors shall have
been duly elected and shall have been qualified.
1/ Mr. Ingle named as Acting President of ESBU during May 1997, succeeding
Mr. Grealis; Mr. Ingle served in this capacity through September 1997, at
which time he was named President of ESBU and Vice President of each of
Cinergy, CG&E, and PSI, all effective October 1, 1997.
2/ Prior to becoming Vice President effective June 1, 1996, Ms. Lanier was a
partner in the law firm of Frost & Jacobs located in Cincinnati, Ohio.
3/ Non-affiliate of Cinergy.
4/ Effective April 22, 1997, Mr. Leonard relinquished additional title of
Chief Financial Officer and Ms. Ludlow appointed Vice President and Chief
Financial Officer.
5/ Effective August 11, 1997, Mr. Steffen was appointed Comptroller of
Cinergy, CG&E, and PSI, succeeding Mr. Winger, who retained office of Vice
President of Cinergy.
6/ Prior to becoming President of Investments, Mr. Grealis was a partner in
the Washington, D.C. law firm of Akin, Gump, Strauss, Hauer & Feld. In
addition, prior to the merger, Mr. Grealis was President of PSI
Investments, Inc. on an interim basis beginning in 1992.
7/ Prior to becoming President of Resources, Mr. Mutz was President of Lilly
Endowment, Inc., a private philanthropic foundation located in
Indianapolis, Indiana.
8/ An affiliated public benefit corporation organized and operating exclusively
for charitable purposes.
9/ Joint venture company formed by Cinergy and Trigen Energy Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Cinergy, CG&E, PSI, and ULH&P
Cinergy's common stock is listed on the New York Stock Exchange and has unlisted
trading privileges on the Boston, Chicago, Cincinnati, Pacific, and Philadelphia
exchanges. As of February 5, 1998, Cinergy's most recent dividend record date,
there were 73,018 common shareholders of record. The following table shows the
high and low sales prices per share, if applicable, and the dividends on common
stock declared by Cinergy, CG&E, PSI, and ULH&P for the past two years:
Market Price (a) Dividends Declared
High Low (per share) (in thousands)
1996
Cinergy
4th Quarter $34 1/4 $30 7/8 $.45
3rd Quarter 32 29 1/8 .43
2nd Quarter 32 27 1/2 .43
1st Quarter 32 1/8 28 1/4 .43
CG&E
4th Quarter $ 50 949 (b)
3rd Quarter 239 909 (b)
2nd Quarter 45 116 (b)
1st Quarter 41 995 (b)
PSI
4th Quarter 29 713 (b)
3rd Quarter 28 311 (b)
2nd Quarter 28 165 (b)
1st Quarter 25 887 (b)
ULH&P
4th Quarter 8.50 (b)
1997
Cinergy
4th Quarter 39 1/8 32 .45
3rd Quarter 35 1/4 32 5/16 .45
2nd Quarter 35 5/8 32 .45
1st Quarter 35 3/4 32 5/8 .45
CG&E
4th Quarter 42 600 (b)
3rd Quarter 42 600 (b)
2nd Quarter 42 600 (b)
1st Quarter 42 600 (b)
PSI
4th Quarter 28 400 (b)
3rd Quarter 28 400 (b)
2nd Quarter 28 400 (b)
1st Quarter 28 400 (b)
ULH&P
4th Quarter 17.00 (b)
(a) Market price for CG&E, PSI, and ULH&P is not applicable.
(b) All of CG&E's and PSI's dividends were paid to 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
1997 1996 1995 1994 1993
(in millions, except per share amounts)
Operating revenues (1) $4 353 $3 243 $3 023 $2 888 $2 833
Net income before extraordinary
item (1) 363 335 347 191 63
Net income (2) 253 335 347 191 63
Common stock
Earnings per share (3)
Net income before extraordinary
item 2.30 2.00 2.22 1.30 .43
Net income 1.61 2.00 2.22 1.30 .43
EPS-assuming dilution (3)
Net income before extraordinary
item 2.28 1.99 2.20 1.29 .43
Net income 1.59 1.99 2.20 1.29 .43
Dividends declared per share 1.80 1.74 1.72 1.50 1.46
Total assets (4) 8 858 8 725 8 103 8 037 7 696
Cumulative preferred stock of
subsidiaries subject to mandatory
redemption (5) - - 160 210 210
Long-term debt (6) 2 151 2 326 2 347 2 615 2 545
Long-term debt due within
one year (6) 85 140 202 60 -
CG&E
1997 1996 1995 1994 1993
(in millions)
Operating revenues (1) $2 452 $1 976 $1 848 $1 788 $1 752
Net income (loss) (1) 239 227 236 158 (9)
Total assets (4) 4 914 4 844 5 081 5 069 5 036
Cumulative preferred stock subject
to mandatory redemption (5) - - 160 210 210
Long-term debt (6) 1 324 1 381 1 518 1 738 1 729
Long-term debt due within
one year (6) - 130 152 - -
PSI
1997 1996 1995 1994 1993
(in millions)
Operating revenues (1) $1 958 $1 332 $1 248 $1 114 $1 092
Net income (1) 132 126 146 82 125
Total assets (4) 3 406 3 295 3 076 2 945 2 645
Long-term debt (6) 826 945 828 878 816
Long-term debt due within
one year (6) 85 10 50 60 -
Cinergy, CG&E, and PSI
(1) See Notes 1 and 15 of the "Notes to Financial Statements" in
"Item 8. Financial Statements and Supplementary Data."
(2) See Notes 1 and 17 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
(3) See Note 16 of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
(4) See Notes 1(f) and 6 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
(5) See Note 3 of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
(6) See Note 4 and 8(b) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
In addition, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 12 of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data" for
discussions of material uncertainties for Cinergy, CG&E, and PSI.
ULH&P
Omitted pursuant to Instruction I(2)(a).
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, 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 Corp. (Cinergy or Company) 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, a Delaware corporation, 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. and The Cincinnati Gas & Electric
Company (CG&E). Cinergy is the parent holding company of PSI Energy, Inc. (PSI),
CG&E, Cinergy Investments, Inc. (Investments), and Cinergy Services, Inc.
(Services). CG&E is an operating utility primarily engaged in providing electric
and gas service in the southwestern portion of Ohio and through its principal
subsidiary, The Union Light, Heat and Power Company (ULH&P), in adjacent areas
in Kentucky. PSI is an operating utility primarily engaged in providing electric
service in north central, central, and southern Indiana. Services provides
management, financial, administrative, engineering, legal, and other services to
Cinergy, CG&E, PSI, and Investments. Cinergy conducts its international and
non-regulated businesses through Investments and its subsidiaries.
FINANCIAL CONDITION
COMPETITIVE PRESSURES
ELECTRIC UTILITY INDUSTRY
Cinergy, CG&E, PSI, and ULH&P
Introduction
The electric utility industry is transitioning from a monopoly cost-of-service
regulated environment to an industry in which companies will ultimately compete
to be the customers' energy provider. This transition will continue to impact
the operations, structure, and profitability of Cinergy. The effects of
competition are already being felt in the wholesale power markets, where the
increased numbers of power marketers and brokers are reducing the margins
previously experienced.
Energy companies are positioning themselves for full competition through mergers
and acquisitions, strategic alliances with other energy companies and
energy-related businesses, and through the development of new products and
services. Just as critical to Cinergy will be the regulatory outcome of the
deregulation process in each of its three franchise states, as well as the
outcome in other states where Cinergy plans to compete.
Deregulation Process
The FERC opened up the wholesale electric markets to competition in 1996 with
Orders 888 and 889. The final rules provided for mandatory filing of open
access/comparability transmission tariffs, provided for functional unbundling of
all services, required utilities to use the filed tariffs for their own bulk
power transactions, established an electronic bulletin board for transmission
availability and pricing information, and established a contract-based approach
to recover any potential "stranded" investments (explained below) as a result of
customer choice at the wholesale level.
Customer choice at the end-user (i.e., retail) level currently remains under the
jurisdiction of individual states (see State Developments). The deregulation
process has varied greatly from state to state. Several states have enacted
customer choice legislation, while many states are in the early stages of
studying the issues. During the process of developing customer choice
legislation, utilities have been required to consider issues such as the
recovery of any stranded investment, ability to compete for incumbent customers,
and the potential forced divestiture of generating assets. Cinergy continues to
be an advocate of competition in the electric utility industry and continues to
pursue customer choice legislation at both the state and Federal levels.
As the deregulation process has progressed, it has become clear that both scale
and diversity of business are critical factors for success. Scale is critical
for several reasons. A critical mass of customers allows the development of new
products and back-office capabilities in a cost-effective manner. A larger
balance sheet scale and diversity of commodities (i.e., gas and electric) allow
the trading business to market risk intermediation products without taking
excessive financial risks and to recover back-office costs in a low margin
business. Merger and acquisition activity in the energy industry appears to be
accelerating as companies attempt to create the desired scale.
Recent Developments
Stranded Investments Due to excess capacity in the industry and the declining
cost of new technology, electricity prices in a competitive market may not fully
cover the costs of past commitments made by utilities while under a cost-
of-service regulated environment. Fixed costs which cannot be recovered through
electricity sales at market prices are referred to as stranded investments.
While the recovery of prudent past investments and commitments has been
supported by FERC in Order 888 and at least partially in the states in which
competition-related legislation has been passed, there is no guarantee that
Cinergy or any other utility will receive full recovery of potential stranded
investments. In addition, in those states which have legislated open
competition, many have required the divestiture of generating assets in order to
qualify and obtain recovery of stranded investments.
Midwest ISO During 1997, Cinergy collaborated with other Midwestern utility
companies on a plan to join the transmission systems of the participating
companies into a single regional system. The plan was filed with the FERC early
in 1998 for approval. If approved, the new system would be managed independently
by an Independent System Operator (ISO). The formation of a Midwest ISO, as it
has become known, would ensure non-discriminatory open transmission access and
system reliability, as well as the development of a regional transmission
tariff, which would help eliminate the "pancaking" of transmission rates in a
region.
Currently, there are eight utilities participating in the filing along with
Cinergy. The proposed ISO consists of 32,000 miles of transmission lines and
covers portions of eight Midwestern states, forming one of the largest ISOs in
the country. FERC's approval of the plan is anticipated to come within a year.
Repeal of the PUHCA Currently, PUHCA creates a number of restrictions that make
preparing for deregulation more difficult. PUHCA restricts the amount which can
be invested outside the regulated utility, including foreign investments and
investments in power plants. It also restricts potential merger partners to
those that meet certain integration requirements.
In 1995, the SEC endorsed recommendations for reform of PUHCA. The
recommendations called for repeal and, pending repeal, significant
administrative reform of the 62-year-old statute. Since the release of the SEC's
report, numerous bills have been introduced in both houses of the United States
(US) Congress providing for the repeal or significant amendment of PUHCA. During
1997, a bill repealing PUHCA was introduced in the US Senate but was never
brought to a vote. Legislation repealing PUHCA is anticipated to be reintroduced
in the US Congress in 1998. Cinergy supports the repeal of this act either as
part of comprehensive reform of the electric industry or as separate
legislation.
Franchise Rights During 1997, several states enacted transition plans that
included a variety of measures designed to create a "level playing field" for
new competitors. In some cases, there has been a mandatory "divestiture" of
existing customers. In others, the plans provide incentives which may encourage
customers to switch suppliers by providing "above market" credits to those who
switch from the incumbent utility. Also, some states have put varying
restrictions on the incumbent utility's ability to compete for these customers.
Cinergy, CG&E, PSI, and ULH&P
State Developments
As previously mentioned, certain states have enacted legislation which will lead
to complete retail competition within the next several years. These states
generally have required up-front rate reductions and the opportunity for all
customer classes to choose an electricity provider. A few states have phased in
customer choice, but still provided for immediate rate reductions.
All states passing legislation have included some mechanism for recovery of
stranded investment. However, states have varied on the methodology to be
applied in determining the level of stranded investment, and divestiture of
generation assets has been required in a few states.
As discussed below, the three states in which Cinergy operates public utility
companies have all had legislation introduced which would provide for full
retail customer choice. None of these states has yet passed legislation, but
policymakers and stakeholders continue to work to resolve issues with an eye
toward passage.
Cinergy and PSI
Indiana A customer choice bill (SB427) was introduced during the 1997 Indiana
legislative session, with support from a coalition made up of Cinergy, the
Indiana Manufacturers Association, the Indiana Industrial Energy Consumers,
Inc., and one other Indiana investor-owned electric utility. After amendments
were made, essentially stripping the bill of most of its provisions and turning
it into a bill calling for the study of deregulation by a legislative committee
known as the Regulatory Flexibility Committee (Study Committee), SB427 passed
the legislature and was signed by the governor.
The Indiana Utility Regulatory Commission (IURC) issued a report titled "Energy
Report: Public Policy Considerations" (Report) to the Study Committee in
November 1997. The scope and purpose of the Report was to provide information to
the Study Committee which would enable them to answer the question of whether
retail customer choice was in the best interest of Indiana. Public policy issues
listed by the Report for the Study Committee to consider were: jurisdiction over
retail transmission; recovery of stranded investments; estimation methodology of
any stranded investments allowed to be recovered; method for recovery of
stranded investments; low-income and environmental programs; and impact of
deregulation on state and local taxes. The Report's conclusion was: "In the long
run, competition in the electricity market could be in the best interest of
Indiana. Experience in other states has shown that the best outcomes and
smoothest process to bring about customer choice in the electric industry have
resulted from a cooperative effort led by the governor, the legislature and the
state commission working together with all stakeholders. Indiana should be
prepared to respond to competition created by other states, especially those
surrounding Indiana, and to any Federal legislation that requires nationwide
competition in the electricity market." As a result of the IURC report and other
testimony to the Study Committee, the Study Committee recommended that they
continue to study changes in the electric industry.
Another customer choice bill (SB 431), sponsored by, among others, those who
supported the customer choice bill during 1997, was introduced in the Indiana
Senate in January 1998. In the House of Representatives, House Bill 1190 (HB
1190) was introduced. This bill calls for a study by the IURC of the effects
deregulation would have on Indiana. Although the legislature is much more
knowledgeable on the customer choice issues as a result of the Study Committee's
report and debating the 1997 customer choice bill, neither SB 431 or HB 1190 was
passed during the 1998 legislative session.
Cinergy and CG&E
Ohio Although the Ohio legislature did not pass customer choice legislation
during 1997, it did create the Joint Select Committee on Electric Industry
Deregulation (Committee) to examine competition and restructuring issues. The
Committee heard testimony from a variety of stakeholders on various customer
choice issues throughout the spring of 1997. In December 1997, the Committee's
chairpersons unveiled the outline of a plan designed to bring competition into
Ohio's retail electric industry in the year 2000. The chairpersons' plan is
based on five basic policies: all customers, including residential, can
participate from the outset; the cost of electricity will decrease from the
outset and continue to decrease at an accelerating rate for all customers during
the transition period; current low-income assistance programs will be continued;
current reliability and quality of service will be maintained; and open free
markets will be established with lower prices driven by competition. The plan
would provide for competition among utilities to begin January 1, 2000, with a
five-year transition period.
Furthermore, the plan addresses the tax consequences of a deregulated
environment through the creation of a revenue-neutral system. The current tax
structure of Ohio subjects Ohio electric utility companies to certain state
taxes which would not be paid by out-of-state competitors selling power in Ohio
retail markets. The new system attempts to remedy this disadvantage while not
diminishing the amount of tax revenues currently being collected by state and
local governments.
The chairpersons were not able to get their plan adopted by the full committee.
Some of the primary concerns that have been expressed are that the plan does not
adequately address utilities' stranded investment concerns, and that the
proposal to create retail marketing areas, or "buying pools," throughout the
state during the transition period would be unduly disruptive in that customers
who did not affirmatively elect to remain with their incumbent utility would be
assigned to the buying pool under a Public Utility Commission of Ohio (PUCO)
designed and administered bidding process. The chairpersons have announced
intentions to introduce a bill in 1998.
Also in Ohio, a bill was introduced in November 1997 (HB 625) authorizing the
issuance of electric utility rate reduction bonds that would permit utilities to
securitize certain assets. The bill itself does not provide for retail
competition but, rather, specifies financing issues a utility may engage in to
prepare for competition. It is uncertain whether this bill or any bill providing
for retail competition will be passed in Ohio in 1998.
Cinergy, CG&E and ULH&P
Kentucky In January 1998, the House Chairman of the Tourism, Development and
Energy Committee introduced a customer choice bill (HB 443). The bill would
allow persons and businesses in participating service areas to choose their
supplier of electricity beginning January 1, 2000. It would also ensure a rate
cap to prevent any increase in generation energy prices for six years, with
certain exceptions. Because of its low electric rates, Kentucky has not to date
been moving aggressively toward retail customer choice. It is uncertain whether
HB 443 will be passed in Kentucky in 1998.
Cinergy
United Kingdom
Transition to full competition in the United Kingdom's (UK) electric utility
industry began with the industry's privatization in 1991. When the industry was
privatized, the generation, transmission, and regional distribution businesses
were, in effect, unbundled into separate companies. The regional distribution
companies, including Midlands Electricity plc (Midlands) (Cinergy, through a
joint venture owns a 50% interest in Midlands, see Note 1(e) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data"),
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 in place, enabling licensed suppliers to use these
networks.
As a result of the transition plan, larger users of electricity have been free
to choose their supplier since 1994 or earlier. Full competition for all
customers was scheduled to be phased in beginning in April 1998. However, due to
delays with the design and testing of information systems, the phase-in to full
competition has been delayed to September 1998. Midlands' service territory is
now scheduled to begin open competition in October 1998.
To date, new entrants to the industry have been limited to independent power
producers, who compete with the formerly state-run generators by using new,
efficient technology. There have been no major new entrants into the supply
business from outside the industry. However, new entrants are expected to emerge
as full competition opens.
A substantial portion of Midlands' operating profit is related to the
distribution business, which will remain a regulated monopoly. Midlands intends
to market both gas and electric service in the supply business, as all customers
gain the ability to choose suppliers.
Cinergy, CG&E, and ULH&P
Gas Utility Industry
Customer Choice The PUCO approved CG&E's gas customer choice program during
1997. The plan, which made customer choice available to all residential and
small commercial customers, went into effect in November 1997. As of January 30,
1998, approximately 7,300 customers have opted to participate in this program.
Large industrial, commercial, and educational institution customers already had
the ability to select their own gas supplier. In 1997, the PUCO approved two
other gas customer choice programs in the state. Cinergy Resources, Inc. (CRI),
Cinergy's gas retail marketing subsidiary, is one of many entities competing for
customer gas supply business in these programs.
CG&E continues to provide the gas transportation service for all customers on
its system without regard to the supplier of the gas commodity. CG&E receives a
transportation charge from customers which is based on its current regulated
rates.
Cinergy and CG&E
Loss of Transportation Customer Late in 1997, AK Steel, Cinergy's largest
natural gas transportation customer, informed CG&E that it plans to build its
own pipeline to connect directly to an interstate natural gas pipeline. The
interruptible contract with CG&E, which represents approximately $7 million of
annual revenues, will expire at the end of 1998. Under that contract, AK Steel
purchases gas directly from other suppliers but uses CG&E's pipelines to deliver
the gas. AK Steel is able to pursue this alternative because of its close
proximity to an existing interstate pipeline. With few customers being similarly
situated, Cinergy and CG&E do not currently anticipate others proceeding in a
similar manner.
Cinergy, CG&E, PSI, and ULH&P
Cinergy's Response to the Changing Competitive Environment
Cinergy believes competition will benefit electric customers individually and
the economy as a whole. Cinergy has taken steps to prepare not only for the
changing environment, but to assure fairness and consistency in the setting of
rules and regulations in the various markets in which Cinergy competes.
Cinergy's basic approach to the deregulation environment is to have set a goal
to be a top five utility in five measures of scale and productivity within five
years. Examples of steps taken to achieve this goal include the following:
Cinergy reorganized its operations into four strategic business units. This
functional unbundling separated Cinergy's business into Energy Services, Energy
Delivery, Energy Commodities, and International business units. Each business
unit is responsible for business expansion in its own markets.
Cinergy enhanced its international presence in 1996 by acquiring its
interest in Midlands, an electricity distribution company located in the UK. In
1997, Cinergy furthered its international development plans by acquiring the
development team and all rights to future projects of Midlands Power
International, a power development subsidiary of Midlands.
Cinergy formed a joint venture with Trigen Energy Corporation (Trigen) to
develop and operate cogeneration and trigeneration facilities throughout the US
and Canada which enables Cinergy to compete for customers outside its own
franchise territory prior to and following the arrival of retail competition.
Cinergy has partnered with two other energy companies to form Cadence
Network LLC which will provide a variety of innovative products and services to
multi-site national accounts customers. These services include consolidated
billing, bill auditing, and rate and usage analysis.
Cinergy has become a major participant in the marketing of power, resulting
in megawatt (mw) sales volume increases of 600% and 80% in 1997 and 1996,
respectively.
In 1997, Cinergy acquired Greenwich Energy Partners (Greenwich). Greenwich
is a small proprietary trader of energy commodities. Through its acquisition of
Greenwich, Cinergy became the first utility company to hold a seat on the New
York Mercantile Exchange (NYMEX). The NYMEX is the world's largest physical
commodity futures exchange and preeminent trading forum for energy and precious
metals.
In 1996, the NYMEX began trading electricity futures and options contracts
with contract delivery points in the western US. During the first half of 1998,
the NYMEX will begin trading contracts with delivery points located in the
Midwest, Mid-Atlantic, and Southern regions of the country. Cinergy's
transmission system was selected as the delivery point for the Midwest region.
Cinergy's acquisition of the NYMEX seat and its selection as a delivery point
for electricity futures trading demonstrates Cinergy's participation as a leader
in the evolving power markets.
Cinergy, CG&E, PSI, and ULH&P
Substantial Accounting Implications
Historically, regulated utilities have applied the provisions 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.
Based on Cinergy's current regulatory orders and the regulatory environment in
which it currently operates, the recognition of its regulatory assets as of
December 31, 1997, is fully supported. However, in light of recent trends in
customer choice legislation, the potential for future losses resulting from
discontinuance of Statement 71 does exist. Such potential losses, if any, cannot
be determined until such time as a legislated plan has been approved by each
state in which Cinergy operates a franchise territory. Cinergy intends to
continue its pursuit of competitive strategies which mitigate the potential
impact of these issues on the financial condition of the Company.
Cinergy, CG&E, PSI, and ULH&P
SECURITIES RATINGS
The current ratings provided by the major credit rating agencies; Duff & Phelps
Credit Rating Co. (D&P), Fitch Investors Service, LP (Fitch), Moody's Investors
Service (Moody's), and Standard and Poor's (S&P), are included in the following
table:
D&P Fitch Moody's S&P
Cinergy
Corporate Credit BBB+ BBB+ Baa2 BBB+
Commercial Paper D-2 F-2 P-2 A-2
CG&E
Secured Debt A- A- A3 A-
Senior Unsecured Debt BBB+ Not rated Baa1 BBB+
Junior Unsecured Debt BBB Not rated Baa2 BBB+
Preferred Stock BBB BBB+ baa1 BBB+
Commercial Paper D-1- F-2 P-2 Not rated
PSI
Secured Debt A- A A3 A-
Senior Unsecured Debt BBB+ A- Baa1 BBB+
Junior Unsecured Debt BBB BBB+ Baa2 BBB+
Preferred Stock BBB BBB+ baa1 BBB+
Commercial Paper D-1- F-2 P-2 Not rated
ULH&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 Demand-Side Management (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). 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.
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. A
settlement agreement with the UCC and CAC was approved in its entirety by the
IURC in August 1997. This settlement agreement reduced the original rate
increase by $2.1 million (.2%). Major provisions of the settlement agreement
include: a) a $4.1 million increase in the annual amortization of certain
regulatory assets; b) a retail rate reduction of $1 million annually; c) a $.9
million reduction in retail rates to reflect an August 31, 1995, cut-off date
for costs to achieve merger savings instead of an October 31, 1996, cut-off
date; and d) authorization to defer for subsequent recovery costs to achieve
merger savings incurred between September 1, 1995, and October 31, 1996.
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 (December 1996 DSM Order). Beginning January 1, 1997,
and continuing through December 31, 2000, the settlement agreement allows PSI to
recover $35 million per year through a non-bypassable charge in PSI's retail
rates. The $35 million is designed to recover all previously incurred, but as
yet unrecovered, DSM costs and all costs related to satisfying remaining
commitments associated with a previous DSM settlement agreement. The $35 million
also includes recovery of carrying costs. Further, the agreement authorizes PSI
to spend up to $8 million annually on ongoing DSM programs through the year 1999
and to collect such amounts currently in retail rates.
February 1995 Order - Retail Rate Proceeding and Merger Savings Allocation Plan
The IURC's February 1995 Order approved a settlement among PSI and certain
intervenors authorizing PSI 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 provided PSI an opportunity to earn up to
an additional 100 basis points above the common equity return authorized in the
September 1996 Order until December 31, 1997. To be eligible for such additional
earnings, PSI had to meet certain performance-related standards. PSI met those
standards, which were measured in conjunction with quarterly fuel adjustment
clause filings. Beginning January 1, 1998, the 100 basis point increment to the
authorized common equity return will be phased out over a twelve-month period.
Effective with this order, PSI began recovering carrying costs on certain
environmental-related projects under construction. This recovery continues until
the date of an approved rate order reflecting such projects in rates. Through
this mechanism, revenues were increased by $9 million, $18 million, and $2
million on an annual basis in February 1995, March 1995, and January 1996,
respectively.
Coal Contract Buyout Costs In August 1996, PSI entered into a coal supply
agreement with Eagle Coal Company (Eagle) for the supply of approximately three
million tons of coal per year. The agreement, which terminates December 31,
2000, provides for a buyout fee of $179 million (including interest) to be
included in the price of coal to PSI over the term of the contract. This fee
represents the costs to Eagle of the buyout of the coal supply agreement between
PSI and Exxon Coal and Minerals Company. The retail jurisdictional portion of
the buyout charge, excluding the portion applicable to joint owners, is being
recovered through the quarterly fuel adjustment clause, with carrying costs on
unrecovered amounts, through December 2002. PSI has also filed a petition at the
FERC for recovery of the wholesale jurisdictional portion of the buyout costs
through the wholesale fuel adjustment clause. Generally, the FERC will allow
recovery if the utility can demonstrate there will be net benefits to customers
during the buyout cost recovery period. The FERC is expected to issue an order
on PSI's petition early in 1998. (See Note 1(i) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")
Cinergy and CG&E
Ohio
PUCO Order - CG&E's Gas Rate Proceeding In December 1996, the PUCO issued an
order (December 1996 Order) approving an overall average increase in gas
revenues for CG&E of 2.5% ($9.3 million annually). The PUCO established an
overall rate of return of 9.7%, including a return on common equity of 12.0%. In
developing this return on common equity, the PUCO considered, among other
things, CG&E's efforts to reduce costs and increase operating efficiency and its
proposals to allow residential customers to choose their natural gas supplier.
The PUCO disallowed certain of CG&E's requests, including the requested working
capital allowance, recovery of certain capitalized information systems
development costs, and certain merger-related costs. These disallowances
resulted in a pretax charge to earnings during the fourth quarter of 1996 of $20
million ($15 million net of taxes or $.10 per share basic, $.09 per share
diluted). CG&E's request for a rehearing on the disallowed information systems
costs and other aspects of the order was denied.
In April 1997, CG&E filed a notice of appeal with the Supreme Court of Ohio
challenging the disallowance of information systems costs and the imputation of
certain revenues. Cinergy and CG&E cannot predict what action the Supreme Court
of Ohio may take with respect to this appeal.
Other In April 1994, the PUCO issued an order approving a settlement agreement
among CG&E and certain intervenors which, among other things, resolved
outstanding issues related to the merger. As part of this settlement, CG&E
agreed to a moratorium on increases in base electric rates until January 1, 1999
(except under certain circumstances). In return, CG&E is allowed to retain all
PUCO electric jurisdictional Non-fuel Merger Savings until 1999.
Consistent with the provisions of the settlement agreement and the December 1996
Order, CG&E expensed merger transaction costs and costs to achieve merger
savings (Merger Costs) applicable to its PUCO jurisdiction of $5 million and $41
million (including $6 million as a result of the December 1996 Order) in 1995
and 1996, respectively. CG&E and its utility subsidiaries have deferred a
portion of the Merger Costs incurred through December 31, 1996, for future
recovery in customer rates.
Additionally, in December 1996, 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 Kentucky Public Service Commission's (KPSC) 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 has deferred its portion of Merger Costs incurred through December 31,
1996, for future recovery in customer 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. The key question under the relevant PUHCA
standards is the amount of increased operating costs, if any, that would result
from the gas operations being divested and operated on a stand-alone basis.
In its order approving the merger, the SEC reserved judgment over Cinergy's
ownership of CG&E's gas operations for three years, at the end of which period
Cinergy would be required to address the matter. In February 1998, Cinergy made
a filing with the SEC setting forth its rationale for retention of the gas
operations. The filing includes, among other things, a study showing that, if
divested and operated on a stand-alone basis, the gas operations would bear
significant increased operating costs, greater than those cited by the SEC in
two 1997 cases permitting electric registered holding companies to acquire and
retain gas properties. For these and other reasons stated in Cinergy's filing,
Cinergy believes its retention of CG&E's gas properties meets all relevant
standards under the PUHCA.
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 (SO2) and nitrogen oxide (NOx)
emissions from utility sources. Reductions of these emissions are to be
accomplished in two phases. Compliance under Phase I was required by January 1,
1995, and Phase II compliance is required by January 1, 2000. To achieve the SO2
reduction objectives of the CAAA, emission allowances have been allocated by the
US Environmental Protection Agency (EPA) to affected sources (e.g., Cinergy's
electric generating units). Each allowance permits one ton of SO2 emissions. The
CAAA allows compliance to be achieved on a national level, which provides
companies the option to achieve this compliance by reducing emissions and/or
purchasing emission allowances.
Cinergy's operating strategy for Phase I was based upon the compliance plans
developed by PSI and CG&E and approved by the IURC and the PUCO, respectively.
All required modifications to Cinergy's generating units to implement the
compliance plans were completed prior to January 1, 1995.
To comply with Phase II SO2 emission requirements, Cinergy's current strategy
includes a 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 SO2 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 NOx reductions required by Phase II, Cinergy may install additional low
NOx burners on certain affected units in addition to the use of a system-wide
NOx emission averaging strategy.
