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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, 1998
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) 421-9500
1-1232 THE CINCINNATI GAS & ELECTRIC COMPANY 31-0240030
(An Ohio Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500
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) 421-9500
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 New York Stock Exchange
& Electric Company 4%
Junior Subordinated New York Stock Exchange
Debentures 8.28%
PSI Energy, Inc. Cumulative Preferred Stock New York Stock Exchange
4.32%, 4.16%, 6 7/8%
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. (X)
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 January 31, 1999, the aggregate market value of the voting and nonvoting
common equity of Cinergy Corp. held by nonaffiliates was $4.9 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 January 31, 1999, shares of Common Stock outstanding for each registrant
were as listed:
Company Shares
Cinergy Corp., par value $.01 per share 158,681,157
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 15, 1999, and the Information
Statement of PSI Energy, Inc. dated March 22, 1999, 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.
47
TABLE OF CONTENTS
Item Page
Number Number
PART I
1 Business
Organization . . . . . . . . . . . . . . . . . . . . . . 4
ECBU . . . . . . . . . . . . . . . . . . . . . . . . . . 5
EDBU . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ESBU . . . . . . . . . . . . . . . . . . . . . . . . . . 7
IBU. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Regulation . . . . . . . . . . . . . . . . . . . . . . . 9
Competitive Pressures, Capital Resources, and
Year 2000. . . . . . . . . . . . . . . . . . . . . . . 10
Employees. . . . . . . . . . . . . . . . . . . . . . . . 10
2 Properties . . . . . . . . . . . . . . . . . . . . . . . . 11
ECBU . . . . . . . . . . . . . . . . . . . . . . . . . . 11
EDBU . . . . . . . . . . . . . . . . . . . . . . . . . . 12
IBU. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3 Legal Proceedings
Manufactured Gas Plant Claims. . . . . . . . . . . . . . 13
United Scrap Lead Site . . . . . . . . . . . . . . . . . 13
4 Submission of Matters to a Vote of Security Holders. . . . 13
Executive Officers of the Registrants. . . . . . . . . . . 14
PART II
5 Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . . 19
6 Selected Financial Data. . . . . . . . . . . . . . . . . . 19
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 21
7A Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . . . 47
Index to Financial Statements and Financial Statement
Schedules. . . . . . . . . . . . . . . . . . . . . . . . 48
8 Financial Statements and Supplementary Data. . . . . . . . 49
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . 130
PART III
10 Directors and Executive Officers of the Registrants. . . . 130
11 Executive Compensation . . . . . . . . . . . . . . . . . . 131
12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . 143
13 Certain Relationships and Related Transactions . . . . . . 144
PART IV
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Financial Statements and Schedules . . . . . . . . . . 144
Reports on Form 8-K. . . . . . . . . . . . . . . . . . 144
Exhibits . . . . . . . . . . . . . . . . . . . . . . . 144
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 159
PART I
ITEM 1. BUSINESS
ORGANIZATION
Cinergy, CG&E, PSI, and ULH&P
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 The Cincinnati Gas & Electric
Company ("CG&E") and PSI Resources, Inc. Cinergy is the parent holding company
of PSI Energy, Inc. ("PSI"), CG&E, Cinergy Investments, Inc. ("Investments"),
Cinergy Global Resources, Inc. ("Global Resources"), and Cinergy Services, Inc.
("Services").
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.
CG&E, an Ohio corporation, is a combination electric and gas public utility
company. It has five wholly-owned utility subsidiaries as follows: The Union
Light, Heat and Power Company, a Kentucky corporation ("ULH&P"); Miami Power
Corporation, an Indiana corporation; The West Harrison Gas and Electric Company,
an Indiana corporation; KO Transmission Company, a Kentucky corporation ("KO
Transmission"); and Lawrenceburg Gas Company, an Indiana corporation. In
addition, CG&E has one wholly-owned non-utility subsidiary, Tri-State
Improvement Company, an Ohio corporation.
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
3,200 square miles, has an estimated population of 2.0 million people, and
includes the cities of Cincinnati and Middletown in Ohio, Covington and Newport
in Kentucky, and Lawrenceburg in Indiana.
ULH&P 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 322,000 people, and includes the cities of Covington
and Newport in Kentucky.
Investments holds virtually all of Cinergy's domestic non-utility businesses and
interests. Global Resources, formed in 1998, principally holds Cinergy's
international businesses and certain other interests. Services is a service
company for the Cinergy system, providing member companies with a variety of
administrative, management, and support services.
Cinergy conducts its operations through various subsidiaries and affiliates. The
Company is functionally organized into four business units through which many of
its activities are conducted: Energy Commodities Business Unit ("ECBU"), Energy
Delivery Business Unit ("EDBU"), Energy Services Business Unit ("ESBU"), and the
International Business Unit ("IBU"). The traditional, vertically-integrated
utility functions have been realigned into the ECBU, EDBU, and ESBU. Each
business unit and its responsibilities as of December 31, 1998, is described in
detail below. As the industry continues its evolution, Cinergy will continually
analyze its operating structure and make adjustments as appropriate. In early
1999, certain organizational changes were begun to further align the business
units to reflect Cinergy's strategic vision. Reference is made to Note 15 of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" for a discussion on financial information by business unit
as of December 31, 1998.
ECBU
Cinergy, CG&E, and PSI
The ECBU operates and maintains the majority of Cinergy's domestic generating
assets which are owned by CG&E and PSI and located in Ohio, Indiana, and
Kentucky. These generating plants are mostly coal-fired and have the capacity to
generate approximately 11,000 megawatts ("MW") of electricity. (Reference is
made to "Item 2. Properties" for a discussion on these generating sites.) The
ECBU produces energy for CG&E, PSI, and ULH&P native load customers.
The ECBU is also involved in energy risk management, wholesale energy marketing
and trading, and financial restructuring services. Wholesale energy marketing
and trading operations are conducted through CG&E and PSI, as well as through
Cinergy Capital & Trading, Inc. ("CC&T"), a subsidiary of Investments, and its
subsidiaries. In 1998, CC&T acquired Producers Energy Marketing, LLC, a natural
gas marketing and trading operation. In 1997, CC&T acquired Greenwich Energy
Partners, which specializes in energy risk management, marketing, and
proprietary arbitrage. For information on the risks associated with these
activities see "Market Risk Sensitive Instruments and Positions" in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Fuel Supply
Cinergy, CG&E, and PSI
Approximately 27 million tons of coal are purchased annually for use by CG&E and
PSI. The majority of the coal required is obtained through long-term coal supply
agreements, with the remaining requirements purchased on the spot market and
through short-term supply agreements. The coal delivered under these agreements
is primarily from mines located in West Virginia, Ohio, Kentucky, and
Pennsylvania for CG&E, and Indiana, Illinois, Pennsylvania, and West Virginia
for PSI.
Alternative sources of fuel are monitored to assure a continuing availability of
economical fuel supplies. Cinergy's practice of purchasing a portion of its coal
requirements on the spot market and the continued investigation of the
least-cost coal options in connection with its compliance with the Clean Air Act
Amendments of 1990 will be maintained. (See the information appearing under the
caption "Environmental Issues" in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.")
It is believed that sufficient coal can be obtained to meet the future
generating requirements of CG&E and PSI. However, the ability to predict the
extent to which coal availability and price may ultimately be affected by future
environmental requirements is uncertain.
Gas Supply
Cinergy, CG&E, and ULH&P
The purchase of natural gas by CG&E and its subsidiaries is coordinated by the
ECBU. The EDBU is responsible for the subsequent delivery of such gas to native
load customers. In 1998, 45% of the natural gas supply was purchased 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 to meet its core requirements, and "swing" load, which is gas available
on a daily basis to accommodate changes in demand. Reservation charges are paid
for firm-base and swing supplies. These charges guarantee delivery from the
supplier during extreme weather.
As the trend of customers purchasing gas directly from gas marketers (suppliers)
and using CG&E and its subsidiaries' facilities for transportation increases,
the companies seek to minimize contract commitment costs to firm suppliers, and
minimize the amount of reservation charges paid to suppliers for firm supply.
Accordingly, it is anticipated that not more than 50% of the gas supply will be
purchased from firm supply agreements in 1999. (Refer to the information
appearing under the caption "Customer Choice" in the "Competitive Pressures"
section of "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of CG&E's gas customer-choice
program.)
Gas purchased is transported on interstate pipelines either directly to the
distribution systems, or it is injected into pipeline storage facilities for
withdrawal and delivery in the future. The majority of the gas supplies
originates from the Gulf of Mexico coastal area of Texas and Louisiana. In
addition, limited supplies originate 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.