Cinergy is forecasting CAAA compliance capital expenditures of $19 million
during the 1998 through 2002 period. Of these forecasted expenditures, $9
million relates to CG&E and $10 million relates to PSI. These expenditures are
included in the amounts provided in the "Capital Requirements" section herein.
In addition, operating costs may increase due to higher fuel costs (e.g.,
higher-quality, lower-sulfur coal; increased use of natural gas) and maintenance
expenses.
Ambient Air Standards The EPA recently revised the National Ambient Air Quality
Standards for ozone and fine particulate matter. These new rules increase the
pressure for additional emissions reductions. On September 23, 1997, Cinergy
announced a proposal to reduce its NOx emissions rate by two-thirds to 0.25
pounds of NOx per one million British thermal units (MMBtu). At that time,
Cinergy's preliminary cost estimate for the two-thirds reduction was between $74
million and $204 million (stated in 1997 dollars). Subsequent to Cinergy's
announcement, the EPA announced on October 10, 1997, its proposed call for
revisions to State Implementation Plans (SIPs) for statewide reductions in NOx
emissions, proposing utility NOx emissions at a rate of 0.15 pounds per MMBtu.
The EPA's schedule calls for all reductions to be in place as early as 2002.
These initiatives will force significant reductions in NOx emissions from many
sources. The EPA has stated that electric utility generating facilities
specifically are targeted. The final total level of NOx reductions will depend
upon the outcome of the SIP revision process. Cinergy estimates that the capital
costs for additional NOx controls at its facilities at the 0.15 pounds of Nox
per MMBtu rate proposed by the EPA could exceed $524 million (stated in 1997
dollars) over the next five years depending upon the final level of reductions,
details of a NOx trading program, and the time frame for implementation.
In February 1998, Cinergy joined with various utilities, labor groups, and other
organizations from several Midwest, Great Lakes, Mid-Atlantic, and Southeast
states in forming the Alliance for Constructive Air Policy (ACAP). This
coalition is committed to working with policymakers to find cost-effective,
equitable approaches for reducing ozone pollution in key regions of the country.
The ACAP is developing an alternative to the EPA's proposed call for SIPs
revisions to reduce NOx emissions (see discussion above). The ACAP's proposal is
a two-step process to achieve reductions in NOx emissions. The first step
involves NOx emission reductions of 55 percent from 1990 levels, or a reduction
in the NOx emission rate to 0.35 pounds of NOx per MMBtu, whichever is less
stringent, by 2004. The second step involves the development of enhanced
subregional air quality modeling that would be used to determine if any
additional reductions are necessary to reach local attainment. These additional
reductions, if needed, would be implemented by 2007. The ACAP is also promoting
the establishment of a subregional trading market for NOx emissions. This system
would allow for a market-based approach to limiting emissions and would produce
cost savings and incentives for the development of new technologies to improve
air quality. Capital costs required for Cinergy to be in compliance under the
ACAP's proposals would be significantly less than those under the current EPA
proposal. But as stated above, final costs of compliance depend on the final
level of reductions required, details of a NOx trading program, and the time
frame for implementation and compliance.
The impact of the particulate standards cannot be determined at this time. The
EPA estimates it will take up to five years to collect sufficient ambient air
monitoring data. The states will then determine the sources of these
particulates and determine a reduction strategy. The ultimate effect of the new
standard could be requirements for newer and cleaner technologies and additional
controls on conventional particulates and/or reductions in SO2 and NOx emissions
from utility sources. Since these studies and determinations have not been made,
Cinergy cannot predict the outcome or effect of the new particulate standards.
Global Climate Change On December 11, 1997, delegates to the United Nations'
climate summit in Japan adopted a landmark environmental treaty (Kyoto Protocol)
to deal with global warming. The Kyoto Protocol establishes legally binding
greenhouse gas emission targets for developed nations. The Kyoto Protocol
framework lacks details related to definitions, implementation, and enforcement
plans. For the Kyoto Protocol to enter into force within the US it will have to
be ratified by a two-thirds vote of the US Senate. In July 1997, the US Senate
passed a resolution advising the Clinton Administration that they would not
favorably consider a protocol which did not include commitments for all nations
of the world, or that would cause harm to the US economy. The Kyoto Protocol, in
its present form, is unlikely to be ratified by the US Senate since it does not
meet the requirements of this resolution.
Significant uncertainty exists concerning the science of climate change, and the
Clinton Administration's environmental and energy policies and how it intends to
reduce greenhouse gas emissions. Cinergy's plan for managing the potential risk
and uncertainty of climate change includes: (1) implementing cost-effective
greenhouse gas emission reduction and offsetting activities; (2) encouraging the
use of alternative fuels for transportation vehicles (a major source of
greenhouse gases); (3) funding research of more efficient and alternative
electric generating technologies; (4) funding research to better understand the
causes and consequences of climate change; and (5) encouraging a global
discussion of the issues and how best to manage them. Cinergy believes that
voluntary programs, such as the US Department of Energy Climate Challenge
Program, which Cinergy joined in 1995, are the most cost-effective means to
limit greenhouse gas emissions.
Air Toxics The air toxics provisions of the CAAA exempted fossil-fueled steam
utility plants from mandatory reduction of air toxics until the EPA completed a
study. The final report issued in February 1998, confirmed utility air toxic
emissions pose little risk to public health. It stated mercury is the pollutant
with the greatest potential threat, while others require further study. A
Mercury Study Report issued in December 1997, stated that mercury is not a risk
to the average American and expressed uncertainty whether reductions in current
domestic sources would reduce human mercury exposure. US utilities are a large
domestic source, but they are negligible compared to global mercury emissions.
The EPA was unable to show a feasible mercury control technology for coal-fired
utilities. The EPA must determine the need for regulation by April 15, 1998. If
more air toxics regulations are issued, the compliance cost could be
significant. Cinergy cannot predict the outcome or effects of the EPA's
determination.
Cinergy, CG&E, PSI, and ULH&P
Other As more fully discussed in Note 12(b)(ii) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data", PSI has
received claims from Indiana Gas Company, Inc. (IGC) and Northern Indiana Public
Service Company (NIPSCO) that PSI is a Potentially Responsible Party under the
Comprehensive Environmental Response, Compensation and Liability Act with
respect to certain manufactured gas plant (MGP) sites, and therefore responsible
for the costs of investigating and remediating these sites.
In August 1997, NIPSCO filed suit against PSI seeking recovery from PSI of
NIPSCO's past and future costs of investigating and remediating MGP related
contamination at the Goshen, Indiana, MGP site. NIPSCO alleged that it has
already incurred about $400,000 in response costs at the site and that
remediation of the site will cost about $2.7 million. PSI denied liability in
its answer to the complaint. The parties are currently engaged in the discovery
process and the case has not yet been scheduled for trial.
Also, in August 1997, PSI reached an agreement with IGC settling IGC's claims
that PSI should contribute to IGC's response costs related to 13 of the 19 MGP
sites conveyed by PSI to IGC in 1945. This agreement requires PSI and IGC to
share past and future response costs equally (50%/50%) at the 13 sites. Further,
the parties must jointly approve future management of the sites and the decision
to spend additional funds. The settlement does not address five sites PSI
acquired from NIPSCO and subsequently sold to IGC.
It is premature, at this time, to predict the nature, extent, and ultimate costs
of, or PSI's responsibility for, environmental investigations and remediations
at MGP sites owned or previously owned by PSI or its predecessors. PSI continues
to gather information pertaining to each of these MGP sites, including the 13
sites which are the subject of the agreement with IGC and the Goshen site which
is the subject of NIPSCO's complaint. Reserves recorded, based on information
currently available, are not material to Cinergy's financial condition or
results of operations. However, as further investigation and remediation
activities are undertaken at these sites, the potential liability for MGP sites
could be material to Cinergy's financial condition or results of operations.
Refer to Note 12(b) and (c) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data" for a more detailed discussion of
the status of certain environmental issues.
CAPITAL REQUIREMENTS
CONSTRUCTION AND OTHER INVESTING ACTIVITIES
Cinergy, CG&E, PSI, and ULH&P
Construction expenditures for the Cinergy system are forecasted to be
approximately $375 million for 1998, and over the next five years (1998 - 2002),
are forecasted to aggregate approximately $1.7 billion. Of these projected
expenditures, approximately $191 million and $866 million relate to CG&E
(including $37 million and $137 million for ULH&P) and $180 million and $858
million relate to PSI, for 1998, and over the next five years, respectively.
Substantially all of these expenditures are for capital improvements to and
expansion of Cinergy's operating facilities.
Cinergy is forecasting no investments in new generating facilities under the
belief that excess supply in the market will continue in the near term. If
deregulation of the generation component of the electric utility industry does
not occur in the manner or in the time frame anticipated, and depending on
capacity constraints, franchise demand requirements, and the regulatory
requirements dictated for Integrated Resource Planning, Cinergy could be forced
to make capital investments in new generating facilities in lieu of relying upon
the existing market for its energy needs. (All forecasted amounts are in nominal
dollars, exclude capital costs for additional NOx controls at Cinergy's
facilities (see "Ambient Air Standards" in the "Environmental Issues" section
herein), and reflect assumptions as to the economy, capital markets,
construction programs, legislative and regulatory actions, frequency and timing
of rate increases, and other related factors, all or any of which may change
significantly.)
Cinergy
As discussed in the "Competitive Pressures" section, during 1996, Cinergy
acquired a 50% interest in Midlands. Cinergy and GPU, Inc. (GPU) formed Avon
Energy Partners Holdings (Avon Energy), a 50%/50% joint venture, and acquired
the outstanding common stock of Midlands through Avon Energy's wholly-owned
subsidiary for approximately $2.6 billion. Cinergy and GPU have each invested
approximately $500 million in Avon Energy. Cinergy funded its investment through
its credit facility. Avon Energy funded the remainder of the purchase price
through the issuance of non-recourse debt (see Note 1(e) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data").
During 1996, Cinergy and Trigen formed a joint venture, Trigen-Cinergy Solutions
LLC (Trigen-Cinergy). Cinergy may invest up to $100 million and provide
guaranties of debt and other obligations in an aggregate amount not to exceed
$250 million at any one time with respect to energy-related products and
services, including those undertaken by Trigen-Cinergy. (See the "Competitive
Pressures" section herein.)
With respect to international development, subject to identifying projects which
meet Cinergy's investment objectives, Cinergy may invest or commit up to $100
million during 1998. Funding of these investments or commitments will be
provided through additional debt borrowings. (See the "Competitive Pressures"
section herein.)
Cinergy
Cinergy's net cash used in investing activities was $377 million in 1997,
compared to $871 million and $363 million in 1996 and 1995, respectively. The
decrease in 1997 was primarily attributable to the effect of Cinergy's
investment in Midlands during 1996.
CG&E and ULH&P
CG&E and its subsidiaries' net cash used in investing activities was $166
million in 1997 (including $23 million for ULH&P), compared to $156 million and
$147 million in 1996 and 1995 (including $19 million and $19 million for ULH&P),
respectively. The increase in 1997 was primarily attributable to an increase in
the amount of construction expenditures.
PSI
PSI's net cash used in investing activities was $152 million in 1997, compared
to $198 million and $230 million and 1996 and 1995, respectively. The decrease
in 1997 was primarily attributable to a decrease in the amount of construction
expenditures for PSI.
OTHER COMMITMENTS
Cinergy, CG&E, PSI, and ULH&P
Securities Redemptions Mandatory redemptions of long-term debt total $501
million ($341 million for CG&E and its subsidiaries, including $20 million for
ULH&P, and $160 million for PSI) during the period 1998 through 2002. On January
29, 1998, PSI gave notice of its intention to redeem on March 1, 1998, all
outstanding shares of its 7.44% Series Cumulative Preferred Stock at a
redemption price of $25 per share. On February 27, 1998, CG&E announced its
intention to redeem on March 29, 1998, $41 million principal amount of its 7
3/8% Series First Mortgage Bonds (due November 1, 2001) at a redemption price of
100.30% and to redeem on March 30, 1998, the entire $100 million principal
amount of its 8 1/2% Series First Mortgage Bonds (due September 1, 2022) at a
redemption price of 100%, both through the maintenance and replacement fund (M&R
Fund) provision of CG&E's first mortgage bond indenture. Additionally, on the
same date, CG&E announced its intention to redeem on March 30, 1998, the
remaining $19 million principal amount of its 7 3/8% Series First Mortgage Bonds
(due November 1, 2001) at a redemption price of 100.87%. On March 24, 1998,
ULH&P announced its intention to redeem on April 23, 1998, $6.3 million
principal amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at
a redemption price of 100.85% through the M&R Fund provision of ULH&P's first
mortgage bond indenture. Additionally, on the same date, ULH&P announced its
intention to redeem on April 24, 1998, the remaining $3.7 million principal
amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at a
redemption price of 101.73%. Cinergy will continue to evaluate opportunities for
the refinancing of outstanding securities beyond mandatory redemption
requirements.
M&R Fund provisions contained in CG&E's, PSI's, and ULH&P's first mortgage bond
indentures require cash payments, bond retirements, or pledges of unfunded
property additions each year based on an amount related to the net revenues of
the respective company.
Cinergy
Windfall Profits Tax During the third quarter of 1997, a windfall profits tax
was levied against Midlands. Cinergy's share of the tax to be paid by Midlands
in two equal installments, due December 1, 1997, and 1998, is approximately 67
million pounds sterling ($109 million or $.69 per share, basic and diluted).
Midlands borrowed the funds to finance the first installment. Cinergy expects
Midlands will borrow funds as necessary to pay the final installment. As
Cinergy's management believes this charge to be unusual in nature, and does not
expect such a charge to recur, the tax was recorded as an extraordinary item in
Cinergy's Consolidated Statement of Income during the third quarter of 1997. No
related tax benefit was recorded for the charge as the windfall profits tax is
not deductible for corporate income tax purposes in the UK, and Cinergy expects
that benefits, if any, derived for US Federal income taxes will not be
significant.
Cinergy, CG&E, PSI, and ULH&P
Year 2000 Costs Cinergy, like most owners of information systems, will be
required to modify significant portions of its systems to accommodate
requirements brought about by the turn of the century. During 1997, Cinergy
incurred costs of approximately $5 million to modify existing computer systems
and applications. Preliminary estimates of the remaining total costs to be
incurred prior to 2000 are approximately $8 million. Maintenance or modification
costs will be expensed as incurred, while the costs of new software will be
capitalized and amortized over the software's useful life.
CAPITAL RESOURCES
Cinergy, CG&E, PSI, and ULH&P
Cinergy, CG&E and its subsidiaries (including ULH&P), and PSI forecast that
their need for external funds during the 1998 through 2002 period will primarily
be for the refinancing of existing securities. (This forecast reflects nominal
dollars and assumptions as to the economy, capital markets, construction
programs, legislative and regulatory actions, frequency and timing of rate
increases, and other related factors, all or any of which may change
significantly.)
INTERNAL FUNDS
Cinergy, CG&E, PSI, and ULH&P
General Currently, the majority of Cinergy's revenues and corresponding cash
flows are derived from cost-of-service regulated operations. Cinergy believes it
is likely that the generation component of the electric utility industry will
ultimately be deregulated. However, the timing and nature of the deregulation
and restructuring of the industry is uncertain. In the interim, revenues
provided by cost-of-service regulated operations are anticipated to continue as
the primary source of funds for Cinergy. As a result of its low-cost position
and market strategy, over the long term, Cinergy believes it will be successful
in a more competitive environment. However, as the industry becomes more
competitive, future cash flows from Cinergy's operations could be subject to a
higher degree of volatility than under the present regulatory structure.
Cinergy
For the year ended December 31, 1997, Cinergy's cash provided from operating
activities was $753 million compared to $855 million and $736 million in 1996
and 1995, respectively. The decrease in 1997 was primarily due to CG&E's and
ULH&P's sales of accounts receivable during 1996. The decrease was offset, in
part, by PSI's payment in 1996 of $80 million in accordance with a 1989
settlement agreement between PSI and Wabash Valley Power Association, Inc.
(WVPA). (See Notes 6 and 12(e) of the "Notes to Financial Statements" in "Item
8. Financial Statements and Supplementary Data.")
CG&E and ULH&P
For the year ended December 31, 1997, CG&E and its subsidiaries' cash provided
from operating activities was $439 million (including $40 million for ULH&P)
compared to $680 million in 1996 (including $42 million for ULH&P) and $446
million in 1995 (including $37 million for ULH&P). The decrease in 1997 was
primarily due to CG&E's and ULH&P's sales of accounts receivable during 1996.
PSI
For the year ended December 31, 1997, PSI's cash provided from operating
activities was $332 million compared to $262 million in 1996 and $284 million in
1995. The increase in 1997 was primarily due to the reflection in 1996 of PSI's
payment of $80 million in accordance with a 1989 settlement agreement between
PSI and WVPA. (See Note 12(e) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data.")
Cinergy, CG&E, PSI, and ULH&P
Merger Savings As previously discussed in the "Regulatory Matters" section, CG&E
currently has a regulatory order in effect which provides a mechanism for the
retention of a portion of net Non-fuel Merger Savings.
COMMON STOCK
Cinergy
During 1997, 1996, and 1995, Cinergy issued 66 thousand, 15 thousand, and 2.6
million new shares, respectively, of common stock pursuant to its dividend
reinvestment and stock purchase plan and various stock-based employee plans. In
addition, Cinergy purchased 1.7 million and 1.2 million shares on the open
market to satisfy substantially all of its 1997 and 1996 obligations,
respectively, under these plans. Cinergy plans to continue using market
purchases of common stock to satisfy all or at least a portion of its
obligations under these plans.
LONG-TERM DEBT
Cinergy, CG&E, PSI, and ULH&P
As of December 31, 1997, CG&E, PSI, and ULH&P had state regulatory authority for
long-term debt issuances of $300 million, $300 million, and $50 million,
respectively. Regulatory approval to issue additional amounts of securities will
be requested as needed. On March 19, 1998, PSI issued $100 million principal
amount of its 7.25% JUnior Maturing Principal Securities (JUMPS). The JUMPS will
mature on March 15, 2028. Proceeds from the sale were used to repay short-term
indebtedness incurred in connection with the redemption on March 1, 1998, of all
outstanding shares of PSI's 7.44% Series Cumulative Preferred Stock at a
redemption price of $25 per share.
SHORT-TERM DEBT
Cinergy, CG&E, PSI, and ULH&P
Cinergy's utility subsidiaries had regulatory authority to borrow up to $853
million ($453 million for CG&E and its subsidiaries, including $50 million for
ULH&P, and $400 million for PSI) as of December 31, 1997. In connection with
this authority, committed lines have been established which permit borrowings of
up to $270 million ($85 million for CG&E and $185 million for PSI), of which
$140 million ($20 million for CG&E and $120 million for PSI) remained unused and
available at December 31, 1997. Also, pursuant to this authority, uncommitted
lines (short-term borrowings with various banks on an "as offered" basis) have
been established. Under these arrangements, $154 million ($100 million for CG&E
and $54 million for PSI) was unused and available at December 31, 1997. CG&E and
PSI also have the capability to issue commercial paper which must be supported
by committed lines (unsecured lines of credit) of the respective company.
Neither CG&E nor PSI issued commercial paper in 1997 or 1996.
To better manage cash and working capital requirements, Cinergy's utility
subsidiaries, including CG&E, PSI, and ULH&P, participate in a money pooling
arrangement. Under this arrangement, Cinergy system companies with surplus
short-term funds, whether from internal or external sources, provide short-term
loans to other system companies at rates that reflect (1) the actual costs of
the external borrowing and/or (2) the costs of the internal funds which are set
at the 30-day Federal Reserve "AA" industrial commercial paper rate. The SEC's
approval of the money pool, pursuant to the PUHCA, extends through December 31,
2002. For amounts outstanding under this money pool arrangement at December 31,
1997, and December 31, 1996, see "Notes payable to affiliated companies" on the
Consolidated Balance Sheets of CG&E and PSI and the Balance Sheets of ULH&P.
Cinergy
In 1997, Cinergy amended its existing credit facility. At year-end, Cinergy had
two separate credit facilities, a $350 million acquisition commitment and a $400
million revolving credit facility, which provides credit support for Cinergy's
newly instituted commercial paper program (see below). As of December 31, 1997,
approximately $111 million of the $400 million revolving facility, excluding the
amount reserved for commercial paper support, remained unused and available.
Cinergy's newly instituted commercial paper program is limited to a maximum
outstanding principal amount of $200 million. As of December 31, 1997,
approximately $161 million of commercial paper was outstanding under this
program. The majority of the proceeds were used to reduce the acquisition
commitment to the year-end level of $350 million. The entire $350 million was
utilized to fund the acquisition of Midlands through Avon Energy and its
wholly-owned subsidiary.
In addition, Cinergy UK, Inc., a subsidiary of Investments, which holds
Cinergy's 50% investment in Avon Energy, entered into a $40 million non-recourse
credit agreement in 1996, which was terminated in October of 1997. This
agreement was replaced by a one year $115 million non-recourse revolving credit
agreement, which had $81 million unused as of December 31, 1997.
On January 20, 1998, the SEC issued an order under the PUHCA permitting Cinergy
to issue and sell from time to time through December 31, 2002: 1) short-term
notes and commercial paper in an aggregate principal amount not to exceed $2
billion outstanding at any time; and 2) up to approximately 30 million
additional shares of Cinergy common stock. Cinergy intends to use the net
proceeds from the issuance and sale of the above mentioned securities for
general corporate purposes.
Net cash used in financing activities totaled $343 million in 1997, as compared
to $110 thousand and $410 million in 1996 and 1995, respectively. The change in
cash flow from financing activities for 1997 primarily resulted from Cinergy
borrowing under its credit facility in 1996 to fund the acquisition of Midlands.
CG&E and ULH&P
CG&E and its subsidiaries' net cash used in financing activities totaled $275
million (including $17 million for ULH&P) for 1997, as compared to $521 million
(including $23 million for ULH&P) for 1995 and $339 million (including $17
million for ULH&P) for 1994. The change in cash flow from financing activities
for 1997 was primarily attributable to CG&E's payments of common stock dividends
to Cinergy during 1996.
PSI
PSI's net cash used in financing activities totaled $165 million for 1997, as
compared to $77 million for 1996 and $45 million for 1995. The change in cash
flow from financing activities for 1997 was primarily attributable to PSI's
issuance of long-term debt in 1996.
SALE OF ACCOUNTS RECEIVABLE
Cinergy, CG&E, PSI, and ULH&P
In January 1996, CG&E, PSI, and ULH&P entered into an agreement to sell, on a
revolving basis, undivided percentage interests in certain of their accounts
receivable up to an aggregate maximum of $350 million, of which $252 million
($167 million by CG&E and its subsidiaries, including $29 million by ULH&P, and
$85 million by PSI), net of reserves, has been sold as of December 31, 1997. The
Consolidated Balance Sheets of Cinergy, CG&E, and PSI and the Balance Sheets of
ULH&P are net of the amounts sold at December 31, 1997 and 1996.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Cinergy, CG&E, PSI, and ULH&P
The following discussions about Cinergy's market risk sensitive instruments and
positions and risk management activities include forward-looking information and
statements that involve risks and uncertainties. The forward-looking information
and statements presented are only estimates of what may occur in the future,
assuming certain adverse market conditions, due to their dependence on model
characteristics and assumptions. As a result, actual future results may differ
materially from those presented. These disclosures are not precise indicators of
expected future losses, rather they merely present indications of reasonably
possible losses.
Energy Commodities Sensitivity
Cinergy, CG&E, and PSI
During 1996 Cinergy functionally reorganized its operations into four strategic
business units, including an energy commodities business unit. The energy
commodities business unit includes Cinergy's power marketing and trading
function, which was formally established in 1995 and was the natural successor
of CG&E's and PSI's existing bulk power operations.
At present, the competitive electric power market is dominated by a small number
of large participants (primarily utilities and a few power marketers), trading
liquidity is limited, and pricing is not transparent. However, similar to the
development of natural gas markets, the market for trading electricity is
expected to develop rapidly and Cinergy plans to be a major participant.
The transactions associated with Cinergy's power marketing and trading function
give rise to various risks, including market risk. Market risk represents the
potential risk of loss from changes in the market value of a particular
commitment arising from adverse changes in market rates and prices. Cinergy's
power marketing and trading operations are actively conducted in all regions of
the US. These operations subject Cinergy to the risks and volatilities
associated with the energy commodities (e.g., primarily electricity) which it
markets and trades. The wholesale power marketing and trading business continues
to be very competitive and, as a result, margins have declined throughout the
year. As Cinergy continues to develop and expand its power marketing and trading
business (and due to its substantial investment in generating assets), its
exposure to movements in the price of electricity and other energy commodities
will become greater. As a result, Cinergy may be subject to increased earnings
volatility.
Cinergy's power marketing and trading activities principally consist of
marketing and trading over-the-counter contracts for the purchase and sale of
electricity. The majority of these contracts commit Cinergy to purchase or sell
electricity at fixed prices in the future (i.e., fixed-price forward purchase
and sales contracts). Cinergy also markets and trades over-the-counter option
contracts. The majority of these forward and option contracts require settlement
by physical delivery of electricity or are netted out in accordance with
industry trading standards. The use of these types of physical commodity
instruments is designed to allow Cinergy to manage and hedge its contractual
commitments, reduce its exposure relative to the volatility of cash market
prices, and take advantage of selected arbitrage opportunities. The use of
derivative commodity instruments intended to be settled in cash was not
significant during 1997.
Cinergy values its portfolio of over-the-counter forward and option contracts
using the aggregate lower of cost or market method. To the extent there are
estimated net aggregate losses in the portfolio, Cinergy reserves for such
losses. As these contracts are settled, actual gains and losses may differ from
the estimated gains and losses utilized in calculating the aggregate lower of
cost or market reserve due to changing market conditions.
Cinergy structures and modifies its net position to capture expected changes in
future demand, seasonal market pricing characteristics, overall market
sentiment, and price relationships between different time periods and trading
regions. Therefore, at times, Cinergy creates a net open position or allows a
net open position to continue when it believes future changes in prices and
market conditions will make the positions profitable. Position imbalances may
also occur because of the basic lack of liquidity in the wholesale power market
itself. To the extent net open positions exist, Cinergy is exposed to the risk
that fluctuating market prices of electric power may potentially impact its
financial condition or results of operations adversely if prices do not move in
the manner or direction expected.
Cinergy measures the risk inherent in its portfolio utilizing value-at-risk
analysis and other methodologies, which simulate forward price curves in
electric power markets to quantify estimates of the magnitude and probability of
potential future losses related to open contract positions. Cinergy's
value-at-risk expresses the potential loss in fair value of its forward contract
and option position over a particular period of time, with a specified
likelihood of occurrence, due to an adverse market movement. Cinergy reports
value-at-risk as a percentage of its earnings, based on a 95% confidence
interval, utilizing one day holding periods. On a one day basis as of December
31, 1997, Cinergy's value-at-risk for its power marketing and trading activities
was less than 2% of Cinergy's "Income Before Interest and Other Charges". The
value-at-risk model uses the variance-covariance statistical modeling technique
and historical volatilities and correlations over the past 200 day period. The
estimated market prices used to value these transactions for value-at-risk
purposes reflect the use of established pricing models and various factors
including quotations from exchanges and over-the-counter markets, price
volatility factors, the time value of money, and location differentials.
Cinergy
Cinergy Capital & Trading, Inc. (CC&T), a subsidiary of Investments,
specializing in energy risk management, marketing, and proprietary arbitrage
trading, actively trades derivative commodity instruments, customarily settled
in cash, including futures, forwards, swaps, and options. CRI also utilizes
derivative commodity instruments, customarily settled in cash, to hedge
purchases and sales of natural gas. The trading and hedging activities of CC&T
and the hedging activities of CRI were not significant to Cinergy's financial
condition or results of operations.
Cinergy, CG&E, PSI, and ULH&P
Credit risk 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.
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 power marketers, other
investor owned utilities, electric cooperatives, and municipalities. As of
December 31, 1997, approximately 65% of Cinergy's power marketing and trading
activity represents commitments with 10 counterparties. The majority of these
contracts are for terms of one year or less. 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 of
December 31, 1997, Cinergy's management believes nonperformance of contractual
obligations by any one counterparty of Cinergy's power marketing and trading
function would not result in losses which are significant to the financial
condition or results of operations of Cinergy.
Cinergy, CG&E, and PSI
Cinergy's energy commodities business unit has established a risk management
function and has implemented active risk management policies and procedures to
manage and minimize its exposure to price risks and associated volatilities,
other market risks, and credit risk. Cinergy maintains credit policies with
regard to its counterparties in order to manage and minimize its exposure to
credit risk. These policies include requiring parent company guaranties and
various forms of collateral under certain circumstances and the use of mutual
netting/closeout agreements. Cinergy manages, on a portfolio basis, the market
risks inherent in its power marketing and trading transactions subject to
parameters established by Cinergy's Risk Policy Committee. Market risks are
monitored by the Risk Management Group of Cinergy's energy commodities business
unit, which operates separately from the units which originate or actively
manage the market risk exposures, to ensure compliance with Cinergy's stated
risk management policies and procedures. These policies and procedures are
reviewed and monitored on a continuous basis to ensure their responsiveness to
changing market and business conditions. In addition, efforts are ongoing to
develop systems to improve the timeliness and quality of market and credit risk
information.
Exchange Rate Sensitivity
Cinergy
Cinergy has exposure to fluctuations in the US dollar/UK pound sterling exchange
rate through its investment in Midlands. Cinergy used dollar denominated
variable interest rate debt to fund this investment, and has hedged the exchange
rate exposure related to this transaction through a currency swap executed in
February 1997. Under the swap, Cinergy exchanged $500 million for 330 million
pounds sterling. When the swap terminates in the year 2002, these amounts will
be re-exchanged; that is, Cinergy will be repaid $500 million and will be
obligated to repay to the counterparty 330 million pounds sterling. To fund this
repayment, Cinergy could buy 330 million pounds sterling in the foreign exchange
market at the prevailing spot rate or enter into a new currency swap.
The purpose of this swap is to hedge the value of Cinergy's investment in
Midlands against changes in the dollar/sterling exchange rate. When the pound
sterling weakens relative to the dollar, the dollar value of Cinergy's
investment in Midlands as shown on its books declines; however, the value of the
swap increases, offsetting the decline in the investment. The reverse is true
when the pound sterling appreciates relative to the dollar. The translation
gains and losses related to the principal exchange on the swap and on Cinergy's
original investment in Midlands are recorded in the cumulative foreign currency
translation adjustment which is reported as a separate component of common stock
equity in the Consolidated Financial Statements.
In connection with this swap, Cinergy must pay semi-annual interest on its pound
sterling obligation and will receive interest on the dollar notional amount. At
December 31, 1997, the fair value of this swap, reflecting the semi-annual
interest obligations through February 2002, and the final principal exchange,
was $(48) million. This was largely offset by a $41 million currency translation
gain to date on Cinergy's investment in Midlands.
The following table summarizes the details of the swap. (For presentation
purposes, the pound sterling payment obligation has been converted to US dollars
using the dollar/sterling spot exchange rate at December 31, 1997, of 1.64515.
The interest rates are based on the six-month London Interbank Offered Rate
(LIBOR) implied forward rates at December 31, 1997.)
Expected Maturity Date
There-
1998 1999 2000 2001 2002 after Total
Currency Swap ($US Equivalent in millions)
Receive principal ($US) $ - $ - $ - $ - $500 $ - $500
Average interest
receive rate - % - % - % - % 6.1% - % 6.1%
Pay principal (pound
sterling UK) $ - $ - $ - $ - $543 $ - $543
Average interest
pay rate - % - % - % - % 7.0% - % 7.0%
Interest Rate Sensitivity
Cinergy, CG&E, PSI, and ULH&P
Cinergy's net exposure to changes in interest rates primarily consists of
short-term debt instruments with floating interest rates that are benchmarked to
US short-term money market indices. At December 31, 1997, this included (i)
short-term bank loans and commercial paper totaling $870 million ($105 million
for CG&E and $131 million for PSI), (ii) $244 million of pollution control
related debt ($184 million for CG&E and $60 million for PSI) which is classified
as other short-term obligations on Cinergy's, CG&E's, and PSI's respective
Balance Sheets, and (iii) a $252 million sale of accounts receivable ($167
million sold by CG&E and its subsidiaries, including $29 million sold by ULH&P,
and $85 million sold by PSI) (Cinergy's, CG&E's, PSI's, and ULH&P's respective
Balance Sheets are net of this sale). At December 31, 1997, interest rates on
bank loans, commercial paper, and the sale of accounts receivable approximated
6%, and the interest rate on the pollution control debt approximated 4%. Current
forward yield curves project no significant change in applicable short-term
interest rates over the next five years.
The following table presents the principal cash repayments and related weighted
average interest rates by maturity date for Cinergy and certain of its utility
subsidiaries' long-term fixed-rate debt, other debt and capital lease
obligations as of December 31, 1997:
Expected Maturity Date
There- Fair
1998 1999 2000 2001 2002 after Total Value
(in millions)
Liabilities
Cinergy and Subsidiaries
Long-term Debt (a)
Fixed rate $ 35 $186 $ 31 $100 $149 $1 650 $2 151 $2 240
Average interest rate (b) 5.3% 6.3% 5.7% 6.1% 7.3% 7.2% 7.1%
Other (c) $ - $ - $ - $ - $ - $ 100 $ 100 $ 97
Average interest rate (b) -% -% -% -% -% 6.5% 6.5%
Capital Lease
Variable rate $ - $ - $ - $ 22 $ - $ - $ 22 $ 22
Average interest rate (b) -% -% -% 5.6% -% -% 5.6%
CG&E and Subsidiaries
Long-term Debt (a)
Fixed rate $ - $180 $ - $ 61 $100 $ 892 $1 233 $1 258
Average interest rate (b) -% 6.3% -% 7.4% 7.3% 7.2% 7.1%
Other (c) $ - $ - $ - $ - $ - $ 100 $ 100 $ 97
Average interest rate (b) -% -% -% -% -% 6.5% 6.5%
Capital Lease
Variable rate $ - $ - $ - $ 22 $ - $ - $ 22 $ 22
Average interest rate (b) -% -% -% 5.6% -% -% 5.6%
PSI
Long-term Debt (a)
Fixed rate $ 35 $ 6 $ 31 $ 39 $ 49 $ 758 $ 918 $ 982
Average interest rate (b) 5.3% 7.2% 5.7% 4.0% 7.3% 7.3% 7.1%
ULH&P
Long-term Debt (a)
Fixed rate $ - $ 20 $ - $ - $ - $ 25 $ 45 $ 46
Average interest rate (b) -% 6.5% -% -% -% 7.8% 7.2%
(a) Includes amounts reflected as long-term debt due within one year.
(b) For the long-term debt obligations, the weighted average interest rate
is based on the coupon rates of the debt that is maturing in the year
reported. For the capital lease, the interest rate is based on a spread
over 3-month LIBOR, and averaged to be approximately 6% in 1997. For
the variable rate Liquid Asset Notes with Coupon Exchange (LANCEs), the
current forward yield curve suggests the interest rate on these notes
would be fixed at 6.50% commencing October 1, 1999.
(c) Variable rate LANCEs.
Cinergy, CG&E, and PSI
To manage Cinergy's exposure to fluctuations in interest rates and to lower
funding costs, Cinergy constantly evaluates the use of, and has entered into,
several interest rate swaps. Under these swaps, Cinergy or 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 amount. This interest differential paid or received is recognized in
the Consolidated Statements of Income as a component of interest expense.
Through two interest rate swap agreements, Cinergy has effectively fixed the
interest rate on the pound sterling denominated obligation created by the
currency swap discussed above. Each contract requires Cinergy to pay
semi-annually a fixed rate and receive a floating rate through February 2002.
The combined notional amount of both swaps is 330 million pounds sterling.
Translation gains and losses related to Cinergy's interest obligation, which is
payable in pounds sterling, are recognized as a component of interest expense in
the Consolidated Statements of Income.
At December 31, 1997, PSI had two interest rate swap agreements outstanding with
notional amounts of $1OO million each. One contract, with three years remaining
of a four-year term, requires PSI to pay a floating rate and receive a fixed
rate. The second contract, with a six-month term, requires PSI to pay a fixed
rate and receive a floating rate. In both cases, the floating rate is based on
applicable LIBOR. The following table presents notional principal amounts and
weighted average interest rates by contractual maturity dates for the interest
rate swaps of Cinergy and PSI. The variable rates are the average implied
forward rates during the contract based on the six month LIBOR yield curve at
December 31, 1997. Although Cinergy's swaps require payments to be made in
pounds sterling, the table reflects the dollar equivalent notional amounts based
on spot market foreign currency exchange rates at December 31, 1997.
Expected Maturity Date
There- Fair
1998 1999 2000 2001 2002 after Total Value
Interest Rate ($US Equivalent in millions)
Derivatives
Interest Rate Swaps
Receive fixed/pay
variable ($US) $ - $ - $100 $ - $ - $ - $100 $ -
Average pay rate 5.9% 6.0% 6.1% - % - % - % 6.0%
Average receive rate 6.1% 6.1% 6.1% - % - % - % 6.1%
Receive variable/pay
fixed ($US) $100 $ - $ - $ - $ - $ - $100 $ -
Average pay rate 6.0% - % - % - % - % - % 6.0%
Average receive rate 5.9% - % - % - % - % - % 5.9%
Receive variable/pay
fixed (pound
sterling UK) $ - $ - $ - $ - $543(a) $ - $543(a) $(3)
Average pay rate - % - % - % - % 7.1% - % 7.1%
Average receive rate - % - % - % - % 6.9% - % 6.9%
(a) Notional converted to US dollars using the Sterling spot exchange rate at
December 31, 1997, of 1.64515.
INFLATION
Cinergy, CG&E, PSI, and ULH&P
Cinergy believes that the recent inflation rates do not materially affect its
financial condition or results of operations. 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."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cinergy, CG&E, PSI, and ULH&P
Reference is made to the "Market Risk Sensitive Instruments and Positions"
section in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Index to Financial Statements and Financial Statement Schedules
Page Number
Financial Statements
Cinergy, CG&E, PSI, and ULH&P
Report of Independent Public Accountants . . . . . . .
Cinergy
Consolidated Statements of Income for the
three years ended December 31, 1997. . . . . . . . .
Consolidated Balance Sheets at
December 31, 1997 and 1996 . . . . . . . . . . . . .
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1997. . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997. . . . .
Results of Operations. . . . . . . . . . . . . . . . .
CG&E
Consolidated Statements of Income for the
three years ended December 31, 1997. . . . . . . . .
Consolidated Balance Sheets at
December 31, 1997 and 1996 . . . . . . . . . . . . .
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1997. . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997. . . . .
Results of Operations. . . . . . . . . . . . . . . . .
PSI
Consolidated Statements of Income for the
three years ended December 31, 1997. . . . . . . . .
Consolidated Balance Sheets at
December 31, 1997 and 1996 . . . . . . . . . . . . .
Consolidated Statements of Changes in
Common Stock Equity for the three years
ended December 31, 1997. . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997. . . . .
Results of Operations. . . . . . . . . . . . . . . . .
ULH&P
Statements of Income for the three years ended
December 31, 1997. . . . . . . . . . . . . . . . . .
Balance Sheets at December 31, 1997 and 1996 . . . . .
Statements of Changes in Common Stock Equity
for the three years ended December 31, 1997. . . . .
Statements of Cash Flows for the three years
ended December 31, 1997. . . . . . . . . . . . . . .
Results of Operations. . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . .
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Cinergy . . . . . . . . . . . . . . . . . . . . . .
CG&E. . . . . . . . . . . . . . . . . . . . . . . .
PSI . . . . . . . . . . . . . . . . . . . . . . . .
ULH&P . . . . . . . . . . . . . . . . . . . . . . .
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, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, as listed in the index
on page 53. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, 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 54 pursuant to Item 14, are presented for
purposes of complying with the Securities and Exchange Commission's Rules and
Regulations under the Securities Exchange Act of 1934 and are not a required
part of the basic financial statements. The supplemental financial statement
schedules have been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Cincinnati, Ohio
January 27, 1998
Cinergy Corp.
and Subsidiaries
CINERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
1997 1996 1995
(in thousands, except per share amounts)
Operating Revenues
Electric $3 861 698 $2 768 706 $2 612 579
Gas 491 145 474 034 410 852
4 352 843 3 242 740 3 023 431
Operating Expenses
Fuel used in electric production 693 435 713 250 716 754
Gas purchased 266 158 249 116 206 250
Purchased and exchanged power 1 219 358 158 838 47 632
Other operation 637 945 598 434 520 590
Maintenance 176 471 193 908 182 180
Depreciation 289 077 282 763 279 759
Amortization of phase-in deferrals 13 483 13 598 9 091
Post-in-service deferred operating
expenses - net 4 362 (1 509) (2 500)
Income taxes (Note 11) 248 937 218 269 221 429
Taxes other than income taxes 265 024 257 815 255 533
3 814 250 2 684 482 2 436 718
Operating Income 538 593 558 258 586 713
Other Income and Expenses - Net
Allowance for equity funds used
during construction 98 1 225 1 964
Post-in-service carrying costs - 1 223 3 186
Phase-in deferred return 8 008 8 372 8 537
Equity in earnings of unconsolidated
subsidiaries (Note 1(e)) 60 392 25 430 -
Income taxes (Note 11) 35 937 19 536 7 358
Other - net (31 502) (40 464) (3 051)
72 933 15 322 17 994
Income Before Interest and Other Charges 611 526 573 580 604 707
Interest and Other Charges
Interest on long-term debt 181 772 190 617 213 911
Other interest 59 947 31 169 20 826
Allowance for borrowed funds used
during construction (5 400) (6 183) (8 065)
Preferred dividend requirements of
subsidiaries 12 569 23 180 30 853
248 888 238 783 257 525
Net Income Before Extraordinary Item $ 362 638 $ 334 797 $ 347 182
Extraordinary Item - Equity Share of
Windfall Profits Tax (Less Applicable
Income Taxes of $0) (Note 17) (109 400) - -
Net Income $ 253 238 $ 334 797 $ 347 182
Average Common Shares Outstanding 157 685 157 678 156 620
Earnings Per Common Share (Note 16)
Net income before extraordinary item $2.30 $2.00 $2.22
Net income $1.61 $2.00 $2.22
Earnings Per Common Share - Assuming
Dilution (Note 16)
Net income before extraordinary item $2.28 $1.99 $2.20
Net income $1.59 $1.99 $2.20
Dividends Declared Per Common Share $1.80 $1.74 $1.72
The accompanying notes are an integral part of these consolidated financial
statements.
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1997 1996
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $8 981 182 $8 809 786
Gas 746 903 713 829
Common 186 078 185 255
9 914 163 9 708 870
Accumulated depreciation 3 800 322 3 591 858
6 113 841 6 117 012
Construction work in progress 183 262 172 614
Total utility plant 6 297 103 6 289 626
Current Assets
Cash and temporary cash investments 53 310 19 327
Restricted deposits 2 319 1 721
Accounts receivable less accumulated provision
for doubtful accounts of $10,382 in 1997 and
$10,618 in 1996 (Note 6) 413 626 199 361
Materials, supplies, and fuel - at average cost
Fuel for use in electric production 57 916 71 730
Gas stored for current use 29 174 32 951
Other materials and supplies 76 066 80 292
Prepayments and other 38 171 37 049
670 582 442 431
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 374 456 377 194
Post-in-service carrying costs and deferred
operating expenses 178 504 186 396
Coal contract buyout costs 122 485 138 171
Deferred demand-side management costs 109 596 134 742
Phase-in deferred return and depreciation 89 689 95 163
Deferred merger costs 90 346 93 999
Unamortized costs of reacquiring debt 66 242 70 518
Other 45 533 72 483
Investments in unconsolidated
subsidiaries (Note 1(e)) 537 720 592 660
Other 275 897 231 551
1 890 468 1 992 877
$8 858 153 $8 724 934
The accompanying notes are an integral part of these consolidated financial
statements.
CINERGY CORP.
CAPITALIZATION AND LIABILITIES
December 31
1997 1996
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $.01 par value;
authorized shares - 600,000,000;
outstanding shares - 157,744,658 in 1997
and 157,679,129 in 1996 $ 1 577 $ 1 577
Paid-in capital 1 573 064 1 590 735
Retained earnings 965 084 992 273
Cumulative foreign currency
translation adjustment (525) (131)
Total common stock equity 2 539 200 2 584 454
Cumulative Preferred Stock of Subsidiaries (Note 3)
Not subject to mandatory redemption 177 989 194 232
Long-term Debt (Note 4) 2 150 902 2 326 378
Total capitalization 4 868 091 5 105 064
Current Liabilities
Long-term debt due within one year (Note 4) 85 000 140 000
Notes payable and other short-term
obligations (Note 5) 1 114 028 922 217
Accounts payable 488 716 305 420
Accrued taxes 187 033 199 479
Accrued interest 46 622 55 590
Other 79 193 114 653
2 000 592 1 737 359
Other Liabilities
Deferred income taxes (Note 11) 1 248 543 1 146 263
Unamortized investment tax credits 166 262 175 935
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 297 142 263 319
Other 277 523 296 994
1 989 470 1 882 511
Commitments and Contingencies (Note 12)
$8 858 153 $8 724 934
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Cumulative
Foreign
Currency
Common Paid-in Retained Translation Total Common
Stock Capital Earnings Adjustment Stock Equity
(dollars in thousands)
Balance December 31, 1994 $1 552 $1 535 658 $877 061 $ - $2 414 271
Net income 347 182 347 182
Issuance of 2,472,103 shares of
common stock - net 25 60 343 60 368
Common stock issuance expenses (229) (229)
Dividends on common stock (see
page 57 for per share amounts) (268 851) (268 851)
Other 1 278 (5 176) (3 898)
Balance December 31, 1995 1 577 1 597 050 950 216 - 2 548 843
Net income 334 797 334 797
Issuance of 8,988 shares of
common stock - net 311 311
Treasury shares purchased (4) (14 887) (14 891)
Treasury shares reissued 4 8 599 8 603
Dividends on common stock (see
page 57 for per share amounts) (274 358) (274 358)
Translation adjustments (131) (131)
Costs of reacquisition of
preferred stock of subsidiary (18 391) (18 391)
Other (338) 9 ____ (329)
Balance December 31, 1996 1 577 1 590 735 992 273 (131) 2 584 454
Net income 253 238 253 238
Issuance of 65,529 shares of
common stock - net 2 066 2 066
Treasury shares purchased (11) (46 199) (46 210)
Treasury shares reissued 11 26 729 26 740
Dividends on common stock (see
page 57 for per share amounts) (283 866) (283 866)
Translation adjustments (394) (394)
Other (267) 3 439 3 172
Balance December 31, 1997 $1 577 $1 573 064 $965 084 $(525) $2 539 200
The accompanying notes are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
(in thousands)
Operating Activities
Net income $253 238 $334 797 $347 182
Items providing or (using) cash:
Depreciation 289 077 282 763 279 759
Deferred income taxes and investment
tax credits - net 67 638 47 912 28 411
Equity in earnings of unconsolidated
subsidiaries (35 239) (25 430) -
Extraordinary item - equity share of windfall
profits tax 109 400 - -
Allowance for equity funds used during
construction (98) (1 225) (1 964)
Regulatory assets - net 71 310 39 282 33 324
Changes in current assets and current
liabilities
Restricted deposits (598) (358) (1 035)
Accounts receivable, net of reserves
on receivables sold (217 157) 132 749 (71 641)
Materials, supplies, and fuel 21 817 44 005 51 214
Accounts payable 183 296 37 281 1 672
Litigation settlement - (80 000) -
Accrued taxes and interest (21 414) (1 289) 52 233
Other items - net 32 175 44,604 16 538
Net cash provided by operating activities 753 445 855 091 735 693
Financing Activities
Issuance of common stock 2 066 311 60 139
Issuance of long-term debt 100 062 150 217 260 280
Funds on deposit from issuance of long-term debt - 973 9 987
Retirement of preferred stock of subsidiaries (16 269) (212 487) (93 466)
Redemption of long-term debt (336 312) (237 183) (398 833)
Change in short-term debt 191 811 572 417 20 900
Dividends on common stock (283 866) (274 358) (268 851)
Net cash used in financing activities (342 508) (110) (409 844)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (328 055) (323 013) (324 905)
Deferred demand-side management costs (19 867) (44 344) (57 571)
Investments in unconsolidated subsidiaries (29 032) (503 349) -
Equity investments in Argentine utilities - - 19 799
Net cash used in investing activities (376 954) (870 706) (362 677)
Net increase (decrease) in cash and temporary
cash investments 33 983 (15 725) (36 828)
Cash and temporary cash investments at beginning
of period 19 327 35 052 71 880
Cash and temporary cash investments at end of
period $ 53 310 $ 19 327 $ 35 052
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $235 948 $207 393 $218 357
Income taxes 140 655 141 917 140 189
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - CINERGY
Kilowatt-Hour (kwh) Sales
Increased activity in Cinergy's power marketing and trading operations led to
higher non-firm power sales for resale and significantly contributed to the
increase in total kwh sales of 78.7%, as compared to 1996. The increase in
retail sales, which reflects a higher average number of commercial and
industrial customers, was partially offset by a decline in residential sales as
a result of mild weather. (See Note 1(c) of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data" and the "Market Risk
Sensitive Instruments and Positions" section for discussions on Cinergy's power
marketing and trading operations.)
Cinergy's total kwh sales in 1996, as compared to 1995, increased 11.0%
reflecting an increase in sales to all customer classes. Increased activity in
Cinergy's power marketing and trading operations led to higher non-firm power
sales for resale. The increase in retail sales which reflects a higher average
number of residential and commercial customers was partially offset by the
return to more normal weather in 1996. The increase in industrial sales was due
to growth in the primary metals sector.
As compared to 1994, total kwh sales in 1995 increased 4.1% reflecting higher
sales to all retail customer classes. Contributing significantly to this
increase were higher residential and commercial sales due to warmer weather
during the 1995 summer cooling season and colder weather during the fourth
quarter of 1995. Additionally, increased sales to industrial customers,
reflecting growth in the primary metals and chemicals sectors, contributed to
the increased kwh sales level. These increases were offset, in part, by a
decline in non-firm power sales for resale.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (3.8)% 2.4% 5.8%
Commercial 1.6 1.3 4.3
Industrial 2.9 3.3 4.6
Total retail .3 2.4 4.9
Sales for resale
Firm power obligations 15.5 10.5 1.7
Non-firm power transactions 460.3 82.0 (1.3)
Total sales for resale 363.9 59.6 (.4)
Total sales 78.7 11.0 4.1
Cinergy currently forecasts a 2% annual compound growth rate in kwh sales over
the 1998 through 2002 period. This forecast excludes non-firm power sales for
resale and any potential new off-system, long-term firm power sales.
Thousand Cubic Feet (Mcf) Sales and Transportation
The milder weather experienced in 1997 contributed to a decrease in residential
and commercial gas sales volumes and led to an 8.2% decrease in total sales
volumes and a 1.1% decrease in total sales and transportation volumes, as
compared to 1996. An increase in gas transportation volumes and a decline in
industrial sales resulted from customers electing to purchase gas directly from
suppliers using transportation services provided by Cinergy.
Mcf gas sales and transportation volumes increased 8.4% in 1996, as compared to
1995. Colder weather in the first half of 1996 led to increased gas sales to
residential and commercial customers. Also contributing to the increase in total
sales was an increase in the number of residential and commercial customers.
Industrial sales decreased and gas transported increased as customers continued
to purchase gas directly from suppliers.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. Increased sales to residential customers, resulting from colder weather
during the fourth quarter of 1995 and an increase in the number of customers,
contributed to the higher sales levels. Additionally, increases in commercial
and industrial transportation volumes, which resulted from customers electing to
purchase gas directly from suppliers, more than offset declines in industrial
and commercial sales.
Year-to-year changes in Mcf sales for each major class of customers and Mcf
transportation volumes are shown below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (6.4)% 3.6% 10.5%
Commercial (9.7) 7.8 (2.0)
Industrial (8.8) (13.3) (26.6)
Total sales (8.2) 2.1 1.5
Gas transported 10.1 19.8 24.4
Total gas sold and transported (1.1) 8.4 8.6
Operating Revenues
ELECTRIC OPERATING REVENUES
Increased kwh sales, as previously discussed, a full year's effects of PSI's
retail rate increases approved in the September 1996 Order, as amended in August
1997, and the December 1996 DSM Order significantly contributed to the $1
billion (39%) increase in electric operating revenues, when compared to 1996.
Also contributing to the increase was the return of approximately $13 million to
customers in 1996 in accordance with the February 1995 Order. The February 1995
Order required all retail operating income above a certain rate of return to be
refunded to customers. Partially offsetting these increases was the operation of
CG&E's fuel adjustment clauses reflecting a lower average cost of fuel used in
electric production.
The $156 million (6%) increase in 1996 electric operating revenues, as compared
to 1995, is due, in large part, to the increase in kwh sales as previously
discussed. Also contributing to the increase was the effect of PSI's September
1996 Order, as well as, a full year's effect of PSI's 4.3% retail rate increase
approved in the February 1995 Order and PSI's 1.9% increase for carrying costs
on construction work in progress property which was approved by the IURC in
March 1995. These rate increases were offset by the return of approximately $10
million to PSI's customers in accordance with the February 1995 Order, the
operation of CG&E's fuel adjustment clauses reflecting a lower average cost of
fuel used in electric production, and a decrease in ULH&P's electric rates
reflecting a reduction in the cost of electricity purchased from CG&E.
Higher retail kwh sales, PSI's electric rate increases which became effective in
February 1995 and March 1995, and a full year's effect of CG&E's electric rate
increase which became effective in May 1994, significantly contributed to the
$167 million (7%) increase in electric operating revenues for 1995, when
compared to 1994.
An analysis of electric operating revenues for the past three years is shown
below:
1997 1996 1995
(dollars in millions)
Previous year's electric
operating revenues $2 769 $2 613 $2 446
Increase (Decrease) due to change in:
Price per kwh
Retail 9 (1) 54
Sales for resale
Firm power obligations (10) (4) (1)
Non-firm power transactions 113 - 4
Total change in price per kwh 112 (5) 57
Kwh sales
Retail 7 56 109
Sales for resale
Firm power obligations 14 9 1
Non-firm power transactions 956 94 (1)
Total change in kwh sales 977 159 109
Other 4 2 1
Current year's electric
operating revenues $3 862 $2 769 $2 613
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and using CG&E facilities to transport the gas (see the "Mcf Sales and
Transportation" section) continues to put downward pressure on gas operating
revenues. Since providing transportation services does not necessitate recovery
of the cost of gas purchased, the revenue per Mcf transported is less than the
revenue per Mcf sold. As a result, a higher relative volume of gas transported
to gas sold translates into lower gas operating revenues.
CG&E's gas rate increase of 2.5% ($9 million annually) approved by the PUCO in
the December 1996 Order and the operation of a gas cost recovery mechanism,
reflecting a higher average cost per Mcf of gas purchased, contributed to the
$17 million (4%) increase in gas operating revenues as compared to 1996. These
increases were partially offset by the previously discussed changes in Mcf gas
sales.
In 1996, gas operating revenues increased $63 million (15%), as compared to
1995. This increase is attributable to the increase in gas sales and
transportation volumes. Also contributing to the increase was the operation of
fuel adjustment clauses, reflecting a higher average cost per Mcf of gas
purchased.
Gas operating revenues declined $32 million (7%) in 1995, as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of fuel adjustment clauses, reflecting a lower average cost
per Mcf of gas purchased.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs declined $20 million (3%)
when compared to 1996.
An analysis of fuel costs for the past three years is shown below:
1997 1996 1995
(in millions)
Previous year's fuel expense $713 $717 $713
Increase (Decrease) due to change in:
Price of fuel 7 (48) (23)
Deferred fuel cost (55) 42 (2)
Kwh generation 28 2 29
Current year's fuel expense $693 $713 $717
Gas Purchased The increase in gas purchased expense of $17 million (7%) in 1997,
as compared to 1996, reflects a higher average cost per Mcf of gas purchased.
This increase was partially offset by a decline in the volumes of gas purchased.
Gas purchased increased $43 million (21%) in 1996, as compared to 1995, due to
an increase in volumes purchased and a higher average cost per Mcf of gas
purchased.
In 1995, gas purchased expense decreased $42 million (17%), as compared to 1994,
primarily reflecting a decline in the average cost per Mcf of gas purchased.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $1.1 billion and $111 million in 1997
and 1996, respectively. These increases primarily reflect increased purchases of
non-firm power for resale to others as a result of increased activity in
Cinergy's power marketing and trading operations. (See Note 1(c) of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" and the "Market Risk Sensitive Instruments and Positions" section for
discussions on Cinergy's power marketing and trading operations.)
OTHER OPERATION
Other operation expenses increased $40 million (7%) in 1997, as compared to
1996. This increase is primarily due to higher other operation expenses of PSI
relating to the Clean Coal Project, amortization of deferred DSM expenses, and
amortization of deferred expenses associated with the Clean Coal Project, all of
which are being recovered in revenues pursuant to either the September 1996
Order or the December 1996 DSM Order. The effect of PSI discontinuing deferral
of certain DSM-related costs in accordance with provisions of the December 1996
DSM Order also added to the increase. Further contributing to the increase is
the effect of CG&E curtailing certain deferrals associated with its DSM programs
for new participants after December 31, 1996, due to the December 1996 Order
that changed the benefit/cost tests that DSM programs must surpass in Ohio in
order for certain DSM-related costs to be eligible for deferral. These increases
were partially offset by the effect of charges in 1996 for early retirement and
severance programs and the December 1996 Order (see below).
Other operation expenses increased $78 million (15%) in 1996, as compared to
1995. This increase is due to a number of factors, including increased
administrative and general expenses reflecting, in part, charges of $35 million
for voluntary early retirement and severance programs and charges totaling $6
million related to the December 1996 Order.
In 1995, other operation expenses decreased $29 million (5%), as compared to
1994. Charges of $62 million in 1994 for Merger Costs and other expenditures
which cannot be recovered from customers under the merger savings sharing
mechanisms authorized by regulators significantly contributed to the decrease.
In addition, emphasis on achieving merger savings and other cost reductions led
to lower operating costs for 1995. These decreases were partially offset by the
recognition of postretirement benefit costs on an accrual basis, an increase in
the ongoing level of DSM expenses, and the amortization of deferred
postretirement benefit costs, deferred Merger Costs, and deferred DSM costs, all
of which are being recovered in revenues pursuant to the February 1995 Order.
MAINTENANCE
In 1997, maintenance costs decreased $17 million (9%), as compared to 1996. This
decrease is primarily attributable to reduced outage related charges and other
maintenance costs associated with PSI's and CG&E's electric production
facilities. Reduced maintenance costs associated with PSI's electric
transmission and distribution facilities also contributed to the decrease for
1997.
An increase of $12 million (6%) in maintenance costs for 1996, as compared to
1995, is primarily attributable to increased maintenance associated with the
Clean Coal Project which began commercial operation in November 1995. Increased
transmission and distribution expenses also contributed to the higher level of
maintenance expense.
Maintenance costs decreased $19 million (9%) in 1995, as compared to 1994,
primarily due to improved scheduling of routine maintenance on electric
generating units. Lower maintenance costs on gas and electric distribution
facilities also contributed to this decrease.
DEPRECIATION
In 1995, depreciation expense decreased $15 million (5%), when compared to 1994,
due in large part to the adoption of lower depreciation rates for PSI effective
in March 1995. This decrease was partially offset by the effect of additions to
utility plant.
AMORTIZATION OF PHASE-IN DEFERRALS AND PHASE-IN DEFERRED RETURN
Amortization of phase-in deferrals and phase-in deferred return reflect the
PUCO-ordered phase-in plan for the Wm. H. Zimmer Generating Station (Zimmer).
(See Note 1(k) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data.")
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect various deferrals of
depreciation, operation and maintenance expenses (exclusive of fuel costs), and
property taxes on certain generating units and other utility plant from the
in-service date until the related plant is reflected in retail rates, net of
amortization of these 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.")
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $12 million (5%) in 1995, 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
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
The increase in equity in earnings of unconsolidated subsidiaries of $35 million
for 1997, as compared to 1996, primarily reflects a full year's effect of the
investment in Midlands. Midlands was purchased during the second quarter of
1996.
OTHER - NET
The $9 million change in other - net for 1997, as compared to 1996, is due, in
part, to charges in 1996 of approximately $14 million associated with the
December 1996 Order, a gain of approximately $4 million in 1997 on the sale of a
PSI investment, and a loss of approximately $5 million in 1996 on the sale of a
foreign subsidiary. These items were partially offset by gains of approximately
$6 million in 1996 related to the sale of certain CG&E assets, approximately $2
million of increased expenses in 1997 associated with the sales of accounts
receivable for PSI, CG&E, and ULH&P, and expenses of approximately $4 million
resulting from the inclusion of the Greenwich acquisition in 1997.