Environmental Matters
Cinergy, CG&E, and PSI
The coal-fired generation of the utility subsidiaries faces potential
restrictions on carbon dioxide and nitrogen oxide ("NOx") emissions. Proposed
NOx limits could require capital costs currently estimated at approximately $38
million for 1999, and $500 million to $700 million (in 1998 dollars) between now
and 2003.
For additional information, see "Environmental Issues" in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EDBU
Cinergy, CG&E, PSI, and ULH&P
The EDBU is comprised of Cinergy's domestic transmission and distribution
operations. Through the EDBU they plan, design, build, operate, and maintain
wire and pipe systems on behalf of Cinergy's domestic utility companies designed
to deliver energy commodities to customers. Approximately 45,000 circuit miles
of electric lines were operated to provide regulated transmission and
distribution service to 1.4 million customers as of December 31, 1998, and
approximately 7,000 miles of gas mains and service lines were operated to
provide regulated distribution service to approximately 470,000 customers at the
end of 1998. (Reference is made to "Item 2. Properties" for a discussion on the
transmission and distribution lines that Cinergy owns through its regulated
subsidiaries.) The EDBU provides transmission and distribution services to the
ESBU on behalf of CG&E, PSI, and ULH&P for delivery of gas and electricity to
the end-use customer.
Electric Operations
Cinergy, CG&E, PSI, and ULH&P
The EDBU, through Cinergy's domestic utility subsidiaries, as well as other
non-affiliated utilities in an eight-state region, participates in the East
Central Area Reliability Coordination Agreement ("ECAR Agreement"). The ECAR
Agreement coordinates the planning and operation of generating and transmission
facilities, which provides 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 is interconnected with the electric systems of Indiana
Michigan Power Company, Columbus Southern Power Company ("CSP"), Ohio Power
Company (all doing business as American Electric Power Company, Inc.), Central
Illinois Public Service Company (doing business as Ameren Corp.), Kentucky
Utilities Company and Louisville Gas & Electric Company (both doing business as
LG&E Energy Corp.), East Kentucky Power Cooperative, Inc., Hoosier Energy Rural
Electric Cooperative, Inc., Indianapolis Power and Light Company, Northern
Indiana Public Service Company, Southern Indiana Gas and Electric Company, The
Dayton Power and Light Company ("DP&L"), and Ohio Valley Electric Corporation.
Cinergy, CG&E, and PSI
CG&E, CSP, and DP&L have constructed electric generating units and related
transmission facilities on varying common ownership bases. 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. (Refer to Note 13 of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data" for a discussion on
CG&E's and PSI's jointly owned plants.)
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 Federal Energy Regulatory Commission ("FERC").
Other Activities of the EDBU
Cinergy
Various Cinergy subsidiaries, through the EDBU, are entering non-regulated
businesses related to its core business. These businesses include: locating and
constructing underground facilities; constructing and owning telecommunications
infrastructure; and engineering, procuring, constructing, operating, and
maintaining electric and gas equipment for others.
ESBU
Cinergy, CG&E, PSI, and ULH&P
The ESBU is responsible for Cinergy's relationships with retail customers,
including gas and electric sales and marketing to both native load and other
retail customers, meter reading, order completion, billing, credit collection
services, and account problem solving.
Customer, Sales Territory, and Revenue Data
Cinergy, CG&E, PSI, and ULH&P
The percent of operating revenues derived from the sale of electricity and the
sale and transportation of natural gas for each registrant for the years ended
December 31 are as follows:
Operating Revenues
Registrant 1998 1997 1996
Electric Gas Electric Gas Electric Gas
Cinergy and subsidiaries 81% 18% 88% 11% 85% 14%
CG&E and subsidiaries 86% 14% 80% 20% 76% 24%
PSI 100% n/a 100% n/a 100% n/a
ULH&P 74% 26% 71% 29% 71% 29%
Regulated operations are conducted through Cinergy's regulated subsidiaries. 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. The area served by PSI is a residential,
agricultural, and widely diversified industrial territory. No one customer
accounts for more than 10% of operating revenues for PSI, 10% of electric or gas
operating revenues for CG&E and its utility subsidiaries, or 10% of electric or
gas operating revenues for ULH&P.
Electric sales are seasonal, due to increased electricity usage for heating
during the winter and air conditioning during the summer. Electricity usage
peaks during the summer. Gas sales are also seasonal, with winter being the peak
time period due to heating during the cold months.