In 1996, other - net changed $37 million, as compared to 1995, due to a number
of factors including $4 million of interest received in 1995 on an income tax
refund related to prior years, charges totaling $14 million associated with the
December 1996 Order, expenses associated with CG&E's and ULH&P's sales of
accounts receivable in 1996, and the effect of a $10 million gain in 1995 on the
sale of Cinergy's investment in an Argentine utility.
The $31 million change in other - net in 1995, as compared to 1994, is due, in
part, to interest on the income tax refund and the $10 million gain discussed
above and charges of $17 million in 1994 for merger-related and other
expenditures which cannot be recovered from customers.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased $23 million (11%) in 1996, as compared to
1995, due to the refinancing and redemptions of long-term debt by CG&E, PSI, and
ULH&P during 1995 and 1996.
OTHER INTEREST
The $29 million increase in other interest, as compared to 1996, is primarily
due to interest expense on increased short-term borrowings used to fund CG&E's
redemption of first mortgage bonds and Cinergy's investments in non-regulated
companies, including Avon Energy.
In 1996, other interest increased $10 million (50%), as compared to 1995,
primarily reflecting increased interest expense on short-term borrowings used to
fund Cinergy's investment in Avon Energy.
PREFERRED DIVIDEND REQUIREMENTS OF SUBSIDIARIES
Preferred dividend requirements of subsidiaries decreased $11 million (46%) and
$8 million (25%) in 1997 and 1996, respectively. These decreases were primarily
attributable to the reacquisition of approximately 90% of the outstanding
preferred stock of CG&E, pursuant to Cinergy's tender offer. (See Note 3(b) of
the "Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
Extraordinary Item - Equity Share of Windfall Profits Tax
Extraordinary item - equity share of windfall profits tax represents the one-
time charge for the windfall profits tax levied against Midlands as recorded in
the third quarter of 1997. (See Note 17 of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data.")
The Cincinnati
Gas & Electric
Company
and subsidiaries
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME
1997 1996 1995
(in thousands)
Operating Revenues
Electric
Non-affiliated companies $1 920 915 $1 458 828 $1 407 119
Affiliated companies 35 341 43 180 30 104
Gas
Non-affiliated companies 491 145 474 034 410 852
Affiliated companies 4 475 7 -
2 451 876 1 976 049 1 848 075
Operating Expenses
Fuel used in electric production 300 487 349 197 327 353
Gas purchased 266 123 249 116 206 250
Purchased and exchanged power
Non-affiliated companies 583 065 46 333 13 870
Affiliated companies 12 473 21 921 42 575
Other operation 308 239 330 169 291 874
Maintenance 90 097 96 205 94 688
Depreciation 163 418 160 951 158 986
Amortization of phase-in deferrals 13 483 13 598 9 091
Amortization of post-in-service
deferred operating expenses 3 290 3 290 3 290
Income taxes (Note 11) 172 047 145 075 136 386
Taxes other than income taxes 211 303 207 904 203 680
2 124 025 1 623 759 1 488 043
Operating Income 327 851 352 290 360 032
Other Income and Expenses - Net
Allowance for equity funds
used during construction 98 1 225 1 790
Phase-in deferred return 8 008 8 372 8 537
Income taxes (Note 11) 33 286 9 139 4 587
Other - net (14 262) (21 296) 4 221
27 130 (2 560) 19 135
Income Before Interest 354 981 349 730 379 167
Interest
Interest on long-term debt 110 134 123 616 143 334
Other interest 10 327 2 793 3 486
Allowance for borrowed funds
used during construction (4 633) (3 859) (3 854)
115 828 122 550 142 966
Net Income 239 153 227 180 236 201
Preferred Dividend Requirement 868 10 643 17 673
Costs of Reacquisition of
Preferred Stock (Note 3(b)) - 18 391 -
Net Income Applicable to
Common Stock $ 238 285 $ 198 146 $ 218 528
The accompanying notes are an integral part of these consolidated financial
statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1997 1996
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $4 700 631 $4 631 605
Gas 746 903 713 829
Common 186 078 185 255
5 633 612 5 530 689
Accumulated depreciation 2 008 005 1 868 579
3 625 607 3 662 110
Construction work in progress 118 133 95 984
Total utility plant 3 743 740 3 758 094
Current Assets
Cash and temporary cash investments 2 349 5 120
Restricted deposits 1 173 1 171
Notes receivable from affiliated companies 27 193 31 740
Accounts receivable less accumulated
provision for doubtful accounts of $9,199 in
1997 and $9,178 in 1996 (Note 6) 193 549 117 912
Accounts receivable from affiliated companies 35 507 2 453
Materials, supplies, and fuel - at average cost
Fuel for use in electric production 29 682 29 865
Gas stored for current use 29 174 32 951
Other materials and supplies 49 111 52 023
Prepayments and other 31 827 32 433
399 565 305 668
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 350 515 344 126
Post-in-service carrying costs and deferred
operating expenses 134 672 141 492
Phase-in deferred return and depreciation 89 689 95 163
Deferred demand-side management costs 38 318 33 534
Deferred merger costs 16 557 17 709
Unamortized costs of reacquiring debt 36 575 38 439
Other 1 439 19 545
Other 103 368 89 908
771 133 779 916
$4 914 438 $4 843 678
The accompanying notes are an integral part of these consolidated financial
statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CAPITALIZATION AND LIABILITIES
December 31
1997 1996
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $8.50 par value;
authorized shares - 120,000,000;
outstanding shares - 89,663,086 in 1997 and
89,663,086 in 1996 $ 762 136 $ 762 136
Paid-in capital 534 649 536 276
Retained earnings 313 803 247 403
Total common stock equity 1 610 588 1 545 815
Cumulative Preferred Stock (Note 3)
Not subject to mandatory redemption 20 793 21 146
Long-term Debt (Note 4) 1 324 432 1 381 108
Total capitalization 2 955 813 2 948 069
Current Liabilities
Long-term debt due within one year (Note 4) - 130 000
Notes payable and other short-term
obligations (Note 5) 289 000 214 488
Notes payable to affiliated companies 12 253 103
Accounts payable 249 538 166 064
Accounts payable to affiliated companies 10 821 12 726
Accrued taxes 149 129 144 261
Accrued interest 25 430 30 570
Other 29 950 32 191
766 121 730 403
Other Liabilities
Deferred income taxes (Note 11) 794 396 767 085
Unamortized investment tax credits 116 966 123 185
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 180 566 165 282
Other 100 576 109 654
1 192 504 1 165 206
Commitments and Contingencies (Note 12)
$4 914 438 $4 843 678
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 1994 $762 136 $337 874 $432 962 $1 532 972
Net income 236 201 236 201
Dividends on preferred stock (17 673) (17 673)
Dividends on common stock (219 550) (219 550)
Other 1 227 (4 714) (3 487)
Balance December 31, 1995 762 136 339 101 427 226 1 528 463
Net income 227 180 227 180
Dividends on preferred stock (10 643) (10 643)
Dividends on common stock (377 969) (377 969)
Contribution from parent company 197 207 197 207
Costs of reacquisition of
preferred stock (18 391) (18 391)
Other (32) (32)
Balance December 31, 1996 762 136 536 276 247 403 1 545 815
Net income 239 153 239 153
Dividends on preferred stock (871) (871)
Dividends on common stock (170 400) (170 400)
Other (1 627) (1 482) (3 109)
Balance December 31, 1997 $762 136 $534 649 $313 803 $1 610 588
The accompanying notes are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
(in thousands)
Operating Activities
Net income $239 153 $227 180 $236 201
Items providing or (using) cash:
Depreciation 163 418 160 951 158 986
Deferred income taxes and investment
tax credits - net 16 443 18 929 26 938
Allowance for equity funds used during
construction (98) (1 225) (1 790)
Regulatory assets - net 32 822 39 561 21 454
Changes in current assets and current
liabilities
Restricted deposits (2) (27) (1 046)
Accounts and notes receivable, net of
reserves on receivables sold (105 829) 156 182 (65 350)
Materials, supplies, and fuel 6 872 2 437 14 039
Accounts payable 81 569 19 587 38 386
Accrued taxes and interest (272) 10 165 17 533
Other items - net 4 629 46 601 297
Net cash provided by operating activities 438 705 680 341 445 648
Financing Activities
Issuance of long-term debt 100 062 - 260 280
Retirement of preferred stock (234) - (93 450)
Redemption of long-term debt (290 612) (162 583) (338 378)
Change in short-term debt 86 662 30 591 69 500
Dividends on preferred stock (871) (10 643) (17 673)
Dividends on common stock (170 400) (377 969) (219 550)
Net cash used in financing activities (275 393) (520 604) (339 271)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (156 499) (142 053) (138 325)
Deferred demand-side management costs (9 584) (19 176) (13 956)
Net cash used in investing activities (166 083) (161 229) (152 281)
Net decrease in cash and temporary cash investments (2 771) (1 492) (45 904)
Cash and temporary cash investments at beginning
of period 5 120 6 612 52 516
Cash and temporary cash investments at end of
period $ 2 349 $ 5 120 $ 6 612
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $115 801 $117 848 $137 892
Income taxes 106 154 109 034 79 769
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - CG&E
Kwh Sales
Increased activity in Cinergy's power marketing and trading operations led to
higher non-firm power sales for resale and significantly contributed to the
increase in total kwh sales of 72.6%, as compared to 1996. Partially offsetting
this increase was a decline in residential sales, as a result of mild weather.
Kwh sales (and related revenues and expenses) outside of Cinergy's control area
resulting from Cinergy's power marketing and trading operations are allocated
50%/50% between CG&E and PSI. (See Note 1(c) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data" and the
"Market Risk Sensitive Instruments and Positions" section for discussions on
Cinergy's power marketing and trading operations.)
CG&E's total kwh sales increased 10.6% in 1996, as compared to 1995, reflecting
an increase in sales to all customer classes. The increase in retail sales,
which reflects a higher average number of residential and commercial customers,
was partially offset by the return to more normal weather in 1996. The increase
in industrial sales was due to growth in the primary metals sector. Increased
activity in Cinergy's power marketing and trading operations led to higher
non-firm power sales for resale.
Kwh sales for 1995 increased 15.3% over 1994, reflecting increased sales to all
customer classes. Significantly contributing to this increase were higher
non-firm power sales for resale primarily due to increased sales to PSI, as a
result of the coordination of CG&E's and PSI's electric dispatch systems. Higher
residential and commercial sales resulted primarily from warmer weather during
the 1995 summer cooling season and colder weather during the fourth quarter of
1995. Additionally, increased sales to industrial customers were mainly
attributable to growth in the primary metals and chemicals sectors.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (6.8)% 4.7% 3.8%
Commercial 1.9 2.3 3.4
Industrial 4.1 3.4 3.9
Total retail (.5) 3.3 3.8
Sales for resale
Firm power obligations (8.4) 3.7 6.3
Non-firm power transactions 356.5 51.7 211.8
Total sales for resale 337.5 48.1 172.6
Total sales 72.6 10.6 15.3
CG&E currently forecasts a 2% annual compound growth rate in kwh sales over the
1998 through 2002 period. This forecast excludes non-firm power sales for resale
and any potential new off-system, long-term firm power sales.
Mcf Sales and Transportation
The milder weather experienced in 1997 contributed to a decrease in residential
and commercial gas sales volumes and led to an 8.2% decrease in total sales
volumes and a 1.1% decrease in total sales and transportation volumes, as
compared to 1996. An increase in gas transportation volumes and a decline in
industrial sales resulted from customers electing to purchase gas directly from
suppliers, using transportation services provided by CG&E.
Mcf gas sales and transportation volumes increased 8.4% in 1996, as compared to
1995. Colder weather in the first half of 1996 led to increased gas sales to
residential and commercial customers. Also contributing to the increase in total
sales was an increase in the number of residential and commercial customers.
Industrial sales decreased and gas transported increased as customers continued
to purchase gas directly from suppliers.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. Increased sales to residential customers, resulting from colder weather
during the fourth quarter of 1995 and an increase in the number of customers,
contributed to the higher sales levels. Additionally, increases in commercial
and industrial transportation volumes, which resulted from customers electing to
purchase gas directly from suppliers, more than offset declines in industrial
and commercial sales.
Year-to-year changes in Mcf sales for each major class of customers and Mcf
transportation volumes are shown below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (6.4)% 3.6% 10.5%
Commercial (9.7) 7.8 (2.0)
Industrial (8.8) (13.3) (26.6)
Total sales (8.2) 2.1 1.5
Gas transported 10.1 19.8 24.4
Total gas sold and transported (1.1) 8.4 8.6
Operating Revenues
ELECTRIC OPERATING REVENUES
Electric operating revenues increased by $454 million (30%) in 1997 and $65
million (5%) in 1996. These increases primarily reflect the increased kwh sales,
as previously discussed. Partially offsetting these increases was the operation
of the fuel adjustment clause reflecting a lower average cost of fuel used in
electric production.
Electric operating revenues increased $91 million (7%) in 1995, as compared to
1994. This increase reflects the higher kwh sales, as previously discussed and a
full year's effect of CG&E's electric rate increase which became effective in
May 1994. This increase was partially offset by the operation of fuel adjustment
clauses reflecting a lower average cost of fuel used in electric production.
An analysis of electric operating revenues for the past three years is shown
below:
1997 1996 1995
(in millions)
Previous year's electric
operating revenues $1 502 $1 437 $1 346
Increase (Decrease) due to change in:
Price per kwh
Retail (44) (13) (10)
Sales for resale
Firm power obligations - - 1
Non-firm power transactions 107 (10) (9)
Total change in price per kwh 63 (23) (18)
Kwh sales
Retail (8) 44 49
Sales for resale
Firm power obligations (1) 1 1
Non-firm power transactions 395 41 60
Total change in kwh sales 386 86 110
Other 5 2 (1)
Current year's electric
operating revenues $1 956 $1 502 $1 437
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and using CG&E facilities to transport the gas (see the "Mcf Sales and
Transportation" section) continues to put downward pressure on gas operating
revenues. Since providing transportation services does not necessitate recovery
of the cost of gas purchased, the revenue per Mcf transported is less than the
revenue per Mcf sold. As a result, a higher relative volume of gas transported
to gas sold translates into lower gas operating revenues.
CG&E's gas rate increase of 2.5% ($9 million annually) approved by the PUCO in
the December 1996 Order and the operation of a gas cost recovery mechanism,
reflecting a higher average cost per Mcf of gas purchased, contributed to the
$22 million (5%) increase in gas operating revenues as compared to 1996. These
increases were partially offset by the previously discussed changes in Mcf gas
sales.
Gas operating revenues increased $63 million (15%) in 1996, as compared to 1995.
This increase is attributable to the increase in gas sales and transportation
volumes. Also contributing to the increase was the operation of the fuel
adjustment clause, reflecting a higher average cost per Mcf of gas purchased.
In 1995, gas operating revenues declined $32 million (7%), as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of the fuel adjustment clause, reflecting a lower average cost
per Mcf of gas purchased.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs decreased $49 million (14%)
in 1997, when compared to 1996.
An analysis of fuel costs for the past three years is shown below:
1997 1996 1995
(in millions)
Previous year's fuel expense $349 $327 $325
Increase (Decrease) due to change in:
Price of fuel 8 (38) (10)
Deferred fuel cost (50) 34 (10)
Kwh generation (7) 26 22
Current year's fuel expense $300 $349 $327
Gas Purchased The increase in gas purchased expense of $17 million (7%) in 1997,
as compared to 1996, reflects a higher average cost per Mcf of gas purchased.
This increase was partially offset by a decline in the volumes of gas purchased.
Gas purchased increased $43 million (21%) in 1996, as compared to 1995, due to
an increase in volumes purchased and a higher average cost per Mcf of gas
purchased.
In 1995, gas purchased expense decreased $42 million (17%), as compared to 1994,
primarily reflecting a decline in the average cost per Mcf of gas purchased.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $527 million and $12 million in 1997 and
1996, respectively. These increases primarily reflect increased purchases of
non-firm power for resale to others as a result of increased activity in
Cinergy's power marketing and trading operations. (See Note 1(c) of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" and the "Market Risk Sensitive Instruments and Positions" section for
discussion on Cinergy's power marketing and trading operations.)
Purchased and exchanged power costs increased $36 million in 1995, as compared
to 1994, reflecting increased purchases from PSI resulting from the coordination
of PSI's and CG&E's electric dispatch systems. This increase was partially
offset by a decline in third-party, short-term power sales to other utilities.
OTHER OPERATION
Other operation expenses decreased $22 million (7%) in 1997, as compared to
1996. This decrease is primarily due to the effect of charges in 1996 for early
retirement and severance programs and the December 1996 Order (see below). This
decrease is partially offset by the effect of CG&E curtailing certain deferrals
associated with its DSM programs for new participants after December 31, 1996,
due to the December 1996 Order that changed the benefit/cost tests that DSM
programs must surpass in Ohio in order for certain DSM-related costs to be
eligible for deferral.
Other operation increased $38 million (13%) in 1996, as compared to 1995. This
increase is attributable to higher administrative and general expenses
reflecting, in part, charges of $30 million for voluntary early retirement and
severance programs and charges totaling $6 million related to the December 1996
Order. The increase is partially offset by a decrease in electric distribution
expenses.
In 1995, other operation expenses decreased $44 million (13%), as compared to
1994. Charges of $52 million in 1994 for Merger Costs and other expenditures,
which cannot be recovered from customers under the merger savings sharing
mechanism authorized by the PUCO, significantly contributed to the decrease. In
addition, emphasis on achieving merger savings and other cost reductions led to
lower operating costs for 1995. The decrease was partially offset by the
write-off of obsolete inventory in December 1995.
MAINTENANCE
In 1997, maintenance costs decreased $6 million (6%), as compared to 1996. This
decrease is primarily attributable to reduced outage related charges and other
maintenance costs associated with electric production facilities. Reduced
maintenance costs associated with electric distribution facilities also
contributed to the decrease for 1997.
The decrease in maintenance expense of $12 million (11%) in 1995, as compared to
1994, was primarily attributable to improved scheduling of routine maintenance
on electric generating units. Lower maintenance costs on gas and electric
distribution facilities also contributed to the decline.
AMORTIZATION OF PHASE-IN DEFERRALS AND PHASE-IN DEFERRED RETURN
Amortization of phase-in deferrals and phase-in deferred return reflect the
PUCO-ordered phase-in plan for Zimmer. (See Note 1(k) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")
AMORTIZATION OF POST-IN-SERVICE DEFERRED OPERATING EXPENSES
Amortization of post-in-service deferred operating expenses reflect the
amortization of certain deferrals as they are recovered through retail rates.
These deferrals include 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. (See Note 1(h) of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data.")
Other Income and Expenses - Net
OTHER - NET
The $7 million change in other - net for 1997, as compared to 1996, is due
primarily to charges in 1996 of approximately $14 million associated with the
December 1996 Order. These charges were partially offset by gains of
approximately $6 million in 1996 related to the sale of certain CG&E assets, and
approximately $2 million of increased expenses in 1997 associated with the sales
of accounts receivable for CG&E and ULH&P.
The change in other - net of $26 million in 1996, as compared to 1995, is due to
a number of factors including $4 million of interest received in 1995 on an
income tax refund related to prior years, charges totaling $14 million
associated with the December 1996 Order, and expenses associated with CG&E's and
ULH&P's sales of accounts receivable in 1996.
The increase in other - net of $11 million in 1995, as compared to 1994, is due,
in part, to interest on the income tax refund discussed above and charges of $12
million in 1994 for merger-related and other expenditures which cannot be
recovered from customers.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
In 1997, interest on long-term debt decreased $13 million (11%), as compared to
1996, primarily due to the redemptions and maturities of long-term debt in 1996
and 1997.
Interest on long-term debt decreased $20 million (14%) in 1996, as compared to
1995, due to the refinancing and redemptions of long-term debt in 1996 and 1995.
OTHER INTEREST
The $8 million increase in other interest, as compared to 1996, is primarily due
to interest expense on increased short-term borrowings used to fund CG&E's
redemption of first mortgage bonds.
PREFERRED DIVIDEND REQUIREMENT
Preferred dividend requirements decreased $10 million (92%) and $7 million (40%)
in 1997 and 1996, respectively. These decreases were primarily attributable to
the reacquisition of approximately 90% of the outstanding preferred stock of
CG&E, pursuant to Cinergy's tender offer. (See Note 3(b) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
In 1995, CG&E's preferred dividend requirement decreased $5 million (21%), as
compared to 1994. The decrease was attributable to the early redemption of
preferred stock in April 1994 and July 1995.
PSI Energy, Inc.
and Subsidiaries
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
1997 1996 1995
(in thousands)
Operating Revenues
Non-affiliated companies $1 940 783 $1 309 878 $1 205 460
Affiliated companies 17 686 22 084 42 575
1 958 469 1 331 962 1 248 035
Operating Expenses
Fuel 392 948 364 053 389 401
Purchased and exchanged power
Non-affiliated companies 636 293 112 505 33 762
Affiliated companies 29 932 43 343 30 104
Other operation 344 878 268 478 228 508
Maintenance 86 374 97 703 87 492
Depreciation 125 659 121 812 120 773
Post-in-service deferred operating
expenses - net 1 072 (4 799) (5 790)
Income taxes (Note 11) 76 890 73 194 85 043
Taxes other than income taxes 53 721 49 911 51 853
1 747 767 1 126 200 1 021 146
Operating Income 210 702 205 762 226 889
Other Income and Expenses - Net
Allowance for equity funds
used during construction - - 174
Post-in-service carrying costs - 1 223 3 186
Income taxes (Note 11) (1 039) (3 997) 941
Other - net 6 997 1 878 (3 188)
5,958 (896) 1 113
Income Before Interest 216 660 204 866 228 002
Interest
Interest on long-term debt 71 638 67 001 70 577
Other interest 13 584 14 511 15 821
Allowance for borrowed funds
used during construction (767) (2 324) (4 211)
84 455 79 188 82 187
Net Income 132 205 125 678 145 815
Preferred Dividend Requirement 11 701 12 537 13 180
Net Income Applicable to Common Stock $ 120 504 $ 113 141 $ 132 635
The accompanying notes are an integral part of these consolidated financial
statements.
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1997 1996
(dollars in thousands)
Electric Utility Plant - Original Cost
In service $4 280 551 $4 178 181
Accumulated depreciation 1 792 317 1 723 279
2 488 234 2 454 902
Construction work in progress 65 129 76 630
Total electric utility plant 2 553 363 2 531 532
Current Assets
Cash and temporary cash investments 18 169 2 911
Restricted deposits 1 146 550
Notes receivable from affiliated companies 21 998 3
Accounts receivable less accumulated provision
for doubtful accounts of $1,183 in 1997 and
$1,269 in 1996 (Note 6) 198 008 74 289
Accounts receivable from affiliated companies 6 384 4 016
Materials, supplies, and fuel - at average cost
Fuel 28 234 41 865
Other materials and supplies 26 955 28 268
Prepayments and other 4 438 3 184
305 332 155 086
Other Assets
Regulatory assets (Note 1(f))
Amounts due from customers - income taxes 23 941 33 068
Post-in-service carrying costs and deferred
operating expenses 43 832 44 904
Coal contract buyout costs 122 485 138 171
Deferred demand-side management costs 71 278 101 208
Deferred merger costs 73 789 76 290
Unamortized costs of reacquiring debt 29 667 32 079
Other 44 094 52 938
Other 138 650 129 667
547 736 608 325
$3 406 431 $3 294 943
The accompanying notes are an integral part of these consolidated financial
statements.
PSI ENERGY, INC.
CAPITALIZATION AND LIABILITIES
December 31
1997 1996
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - without par value; $.01 stated
value; authorized shares - 60,000,000;
outstanding shares - 53,913,701 in 1997 and 1996 $ 539 $ 539
Paid-in capital 400 893 402 947
Retained earnings 636 228 626 089
Total common stock equity 1 037 660 1 029 575
Cumulative Preferred Stock (Note 3)
Not subject to mandatory redemption 157 196 173 086
Long-term Debt (Note 4) 826 470 945 270
Total capitalization 2 021 326 2 147 931
Current Liabilities
Long-term debt due within one year (Note 4) 85 000 10 000
Notes payable and other short-term
obligations (Note 5) 190 600 171 729
Notes payable to affiliated companies 16 435 13 186
Accounts payable 212 833 114 330
Accounts payable to affiliated companies 41 326 12 850
Accrued taxes 69 304 73 206
Accrued interest 21 369 24 045
Other 2 560 17 107
639 427 436 453
Other Liabilities
Deferred income taxes (Note 11) 403 535 372 997
Unamortized investment tax credits 49 296 52 750
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 116 576 98 037
Other 176 271 186 775
745 678 710 559
Commitments and Contingencies (Note 12)
$3 406 431 $3 294 943
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 1994 $539 $389 309 $493 103 $ 882 951
Net income 145 815 145 815
Dividends on preferred stock (13 181) (13 181)
Contribution from parent company 13 926 13 926
Other 18 (462) (444)
Balance December 31, 1995 539 403 253 625 275 1 029 067
Net income 125 678 125 678
Dividends on preferred stock (12 629) (12 629)
Dividends on common stock (112 076) (112 076)
Other (306) (159) (465)
Balance December 31, 1996 539 402 947 626 089 1 029 575
Net income 132 205 132 205
Dividends on preferred stock (11 795) (11 795)
Dividends on common stock (113 600) (113 600)
Other (2 054) 3 329 1 275
Balance December 31, 1997 $539 $400 893 $636 228 $1 037 660
The accompanying notes are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
(in thousands)
Operating Activities
Net income $132 205 $125 678 $145 815
Items providing or (using) cash:
Depreciation 125 659 121 812 120 773
Deferred income taxes and investment
tax credits - net 35 661 29 925 5 201
Allowance for equity funds used during
construction - - (174)
Regulatory assets - net 38 488 (279) 11 870
Changes in current assets and current
liabilities
Restricted deposits (596) (336) 16
Accounts and notes receivable, net of
reserves on receivables sold (149 290) 2 722 (57 926)
Materials, supplies, and fuel 14 944 41 343 31 748
Accounts payable 126 979 10 363 (25 958)
Litigation settlement - (80 000) -
Accrued taxes and interest (6 578) 6 704 34 078
Other items - net 14 630 3 813 18 714
Net cash provided by operating activities 332 102 261 745 284 157
Financing Activities
Issuance of long-term debt - 150 217 -
Funds on deposit from issuance of long-term debt - 973 9 987
Retirement of preferred stock (16 035) (15 116) (16)
Redemption of long-term debt (45 700) (74 600) (60 455)
Change in short-term debt 22 120 (13 616) 4 958
Dividends on preferred stock (11 795) (12 629) (13 181)
Dividends on common stock (113 600) (112 076) -
Capital contribution from parent company - - 13 926
Net cash provided by (used in) financing
activities (165 010) (76 847) (44 781)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (141 552) (172 341) (186 580)
Deferred demand-side management costs (10 282) (25 168) (43 615)
Net cash used in investing activities (151 834) (197 509) (230 195)
Net increase (decrease) in cash and temporary
cash investments 15 258 (12 611) 9 181
Cash and temporary cash investments at beginning
of period 2 911 15 522 6 341
Cash and temporary cash investments at end of
period $ 18 169 $ 2 911 $ 15 522
Supplemental Disclosure Of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $ 82 959 $ 76 655 $ 80 465
Income taxes 58 671 37 048 60 148
The accompanying notes are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - PSI
Kwh Sales
Increased activity in Cinergy's power marketing and trading operations led to
higher non-firm power sales for resale and significantly contributed to the
increase in total kwh sales of 69.1%, as compared to 1996. The increase in
retail sales reflects a higher average number of commercial and industrial
customers, which was partially offset by a decrease in residential sales, as a
result of mild weather. Kwh sales (and related revenues and expenses) outside of
Cinergy's control area resulting from Cinergy's power marketing and trading
operations are allocated 50%/50% between CG&E and PSI. (See Note 1(c) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" and the "Market Risk Sensitive Instruments and Positions"
section for discussions on Cinergy's power marketing and trading operations.)
PSI's total kwh sales increased 11.0% in 1996, as compared to 1995. Increased
activity in Cinergy's power marketing and trading operations led to higher
non-firm power sales for resale. The increase in retail sales, which reflects a
higher average number of residential and industrial customers, was partially
offset by the return to more normal weather in 1996. The increase in industrial
sales was due to growth in the primary metals and transportation equipment
sectors.
As compared to 1994, total kwh sales in 1995 increased 6.3%, reflecting
increased sales to all customer classes. Contributing significantly to this
increase were higher residential and commercial sales due to warmer weather
during the 1995 summer cooling season, colder weather during the fourth quarter
of 1995, and an increase in the number of residential and commercial customers.
Increased sales to industrial customers, reflecting growth in the primary
metals, chemicals, and food products sectors, also contributed to the increased
kwh sales level. This increase also reflects higher non-firm power sales for
resale resulting from an increase in sales to CG&E reflecting the coordination
of PSI's and CG&E's electric dispatch systems.
Year-to-year changes in kwh sales for each major class of customers are shown
below:
Increase (Decrease) from Prior Year
1997 1996 1995
Retail
Residential (.5)% - % 7.9%
Commercial 1.3 0.4 5.2
Industrial 2.1 3.3 5.1
Total retail 1.1 1.5 6.0
Sales for resale
Firm power obligations 18.7 11.4 1.1
Non-firm power transactions 277.9 51.6 10.2
Total sales for resale 219.1 40.2 7.4
Total sales 69.1 11.0 6.3
PSI currently forecasts a 3% annual compound growth rate in kwh sales over the
1998 through 2002 period. This forecast excludes non-firm power sales for resale
and any potential new off-system, long-term firm power sales.
Operating Revenues
Increased kwh sales, as previously discussed, a full year's effects of PSI's
retail rate increases approved in the September 1996 Order, as amended in August
1997, and the December 1996 DSM Order significantly contributed to the $626
million (47%) increase in electric operating revenues, when compared to 1996.
Also contributing to the increase was the return of approximately $13 million to
customers in 1996 in accordance with the February 1995 Order. The February 1995
Order required all retail operating income above a certain rate of return to be
refunded to customers.
Operating revenues increased $84 million (7%) in 1996, as compared to 1995, due,
in large part, to the increase in kwh sales as previously discussed. Also
contributing to the increase was the effect of a 7.6% retail rate increase
approved in the September 1996 Order, as well as a full year's effect of a 4.3%
retail rate increase approved in the February 1995 Order and a 1.9% increase for
carrying costs on construction work in progress (CWIP) property which was
approved by the IURC in March 1995. Partially offsetting these increases was the
return of approximately $10 million to customers in accordance with the February
1995 Order.
Higher kwh sales and electric rate increases which became effective in February
1995 and March 1995 significantly contributed to the $134 million (12%) increase
in operating revenues for 1995, when compared to 1994.
An analysis of operating revenues for the past three years is shown below:
1997 1996 1995
(in millions)
Previous year's operating revenues $1 332 $1 248 $1 114
Increase (Decrease) due to change in:
Price per kwh
Retail 56 8 68
Sales for resale
Firm power obligations (10) (3) (1)
Non-firm power transactions 93 - 1
Total change in price per kwh 139 5 68
Kwh sales
Retail 12 16 55
Sales for resale
Firm power obligations 14 8 1
Non-firm power transactions 451 55 9
Total change in kwh sales 477 79 65
Other 10 - 1
Current year's operating revenues $1 958 $1 332 $1 248
Operating Expenses
FUEL
Electric fuel costs increased $29 million (8%) in 1997, when compared to 1996.
An analysis of fuel costs for the past three years is shown below:
1997 1996 1995
(in millions)
Previous year's fuel expense $364 $389 $387
Increase (Decrease) due to change in:
Price of fuel (2) (10) (13)
Deferred fuel cost (5) 8 8
Kwh generation 36 (23) 7
Current year's fuel expense $393 $364 $389
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $510 million and $92 million in 1997 and
1996, respectively. These increases primarily reflect increased purchases of
non-firm power for resale to others as a result of increased activity in
Cinergy's power marketing and trading operations. (See Note 1(c) of the "Notes
to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" and the "Market Risk Sensitive Instruments and Positions" section for
discussions on Cinergy's power marketing and trading operations.)
Purchased and exchanged power increased $22 million (54%) in 1995, as compared
to 1994, reflecting increased purchases from CG&E as a result of the
coordination of PSI's and CG&E's electric dispatch systems. This increase was
partially offset by a decline in third party, short-term power sales to other
utilities.
OTHER OPERATION
Other operation expenses increased $76 million (28%) in 1997, as compared to
1996. This increase is primarily due to higher other operation expenses relating
to the Clean Coal Project, amortization of deferred DSM expenses, and
amortization of deferred expenses associated with the Clean Coal Project, all of
which are being recovered in revenues pursuant to either the September 1996
Order or the December 1996 DSM Order. The effect of discontinuing deferral of
certain DSM-related costs in accordance with provisions of the December 1996 DSM
Order also added to the increase. These increases were partially offset by the
effect of charges in 1996 for early retirement and severance programs.
Other operation expenses increased approximately $40 million (17%) in 1996, as
compared to 1995. This increase was due to a number of factors, including an
increase related to the ongoing level and amortization of DSM expenses and an
increase in production expenses associated with the operations of the Clean Coal
Project, all of which are being recovered in revenues pursuant to the February
1995 and September 1996 Orders. Charges related to voluntary early retirement
and severance programs and increased transmission costs also contributed to the
higher level of other operation expenses.
In 1995, other operation expenses increased $15 million (7%), as compared to
1994. This increase was due to a number of factors, including the recognition of
postretirement benefit costs on an accrual basis, an increase in the ongoing
level of DSM expenses, and the amortization of deferred postretirement benefit
costs, deferred Merger Costs, and deferred DSM costs, all of which are being
recovered in revenues pursuant to the February 1995 Order. These increases were
partially offset by charges of $10 million in 1994 for severance benefits to
former officers of PSI which cannot be recovered from customers under the merger
savings sharing mechanisms authorized by the IURC. In addition, emphasis on
achieving merger savings and other cost reductions also partially offset the
increase in other operation expenses.
MAINTENANCE
In 1997, maintenance costs decreased $11 million (12%), as compared to 1996.
This decrease is primarily attributable to reduced outage related charges and
other maintenance costs associated with electric production facilities. Reduced
maintenance costs associated with electric transmission and distribution
facilities also contributed to the decrease for 1997.
An increase of $10 million (12%) in maintenance costs in 1996, as compared to
1995, is primarily attributable to increased maintenance associated with the
Clean Coal Project which began commercial operation in November 1995. Increased
transmission and distribution costs also contributed to the higher level of
maintenance costs.
Maintenance costs decreased $7 million (7%) in 1995, as compared to 1994,
primarily due to improved scheduling of routine maintenance on generating units
and lower maintenance costs on transmission and distribution facilities.
DEPRECIATION
In 1995, depreciation expense decreased $17 million (12%), when compared to
1994, due, in large part, to the adoption of lower depreciation rates effective
in March 1995. This decrease was partially offset by the effect of additions to
utility plant.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect the deferral of
depreciation on certain major projects, primarily environmental in nature, from
the in-service date until the related projects are reflected in retail rates,
net of amortization of these 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 $4 million (8%) in 1997, as compared to
1996, primarily due to an increase in the Indiana Corporate Gross Income Tax.
Taxes other than income taxes increased $6 million (12%) in 1995, as compared to
1994, primarily due to increased property taxes resulting from a greater
investment in taxable property.
Other Income and Expenses - Net
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on certain
major projects, primarily environmental in nature, from the in-service date
until the related projects are reflected in retail rates. (See Note 1(h) of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
OTHER - NET
The $5 million change in other - net for 1997, as compared to 1996, is primarily
due to a gain in 1997 on the sale of a PSI investment.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
In 1997, interest on long-term debt increased $5 million (7%) over the prior
year. The increase was primarily due to the net issuance of approximately $100
million of long-term debt during 1996 and 1997.
Interest on long-term debt decreased $4 million (5%) in 1996, as compared to
1995, due to the redemption of $135 million of long-term debt during the period
from August 1995 through December 1996.
ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION
Allowance for borrowed funds used during construction decreased $2 million (45%)
in 1996, as compared to 1995. This decrease is primarily attributable to a
decrease in the average balance of CWIP, resulting from the Clean Coal Project
being completed at the end of 1995.
Allowance for borrowed funds used during construction decreased $5 million (55%)
in 1995, as compared to 1994, primarily as a result of a decrease in the average
balance of CWIP, which was partially offset by an increase in the debt component
of the AFUDC rate.
The Union Light,
Heat and Power
Company
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF INCOME
1997 1996 1995
(in thousands)
Operating Revenues
Electric $192 774 $190 900 $187 180
Gas 78 848 76 868 70 288
271 622 267 768 257 468
Operating Expenses
Electricity purchased from parent
company for resale 145 906 143 839 142 308
Gas purchased 44 354 41 185 36 745
Other operation 31 153 30 934 30 712
Maintenance 5 764 4 997 4 580
Depreciation 12 369 11 909 11 438
Income taxes (Note 11) 9 586 9 834 7 887
Taxes other than income taxes 4 055 4 036 3 968
253 187 246 734 237 638
Operating Income 18 435 21 034 19 830
Other Income and Expenses - Net
Allowance for equity funds used
during construction 97 (8) 71
Income taxes (Note 11) 1 100 (352) (44)
Other - net (1 947) (1 417) 6
(750) (1 777) 33
Income Before Interest 17 685 19 257 19 863
Interest
Interest on long-term debt 3 523 4 016 7 161
Other interest 1 396 703 728
Allowance for borrowed funds used
during construction (151) (58) (198)
4 768 4 661 7 691
Net Income $ 12 917 $ 14 596 $ 12 172
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
BALANCE SHEETS
ASSETS
December 31
1997 1996
(dollars in thousands)
Utility Plant - Original Cost
In service
Electric $204 111 $195 053
Gas 155 167 148 203
Common 19 073 19 285
378 351 362 541
Accumulated depreciation 133 213 122 310
245 138 240 231
Construction work in progress 14 346 9 050
Total utility plant 259 484 249 281
Current Assets
Cash and temporary cash investments 546 1 197
Notes receivable from affiliated companies - 100
Accounts receivable less accumulated provision
for doubtful accounts of $996 in 1997 and
$1,024 in 1996 (Note 6) 7 308 12 763
Accounts receivable from affiliated companies 446 620
Materials, supplies, and fuel - at average cost
Gas stored for current use 5 401 6 351
Other materials and supplies 693 716
Income tax refundable - 1 670
Prepayments and other 385 370
14 779 23 787
Other Assets
Regulatory assets (Note 1(f))
Deferred merger costs 5 213 5 218
Unamortized costs of reacquiring debt 3 590 3 764
Other 2 262 2 357
Other 6 262 5 146
17 327 16 485
$291 590 $289 553
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
CAPITALIZATION AND LIABILITIES
December 31
1997 1996
(dollars in thousands)
Common Stock Equity (Note 2)
Common stock - $15.00 par value;
authorized shares - 1,000,000;
outstanding shares - 585,333 in 1997
and 1996 $ 8 780 $ 8 780
Paid-in capital 18 683 18 839
Retained earnings 95 450 92 484
Total common stock equity 122 913 120 103
Long-term Debt (Note 4) 44 671 44 617
Total capitalization 167 584 164 720
Current Liabilities
Notes payable to affiliated companies 23 487 30 649
Accounts payable 11 097 12 018
Accounts payable to affiliated companies 19 712 16 771
Accrued taxes 6 332 84
Accrued interest 1 286 1 284
Other 4 364 5 248
66 278 66 054
Other Liabilities
Deferred income taxes (Note 11) 26 211 33 463
Unamortized investment tax credits 4 516 4 797
Accrued pension and other postretirement
benefit costs (Notes 9 and 10) 14 044 12 983
Income taxes refundable through rates 6 566 5 121
Other 6 391 2 415
57 728 58 779
Commitments and Contingencies (Note 12)
$291 590 $289 553
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
Balance December 31, 1994 $8 780 $18 839 $74 203 $101 822
Net income 12 172 12 172
Dividends on common stock (3 512) (3 512)
Balance December 31, 1995 8 780 18 839 82 863 110 482
Net income 14 596 14 596
Dividends on common stock (4 975) (4 975)
Balance December 31, 1996 8 780 18 839 92 484 120 103
Net income 12 917 12 917
Dividends on common stock (9 951) (9 951)
Other - (156) - (156)
Balance December 31, 1997 $8 780 $18 683 $95 450 $122 913
The accompanying notes are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CASH FLOWS
1997 1996 1995
(in thousands)
Operating Activities
Net income $12 917 $14 596 $12 172
Items providing or (using) cash:
Depreciation 12 369 11 909 11 438
Deferred income taxes and investment
tax credits - net (6 124) 9 857 652
Allowance for equity funds used during
construction (97) 8 (71)
Regulatory assets 100 (1 500) 170
Changes in current assets and current
liabilities
Accounts and notes receivable, net
of reserves on receivables sold 4 507 20 758 (4 003)
Materials, supplies, and fuel 973 (1 339) 1 894
Accounts payable 2 020 (4 690) 11 824
Accrued taxes and interest 7 920 (1 494) (1 607)
Other items - net 5 343 (6 554) 4 412
Net cash provided by operating activities 39 928 41 551 36 881
Financing Activities
Issuance of long-term debt - - 14 704
Redemption of long-term debt - (26 083) (37 036)
Change in short-term debt (7 162) 7 606 8 543
Dividends on common stock (9 951) (4 975) (3 512)
Net cash used in financing activities (17 113) (23 452) (17 301)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (23 466) (18 652) (18 901)
Net cash used in investing activities (23 466) (18 652) (18 901)
Net increase (decrease) in cash and temporary
cash investments (651) (553) 679
Cash and temporary cash investments at beginning
of period 1 197 1 750 1 071
Cash and temporary cash investments at end of
period $ 546 $ 1 197 $ 1 750
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest (net of amount capitalized) $ 4 490 $ 4 667 $ 8 121
Income taxes 2 859 1 240 7 727
The accompanying notes are an integral part of these financial statements.
RESULTS OF OPERATIONS - ULH&P
Kwh Sales
Kwh sales decreased by 1.2%, compared to 1996. This decrease was a result of
mild weather. This decline was partially offset by an increase in commercial
sales, which reflects a higher average number of customers.
In 1996, total kwh sales increased 5.8% as compared to 1995, reflecting
increased sales to all customer classes. The increase in retail sales, which
reflects a higher average number of residential and commercial customers, was
partially offset by the return to more normal weather in 1996. The increased
industrial sales primarily reflect growth in the food products sector.
Total kwh sales in 1995, as compared to 1994, increased 7.2% reflecting
increased sales to all customer classes. The increase in residential and
commercial kwh sales was due to warmer weather during the 1995 summer cooling
season and colder weather during the fourth quarter of 1995 and an increase in
the average number of customers. The increased industrial sales primarily
reflect growth in the primary metals sector.
ULH&P currently forecasts a 2% annual compound growth rate in kwh sales over the
1998 through 2002 period.
Mcf Sales and Transportation
Mcf gas sales and transportation volumes decreased slightly, as compared to
1996. The milder weather experienced in 1997 contributed to a decrease in
residential and commercial sales. Gas transportation volumes increased and
industrial gas sales decreased as customers continued to purchase gas directly
from suppliers using transportation services provided by ULH&P.
Mcf gas sales and transportation volumes increased 6.6%, as compared to 1995.
Colder weather in the first quarter of 1996, cooler than normal weather early in
the second quarter of 1996, and increases in the average number of customers led
to increased sales to residential and commercial customers. This increase was
partially offset by a decrease in industrial sales as customers continued to
purchase gas directly from suppliers.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared
to 1994. The colder weather during the fourth quarter of 1995 primarily
attributed to the increase in residential and commercial sales. These increases
were partially offset by a decline in industrial sales resulting from customers
electing to purchase directly from suppliers, creating additional demand for
transportation services.
Operating Revenues
ELECTRIC OPERATING REVENUES
Electric operating revenues increased $2 million (1%) in 1997, $4 million (2%)
in 1996, and $10 million (5%) in 1995. The increase in 1997 was partially due to
the effect of an order issued by the Kentucky Public Service Commission in July
1996. This order authorized a decrease in electric rates, retroactive to July
1995, reflecting a reduction in the cost of electricity purchased from CG&E.
Partially offsetting this increase was a decline in kwh sales, as previously
discussed. Increases in 1996 and 1995 reflect higher kwh sales, which was
partially offset by the lower average cost of electricity purchased.
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from
producers and using ULH&P facilities to transport the gas (see the "Mcf Sales
and Transportation" section) continues to put downward pressure on gas operating
revenues. Since providing transportation services does not necessitate recovery
of gas purchased costs, the revenue per Mcf transported is less than the revenue
per Mcf sold. As a result, a higher relative volume of gas transported to gas
sold translates into lower gas operating revenues.
The $2 million (3%) increase in gas operating revenues in 1997, as compared to
1996, was due to the operation of the fuel adjustment clause reflecting a higher
average cost per Mcf of gas purchased.
Gas operating revenues increased $7 million (9%) in 1996, as compared to 1995.
The increase was primarily attributable to the operation of the fuel adjustment
clause reflecting an increase in the average cost per Mcf of gas purchased and
an increase in total volumes sold and transported.
In 1995, gas operating revenues declined $2 million (2%), as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of the fuel adjustment clause reflecting a lower average cost
per Mcf of gas purchased.
Operating Expenses
ELECTRICITY PURCHASED FROM PARENT COMPANY FOR RESALE
Electricity purchased increased $7 million (6%) in 1995, as compared to 1994,
due to an increase in volumes purchased.
GAS PURCHASED
The increase in gas purchased expense of $3 million (8%) in 1997, as compared to
1996, reflects a higher average cost per Mcf of gas purchased partially offset
by a decline in the volumes of gas purchased.
Gas purchased increased $4 million (12%) in 1996, as compared to 1995, due to an
increase in volumes purchased and a higher average cost per Mcf of gas
purchased, as previously discussed.
In 1995, gas purchased expense decreased $4 million (9%) from 1994 primarily due
to a decrease in the average cost per Mcf of gas purchased.
OTHER OPERATION
In 1995, other operation expense decreased $2 million (5%), as compared to 1994,
due, in part, to decreased gas and electric distribution expenses and decreased
gas production expenses.
MAINTENANCE
In 1997, maintenance costs increased $1 million (15%), as compared to 1996. This
increase is primarily attributable to increased maintenance costs on electric
distribution facilities.
In 1996, maintenance costs increased $.4 million (9%) as compared to 1995,
primarily as a result of increased transmission and distribution costs.
Maintenance costs decreased $1 million (16%) in 1995, as compared to 1994,
primarily as a result of reduced maintenance costs on gas and electric
distribution facilities.
DEPRECIATION
Depreciation expense increased $1 million (8%) in 1995, as compared to 1994,
primarily due to additions to electric and gas plant in service.
Other Income and Expenses - Net
OTHER - NET
The $.5 million change in other - net for 1997, as compared to 1996, is
primarily due to increased expenses associated with ULH&P's sales of accounts
receivable.
The decrease in other - net of $1 million in 1996, as compared to 1995, is
primarily attributable to expenses associated with the sales of accounts
receivables in 1996.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
The $.5 million (12%) decrease in interest on long-term debt, as compared to
1996, is primarily due to the redemption of $25 million of long-term debt in
1996.
Interest on long-term debt decreased $3 million (44%) in 1996, as compared to
1995, due to the redemption of $25 million and $35 million of long-term debt in
1996 and 1995, respectively.
OTHER INTEREST
The $1 million increase in other interest, as compared to 1996, is primarily due
to increased short-term borrowings from affiliated companies through Cinergy's
money pool arrangement.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Cinergy, CG&E, PSI, and ULH&P
(a) Nature of Operations Cinergy Corp., a Delaware corporation, (Cinergy or
Company), 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). Cinergy's utility subsidiaries are CG&E and PSI Energy, Inc. (PSI).
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 Resources' utility subsidiary, is engaged in the production,
transmission, distribution, and sale of electric energy in north central,
central, and southern Indiana. The majority of Cinergy's operating revenues are
derived from the sale of electricity and the sale and transportation of natural
gas.
Cinergy's non-utility subsidiaries are Cinergy Investments, Inc. (Investments)
and Cinergy Services, Inc. (Services). 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), Cinergy Global Power, Inc.,
and Trigen-Cinergy Solutions LLC (Trigen-Cinergy). (See Note 1(e) for a further
discussion of Midlands.) Services, a Delaware corporation, is the service
company for the Cinergy system, providing member companies with a variety of
administrative, management, and support services.
Cinergy, CG&E, PSI, and ULH&P
(b) Presentation The accompanying Consolidated Financial Statements of Cinergy,
CG&E, and PSI include the accounts of Cinergy, CG&E, and PSI, respectively, and
their 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.
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 and 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.)
Certain reclassifications of prior years' data have been made to conform with
the current year's presentation.
Cinergy, CG&E, and PSI
(c) Power Marketing and Trading Cinergy's power marketing and trading function
actively markets and trades over-the-counter forward and option contracts for
the purchase and sale of electricity. The majority of these contracts are
settled via physical delivery of electricity or netted out in accordance with
industry trading standards. Option premiums are deferred and included in the
Consolidated Balance Sheets and amortized to "Operating Revenues - Electric" or
"Purchased and exchanged power" in the Consolidated Statements of Income over
the term of the option contract. Cinergy values its portfolio of
over-the-counter forward and option contracts using the aggregate lower of cost
or market method. To the extent there are net aggregate losses in the portfolio,
Cinergy reserves for such losses. Net gains are recognized when realized. Due to
the lack of liquidity and the volatility currently experienced in the power
markets, significant assumptions must be made by the Company when estimating
current market values for purposes of the aggregate lower of cost or market
comparison. It is possible that the actual gains and losses from the Company's
power marketing and trading activities could differ substantially from the gains
and losses estimated currently.
Cinergy, CG&E, and PSI
(d) Financial Derivatives Cinergy and its subsidiaries use derivative financial
instruments to hedge exposures to foreign currency exchange rates, lower funding
costs, and manage exposures to fluctuations in interest rates. Instruments used
as hedges must be designated as a hedge at the inception of the contract and
must be effective at reducing the risk associated with the exposure being
hedged. Accordingly, changes in market values of designated hedge instruments
must be highly correlated with changes in market values of the underlying hedged
items at inception of the hedge and over the life of the hedge contract.
Cinergy utilizes a currency swap to hedge its pound sterling denominated net
investment in Avon Energy Partners Holdings (Avon Energy). Accordingly, any
translation gains or losses related to the principal exchange on the currency
swap are recorded in the cumulative foreign currency translation adjustment
which is a separate component of common stock equity. Aggregate translation
losses related to the principal exchange of the currency swap are reflected in
"Current Liabilities - Other" in the Consolidated Balance Sheets.
Interest rate swaps are accounted for under the accrual method. Accordingly,
gains and losses based on any interest differential between fixed-rate and
floating-rate interest amounts, calculated on agreed upon notional principal
amounts, are recognized in the Consolidated Statements of Income as a component
of interest expense as realized over the life of the agreement.
Cinergy
(e) Investments in Unconsolidated Subsidiaries
Except for Cinergy's investment in Avon Energy, investments in unconsolidated
subsidiaries are not significant. In May 1996, Cinergy and GPU, Inc. (GPU), a
Pennsylvania corporation, entered into a 50%/50% joint venture agreement and
formed Avon Energy, incorporated in London, England. Avon Energy, through a
wholly-owned subsidiary, immediately began acquiring the outstanding common
stock of Midlands, a United Kingdom (UK) regional electric company. During the
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. 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.
Summarized financial information for Avon Energy is as follows:
December 31, 1997
Avon Energy
Assets (in millions)
Property, plant, and equipment $1 890
Current assets 676
Other assets 2 148
Total assets $4 714
Capitalization and Liabilities
Total common shareholders' equity $1 006
Long-term debt 1 533
Other liabilities 2 175
Total capitalization and
liabilities $4 714
Cinergy's investments in unconsolidated
subsidiaries: Avon Energy $ 505
Other companies 33
Total investments in unconsolidated
subsidiaries $ 538
Year Ended
December 31, 1997
Avon Energy
(in millions)
Operating revenues $2 176
Net income before extraordinary item $ 127
Extraordinary item - windfall profits
tax (less applicable income taxes of $0) $ (219)
Net loss $ (92)
Cinergy's equity in earnings of Avon Energy
before extraordinary item $ 63
Cinergy's equity in extraordinary item $ (109)
Cinergy's equity in earnings of: Avon Energy $ (46)
Other companies (3)
Total equity in the earnings of unconsolidated
subsidiaries $ (49)
During 1997, Cinergy received $25 million of dividends from Avon Energy.
The pro forma financial information for 1996 presented below assumes 100% of
Midlands was acquired on January 1, 1996. The pro forma adjustments include
recognition of equity in the estimated earnings of Avon Energy, an adjustment
for interest expense on debt associated with Cinergy's investment in Avon
Energy, and related income taxes. The estimated earnings of Avon Energy include
the historical earnings of Midlands prior to its acquisition by Avon Energy,
adjusted for the estimated effect of purchase accounting (including the
amortization of goodwill) and conversion to United States (US) GAAP, interest
expense on debt issued by Avon Energy 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/pound sterling.
Year Ended December 31, 1996
Net Earnings Per Share(1)
Income Basic Diluted
(in millions, except
per share amounts)
Cinergy $335 $2.00(2) $1.99(2)
Pro forma adjustments:
Equity in earnings of Avon Energy 20
Interest expense (14)
Income taxes 6
Pro forma results $347 $2.08 $2.06
(1) See Note 16.
(2) Earnings per share after a charge of $.12 per share for the cost of
reacquiring preferred stock of CG&E through a tender offer.
Cinergy, CG&E, PSI, and ULH&P
(f) Regulation Cinergy, its utility subsidiaries (CG&E, together with its
subsidiaries, and PSI), and certain of its non-utility subsidiaries are subject
to regulation by the Securities and Exchange Commission (SEC) under the PUHCA.
Cinergy's utility subsidiaries are also subject to regulation by the Federal
Energy Regulatory Commission (FERC) and the state utility commissions of
Indiana, Kentucky, and Ohio.
The accounting policies of Cinergy's utility subsidiaries conform to the
accounting requirements and ratemaking practices of these regulatory authorities
and to GAAP, including the provisions of Statement of Financial Accounting
Standards No. 71, 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. Certain criteria must be met for regulatory
assets to be recorded and for the continued application of the provisions of
Statement 71, including regulated rates designed to recover the specific
utility's costs. Failure to satisfy the criteria in Statement 71 would eliminate
the basis for recognition of regulatory assets.
Based on Cinergy's current regulatory orders and the regulatory environment in
which it currently operates, the recognition of its regulatory assets as of
December 31, 1997, is fully supported. The regulatory assets of PSI and CG&E and
its utility subsidiaries as of December 31 are as follows:
1997 1996
PSI CG&E 1/Cinergy PSI CG&E 1/Cinergy
(in millions)
Amounts due from customers -
income taxes (Note 1(g)) $ 24 $350 $ 374 $ 33 $344 $ 377
Post-in-service carrying costs and
deferred operating expenses
(Note 1(h)) 44 135 179 45 141 186
Coal contract buyout costs (Note 1(i)) 122 - 122 138 - 138
Deferred demand-side management (DSM)
costs (Note 1(j)) 71 39 110 102 33 135
Phase-in deferred return and
depreciation (Note 1(k)) - 90 90 - 95 95
Deferred merger costs (Note 1(l)) 74 16 90 76 18 94
Unamortized costs of reacquiring
debt (Note 1(m)) 30 36 66 32 39 71
Coal gasification services expenses
(Note 1(n)) 22 - 22 25 - 25
Other 22 2 24 28 20 48
Total $409 $668 $1 077 $479 $690 $1 169
1/ Includes $11 million related to ULH&P at both December 31, 1997, and 1996.
PSI has previously received regulatory orders authorizing the recovery of $399
million of its total regulatory assets at December 31, 1997. CG&E has previously
received regulatory orders authorizing the recovery of $595 million (including
$4 million for ULH&P) of its total regulatory assets at December 31, 1997. Both
PSI and CG&E (including ULH&P) will request recovery of additional amounts in
future proceedings, which could include proceedings, if any, related to
transition to customer choice in each applicable jurisdiction.
Cinergy, CG&E, PSI, and ULH&P
(g) Federal and State Income Taxes Under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement
109), deferred tax assets and liabilities are recognized for the income tax
consequences of transactions treated differently for financial reporting and tax
return purposes, measured on the basis of statutory tax rates. Investment tax
credits utilized to reduce Federal income taxes 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. In accordance with the provisions of
Statement 71, Cinergy, PSI, and CG&E have recorded a regulatory asset, "Amounts
due from customers - income taxes," representing the probable recovery from
customers of additional income taxes established under Statement 109. ULH&P has
recorded a regulatory liability "Income taxes refundable through rates"
representing the probable repayment to customers of income taxes established
under Statement 109 to the extent deferred income taxes recovered in rates
exceed amounts payable in future periods.
Cinergy, CG&E, and PSI
(h) Post-in-service Carrying Costs and Deferred Operating Expenses CG&E received
various orders from the Public Utilities Commission of Ohio (PUCO) which
permitted the deferral of carrying costs and non-fuel operating expenses
(including depreciation) for the Wm. H. Zimmer Generating Station (Zimmer) and
Woodsdale Generating Station (Woodsdale) units. Effective with the dates of the
PUCO's orders reflecting the units in customer rates, the deferrals of
post-in-service carrying costs are being recovered over the lives of the
applicable units and the deferred non-fuel operating expenses are being
recovered over a 10-year period.
PSI received authority from the Indiana Utility Regulatory Commission (IURC) for
the accrual of the debt component of carrying costs (to the extent not recovered
currently in retail rates) and the deferral of depreciation expense on certain
major projects which are primarily environmental in nature. These projects
include a 262-megawatt clean coal power generating facility located at the
Wabash River Generating Station (Clean Coal Project) and a scrubber at Gibson
Generating Station (Gibson). In a February 1995 order (February 1995 Order) and
a September 1996 order (September 1996 Order), the IURC authorized the recovery
of deferred costs incurred prior to August 31, 1995. These deferred costs are to
be recovered over the remaining lives of the related assets. Deferrals incurred
after this date will be requested for recovery in future proceedings. These
proceedings could include proceedings, if any, related to transition to customer
choice.
Cinergy and PSI
(i) Coal Contract Buyout Costs In August 1996, PSI entered into a coal supply
agreement with Eagle Coal Company (Eagle) for the supply of approximately three
million tons of coal per year. The agreement, which terminates December 31,
2000, provides for a buyout fee of $179 million (including interest) to be
included in the price of coal to PSI over the term of the contract. This fee
represents the costs to Eagle of the buyout of the coal supply agreement between
PSI and Exxon Coal and Minerals Company. The retail jurisdictional portion of
the buyout charge, excluding the portion applicable to joint owners, is being
recovered through the quarterly fuel adjustment clause, with carrying costs on
unrecovered amounts, through December 2002. PSI has also filed a petition at the
FERC for recovery of the wholesale jurisdictional portion of the buyout costs
through the wholesale fuel adjustment clause. Generally, the FERC will allow
recovery if the utility can demonstrate there will be net benefits to customers
during the buyout cost recovery period. The FERC is expected to issue an order
on PSI's petition early in 1998.
Cinergy, CG&E, PSI, and ULH&P
(j) DSM A settlement agreement between PSI and certain intervenors, in a
proceeding established to review PSI's current and proposed DSM programs, was
approved by the IURC in December 1996. Beginning January 1, 1997, and continuing
through December 31, 2000, the settlement agreement allows PSI to recover $35
million per year through a non-bypassable charge in PSI's retail rates. The $35
million is designed to recover all previously incurred, but as yet unrecovered,
DSM costs and all costs related to satisfying remaining commitments associated
with a previous DSM settlement agreement. The $35 million also includes recovery
of carrying costs. Further, the agreement authorizes PSI to spend up to $8
million annually on ongoing DSM programs through the year 1999 and to collect
such amounts currently in retail rates.
Additionally, in December 1996, the PUCO issued an order applicable to CG&E's
DSM programs. The order requires CG&E to spend up to one-half of the annual $5
million currently included in retail rates on PUCO-sanctioned low-income
residential programs. The remaining portion of the $5 million is to be applied
to the recovery of DSM cost deferrals. CG&E's participation in the low-income
programs will be a factor considered by the PUCO in setting future rates of
return and approving competitive transition plans.
The Kentucky Public Service Commission has authorized concurrent recovery of
costs related to various DSM programs of ULH&P.