Other Activities of the ESBU
Cinergy
The ESBU, through various non-regulated subsidiaries and joint ventures, is
responsible for the development and marketing of products and services to meet
retail customers' needs. These products and services include: retail marketing
of natural gas and electricity; energy-related asset management services to
commercial and industrial customers; energy management and consulting services
to commercial customers that operate retail facilities; bundled billing services
for residential and small business customers; and telecommunications services.
The ESBU, through various non-regulated companies, also invests in the
development of thermal and chilled water energy facilities through joint venture
arrangements with Trigen Energy Corporation.
IBU
Cinergy
The IBU manages Cinergy's direct and indirect international business holdings
through Global Resources and its subsidiaries in more than ten countries.
Cinergy, through a subsidiary of Global Resources, along with GPU, Inc. formed a
50%/50% joint venture, Avon Energy Partners Holdings ("Avon Energy"), and
acquired Midlands Electricity plc ("Midlands") in June 1996. Midlands primarily
distributes and supplies electricity to over 2.2 million industrial, commercial,
and residential customers in the United Kingdom ("UK"). In addition, Midlands,
together with its subsidiaries, generates power, supplies natural gas to retail
customers, and performs electrical contracting services. In November 1998,
Midlands entered into an agreement, which is subject to governmental and
regulatory approvals, to sell its power supply business to National Power PLC.
(See Note 10 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data" for summarized financial data for
Avon Energy.)
During 1998, Cinergy received approval from the Securities and Exchange
Commission ("SEC") to invest up to 100% of its retained earnings in foreign
utility companies ("FUCOs") and "exempt wholesale generators" ("EWGs"). At
December 31, 1998, Cinergy's consolidated retained earnings equaled $945 million
and its aggregate investment in EWGs and FUCOs totaled $619 million, of which
approximately $108 million was invested during 1998.
Cinergy continues to pursue energy-related investment opportunities. The timing
of such investments will depend on changing market conditions and regulatory
approvals. Certain risks such as foreign exchange risk are inherent in these
types of investments. Cinergy implements a variety of agreements such as
currency swap agreements or contracts pegged to the United States ("US") dollar
to mitigate risks associated with international investment. Nonetheless, it is
not possible to mitigate all risks. (Reference is made to "Market Risk Sensitive
Instruments and Positions" in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.")
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 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.
CG&E, ULH&P, and PSI are each subject to regulation by the 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. Transportation of gas between CG&E and
ULH&P by KO Transmission is subject to regulation by the FERC under the Natural
Gas Act.
CG&E, ULH&P, and PSI are subject to regulation by their respective state utility
commissions as to retail rates, services, accounts, depreciation, issuance of
securities, acquisitions, and sales of certain utility properties.
Refer to the information appearing under the caption "Rate Orders and Other
Regulatory Matters" in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1(f) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data"
for additional discussions on rate orders in effect and other regulatory
matters.
Cinergy
Midlands is subject to regulation by the UK's Office of Electricity Regulation.
Midlands' rates are subject to regulatory review every five years, with the
results of the next review scheduled to become effective on April 1, 2000. The
supply business franchise license, which Midlands intends to sell to National
Power plc, currently applies only to customers having an annual maximum demand
of less than 100 kilowatt-hours ("kwh"). Customers with a higher demand are able
to buy their electricity from any electricity supplier. (See Note 10 of the
"Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data" for a discussion of the pending sale of Midlands' supply
business.)
On October 28, 1998, Midlands opened up a section of its market to competition.
Domestic and small business customers within those areas were free from that
date to move to a new electricity supplier. Midlands, similar to other regional
electric suppliers, is opening up its market to competition in phases. Midlands'
market is expected to be completely open by March 1999. Opening the market to
competition enabled Midlands to compete for domestic and small business
customers outside of its service area as permitted, and also enabled Midlands'
competitors to compete for Midlands' customers.
COMPETITIVE PRESSURES, CAPITAL RESOURCES, AND YEAR 2000
Cinergy, CG&E, PSI, and ULH&P
Refer to the information appearing under the applicable captions in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for discussions regarding Competitive Pressures, Capital Resources,
and Year 2000.
EMPLOYEES
Cinergy, CG&E, PSI, and ULH&P
The number of employees of Cinergy and its subsidiaries at December 31, 1998,
was 8,794, of whom 1,260 were employed by international subsidiaries. Cinergy
and its utility subsidiaries have collective bargaining agreements with the
International Brotherhood of Electrical Workers ("IBEW"), the United
Steelworkers of America ("USWA"), and the Independent Utilities Union ("IUU").