Cinergy and CG&E
(k) Phase-in Deferred Return and Depreciation In May 1992, the PUCO issued an
order (May 1992 Order) establishing a rate phase-in plan for Zimmer. In the
first three years of the rate phase-in plan, rates charged to customers did not
fully recover depreciation expense and return on investment. In accordance with
the provisions of the May 1992 Order, this deficiency has been recognized as a
regulatory asset and is being recovered over a seven-year period which began in
May 1995.
Cinergy, CG&E, PSI, and ULH&P
(l) Deferred Merger Costs CG&E and its utility subsidiaries have deferred a
portion of merger transaction costs and costs to achieve merger savings
(collectively, Merger Costs) incurred through December 31, 1996, for future
recovery in customer rates.
In accordance with various IURC orders, PSI has deferred Merger Costs incurred
through October 31, 1996, and is recovering $44 million of these deferred costs
incurred through August 31, 1995, over a ten-year period.
CG&E and PSI completed voluntary workforce reduction and severance programs in
1996. The pre-tax costs of these programs and the related accounting were as
follows:
1996 Programs
(in millions)
CG&E 1/ PSI
Costs expensed $30 $ 5
Costs deferred 9 33
$39 $38
1/ Includes $2 million related to ULH&P.
The above amounts reflect approximately $61 million ($31 million for CG&E and
$30 million for PSI) of costs associated with additional pension benefits
further discussed in Note 9.
Cinergy, CG&E, PSI, and ULH&P
(m) Debt Discount, Premium, and Issuance Expenses and Costs of Reacquiring Debt
Debt discount, premium, and issuance expenses on outstanding long-term debt of
Cinergy's utility subsidiaries are amortized over the lives of the respective
issues.
In accordance with established ratemaking practices, Cinergy's utility
subsidiaries have deferred costs (principally call premiums) from the
reacquisition of long-term debt and are amortizing such amounts over periods
ranging from 1 to 24 years (4 to 24 years for CG&E and its subsidiaries, 1 to 24
years for PSI, and 11 to 23 for ULH&P).
Cinergy and PSI
(n) Coal Gasification Services Expenses In November 1995, upon commercial
operation of the Clean Coal Project, PSI and Destec Energy, Inc. (Destec) began
a 25-year contractual agreement for the provision of coal gasification services.
The agreement requires PSI to pay Destec a base monthly fee including certain
monthly operating expenses. Over the next five years (1998 through 2002), the
base monthly fees and expenses are expected to total $201 million. PSI received
authorization in the September 1996 Order for the inclusion of the costs of the
Clean Coal Project in retail rates. PSI also received authorization to defer,
for subsequent recovery in retail rates, the base monthly fees and expenses
incurred prior to the effective date of the September 1996 Order.
Cinergy, CG&E, PSI, and ULH&P
(o) Utility Plant Utility plant is stated at the original cost of construction,
which includes an allowance for funds used during construction (AFUDC) and a
proportionate share of overhead costs. Construction overhead costs include
salaries, payroll taxes, fringe benefits, and other expenses.
Substantially all utility plant is subject to the lien of each applicable
company's first mortgage bond indenture.
Cinergy, CG&E, PSI, and ULH&P
(p) AFUDC Cinergy's utility subsidiaries capitalize AFUDC, a non-cash income
item, which is defined in the regulatory system of accounts prescribed by the
FERC as including "the net cost for the period of construction of borrowed funds
used for construction purposes and a reasonable rate on other funds when so
used." AFUDC accrual rates were as follows and are compounded semi-annually:
1997 1996 1995
Cinergy average 6.3% 7.1% 7.9%
CG&E and its utility
subsidiaries average 6.4 8.7 8.8
ULH&P average 6.9 8.8 7.0
PSI average 5.9 5.4 7.0
Cinergy, CG&E, PSI, and ULH&P
(q) Depreciation and Maintenance Provisions for depreciation are determined by
using the straight-line method applied to the cost of depreciable plant in
service. The rates are based on periodic studies of the estimated service lives
and net cost of removal of the properties. The average depreciation rates for
utility plant are:
1997 1996 1995
PSI 3.0% 3.0% 3.1%
CG&E and its utility subsidiaries
Electric 2.9 2.9 2.9
Gas 2.9 2.8 2.8
Common 3.0 3.0 3.4
ULH&P
Electric 3.3 3.3 3.3
Gas 3.1 3.1 3.1
Common 5.0 5.1 5.1
For Cinergy's utility subsidiaries, maintenance and repairs of property units
and replacements of minor items of property are charged to maintenance expense.
The costs of replacements of property units are capitalized. The original cost
of the property retired and the related costs of removal, less salvage
recovered, are charged to accumulated depreciation.
Cinergy, CG&E, PSI, and ULH&P
(r) Operating Revenues and Fuel Costs Cinergy's utility subsidiaries recognize
revenues for electric and gas service rendered during the month, including
revenues associated with sales unbilled at the end of each month. The costs of
electricity and gas purchased and the cost of fuel used in electric production
are expensed as recovered through revenues. Any portion of these costs which are
recoverable or refundable in future periods is deferred in the accompanying
Balance Sheets. PSI's recovery of fuel costs is subject to a determination that
such recovery will not result in PSI earning a return in excess of that allowed
in the September 1996 Order. Prior to January 1, 1998, this earnings test was
calculated in accordance with the settlement agreement approved in the February
1995 Order and the Indiana statute in effect at the time of the settlement
agreement. Effective January 1, 1998, PSI will follow the provisions of the
current Indiana statute, which are generally less stringent with regard to the
earnings test.
Cinergy, CG&E, and ULH&P
(s) Order 636 In 1992, the FERC issued order 636 (Order 636). CG&E and certain
of its utility subsidiaries are subject to Order 636 which restructured
operations between interstate gas pipelines and their customers for gas sales
and transportation services. Order 636 also allowed pipelines to recover from
customers transition costs incurred in complying with the order. In July 1994,
the PUCO issued an order approving a stipulation between CG&E and its
residential and industrial customer groups providing for recovery of these
pipeline transition costs. CG&E is presently recovering its Order 636 transition
costs pursuant to a PUCO-approved tariff. CG&E's utility subsidiaries, including
ULH&P, recover such costs through their gas cost recovery mechanisms. These
costs are deferred as incurred by CG&E and its applicable utility subsidiaries
and amortized as recovered from customers.
Cinergy, CG&E, PSI, and ULH&P
(t) Statements of Cash Flows All temporary cash investments with maturities of
three months or less, when acquired, are reported as cash equivalents. See Notes
3(b) and 8(a)(i) for information concerning non-cash investing transactions
during 1996.
Cinergy
(u) Translation of Foreign Currency All assets and liabilities reported in the
balance sheets of foreign subsidiaries whose functional currency is other than
the US dollar are translated at year-end exchange rates; income and expense
items are translated at the average exchange rate prevailing during the month
the respective transactions occur. Translation gains and losses are accumulated
as a separate component of common stock equity.
2. Common Stock
(a) Changes in Common Stock Outstanding
Cinergy
The following table reflects the shares of Cinergy common stock reserved for
issuance at December 31, 1997, and shares issued in 1997, 1996, and 1995 for the
Company's stock-based plans.
Shares
Reserved at Shares Issued
Dec. 31, 1997 1997 1996 1995
401(k) Savings Plans 6 469 373 - - 1 222 379
Dividend Reinvestment and
Stock Purchase Plan 1 798 486 - - 935 711
Directors' Deferred
Compensation Plan 200 000 - - -
Performance Shares Plan (PSP) 771 301 - 492 28 207
Employee Stock Purchase
and Savings Plan 1 932 384 - - 1 010
Stock Option Plan 4 558 777 22 219 15 007 403 997
1996 Long-term Incentive
Compensation Plan (LTIP) 6 956 386 43 614 - -
Cinergy retired 304, 6,511, and 119,211 shares of common stock in 1997, 1996,
and 1995, respectively, primarily representing shares tendered as payment for
the exercise of previously granted stock options. In 1995, Cinergy issued 10
shares of common stock, representing the remainder of a non-officer employee
award program granted in 1994.
ULH&P
All of ULH&P's common stock is held by CG&E.
Cinergy, CG&E, and PSI
(b) Dividend Restrictions Cinergy owns all of the common stock of CG&E and PSI.
The ability of Cinergy to pay dividends to holders of its common stock is
principally dependent on the ability of CG&E and PSI to pay common dividends to
Cinergy. CG&E and PSI cannot purchase or otherwise acquire for value or pay
dividends on their common stock if dividends are in arrears on their preferred
stock. The amount of common stock dividends that each company can pay also may
be limited by certain capitalization and earnings requirements. Currently, these
requirements do not impact the ability of either company to pay dividends on
common stock.
Cinergy
(c) Stock-based Compensation Plans Cinergy has four stock-based compensation
plans: the LTIP, the Stock Option Plan, the PSP, and the Employee Stock Purchase
and Savings Plan. Cinergy ceased accrual of incentive compensation under the PSP
as of December 31, 1996, and on January 1, 1997, implemented the LTIP.
Cinergy accounts for 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 1997, 1996,
and 1995, compensation cost related to Cinergy's stock-based compensation plans,
before income taxes, recognized in the Consolidated Statements of Income was $6
million, $2 million, and $1 million, respectively.
Net income and earnings per share for 1997, 1996, and 1995, assuming
compensation cost for these plans had been determined at fair value, consistent
with the provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (Statement 123), would have
been as follows:
1997 1996 1995
(in millions, except per share amounts)
Net income - as reported $253 $335 $347
- pro forma $251 $334 $346
Earnings per share - as reported $1.61 $2.00 $2.22
- pro forma $1.59 $1.99 $2.21
Diluted earnings per share - as reported $1.59 $1.99 $2.20
- pro forma $1.58 $1.99 $2.20
In accordance with 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)LTIP In 1996, Cinergy adopted the LTIP. Under this plan, certain key
employees may be granted stock options and restricted shares of Cinergy common
stock. Stock options are granted at the fair market value of the shares on the
date of grant. These options vest in three years and expire in 10 years from the
date of grant. None of the stock options were exercisable as of December 31,
1997. Restricted shares are granted at the fair market value of the shares on
the date of grant, discounted to reflect the inability to sell the shares during
the three-year restriction period. In addition to the stock options and
restricted shares, participants may earn additional shares if Cinergy's Total
Shareholder Return (TSR) exceeds that of the average annual median TSR of a
selected peer group. Conversely, if Cinergy's TSR falls below that of the peer
group, participants would lose some or all of the restricted shares. Dividends
on any restricted stock awards and additional performance shares will be paid in
shares of common stock during the payout period in the years 2000 to 2002. No
stock-based awards were made under the LTIP prior to 1997. In 1997, 425,938
performance-based restricted shares at a weighted average price of $29.95 and
369,600 stock options at a weighted average exercise price of $33.60 were
granted to certain key employees. The number of shares of common stock to be
awarded under the LTIP is limited in the aggregate to 7,000,000 shares.
LTIP stock option activity for 1997 is summarized as follows:
1997
Weighted
Average
Exercise
Number Price
Outstanding, beginning of year - -
Granted 369 600 $33.60
Outstanding, end of year 369 600 $33.60
Exercisable, end of year - -
Weighted average fair value of
options granted during the year $3.71
The fair values of options granted were estimated 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:
1997
Risk-free interest rate 6.2%
Expected dividend yield 5.4%
Expected lives 6.5 yrs.
Expected common stock variance 1.7%
(ii) Stock Option Plan The Cinergy Stock Option 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. 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 1997, 1996, and 1995 is summarized as follows (no
SARs have been granted under this plan):
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
Outstanding, beginning of year 3 359 508 $23.61 3 652 956 $22.47 2 409 453 $19.74
Granted - - 220 000 29.75 1 672 500 24.91
Exercised (380 162) 21.71 (513 448) 18.16 (403 997) 16.16
Forfeited - - - - (25 000) 24.31
Outstanding, end of year 2 979 346 $23.85 3 359 508 $23.61 3 652 956 $22.47
Exercisable, end of year 1 259 859 $22.62 989 021 $21.12 895 456 $17.47
Weighted average fair value of
options granted during the year $ - $3.07 $2.41
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 in 1996 and 1995 (no
options were granted during 1997), were as follows:
1996 1995
Risk-free interest rate 6.3% 7.3%
Expected dividend yield 5.8% 6.9%
Expected lives 6.5 yrs. 6.5 yrs.
Expected common stock variance 1.8% 1.8%
Price ranges, along with certain other information, for options outstanding
under the Stock Option Plan at December 31, 1997, are as follows:
Outstanding Exercisable
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Contractual Exercise
Price Range Number Price Life Number Price
$13.14 - $17.35 234 179 $15.13 2.0 yrs. 234 179 $15.13
$22.88 - $25.19 2 311 744 $23.72 7.0 yrs. 897 257 $23.63
$28.81 - $31.56 433 423 $29.29 8.1 yrs. 128 423 $29.13
(iii) PSP Cinergy's PSP is a long-term incentive plan developed to reward
officers and other key employees for achieving corporate and individual goals.
Under the PSP, participants are granted contingent shares of common stock. A
percentage of these contingent shares is earned with respect to each participant
based on the level of goal attainment at the completion of a performance cycle.
Performance cycles consist of overlapping four-year periods, beginning every two
years. Awards earned under the PSP are paid in two installments: one-half of the
award is paid in the year immediately following the end of the performance cycle
and one-half of the award is paid in the subsequent year. The most recently
commenced four-year performance cycle under the PSP began January 1, 1996, and
was scheduled to end December 31, 1999. As previously discussed, Cinergy
implemented the LTIP effective January 1, 1997, and ceased accrual of incentive
compensation under the PSP as of December 31, 1996. The total number of shares
of common stock available under this plan may not exceed 800,000 shares. Final
payouts for performance cycle four that began January 1, 1992, were made in
1997. Final payouts for cycles five and six, which began in January 1994 and
January 1996, respectively, will be made in 1999.
The following table provides certain information regarding contingent shares
granted under the PSP for the performance cycle which began January 1, 1996:
1996
Number of contingent shares granted 166 280
Fair value at date of grant (dollars in thousands) $ 3 508
Weighted average per share amounts $24.47
The fair values of contingent shares and the weighted average per share amounts
are measured at the market price of a share of common stock as if it were vested
and issued on the date of grant, adjusted for expected forfeitures and the
estimated present value of dividends foregone during the related performance
cycle.
(iv) Employee Stock Purchase and Savings Plan Cinergy's 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. A new offering period
began January 1, 1997, and will end February 28, 1999. The purchase price under
this offering is $31.825. The most recently completed offering period ended
December 31, 1996. The purchase price under this offering was $21.7312. 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 1997, 1996, and 1995 is
summarized as follows:
1997 1996 1995
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
Granted 338 947 31.83 - - 328 362 21.73
Exercised (95) 31.83 (414 284) 21.73 (1 010) 21.73
Forfeited (12 485) 31.83 (76 503) 21.73 (54 169) 21.73
Outstanding, end of year 326 367 $31.83 - $ - 490 787 $21.73
Weighted average fair value of
options granted during the year $3.08 $ - $2.42
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:
1997 1995
Risk-free interest rate 5.9% 7.7%
Expected dividend yield 5.4% 7.3%
Expected lives 2.0 yrs. 2.0 yrs.
Expected common stock variance 1.6% 1.7%
3. Preferred Stock of Subsidiaries
Cinergy, CG&E, and PSI
(a) Schedule of Cumulative Preferred Stock
December 31
CG&E 1997 1996
Authorized 6,000,000 shares (dollars in thousands)
Not subject to mandatory redemption
Par value $100 per share - outstanding
4% Series 169,834 shares in 1997 and 169,835 shares in 1996 $ 16 983 $ 16 984
4 3/4% Series 38,096 shares in 1997 and 41,621 shares in 1996 3 810 4 162
Total 20 793 21 146
PSI
Not subject to mandatory redemption
Par value $25 per share - authorized 5,000,000 shares - outstanding
4.32% Series 169,161 shares in 1997 and 169,162 in 1996 4 229 4 229
4.16% Series 148,763 shares in 1997 and 1996 3 719 3 719
7.44% Series 3,408,712 shares in 1997 and 1996 85 218 85 218
Par value $100 per share - authorized 5,000,000 shares - outstanding
3 1/2% Series 40,302 shares in 1997 and 40,567 shares in 1996 4 030 4 056
6 7/8% Series 600,000 shares in 1997 and 1996 60 000 60 000
7.15% Series 158,640 shares in 1996 - 15 864
Total 157 196 173 086
Total - Cinergy
Total not subject to mandatory redemption $177 989 $194 232
Cinergy, CG&E, and PSI
(b) Changes in Cumulative Preferred Stock Outstanding
Changes in cumulative preferred stock outstanding during 1997, 1996, and 1995,
were as follows:
Shares Par
Retired Value
(dollars in
thousands)
1997
Not subject to mandatory redemption
Par value $100 per share
CG&E
4% Series 1 $ 1
4 3/4% Series 3 525 352
PSI
3 1/2% Series 265 26
7.15% Series 158 640 15 864
Par value $25 per share
PSI
4.32% Series 1 -
1996
Not subject to mandatory redemption
Par value $100 per share
CG&E
4% Series 100 165 $10 016
4 3/4% Series 88 379 8 838
PSI
3 1/2% Series 276 29
Par value $25 per share
PSI
7.44% Series 591 288 14 782
Subject to mandatory redemption
Par value $100 per share
CG&E
7 7/8% Series 800 000 80 000
7 3/8% Series 800 000 80 000
1995
Not subject to mandatory redemption
Par value $100 per share
CG&E
7.44% Series 400 000 $40 000
PSI
3 1/2% Series 329 32
Subject to mandatory redemption
Par value $100 per share
CG&E
9.15% Series 500 000 50 000
Cinergy and CG&E
During the third quarter of 1996, Cinergy commenced an offer to purchase any and
all outstanding shares of preferred stock of CG&E. Cinergy purchased 1,788,544
shares of preferred stock and made a capital contribution to CG&E of all the
shares it acquired and CG&E canceled the shares. 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 reflected in current
liabilities)
December 31
1997 1996
CG&E and Subsidiaries (dollars in thousands)
CG&E
First Mortgage Bonds
5.80% Series due February 15, 1999 $ 110 000 $ 110 000
7 3/8% Series due May 1, 1999 50 000 50 000
7 3/8% Series due November 1, 2001 60 000 60 000
7 1/4% Series due September 1, 2002 100 000 100 000
8 1/8% Series due August 1, 2003 - 60 000
6.45% Series due February 15, 2004 110 000 110 000
8.95% Series due December 15, 2021 - 100 000
8 1/2% Series due September 1, 2022 100 000 100 000
7.20% Series due October 1, 2023 300 000 300 000
5.45% Series due 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 924 700 1 084 700
Pollution Control Notes
6.50% due November 15, 2022 12 721 12 721
Other Long-term Debt
6.90% Debentures due June 1, 2025
(Redeemable at the option of the holders on June 1, 2005) 150 000 150 000
8.28% Junior subordinated debentures due July 1, 2025 100 000 100 000
Variable rate Liquid Asset Notes with Coupon Exchange
(LANCEs) due October 1, 2007
(Redeemable at the option of CG&E)
(Variable interest rate sets at 6.50% commencing
October 1, 1999)
(Holders of not less than 66 2/3% in an
aggregate principal amount of the LANCEs have the one-time
right to convert from the 6.50% fixed rate to a LIBOR-
based floating rate at any interest rate payment date
between October 1, 1999 and October 1, 2002) 100 000 -
Total other long-term debt 350 000 250 000
Unamortized Premium and Discount - Net (8 860) (12 130)
Total - CG&E 1 278 561 1 335 291
ULH&P
First Mortgage Bonds
6 1/2% Series due August 1, 1999 20 000 20 000
8% Series due October 1, 2003 10 000 10 000
Total first mortgage bonds 30 000 30 000
Other Long-term Debt
7.65% Debentures due July 15, 2025 15 000 15 000
Unamortized Premium and Discount - Net (329) (383)
Total - ULH&P 44 671 44 617
Lawrenceburg Gas Company (Lawrenceburg)
First Mortgage Bonds
9 3/4% Series due October 1, 2001 1 200 1 200
Total - CG&E and subsidiaries $1 324 432 $1 381 108
PSI
First Mortgage Bonds
Series S, 7%, due January 1, 2002 $ 26 429 $ 26 429
Series Y, 7 5/8%, due January 1, 2007 24 140 24 140
Series NN, 7.60%, due March 15, 2012 (Pollution Control) - 35 000
Series QQ, 8 1/4%, due June 15, 2013 (Pollution Control) 23 000 23 000
Series TT, 7 3/8%, due March 15, 2012 (Pollution Control) 10 000 10 000
Series UU, 7 1/2%, due March 15, 2015 (Pollution Control) 14 250 14 250
Series YY, 5.60%, due February 15, 2023 (Pollution Control) 29 945 29 945
Series ZZ, 5 3/4%, due February 15, 2028 (Pollution Control) 50 000 50 000
Series AAA, 7 1/8%, due February 1, 2024 50 000 50 000
Total first mortgage bonds 227 764 262 764
Secured Medium-term Notes
Series A, 7.15% to 8.88%, due January 6, 1999 to
June 1, 2022 290 000 290 000
Series B, 5.22% to 8.26%, due September 17, 1998
to August 22, 2022 195 000 230 000
(Series A and B, 7.66% weighted average interest rate
and 14 year weighted average remaining life)
Total secured medium-term notes 485 000 520 000
Other Long-term Debt
Series 1994A Promissory Note, non-interest bearing,
due January 3, 2001 19 825 19 825
6.25%, due December 15, 2005
(Notes are callable and/or putable on December 15, 1998) - 50 000
6.35% Debentures due November 15, 2006
(Redeemable in whole or in part at the option of the
holders on November 15, 2000) 100 000 100 000
Total other long-term debt 119 825 169 825
Unamortized Premium and Discount - Net (6 119) (7 319)
Total - PSI $ 826 470 $ 945 270
Total - Cinergy
First Mortgage Bonds $1 183 664 $1 378 664
Secured Medium-term Notes 485 000 520 000
Pollution Control Notes 12 721 12 721
Other Long-term Debt 484 825 434 825
Unamortized Premium and Discount - Net (15 308) (19 832)
Total long-term debt $2 150 902 $2 326 378
(b) Mandatory Redemption and Other Requirements
Long-term debt maturities for the next five years (excluding $50 million of
6.25% notes, due December 15, 2005, which are callable and/or putable on
December 15, 1998) are as follows:
Cinergy and CG&E and
Subsidiaries Subsidiaries PSI ULH&P
(in millions)
1998 $ 35 $ - $ 35 $ -
1999 186 180 6 20
2000 31 - 31 -
2001 100 61 39 -
2002 149 100 49 -
$501 $341 $160 $20
On February 27, 1998, CG&E announced its intention to redeem on March 29, 1998,
$41 million principal amount of its 7 3/8% Series First Mortgage Bonds (due
November 1, 2001) at a redemption price of 100.30% and to redeem on March 30,
1998, the entire $100 million principal amount of its 8 1/2% Series First
Mortgage Bonds (due September 1, 2022) at a redemption price of 100%, both
through the maintenance and replacement fund (M&R Fund) provision of CG&E's
first mortgage bond indenture. Additionally, on the same date, CG&E announced
its intention to redeem on March 30, 1998, the remaining $19 million principal
amount of its 7 3/8% Series First Mortgage Bonds (due November 1, 2001) at a
redemption price of 100.87%. M&R 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 and Other Short-term Obligations
Cinergy, CG&E, PSI, and ULH&P
Obligations representing notes payable and other short-term obligations
(excluding notes payable to affiliated companies) and weighted average interest
rates were as follows:
Cinergy
December 31, 1997 December 31, 1996
Weighted Weighted
Established Average Established Average
Lines Outstanding Rate Lines Outstanding Rate
(in millions) (in millions)
Cinergy
Committed lines
Acquisition line $ 350 $ 350 6.25% $ 500 $477 5.96%
Revolving line 400 89 6.27 100 32 5.95
Commercial paper - 161 6.19 - - -
Utility subsidiaries
Committed lines 270 30 6.09 280 99 5.92
Uncommitted lines 360 206 6.19 285 78 6.03
Pollution control notes 244 244 4.08 209 209 3.96
Cinergy UK, Inc. 115 34 7.20 40 27 6.91
Total $1 739 $1 114 5.78% $1 414 $922 5.53%
CG&E
December 31, 1997 December 31, 1996
Weighted Weighted
Established Average Established Average
Lines Outstanding Rate Lines Outstanding Rate
(in millions) (in millions)
Committed lines $ 85 $ 15 6.13% $ 80 $ 15 5.85%
Uncommitted lines 190 90 6.19 140 15 6.11
Pollution control notes 184 184 4.08 184 184 3.96
Total $459 $289 4.85% $404 $214 4.25%
PSI
Committed lines $185 $ 15 6.06% $200 $ 84 5.94%
Uncommitted lines 170 116 6.19 145 63 6.01
Pollution control notes 60 60 4.08 25 25 3.99
Total $415 $191 5.52% $370 $172 5.69%
Cinergy, CG&E, and PSI
Cinergy's committed lines are comprised of an acquisition line and a revolving
line and are maintained by commitment fees which were immaterial during the 1995
through 1997 period. The established revolving line (as shown in the above
table) also provides credit support for the newly instituted commercial paper
program. Such program is limited to a maximum outstanding principal amount of
$200 million. The majority of the proceeds from the commercial paper sales were
used to reduce the acquisition line to the year-end level of $350 million. CG&E
and PSI also have the capacity to issue commercial paper that must be supported
by committed lines (unsecured lines of credit) of the respective company.
Neither CG&E nor PSI issued commercial paper in 1997 or 1996.
Cinergy, CG&E, PSI, and ULH&P
Cinergy's utility subsidiaries had regulatory authority to borrow up to $853
million ($453 million for CG&E and its subsidiaries, including $50 million for
ULH&P, and $400 million for PSI) as of December 31, 1997. In connection with
this authority, committed lines, as well as, uncommitted lines (short-term
borrowings with various banks on an "as offered" basis) have been arranged. The
established committed lines (as shown in the above table) include $100 million
designated as backup for certain of the uncommitted lines at December 31, 1997.
Further, the committed lines are maintained by commitment fees, which were
immaterial during the 1995 through 1997 period.
Cinergy
In addition, Cinergy UK, Inc. (Cinergy UK), a subsidiary of Investments, which
holds Cinergy's 50% investment in Avon Energy, entered into a $40 million
non-recourse credit agreement in 1996, which was terminated in October of 1997.
This agreement was replaced by a one-year $115 million non-recourse revolving
credit agreement. The commitment fees paid for these lines were immaterial for
the 1996 through 1997 period.
Cinergy, CG&E, PSI, and ULH&P
Amounts outstanding of the committed lines for Cinergy, the utility
subsidiaries, and Cinergy UK would become immediately due upon an event of
default which includes non-payment, default under other agreements governing
company indebtedness, bankruptcy, or insolvency. Certain of the uncommitted
lines have similar default provisions.
Cinergy, CG&E, and PSI
Both CG&E and PSI have issued variable rate pollution control notes. Holders of
these pollution control notes have the right to put their notes on any business
day. Accordingly, these issuances are reflected in the Consolidated Balance
Sheets as "Notes payable and other short-term obligations."
Cinergy, CG&E, PSI, and ULH&P
To better manage cash and working capital requirements, Cinergy's utility
subsidiaries, including CG&E, PSI, and ULH&P, participate in a money pooling
arrangement. Under this arrangement, Cinergy system companies with surplus
short-term funds, whether from internal or external sources, provide short-term
loans to other system companies at rates that reflect (1) the actual costs of
the external borrowing and/or (2) the costs of the internal funds which are set
at the 30-day Federal Reserve "AA" industrial commercial paper rate. The SEC's
approval of the money pool, pursuant to the PUHCA, extends through December 31,
2002. For amounts outstanding under this money pool arrangement at December 31,
1997 and December 31, 1996, see "Notes payable to affiliated companies" on the
Consolidated Balance Sheets for CG&E and PSI and the Balance Sheets for ULH&P.
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 $252 million
($167 million by CG&E and its subsidiaries, including $29 million by ULH&P, and
$85 million by PSI), net of reserves, has been sold as of December 31, 1997. The
Consolidated Balance Sheets of Cinergy, CG&E and PSI and the Balance Sheets of
ULH&P are net of the amounts sold at December 31, 1997 and 1996.
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 are follows:
1997 1996 1995
(in millions)
Cinergy and subsidiaries $36 $31 $36
CG&E and subsidiaries 18 18 22
PSI 18 13 14
ULH&P 1 2 5
Future minimum lease payments required under operating leases with remaining,
non-cancelable lease terms in excess of one year as of December 31, 1997, are as
follows:
Cinergy and CG&E and
Subsidiaries Subsidiaries PSI ULH&P*
(in millions, ULH&P in thousands)
1998 $ 36 $ 9 $11 $124
1999 29 9 7 110
2000 22 7 5 59
2001 13 5 3 -
2002 7 4 2 -
After 2002 26 22 3 -
$133 $56 $31 $293
* Excludes amounts applicable to CG&E's non-cancelable leases allocated to
ULH&P.
Cinergy and CG&E
(b) Capital Lease
In November 1996, CG&E entered into a sale-leaseback agreement for certain
equipment at Woodsdale. 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.
Cinergy
(i) Foreign Exchange Hedging Activity Cinergy has hedged its pound sterling
denominated investment in Midlands through a currency swap. The currency swap
requires Cinergy to exchange a series of pound sterling denominated cash flows
for a series of dollar denominated cash flows based on Cinergy's initial
exchange of $500 million for 330 million pounds sterling. Translation gains and
losses related to the principal exchange on the currency swap have been recorded
in the cumulative foreign currency translation adjustment which is reported as a
separate component of common stock equity in the Consolidated Financial
Statements of Cinergy. At December 31, 1997, translation losses of approximately
$43 million related to the principal exchange of the currency swap have been
reflected in "Current Liabilities - Other" in the Consolidated Balance Sheets of
Cinergy.
Cinergy, CG&E, and PSI
(ii) Interest Rate Risk Management Cinergy and its subsidiaries enter into
interest rate swaps to lower funding costs and manage exposures 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, 1997, Cinergy has effectively fixed
the interest rate applicable to the pound sterling denominated leg of its
currency swap through two interest rate swap agreements. These contracts require
Cinergy to pay a fixed rate and receive a floating rate. Both of the interest
rate swaps are forward starting swaps that effectively fix the interest rate
applicable to the ensuing four year period of the currency swap. These contracts
have a total notional principal amount of 330 million pounds sterling.
Translation gains and losses related to Cinergy's interest obligation, which is
payable in pounds sterling, are recognized as a component of interest expense in
the Consolidated Statements of Income. At December 31, 1997, PSI had two
interest rate swap agreements outstanding with notional amounts of $100 million
each. One contract, with three years remaining from a four-year term, requires
PSI to pay a floating rate and receive a fixed rate. The second contract, with a
six-month term, requires PSI to pay a fixed rate and receive a floating rate. In
all cases, the floating rate is based on the applicable LIBOR and the interest
differential paid or received is recognized in the Consolidated Statements of
Income as a component of interest expense. The fair values of the interest rate
swap agreements at December 31, 1997, 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
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Instruments (in millions; ULH&P in thousands)
Cinergy and Subsidiaries
First mortgage bonds and
other long-term debt (includes
amounts reflected as long-term
debt due within one year) $ 2 236 $ 2 337 $ 2 466 $ 2 472
CG&E and Subsidiaries
First mortgage bonds and
other long-term debt (includes
amounts reflected as long-term
debt due within one year) $ 1 324 $ 1 355 $ 1 511 $ 1 508
PSI
First mortgage bonds and
other long-term debt (includes
amounts reflected as long-term
debt due within one year) $ 912 $ 982 $ 955 $ 964
ULH&P
First mortgage bonds and
other long-term debt $44 671 $45 591 $44 617 $44 668
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 and
Other Short-Term Obligations Due to the short period to maturity, the carrying
amounts reflected on the Balance Sheets approximate fair values.
First Mortgage Bonds and Other Long-Term Debt 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.
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.
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 power marketers, other
investor owned utilities, electric cooperatives, and municipalities. As of
December 31, 1997, approximately 65% of Cinergy's power marketing and trading
activity represents commitments with 10 counterparties. The majority of these
contracts are for terms of one year or less. 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 of
December 31, 1997, Cinergy's management believes nonperformance of contractual
obligations by any one counterparty of Cinergy's power marketing and trading
function would not result in losses which are significant to the financial
condition or results of operations of Cinergy.
Potential exposure to credit risk also exists from Cinergy's use of financial
derivatives such as 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
Cinergy's defined benefit pension plans 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.
Cinergy's funding policy is 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 last three plan years are: $8
million for 1997, $7 million for 1996, and $18 million for 1995. Of these
amounts, CG&E and its subsidiaries had contributions of $4 million applicable to
the 1997 plan year and $7 million applicable to each of the 1996 and 1995 plan
years. PSI had contributions of $4 million applicable to the 1997 plan year, no
contributions for the 1996 plan year, and contributions of $11 million for the
1995 plan year. The plans' assets consist of investments in equity and fixed
income securities.
Effective January 1, 1998, Cinergy reconfigured its defined benefit pension
plans. The reconfigured plans cover the same employees as the previous plans and
established a uniform final average pay formula for all employees. When an
employee retires, he or she will receive the greater of the benefit accrued
under the previous plan as of December 31, 1997, or the benefit accrued under
the new plan as of the retirement date. The reconfiguration of the pension plans
is not expected to have a significant impact on the Company's financial
condition or results of operations.
Cinergy
Cinergy's pension cost for 1997, 1996, and 1995 included the following
components:
1997 1996 1995
(in millions)
Benefits earned during the period $ 19.8 $21.2 $ 18.5
Interest accrued on projected
benefit obligations 67.8 61.6 61.4
Return on plans' assets
Actual (186.6) (75.6) (119.3)
Deferred gain 123.8 14.4 58.8
Net amortizations 2.8 2.9 2.3
Net periodic pension cost $ 27.6 $24.5 $ 21.7
CG&E and ULH&P
CG&E's and its subsidiaries' (including ULH&P's) pension cost for 1997, 1996,
and 1995 included the following components:
1997 1996 1995
(in millions)
Benefits earned during the period $ 10.5 $11.2 $ 9.8
Interest accrued on projected
benefit obligations 41.2 38.6 38.8
Return on plans' assets
Actual (108.3) (53.8) (71.9)
Deferred gain 71.2 17.2 34.0
Net amortizations 1.8 2.1 1.5
Net periodic pension cost $ 16.4 $15.3 $12.2
PSI
PSI's pension cost for 1997, 1996, and 1995 included the following components:
1997 1996 1995
(in millions)
Benefits earned during the period $ 9.3 $10.0 $ 8.7
Interest accrued on projected
benefit obligations 26.6 23.0 22.6
Return on plans' assets
Actual (78.3) (21.8) (47.4)
Deferred gain (loss) 52.6 (2.8) 24.8
Net amortizations 1.0 0.8 0.8
Net periodic pension cost $11.2 $ 9.2 $ 9.5
Cinergy, CG&E, PSI, and ULH&P
During 1996, CG&E and its subsidiaries (including ULH&P) recognized an
additional $31 million of accrued pension cost in accordance with Statement of
Financial Accounting Standards No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits
(Statement 88). Additionally, during 1996, PSI recognized an additional $30
million of accrued pension cost in accordance with Statement 88. These amounts
represent the costs associated with additional benefits extended in connection
with voluntary workforce reduction programs (see Note 1(l)).
1997 1996 1995
Actuarial Assumptions:
For determination of projected benefit
obligations
Discount rate 7.5% 8.0% 7.5%
Rate of increase in future compensation 4.5 5.0 4.5
For determination of pension cost
Rate of return on plans' assets
PSI 9.0 9.0 9.0
CG&E and subsidiaries 9.0 9.0 9.5
Cinergy
The following table reconciles the plans' funded status with amounts recorded in
the Consolidated Financial Statements of Cinergy. Under the provisions of
Statement of Financial Accounting Standards No. 87, Employers' Accounting for
Pensions (Statement 87), certain assets and obligations of the plans are
deferred and recognized in the Consolidated Financial Statements of Cinergy in
later years.
1997 1996
Plans' Plans' Plan's
Assets Exceed Assets Exceed Accumulated
Accumulated Accumulated Benefits
Benefits Benefits Exceed Assets
(in millions)
Actuarial present value
of benefits
Vested benefits $(731.6) $(423.1) $(241.6)
Non-vested benefits (35.5) (33.5) (10.1)
Accumulated benefit
obligations (767.1) (456.6) (251.7)
Effect of future
compensation
increases (193.2) (121.7) (53.3)
Projected benefit
obligations (960.3) (578.3) (305.0)
Plans' assets at fair value 888.1 531.6 234.1
Projected benefit
obligations in excess of
plans' assets (72.2) (46.7) (70.9)
Remaining balance of plans'
net assets existing at
date of initial application
of Statement 87 to be
recognized as a reduction
of pension cost in future
periods (8.5) (6.7) (3.1)
Unrecognized net gain
resulting from experience
different from that
assumed and effects of
changes in assumptions (134.6) (48.4) (28.1)
Prior service cost not
yet recognized in net
periodic pension cost 46.6 33.6 23.2
Accrued pension cost at
December 31 $(168.7) $ (68.2) $ (78.9)
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 Consolidated Financial Statements in later years.
1997 1996
Plans' Plan's Plan's
Assets Exceed Assets Exceed Accumulated
Accumulated Accumulated Benefits
Benefits Benefits Exceed Assets
(in millions)
Actuarial present value
of benefits
Vested benefits $(437.2) $(160.3) $(241.6)
Non-vested benefits (17.6) (17.0) (10.1)
Accumulated benefit
obligations (454.8) (177.3) (251.7)
Effect of future
compensation
increases (111.7) (53.2) (53.3)
Projected benefit
obligations (566.5) (230.5) (305.0)
Plans' assets at fair
value 528.1 223.3 234.1
Projected benefit
obligations in excess of
plans' assets (38.4) (7.2) (70.9)
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 (4.9) (2.4) (3.1)
Unrecognized net gain
resulting from experience
different from that
assumed and effects of
changes in assumptions (110.3) (40.1) (28.1)
Prior service cost not
yet recognized in net
periodic pension cost 30.7 16.1 23.2
Accrued pension cost at
December 31 $(122.9) $ (33.6) $ (78.9)
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 later years.
1997 1996
(in millions)
Actuarial present value of benefits
Vested benefits $(294.4) $(262.8)
Non-vested benefits (17.9) (16.5)
Accumulated benefit obligation (312.3) (279.3)
Effect of future compensation
increases (81.5) (68.5)
Projected benefit obligation (393.8) (347.8)
Plan's assets at fair value 360.0 308.3
Projected benefit obligation in
excess of plan's assets (33.8) (39.5)
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 (3.6) (4.3)
Unrecognized net (gain) resulting
from experience different from that
assumed and effects of changes in
assumptions (24.3) (8.3)
Prior service cost not yet recognized
in net periodic pension cost 15.9 17.5
Accrued pension cost
at December 31 $ (45.8) $ (34.6)
10. Other Postretirement Benefits
Cinergy, CG&E, PSI, and ULH&P
Cinergy provides certain health care and life insurance benefits to retired
employees who have met minimum age and service requirements and their eligible
dependents. The health care benefits include medical coverage, dental coverage,
and prescription drugs and are subject to certain limitations, such as
deductibles and co-payments. Prior to January 1, 1997, 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 1997, 1996, and 1995 included the following
components:
Cinergy
Health Life
Care Insurance Total
(in millions)
1997
Benefits earned during the period $ 3.0 $ .1 $ 3.1
Interest accrued on Accumulated Post-
retirement Benefit Obligation (APBO) 14.1 2.2 16.3
Net amortization and deferral .2 .1 .3
Amortization of transition obligations 4.7 .3 5.0
Net periodic postretirement benefit cost $22.0 $2.7 $24.7
1996
Benefits earned during the period $ 5.7 $ .1 $ 5.8
Interest accrued on APBO 16.5 2.2 18.7
Net amortization and deferral .3 - .3
Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $30.6 $2.6 $33.2
1995
Benefits earned during the period $ 4.4 $ .1 $ 4.5
Interest accrued on APBO 15.6 2.2 17.8
Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $28.1 $2.6 $30.7
CG&E and ULH&P
Health Life
Care Insurance Total
(in millions)
1997
Benefits earned during the period $1.4 $ .1 $ 1.5
Interest accrued on APBO 5.0 2.0 7.0
Net amortization and deferral .2 .1 .3
Amortization of transition obligation 1.5 .4 1.9
Net periodic postretirement benefit cost $8.1 $2.6 $10.7
1996
Benefits earned during the period $ .7 $ .1 $ .8
Interest accrued on APBO 4.9 2.0 6.9
Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $8.2 $2.5 $10.7
1995
Benefits earned during the period $ .4 $ .1 $ .5
Interest accrued on APBO 4.5 2.0 6.5
Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $7.5 $2.5 $10.0
PSI
Health Life
Care Insurance Total
(in millions)
1997
Benefits earned during the period $ 1.6 $ - $ 1.6
Interest accrued on APBO 9.1 .2 9.3
Amortization of transition obligation 3.2 (.1) 3.1
Net periodic postretirement benefit cost $13.9 $ .1 $14.0
1996
Benefits earned during the period $ 5.0 $ - $ 5.0
Interest accrued on APBO 11.6 .2 11.8
Net amortization and deferral .3 - .3
Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $22.4 $ .1 $22.5
1995
Benefits earned during the period $ 4.0 $ - $ 4.0
Interest accrued on APBO 11.1 .2 11.3
Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $20.6 $ .1 $20.7
Cinergy, CG&E, PSI, and ULH&P
The following table reconciles the APBO of the health care and life insurance
plans with amounts recorded in the Financial Statements. Under the provisions 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 later years.
Cinergy
Health Life
Care Insurance Total
(in millions)
1997
Actuarial present value of benefits
Fully eligible active plan participants $ (9.9) $ (2.3) $ (12.2)
Other active plan participants (66.3) (1.1) (67.4)
Retirees and beneficiaries (113.6) (28.7) (142.3)
Projected APBO (189.8) (32.1) (221.9)
Unamortized transition obligations 70.7 .2 70.9
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 21.1 1.5 22.6
Accrued postretirement benefit obligations
at December 31, 1997 $ (98.0) $(30.4) $(128.4)
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)
Increasing the health care cost trend rate by one percentage point in each year
would increase the APBO by approximately $24 million for 1997 and $21 million
for 1996, and the aggregate of the service and interest cost components of the
postretirement benefit cost by approximately $2 million for 1997, $4 million for
1996, and $3 million for 1995.
CG&E and ULH&P
Health Life
Care Insurance Total
(in millions)
1997
Actuarial present value of benefits
Fully eligible active plan participants $ (5.3) $ (2.2) $ (7.5)
Other active plan participants (32.9) (.9) (33.8)
Retirees and beneficiaries (30.2) (25.8) (56.0)
Projected APBO (68.4) (28.9) (97.3)
Unamortized transition obligation 23.0 2.1 25.1
Unrecognized prior service cost - .2 .2
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 13.6 .7 14.3
Accrued postretirement benefit obligation
at December 31, 1997 $ (31.8) $(25.9) $ (57.7)
1996
Actuarial present value of benefits
Fully eligible active plan participants $ (10.8) $ (1.6) $ (12.4)
Other active plan participants (24.2) (1.3) (25.5)
Retirees and beneficiaries (28.7) (23.6) (52.3)
Projected APBO (63.7) (26.5) (90.2)
Unamortized transition obligation 24.5 2.5 27.0
Unrecognized prior service cost - .3 .3
Unrecognized net loss (gain) resulting from
experience different from that assumed
and effects of changes in assumptions 11.5 (1.4) 10.1
Accrued postretirement benefit obligation
at December 31, 1996 $ (27.7) $(25.1) $ (52.8)
Increasing the health care cost trend rate by one percentage point in each year
would increase the APBO by approximately $9 million and $7 million for 1997 and
1996 respectively, and the aggregate of the service and interest cost components
of the postretirement benefit cost by approximately $1 million for 1997, 1996,
and 1995.
PSI
Health Life
Care Insurance Total
(in millions)
1997
Actuarial present value of benefits
Fully eligible active plan participants $ (4.6) $ (.1) $ (4.7)
Other active plan participants (33.4) (.2) (33.6)
Retirees and beneficiaries (83.4) (2.9) (86.3)
Projected APBO (121.4) (3.2) (124.6)
Unamortized transition obligation 47.7 (1.9) 45.8
Unrecognized prior service cost - (.2) (.2)
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 7.5 .7 8.2
Accrued postretirement benefit obligation
at December 31, 1997 $ (66.2) $ (4.6) $ (70.8)
1996
Actuarial present value of benefits
Fully eligible active plan participants $ (2.9) $ - $ (2.9)
Other active plan participants (25.6) (.2) (25.8)
Retirees and beneficiaries (89.3) (2.8) (92.1)
Projected APBO (117.8) (3.0) (120.8)
Unamortized transition obligation 50.9 (2.1) 48.8
Unrecognized prior service cost - (.3) (.3)
Unrecognized net loss resulting from
experience different from that assumed
and effects of changes in assumptions 8.0 .9 8.9
Accrued postretirement benefit obligation
at December 31, 1996 $ (58.9) $ (4.5) $ (63.4)
Increasing the health care cost trend rate by one percentage point in each year
would increase the APBO by approximately $15 million and $14 million for 1997
and 1996, respectively, and the aggregate of the service and interest cost
components of the postretirement benefit cost for each of 1997, 1996, and 1995
by approximately $1 million, $3 million, and $2 million, respectively.
Cinergy, CG&E, PSI, and ULH&P
The following assumptions were used to determine the APBO:
1997 1996 1995
Discount rate 7.5% 8.0% 7.5%
Health care cost trend rate,
gradually declining to 5%
CG&E 7.0-8.0% 7.0-9.0% 8.0-11.0%
PSI 7.0-8.0 7.0-9.0 8.0-10.0
Year ultimate trend rates achieved
CG&E 2004 2004 2002
PSI 2004 2004 2007
11. Income Taxes
Cinergy
Cinergy complies with the provisions of Statement 109. Statement 109 requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of existing differences between the financial reporting and tax
reporting bases of assets and liabilities.
The significant components of Cinergy's net deferred income tax liability at
December 31, 1997, and 1996, are as follows:
1997 1996
(in millions)
Deferred Income Tax Liability
Utility plant $1 076.8 $1 061.3
Unamortized costs of reacquiring debt 24.4 23.2
Deferred operating expenses
and carrying costs 70.4 73.5
Amounts due from customers - income taxes 129.4 129.4
Deferred DSM costs 31.7 43.4
Investment in unconsolidated subsidiary 55.0 13.5
Other 47.9 41.3
Total deferred income tax liability 1 435.6 1 385.6
Deferred Income Tax Asset
Unamortized investment tax credits 60.5 63.9
Deferred fuel costs - 12.9
Accrued pension and other benefit costs 63.3 60.4
Other 63.3 102.1
Total deferred income tax asset 187.1 239.3
Net Deferred Income Tax Liability $1 248.5 $1 146.3
CG&E
CG&E and its subsidiaries comply with the provisions of Statement 109. Statement
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of existing differences between the financial reporting
and tax reporting bases of assets and liabilities.
The significant components of CG&E's net deferred income tax liability at
December 31, 1997, and 1996, are as follows:
1997 1996
(in millions)
Deferred Income Tax Liability
Utility plant $683.3 $671.6
Unamortized costs of reacquiring debt 11.1 11.2
Deferred operating expenses
and carrying costs 62.0 73.5
Amounts due from customers - income taxes 121.9 120.7
Deferred DSM costs 11.7 6.0
Other 43.9 40.9
Total deferred income tax liability 933.9 923.9
Deferred Income Tax Asset
Unamortized investment tax credits 41.7 43.9
Accrued pension and other benefit costs 39.2 31.4
Other 58.6 81.5
Total deferred income tax asset 139.5 156.8
Net Deferred Income Tax Liability $794.4 $767.1
PSI
PSI and its subsidiaries comply with the provisions of Statement 109. Statement
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of existing differences between the financial reporting
and tax reporting bases of assets and liabilities.
The significant components of PSI's net deferred income tax liability at
December 31, 1997, and 1996, are as follows:
1997 1996
(in millions)
Deferred Income Tax Liability
Electric utility plant $393.5 $389.7
Unamortized costs of reacquiring debt 13.3 12.0
Amounts due from customers - income taxes 7.5 8.7
Deferred operating expenses
and accrued carrying costs 8.4 -
Deferred DSM costs 20.0 37.4
Other 3.7 -
Total deferred income tax liability 446.4 447.8
Deferred Income Tax Asset
Unamortized investment tax credits 18.8 20.0
Accrued pension and other benefit costs 24.1 29.0
Deferred fuel costs - 7.1
Other - 18.7
Total deferred income tax asset 42.9 74.8
Net Deferred Income Tax Liability $403.5 $373.0
ULH&P
ULH&P complies with the provisions of Statement 109. Statement 109 requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of existing differences between the financial reporting and tax
reporting bases of assets and liabilities.
The significant components of ULH&P's net deferred income tax liability at
December 31, 1997, and 1996, are as follows:
1997 1996
(in thousands)
Deferred Income Tax Liability
Utility plant $34 001 $33 872
Unamortized costs of reacquiring debt 1 463 996
Deferred fuel costs - 5 459
Other 2 546 3 732
Total deferred income tax liability 38 010 44 059
Deferred Income Tax Asset
Unamortized investment tax credits 1 832 1 946
Amounts due to customers - income taxes 2 650 2 067
Deferred fuel costs 508 -
Accrued pension and other benefit costs 2 397 2 482
Other 4 412 4 101
Total deferred income tax asset 11 799 10 596
Net Deferred Income Tax Liability $26 211 $33 463
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, 1997. 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
1997 1996 1995
(in millions)
Current Income Taxes
Federal $133.3 $143.4 $175.3
State 12.1 7.5 10.4
Total current income taxes 145.4 150.9 185.7
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 26.7 61.6 53.8
DSM costs (8.5) (1.9) 12.0
Pension and other benefit costs .9 (28.2) (21.8)
Litigation settlement 1.8 26.2 -
Fuel costs 4.4 8.8 .3
Other items - net 49.5 (15.4) (7.5)
Total deferred Federal income taxes 74.8 51.1 36.8
State 2.4 6.5 1.7
Total deferred income taxes 77.2 57.6 38.5
Investment Tax Credits - Net (9.6) (9.8) (10.1)
Total Income Taxes $213.0 $198.7 $214.1
Allocated to:
Operating income $248.9 $218.2 $221.4
Other income and expenses - net (35.9) (19.5) (7.3)
$213.0 $198.7 $214.1
CG&E
1997 1996 1995
(in millions)
Current Income Taxes
Federal $117.1 $115.5 $102.4
State 5.2 1.5 2.5
Total current income taxes 122.3 117.0 104.9
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 13.6 36.6 33.9
DSM costs 7.5 .6 3.6
Pension and other benefit costs (2.8) (17.0) (10.7)
Fuel costs (5.5) 10.8 6.3
Other items - net 10.8 (8.1) (1.0)
Total deferred Federal income taxes 23.6 22.9 32.1
State (1.0) 2.2 .8
Total deferred income taxes 22.6 25.1 32.9
Investment Tax Credits - Net (6.2) (6.2) (6.0)
Total Income Taxes $138.7 $135.9 $131.8
Allocated to:
Operating income $172.0 $145.0 $136.4
Other income and expenses - net (33.3) (9.1) (4.6)
$138.7 $135.9 $131.8
PSI
1997 1996 1995
(in millions)
Current Income Taxes
Federal $35.5 $41.3 $71.4
State 6.8 6.0 7.5
Total current income taxes 42.3 47.3 78.9
Deferred Income Taxes
Federal
Depreciation and other electric utility
plant-related items 13.3 25.0 19.9
DSM costs (16.1) (2.5) 8.4
Pension and other benefit costs 3.7 (11.2) (11.1)
Litigation settlement 6.2 26.2 -
Fuel costs 9.9 (2.0) (6.0)
Coal contract buyout 5.5 - -
Destec payments 7.7 - -
Other items - net 5.6 (6.3) (3.0)
Total deferred Federal income taxes 35.8 29.2 8.2
State 3.3 4.3 1.1
Total deferred income taxes 39.1 33.5 9.3
Investment Tax Credits - Net (3.5) (3.6) (4.1)
Total Income Taxes $77.9 $77.2 $84.1
Allocated to:
Operating income $76.9 $73.2 $85.0
Other income and expenses - net 1.0 4.0 (.9)
$77.9 $77.2 $84.1
ULH&P
1997 1996 1995
(in thousands)
Current Income Taxes
Federal $11 607 $ 416 $5 955
State 3 002 (87) 1 324
Total current income taxes 14 609 329 7 279
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 847 1 506 1 382
Pension and other benefit costs - (277) (381)
Fuel costs (5 486) 6 111 (534)
Unamortized costs of reacquiring debt (122) 458 808
Other items - net 12 291 (556)
Total deferred Federal income taxes (4 749) 8 089 719
State
Depreciation and other utility plant-
related items 287 425 390
Fuel costs (1 404) 1 570 (137)
Other items - net 23 55 (35)
Total deferred state income taxes (1 094) 2 050 218
Total deferred income taxes (5 843) 10 139 937
Investment Tax Credits - Net (280) (282) (285)
Total Income Taxes $ 8 486 $10 186 $7 931
Allocated to:
Operating income $ 9 586 $ 9 834 $7 887
Other income and expenses - net (1 100) 352 44
$ 8 486 $10 186 $7 931
Cinergy, CG&E, PSI, and ULH&P
Federal income taxes, computed by applying the statutory Federal income tax rate
to book income before extraordinary item and Federal income tax, are reconciled
to Federal income tax expense reported in the Consolidated Statements of Income
of Cinergy, CG&E, and PSI and the Statements of Income of ULH&P as follows:
Cinergy
1997 1996 1995
(in millions)
Statutory Federal income tax provision $196.4 $181.8 $192.2
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (9.6) (9.8) (10.1)
Depreciation and other utility plant-
related differences 11.7 14.1 9.0
Preferred dividend requirements of
subsidiaries 4.4 8.5 10.8
Foreign tax adjustments (13.2) (11.1) -
Other - net 8.8 1.2 .1
Federal income tax expense $198.5 $184.7 $202.0
CG&E
1997 1996 1995
(in millions)
Statutory Federal income tax provision $130.8 $125.8 $127.6
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (6.2) (6.2) (6.0)
Depreciation and other utility plant-
related differences 9.8 11.7 9.0
Preferred dividends - - 6.2
Other - net .1 .9 (8.3)
Federal income tax expense $134.5 $132.2 $128.5
PSI
1997 1996 1995
(in millions)
Statutory Federal income tax provision $ 70.0 $ 67.4 $ 77.5
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (3.5) (3.6) (4.1)
Other - net 1.3 3.1 2.1
Federal income tax expense $ 67.8 $ 66.9 $ 75.5
ULH&P
1997 1996 1995
(in thousands)
Statutory Federal income tax provision $6 823 $7 987 $6 496
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (280) (282) (285)
Depreciation and other utility plant-
related differences 96 358 219
Other - net (61) 160 (41)
Federal income tax expense $6 578 $8 223 $6 389
12. Commitments and Contingencies
(a) Construction
Cinergy, CG&E, PSI, and ULH&P
Cinergy currently forecasts the aggregate expenditures for its construction
program for the 1998 through 2002 period to be $1.7 billion. Of these projected
expenditures, approximately $866 million relates to CG&E and its subsidiaries,
including $137 million for ULH&P, and $858 million relates to PSI.
(b) Manufactured Gas Plant (MGP) Sites
Cinergy, CG&E, PSI, and ULH&P
(i) General Prior to the 1950s, gas was produced at MGP sites through a
process that involved the heating of coal and/or oil. The gas produced from this
process was sold for residential, commercial, and industrial uses.
Cinergy and PSI
(ii) PSI Coal tar residues, related hydrocarbons, and various metals
associated with MGP sites have been found at former MGP sites in Indiana,
including at least 21 MGP sites which PSI or its predecessors previously owned.
In 1945, PSI sold 19 of these sites to Indiana Gas and Water Company, Inc. (now
Indiana Gas Company, Inc. (IGC)), including the Shelbyville and Lafayette sites
(discussed below). PSI or its predecessors acquired seven of the 21 MGP sites
from Northern Indiana Public Service Company (NIPSCO), five of which were among
the 19 sites PSI sold to IGC. The other two sites acquired from NIPSCO are
located in Goshen (discussed below) and Warsaw, Indiana.
PSI has received claims from IGC and NIPSCO that PSI is a Potentially
Responsible Party (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) with respect to the 21 MGP sites, and
therefore responsible for the costs of investigating and remediating these
sites.
The Shelbyville MGP site has been the subject of an investigation and cleanup
enforcement action by the Indiana Department of Environmental Management (IDEM)
against IGC and PSI. Pursuant to an agreement, PSI and IGC have conducted
investigation and remediation activities at the Shelbyville site and are sharing
the costs of these activities. In 1997, PSI and IGC submitted a proposed agreed
order to IDEM relative to the Shelbyville site, which, if accepted by IDEM, will
result in a determination of whether the activities previously undertaken at the
site are sufficient to adequately protect human health and the environment.
Based upon environmental investigations and remediation completed to date, PSI
believes that any further investigation and remediation required for this site
will not have a material adverse effect on its financial condition or results of
operations.
In 1992, the IDEM issued an order to IGC, naming IGC as a PRP as defined in the
CERCLA, which requires investigation and remediation of the Lafayette MGP site.
IGC entered into an agreed order with the IDEM for the removal of MGP
contamination at that site.
In August 1997, NIPSCO filed suit against PSI in the United States District
Court for the Northern District of Indiana, South Bend Division, claiming,
pursuant to CERCLA, recovery from PSI of NIPSCO's past and future costs of
investigating and remediating MGP related contamination at the Goshen MGP site.
NIPSCO alleged that it has already incurred about $400,000 in response costs at
the site and that remediation of the site will cost about $2.7 million. PSI
denied liability in its answer to the complaint. The parties are currently
engaged in the discovery process and the case has not yet been scheduled for
trial.
Also, in August 1997, PSI reached an agreement with IGC settling IGC's claims
that PSI contribute to IGC's response costs related to 13 of the 19 MGP sites
conveyed by PSI to IGC in 1945. This agreement requires PSI and IGC to share
past and future response costs equally (50%/50%) at the 13 sites. Further, the
parties must jointly approve future management of the sites and the decisions to
spend additional funds. The settlement does not address the five sites PSI
acquired from NIPSCO and subsequently sold to IGC (including the Lafayette
site).
PSI has placed its insurance carriers on notice of IGC's, NIPSCO's, and IDEM's
claims.
In May 1995, the IURC denied IGC's request for recovery of costs incurred in
complying with Federal, state, and local environmental 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 petitioned the Indiana Supreme
Court to review the Court of Appeals decision. In August 1997, the Indiana
Supreme Court denied transfer of this case. Accordingly, the IURC's decision
denying rate recovery for these costs by IGC remains intact. 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.
PSI continues to gather information pertaining to each of these MGP sites,
including the 13 sites which are the subject of the agreement with IGC and the
Goshen site which is the subject of NIPSCO's complaint. Reserves recorded, based
on information currently available, are not material to Cinergy's financial
condition or results of operations. However, as further investigation and
remediation activities are undertaken at these sites, the potential liability
for MGP sites could be material to Cinergy's financial condition or results of
operations.
Cinergy, CG&E, and ULH&P
(iii) CG&E and its Utility Subsidiaries Lawrenceburg, a wholly-owned
subsidiary of CG&E, also has a MGP site. In May 1995, Lawrenceburg and the IDEM
reached an agreement to include the Lawrenceburg MGP site in the IDEM's
voluntary cleanup program. Lawrenceburg implemented a remediation plan, and, on
September 20, 1996, received a certificate of completion on the cleanup from the
IDEM. The total costs incurred for the cleanup program were approximately
$273,000.
CG&E and its utility subsidiaries are aware of other potential sites where MGP
activities may have occurred at some time in the past. None of these sites is
known to present a risk to the environment. CG&E and its utility subsidiaries
have undertaken preliminary site assessments to obtain more information about
some of the other potential MGP sites.
Cinergy and CG&E
(c) United Scrap Lead Site
The United States Environmental Protection Agency (EPA) alleges that CG&E 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. In January 1998, CG&E executed a de minimis settlement agreement,
which if accepted by the Federal District Court will resolve CG&E's potential
liability for the site. Action on the proposed settlement is expected by the end
of 1998.
Cinergy, CG&E, and PSI
(d) Enertech Associates, Inc. (Enertech) Litigation
In October 1995, a suit was filed in the Federal District Court for the Southern
District of Ohio by three former employees of Enertech, formerly named Power
International, Inc., a subsidiary of Investments, naming as defendants Enertech,
Cinergy, Investments, CG&E, PSI, James E. Rogers, and William J. Grealis. (Mr.
Rogers and/or Mr. Grealis are officers and/or directors of the foregoing
companies.) The lawsuit, which stems from the termination of employment of the
three former employees, alleges that they entered into employment contracts with
Enertech based on the opportunity to participate in potential profits from
future investments in energy projects in central and eastern Europe. The suit
alleges causes of action based upon, among other theories, breach of contract
related to the events surrounding the termination of their employment and fraud
and misrepresentation related to the level of financial support for future
projects. The suit alleges compensatory damages of $154 million based upon
assumed future success of potential future investments and punitive damages of
three times that amount. All defendants are vigorously defending against the
charges based upon meritorious defenses. Cinergy is currently unable 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 was contingent upon a number of events,
including the conclusion of WVPA's bankruptcy proceeding, negotiation of certain
terms and conditions with WVPA, the Rural Utilities Service (RUS), and the
National Rural Utilities Cooperative Finance Corporation (CFC), and certain
regulatory approvals. In December 1996, following the resolution of issues
associated with WVPA's bankruptcy proceeding, PSI, on behalf of itself and its
officers, paid $80 million on behalf of WVPA to the RUS and the CFC. The $80
million obligation, net of insurance proceeds, other credits, and applicable
income tax effects, was charged to income in 1988. In January 1997, an order
dismissing the WVPA litigation against PSI and its officers with prejudice was
entered by the United States District Court for the Southern District of
Indiana. Negotiations among PSI, WVPA, the RUS, and the CFC continue regarding
certain additional terms and conditions of the settlement agreement. Based on
the current status of negotiations, the Company believes it has adequately
reserved for any loss that would be material to its financial condition or
results of operations. However, the Company cannot currently predict the outcome
of these negotiations. Depending of the form of the final negotiated terms and
conditions and the form of any regulatory approvals, the Company could be
required to recognize additional losses of up to $90 million for accounting
purposes. The recognition of this loss is not expected to have an immediate
impact on Cinergy's cash flow. The Company believes that negotiations could be
concluded and the final terms and conditions determined during 1998.
Cinergy, CG&E, and ULH&P
(f) Potential Divestiture of Gas Operations
Under the PUHCA, the divestiture of CG&E's gas operations may be required. The
key question under the relevant PUHCA standards is the amount of increased
operating costs, if any, that would result from the gas operations being
divested and operated on a stand-alone basis.
In its order approving the merger, the SEC reserved judgment over Cinergy's
ownership of CG&E's gas operations for three years, at the end of which period
Cinergy would be required to address the matter. In February 1998, Cinergy made
a filing with the SEC setting forth its rationale for retention of the gas
operations. The filing includes, among other things, a study showing that, if
divested and operated on a stand-alone basis, the gas operations would bear
significant increased operating costs, greater than those cited by the SEC in
two 1997 cases permitting electric registered holding companies to acquire and
retain gas properties. For these and other reasons stated in Cinergy's filing,
Cinergy believes its retention of CG&E's gas properties meets all relevant
standards under the PUHCA.
Cinergy, CG&E, and PSI
13. Jointly Owned Plant
PSI is a joint owner of Gibson Unit 5 with WVPA and the Indiana Municipal Power
Agency (IMPA). Additionally, PSI is a co-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:
1997
Utility Plant Accumulated Construction
Share in Service Depreciation Work in Progress
(dollars in millions)
PSI
Production
Gibson (Unit 5) 50.05% $ 205 $ 97 $ 1
Transmission and local
facilities 94.28 1 918 673 32
CG&E
Production
Miami Fort Station
(Units 7 and 8) 64 208 117 4
W.C. Beckjord Station
(Unit 6) 37.5 41 25 1
J.M. Stuart Station 39 273 121 1
Conesville Station
(Unit 4) 40 72 37 2
Zimmer 46.5 1 216 239 5
East Bend Station 69 330 164 2
Killen Station 33 187 85 -
Transmission Various 63 31 1
14. Quarterly Financial Data (unaudited)
Cinergy
Basic Diluted
Earnings Earnings
Operating Operating Net (Loss) (Loss)
Quarter Ended Revenues Income Income(Loss) Per Share Per Share
(in millions, except per share amounts)
1997
March 31 $1 030 $152 $114 $ .72 $ .71
June 30 865 105 55 .35 .35
September 30 1 355 140 (27)(a) (.16)(a) (.17)(a)
December 31 1 103 142 111 .70 .70
Total $4 353 $539 $253 (a) $1.61 (a) $1.59 (a)
1996
March 31 $ 884 $169 $110 $ .70 $ .69
June 30 717 113 56(b) .35(b) .35 (b)
September 30 766 150 98 .51(c) .51 (c)
December 31 876 126 71(b) .44(b) .44 (b)
Total $3 243 $558 $335(b) $2.00(b)(c) $1.99 (b)(c)
(a) For a discussion of the windfall profits tax levied against Midlands, which
was recorded in the third quarter as an extraordinary item, see Note 17.
Net income, basic earnings per share and diluted earnings per share during
the third quarter of 1997, before the extraordinary item, were $83 million,
$.53, and $.52, respectively. Total net income, basic earnings per share,
and diluted earnings per share for 1997, before the extraordinary item,
were $363 million, $2.30, and $2.28, respectively.
(b) In 1996, Cinergy recognized charges to earnings of approximately $55
million ($38 million, net of taxes or $.24 per share, basic and diluted)
primarily for charges related to voluntary early retirement and severance
programs and disallowances associated with the PUCO's December 1996 Order
in CG&E's gas rate proceeding. Of these charges, approximately $11 million,
net of taxes or $.07 per share (basic and diluted), was recognized in the
second quarter, and approximately $27 million, net of taxes or $.17 per
share (basic and diluted), was recognized in the fourth quarter. Of the
total $55 million charge, $41 million is reflected in "Operating Expenses -
Other operation" and $14 million is reflected in "Other Income and Expenses
- Net."
(c) In the third quarter of 1996, Cinergy incurred costs of $18 million or $.12
per share (basic and diluted), related to the reacquisition of 90% of
CG&E's preferred stock through a tender offer. (See Note 3(b).)
CG&E
Operating Operating Net
Quarter Ended Revenues Income Income
(in millions)
1997
March 31 $ 614 $ 99 $ 68
June 30 487 65 37
September 30 712 78 52
December 31 639 86 82
Total $2 452 $328 $239
1996
March 31 $ 575 $120 $ 92
June 30 437 69(a) 39(a)
September 30 431 90 62
December 31 533 73(a) 34(a)
Total $1 976 $352 $227
(a) In 1996, CG&E 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)
1997
March 31 $ 424 $ 54 $ 33
June 30 390 41 23
September 30 651 61 41
December 31 493 55 35
Total $1 958 $211 $132
1996
March 31 $ 328 $ 50 $ 27
June 30 290 44(a) 25(a)
September 30 348 61 43
December 31 366 51(a) 31(a)
Total $1 332 $206 $126
(a) In 1996, PSI recognized 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 Provision
Operating Operating Income for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in millions)
1997
Electric $3 862 $505 $229 $266 $247
Gas 491 34 20 23 44
Total $4 353 $539 $249 $289 $291
1996
Electric $2 769 $520 $204 $260 $276
Gas 474 38 14 23 32
Total $3 243 $558 $218 $283 $308
1995
Electric $2 612 $548 $209 $258 $286
Gas 411 39 12 22 36
Total $3 023 $587 $221 $280 $322
December 31
1997 1996 1995
(in millions)
Property, Plant, and Equipment - net
Electric $5 724 $5 737 $5 718
Gas 573 553 532
6 297 6 290 6 250
Other Corporate Assets 2 561 2 435 1 853
Total Assets $8 858 $8 725 $8 103
For a discussion of the potential divestiture of CG&E's gas operations, see Note
12(f).
CG&E
Operating
Operating Operating Income Provision for Construction
Year Ended Revenues(1) Income Taxes Depreciation Expenditures
(in millions)
1997
Electric $1 956 $290 $152 $140 $105
Gas 496 38 20 23 44
Total $2 452 $328 $172 $163 $149
1996
Electric $1 502 $314 $131 $138 $109
Gas 474 38 14 23 32
Total $1 976 $352 $145 $161 $141
1995
Electric $1 437 $321 $124 $137 $101
Gas 411 39 12 22 36
Total $1 848 $360 $136 $159 $137
December 31
1997 1996 1995
(in millions)
Property, Plant, and Equipment - net
Electric $3 171 $3 205 $3 244
Gas 573 553 532
3 744 3 758 3 776
Other Corporate Assets 1 170 1 086 1 305
Total Assets $4 914 $4 844 $5 081
For a discussion of the potential divestiture of CG&E's, including ULH&P's, gas
operations, see Note 12(f).
ULH&P
Operating
Operating Operating Income Provision for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in thousands)
1997
Electric $192 774 $10 427 $6 549 $ 7 193 $14 115
Gas 78 848 8 008 3 037 5 176 9 448
Total $271 622 $18 435 $9 586 $12 369 $23 563
1996
Electric $190 900 $12 558 $5 644 $ 6 935 $ 9 571
Gas 76 868 8 476 4 190 4 974 9 073
Total $267 768 $21 034 $9 834 $11 909 $18 644
1995
Electric $187 180 $11 425 $4 500 $ 6 679 $10 909
Gas 70 288 8 405 3 387 4 759 8 063
Total $257 468 $19 830 $7 887 $11 438 $18 972
December 31
1997 1996 1995
(in thousands)
Property, Plant, and Equipment - net
Electric $147 869 $142 490 $138 482
Gas 111 615 106 791 104 749
259 484 249 281 243 231
Other Corporate Assets 32 106 40 272 54 911
Total Assets $291 590 $289 553 $298 142
For a discussion of the potential divestiture of ULH&P's gas operations, see
Note 12(f).
Cinergy
16. Earnings Per Share
Effective December 31, 1997, Cinergy adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share (Statement 128).
Statement 128 replaces the calculation of primary and fully diluted earnings per
share under previous accounting standards with basic and diluted earnings per
share amounts. Previously reported earnings per share amounts have been restated
to comply with the provisions of Statement 128.
The after-tax earnings per share impact of the extraordinary item - equity share
of windfall profits tax in 1997 was $.69 for both basic and diluted earnings per
share.
Presented below is a reconciliation of earnings per common share (basic EPS) and
earnings per common share assuming dilution (diluted EPS).
Income Shares Earnings
(Numerator) (Denominator) Per Share
(In thousands, except per share amounts)
1997
Earnings per common share:
Net income before extraordinary item $362 638 157 685 $2.30
Effect of dilutive securities:
Common stock options 928
Contingently issuable common stock 204
EPS--assuming dilution:
Net income before extraordinary
item plus assumed conversions $362 638 158 817 $2.28
1996
Net income $334 797
Less: costs of reacquisition of
preferred stock of subsidiary 18 391
Earnings per common share:
Net income applicable to common
stock 316 406 157 678 $2.00
Effect of dilutive securities:
Common stock options 923
Contingently issuable common stock 314
EPS--assuming dilution:
Net income applicable to common
stock plus assumed conversions $316 406 158 915 $1.99
1995
Earnings per common share:
Net income $347 182 156 620 $2.22
Effect of dilutive securities:
Common stock options 586
Contingently issuable common stock 316
EPS--assuming dilution:
Net income plus assumed conversions $347 182 157 522 $2.20
Options to purchase shares of common stock that were excluded from the
calculation of EPS--assuming dilution because the exercise prices of these
options were greater than the average market price of the common shares
during the year are summarized below:
Average
Exercise
Year Shares Price
1997 22 300 $35.25
1996 45 000 31.56
1995 215 000 28.81
Cinergy
17. Extraordinary Item - Equity Share of Windfall Profits Tax
In May 1997, general elections were held in Great Britain which resulted in the
Labour Party gaining control of the government. In July 1997, the Labour
Government announced a windfall profits tax to be levied against a limited
number of British companies, including Midlands, which had previously been owned
and operated by the government. The tax, which was enacted into law during the
third quarter of 1997, was intended to be a recovery of funds by the government
due to the undervaluing of the companies subject to the tax when they were
privatized by the government via public stock offerings several years ago.
Cinergy's share of the tax to be paid by Midlands in two equal installments, due
December 1, 1997 and 1998, is approximately 67 million pounds sterling ($109
million or $.69 per share, basic and diluted). Midlands borrowed the funds to
finance the first installment. Cinergy expects Midlands will borrow funds as
necessary to pay the final installment. As Cinergy's management believes this
charge to be unusual in nature, and does not expect such a charge to recur, the
tax was recorded as an extraordinary item in Cinergy's Consolidated Statement of
Income during the third quarter of 1997. No related tax benefit was recorded for
the charge as the windfall profits tax is not deductible for corporate income
tax purposes in the UK, and Cinergy expects that benefits, if any, derived for
US Federal income taxes will not be significant.
18. Subsequent Events (Unaudited)
ULH&P
(a) Redemption of 8% Series First Mortgage Bonds On March 24, 1998, ULH&P
announced its intention to redeem on April 23, 1998, $6.3 million principal
amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at a
redemption price of 100.85% through the M&R Fund Provision of ULH&P's first
mortgage bond indenture. Additionally, on the same date, ULH&P announced its
intention to redeem on April 24, 1998, the remaining $3.7 million principal
amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at a
redemption price of 101.73%.
PSI
(b) Issuance of 7.25% JUnior Maturing Principal Securities (JUMPS) On March 19,
1998, PSI issued $100 million principal amount of its 7.25% JUMPS. The JUMPS
will mature on March 15, 2028. Proceeds from the sale were used to repay
short-term indebtedness incurred in connection with the redemption on March 1,
1998, of all outstanding shares of PSI's 7.44% Series Cumulative Preferred Stock
at a redemption price of $25 per share.
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), 1998 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,
1998, included:
Jackson H. Randolph Mr. Randolph, age 67, is Chairman of CG&E. He has served as
a director of CG&E since 1983, and his current term as director expires April
21, 1998.
James E. Rogers Mr. Rogers, age 50, is Vice Chairman and Chief Executive Officer
of CG&E. He has served as a director of CG&E since 1994, and his current term as
director expires April 21, 1998.
William J. Grealis Mr. Grealis, age 52, is President of CG&E. He has served as a
director of CG&E since 1995, and his current term expires April 21, 1998.
PSI
Reference is made to PSI Energy, Inc.'s (PSI) 1998 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 18 through 20 under
the caption "Executive Officers of the Registrants" is referenced in reliance
upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K.
ULH&P
Omitted pursuant to Instruction I(2)(c).
ITEM 11. EXECUTIVE COMPENSATION
Cinergy
Reference is made to Cinergy's 1998 Proxy Statement with respect to executive
compensation.
CG&E
Reference is made to Cinergy's 1998 Proxy Statement with respect to executive
compensation, except as to information pertaining to the compensation of
directors and to the performance graph, which information is set forth below.
Compensation of Directors
Directors who are not employees (non-employee directors) receive an annual
retainer fee of $8,000 plus a fee of $1,000 for each CG&E board of directors'
meeting attended; however, any non-employee director of CG&E who also serves as
a non-employee director of Cinergy or any of its affiliates shall neither
receive such annual retainer fee, nor any compensation for attendance at any
CG&E board meeting that is held concurrently or consecutively with a 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, 1993, through October
24, 1994, the final trading date of CG&E's common stock. The graph assumes a
$100 investment on January 1, 1993, and reinvestment of all dividends.
Omitted is a line graph illustrating the following data.
1/1/93 1/1/94 10/24/94
CG&E Common Stock $100.00 $117.80 $103.70
S&P Electric Utilities Index $100.00 $112.60 $ 93.00
S&P 500 Stock Index $100.00 $110.10 $111.10
PSI
Reference is made to PSI's 1998 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 1998 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 the
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, 1997.
CG&E's directors and executive officers did not beneficially own shares of any
series of the class of CG&E's cumulative preferred stock as of December 31,
1997. The beneficial ownership of Cinergy's common stock held by each director
and named executive officer as of December 31, 1997, is set forth in the
following table.
Amount and Nature
Name of Beneficial Owner(1) of Beneficial Ownership (2)
William J. Grealis 86,313 shares
J. Wayne Leonard 140,961 shares
Jackson H. Randolph 152,426 shares
James E. Rogers 339,254 shares
Larry E. Thomas 130,366 shares
All directors and executive 1,050,910 shares (2)
officers as a group (representing 0.67% of the class)
(1) No individual listed beneficially owned more than 0.215% 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 -
55,887; Mr. Leonard - 97,611; Mr. Randolph - 50,000; Mr. Rogers - 145,629;
Mr. Thomas - 74,104; and all directors and executive officers as a group -
497,698.
PSI
Reference is made to PSI's 1998 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 53 and 54 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
(c) Exhibits.
Copies of the documents listed below which are identified with an asterisk (*)
have heretofore been filed with the Securities and Exchange Commission (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 December 18,
1997.
CG&E
3-c *Amended Articles of Incorporation of The Cincinnati
Gas & Electric Company (CG&E) effective October 23,
1996. (Exhibit to CG&E's September 30, 1996, Form 10-Q
in File No. 1-1232.)
3-d *Regulations of CG&E as amended, April 25, 1996.
(Exhibit to CG&E's 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 Amendment to Article D of the Amended Articles of
Consolidation of PSI Energy, Inc., effective July 10,
1997.
Exhibit
Designation Nature of Exhibit
3-g *By-laws of PSI, as amended to December 17,
1996. (Exhibit to PSI's March 31, 1997, Form 10-Q
in File No. 1-3543.)
ULH&P
3-h *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-i *By-laws of ULH&P as amended, adopted May 8,
1996. (Exhibit to ULH&P's March 31, 1996
Form 10-Q in File No. 2-7793.)
3-j Amendment to Restated Articles of Incorporation of
ULH&P (Article Third) and Amendment to the By-laws of
ULH&P (Article 1), both effective July 24, 1997.
Cinergy 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.)
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 *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-f *Forty-first Supplemental Indenture between PSI and
LaSalle National Bank dated June 15, 1988. (Exhibit to
PSI's 1988 Form 10-K in File No. 1-3543.)
Exhibit
Designation Nature of Exhibit
4-g *Forty-second Supplemental Indenture between PSI and
LaSalle National Bank dated August 1, 1988. (Exhibit to
PSI's 1988 Form 10-K in File No. 1-3543.)
4-h *Forty-fourth Supplemental Indenture between PSI and
LaSalle National Bank dated March 15, 1990. (Exhibit to
PSI's 1990 Form 10-K in File No. 1-3543.)
4-i *Forty-fifth Supplemental Indenture between PSI and
LaSalle National Bank dated March 15, 1990. (Exhibit to
PSI's 1990 Form 10-K in File No. 1-3543.)
4-j *Forty-sixth Supplemental Indenture between PSI and
LaSalle National Bank dated June 1, 1990. (Exhibit to
PSI's 1991 Form 10-K in File No. 1-3543.)
4-k *Forty-seventh Supplemental Indenture between PSI and
LaSalle National Bank dated July 15, 1991. (Exhibit to
PSI's 1991 Form 10-K in File No. 1-3543.)
4-l *Forty-eighth Supplemental Indenture between PSI and
LaSalle National Bank dated July 15, 1992. (Exhibit to
PSI's 1992 Form 10-K in File No. 1-3543.)
4-m *Forty-ninth Supplemental Indenture between PSI and LaSalle
national Bank dated February 15, 1993. (Exhibit to PSI's 1992
Form 10-K in File No. 1-3543.)
4-n *Fiftieth Supplemental Indenture between PSI and
LaSalle National Bank dated February 15, 1993. (Exhibit
to PSI's 1992 Form 10-K in File No. 1-3543.)
4-o *Fifty-first Supplemental Indenture between PSI and
LaSalle National Bank dated February 1, 1994. (Exhibit
to PSI's 1993 Form 10-K in File No. 1-3543.)
4-p *Indenture (Secured Medium-term Notes, Series A), dated
July 15, 1991, between PSI and LaSalle National Bank,
as Trustee. (Exhibit to PSI's Form 10-K/A, Amendment
No. 2, dated July 15, 1993, in File No. 1-3543.)
4-q *Indenture (Secured Medium-term Notes, Series B), dated
July 15, 1992, between PSI and LaSalle National Bank,
as Trustee. (Exhibit to PSI's Form 10-K/A, Amendment
No. 2, dated July 15, 1993, in File No. 1-3543.)
Exhibit
Designation Nature of Exhibit
4-r *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-s *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-t *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-u *First Supplemental 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-v *Second Supplemental Indenture 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.)
4-w Third Supplemental Indenture dated as of March 15,
1998, between PSI and The Fifth Third Bank, as Trustee.
Cinergy and CG&E
4-x *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-y *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-z *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-aa *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-bb *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.)
Exhibit
Designation Nature of Exhibit
4-cc *Thirty-fourth Supplemental Indenture between CG&E and
The Bank of New York dated as of October 1, 1993.
(Exhibit to CG&E's September 30, 1993, Form 10-Q in
File No. 1-1232.)
4-dd *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-ee *Thirty-sixth Supplemental Indenture between
G&E and The Bank of New York dated as of
February 15, 1994. (Exhibit to CG&E's
Registration Statement No. 33-52335.)
4-ff *Thirty-seventh Supplemental Indenture
between CG&E and The Bank of New York dated
as of October 14, 1996. (Exhibit to
Cinergy's 1996 Form 10-K in File No. 1-11377.)
4-gg *Loan Agreement between CG&E and the 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-hh *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-ii *Loan Agreement between CG&E and the County of Boone,
Kentucky dated as of January 1, 1994. (Exhibit to
CG&E's 1993 Form 10-K in File No. 1-1232.)
4-jj *Loan Agreement between CG&E and the State of Ohio Air
Quality Development Authority dated as of December 1,
1985. (Exhibit to CG&E's 1985 Form 10-K in File No.
1-1232.)
4-kk *Loan Agreement between CG&E and the State of Ohio Air
Quality Development Authority dated as of December 1,
1985. (Exhibit to CG&E's 1985 Form 10-K in File No.
1-1232.)
4-ll *Loan Agreement between CG&E and 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.)
Exhibit
Designation Nature of Exhibit
4-mm *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-nn *Loan Agreement between CG&E and the State of Ohio
Water Development Authority dated as of January 1,
1994. (Exhibit to CG&E's 1993 Form 10-K in File No.
1-1232.)
4-oo *Loan Agreement between CG&E and the State of Ohio Air
Quality Development Authority dated as of January 1,
1994. (Exhibit to CG&E's 1993 Form 10-K in File No.
1-1232.)
4-pp *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-qq *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-rr *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-ss *Third Supplemental Indenture between CG&E and The
Fifth Third Bank dated as of October 9, 1997. (Exhibit
to CG&E'S September 30, 1997, Form 10-Q in File No.
1-1232.)
Cinergy, CG&E, and ULH&P
4-tt *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-uu *Seventh Supplemental Indenture between ULH&P
and The Bank of New York dated as of October
1, 1973. (Exhibit to CG&E's Registration
Statement No. 2-60961.)
Exhibit
Designation Nature of Exhibit
4-vv *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-ww *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-xx *First Supplemental Indenture between ULH&P and The
Fifth Third Bank dated as of July 15, 1995. (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, 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, Cinergy
Investments, Inc. (Investments), PSI, and
William J. Grealis. (Exhibit to Cinergy's
1994 Form 10-K in File No. 1-11377.)
10-e +First Amendment to Employment Agreement dated January
1, 1997, among Cinergy, CG&E, Services, Investments,
PSI, and William J. Grealis.
Exhibit
Designation Nature of Exhibit
10-f *+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 *+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-h *+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 *+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-j *+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 *+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-l *+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.)
10-m +Employment Agreement dated April 22, 1997,
among Cinergy, Services, CG&E, PSI, and
Madeleine W. Ludlow.
10-n +Employment Agreement dated October 1, 1997,
among Cinergy, Services, CG&E, PSI, and
Donald B. Ingle, Jr.
Cinergy and PSI
10-o *+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 in File No. 1-9941.)
Exhibit
Designation Nature of Exhibit
10-p *+First Amendment to Employment Agreement
dated August 30, 1996, among Cinergy, PSI,
and John M. Mutz. (Exhibit to Cinergy's
1996 Form 10-K in File No. 1-11377.)
10-q *+Deferred Compensation Agreement, effective
as of January 1, 1992, between PSI 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-r *+Split Dollar Life Insurance Agreement,
effective as of January 1, 1992, between PSI
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 *+First Amendment to Split Dollar Life
Insurance Agreement between PSI 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-t *+PSI Union Employees' 401(k) Savings Plan as amended
and restated January 1, 1992. (Exhibit to PSI Resources
1992 Form 10-K in File No. 1-9941.)
10-u *Amendment to 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-v *+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.)
10-w *+PSI Employees' 401(k) Savings Plan as amended and
restated January 1, 1992. (Exhibit to PSI Resources
1992 Form 10-K in File No. 1-9941.)
10-x *Amendment to 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.)
Exhibit
Designation Nature of Exhibit
10-y *+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-z *+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-aa *+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-bb *+Deferred Compensation Agreement between CG&E and
Jackson H. Randolph dated January 1, 1992. (Exhibit to
CG&E's 1992 Form 10-K in File No. 1-1232.)
10-cc *+Split Dollar Insurance Agreement, effective
as of May 1, 1993, between CG&E and Jackson
H. Randolph. (Exhibit to Cinergy's 1994
Form 10-K in File No. 1-11377.)
10-dd *+Amended and Restated Supplemental
Retirement Income Agreement between CG&E and
Jackson H. Randolph. (Exhibit to Cinergy's,
1995 Form 10-K in File No. 1-11377.)
10-ee *CG&E Deferred Compensation and Investment
Plan, as amended and restated, effective
January 1, 1995. (Exhibit to Cinergy's 1996
Form 10-K in File No. 1-11377.)
10-ff *CG&E Savings Incentive Plan, as amended and
restated, effective January 1, 1995.
(Exhibit to Cinergy's 1996 Form 10-K in File
No. 1-11377.)
10-gg +Amended and Restated Supplemental Executive Retirement
Income Agreement between CG&E and certain executive
officers.
10-hh *+Executive Severance Agreement between CG&E and
certain executive officers. (Exhibit to CG&E's 1989
Form 10-K in File No. 1-1232.)
Exhibit
Designation Nature of Exhibit
Cinergy
10-ii *+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-jj +1997 Amendments to Various Compensation and
Benefit Plans of Cinergy Corp., adopted
January 30, 1997.
10-kk *+Cinergy Stock Option Plan, adopted October 18, 1994,
effective October 24, 1994. (Exhibit to Cinergy's Form
S-8, filed October 19, 1994, in File No. 1-11377.)
10-ll *+Amendment to 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-mm *+Cinergy Performance Shares Plan, adopted October 18,
1994, effective October 24, 1994. (Exhibit to Cinergy's
Form S-8, filed October 19, 1994, in File No. 1-11377.)
10-nn *+Amendment to 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-oo *+Cinergy Annual Incentive Plan, adopted October 18,
1994, effective October 24, 1994. (Exhibit to Cinergy's
1994 Form 10-K in File No. 1-11377.)
10-pp *+Amendment to Cinergy Annual Incentive Plan, amended
January 25, 1996, effective January 1, 1996. (Exhibit
to Cinergy's 1996 10-K in File No. 1-11377.)
10-qq *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-rr *Amendment to Cinergy's Employee Stock Purchase and
Savings Plan, adopted April 26, 1996, effective January
1, 1996. (Exhibit to Cinergy's June 30, 1996, Form 10-Q
in File No. 1-11377.)
Exhibit
Designation Nature of Exhibit
10-ss *Amendment to Cinergy's Employee Stock Purchase and
Savings Plan, adopted October 22, 1996, effective
November 1, 1996. (Exhibit to Cinergy's September 30,
1996, Form 10-Q in File No. 1-11377.)
10-tt *+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-uu *+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-vv *+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-ww *+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-xx *+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.)
10-yy *+Amendment to Cinergy's 1996 Long-Term Incentive
Compensation Plan, adopted October 22, 1996, effective
November 1, 1996. (Exhibit to Cinergy's September 30,
1996, Form 10-Q in File No. 1-11377.)
10-zz *+Cinergy's 401(k) Excess Plan, adopted
December 17, 1996. (Exhibit to Cinergy's
1996 Form 10-K in File No. 1-11377.)
Exhibit
Designation Nature of Exhibit
10-aaa *+Cinergy's Nonqualified Deferred Incentive
Compensation Plan, adopted December 17,
1996. (Exhibit to Cinergy's 1996 Form 10-K
in File No. 1-11377.)
Cinergy, CG&E, and PSI
21 Subsidiaries of Cinergy, CG&E, and PSI
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, 1997
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
1997 $10 618 $12 582 $ 5 609 $ 18 427 $ - $10 382
1996 $94 409 $22 341 $ 9 503 $115 635 $ - $10 618
1995 $90 547 $33 921 $(8 489) $ 21 570 $ - $94 409 1/
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."
THE CINCINNATI GAS AND ELECTRIC COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
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
1997 $9 178 $ 6 484 $ 5 609 $12 072 $ - $9 199
1996 $9 615 $17 297 $ 6 669 $24 403 $ - $9 178
1995 $8 999 $27 623 $(8 496) $18 511 $ - $9 615
PSI ENERGY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
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
1997 $ 1 269 $6 098 $ - $ 6 184 $ - $ 1 183
1996 $84 517 $5 041 $2 834 $91 123 $ - $ 1 269
1995 $81 272 $6 100 $ 7 $ 2 862 $ - $84 517 1/
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."
THE UNION LIGHT, HEAT AND POWER COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997
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
1997 $1 024 $1 579 $ 691 $2 298 $ - $ 996
1996 $1 035 $1 862 $1 577 $3 450 $ - $1 024
1995 $ 457 $3 010 $ - $2 432 $ - $1 035
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 26, 1998
By /s/ James E. Rogers
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
J. Wayne Leonard Vice President and Director
Larry E. Thomas Vice President and Director
Cinergy, CG&E, PSI, and ULH&P
/s/James E. Rogers Vice Chairman, Chief March 26, 1998
James E. Rogers Executive Officer, and Director
Attorney-in-fact for all President of Cinergy
the foregoing persons (Principal Executive Officer)
/s/Madeleine W. Ludlow Vice President and March 26, 1998
Madeleine W. Ludlow Chief Financial Officer
Director of ULH&P
(Principal Financial Officer)
/s/John P. Steffen Vice President and Comptroller March 26, 1998
John P. Steffen (Principal Accounting Officer)