The following is a table showing the number of employees for each registrant by
classification:
Classification Cinergy CG&E PSI ULH&P
IBEW 2,808 1,099 (a) 1,344 (d) 69 (a)
USWA 403 287 (b) n/a 92 (b)
IUU 1,022 514 (c) n/a 61 (c)
Non-Bargaining 3,301 394 663 24
International 1,260 (e) n/a n/a n/a
8,794 2,294 2,007 246
(a) Contract will expire April 1, 2001.
(b) Contract will expire May 15, 2002.
(c) Contract will expire April 1, 2001.
(d) Contract will expire April 30, 1999. (See Note 12(e) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" for further information.)
(e) Of this number, 847 belonged to bargaining units.
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" for a discussion of
jointly-owned plant.
Cinergy, CG&E, and PSI
ECBU
At December 31, 1998, Cinergy's 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:
Principal Net
Percent Fuel Capability
Plant Name Location Ownership Source 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.
The 1998 peak loads (exclusive of off-system transactions) occurred in August
for CG&E at 4,725 MW and in July for PSI at 5,708 MW. For the period 1999
through 2008, peak load and kwh sales for CG&E and PSI are each forecast to have
annual growth of 2% and 1%, respectively. These forecasts reflect load growth,
alternative fuel choices, population growth, and housing starts, and exclude
non-firm power transactions and any potential off-system, long-term firm power
sales. During 1998, substantially all of CG&E's and PSI's kwh generation was
from coal-fired units.
EDBU
Outlined in the following table are the electric transmission and distribution
systems (excluding jointly-owned portions) for Cinergy, CG&E, PSI, and ULH&P as
of December 31, 1998:
Electric Electric Substation
Transmission Distribution Combined
Systems Systems Capacity
(circuit miles) (kilovolt-amperes)
Cinergy and subsidiaries 7 056 37 470 50 002 861
CG&E and subsidiaries 1 788 17 551 21 518 202
PSI 5 268 19 919 28 484 659
ULH&P 105 2 529 1 094 548
A portion of CG&E's total transmission system is jointly owned, primarily in
conjunction with its jointly-owned electric generating units. Further, certain
portions of PSI's transmission systems are jointly owned. In addition to an
intercompany tie between CG&E's and PSI's electric systems, Cinergy's electric
system is interconnected with 10 other utilities.
At year-end, CG&E's natural gas distribution system consisted of 5,836 miles of
mains and service lines located in southwestern Ohio. CG&E also owns two
propane/air peakshaving plants. Associated with these plants are two underground
caverns with a total capacity of fifteen million gallons. 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.
At year-end, ULH&P's natural gas distribution system consisted of 1,331 miles of
mains and service lines located in northern Kentucky. ULH&P also owns a
propane/air peakshaving plant. Further, ULH&P owns a seven million gallon
capacity underground storage cavern for liquid propane and related liquid
propane feeder lines located in northern Kentucky, 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
IBU
As of December 31, 1998, Cinergy had interests in 4,479 MW of electric
generating plants. This includes Cinergy's international subsidiaries, as well
as jointly-owned investments. Additionally, ownership of two district heating
plants provides 816 MW of thermal capacity, of which 132 MW can be converted to
electricity. Cinergy also owns interests in 39,133 miles of transmission and
distribution systems through jointly-owned investments. Through these
investments, Cinergy serves 2.24 million transmission and distribution customers
and 16,500 retail district heating customers (served through 275 wholesale
customers).
ITEM 3. LEGAL PROCEEDINGS
Cinergy, CG&E, and PSI
Manufactured Gas Plant Claims
See Note 12(b) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
Cinergy and CG&E
United Scrap Lead Site
The United States Environmental Protection Agency ("EPA") alleged that CG&E was
a Potentially Responsible Party under the Comprehensive Environmental Response,
Compensation and Liability Act liable for cleanup of the United Scrap Lead Site
in Troy, Ohio. CG&E was one of approximately 200 companies so named. In January
1998, CG&E executed a de minimis settlement agreement. This agreement, which was
accepted by the Federal District Court in October 1998, fully resolves CG&E's
liability for the site.
ULH&P
ULH&P has no material pending legal proceedings.
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, 1999)
Age at
Dec. 31,
Name 1998 Office & Date Elected or in Job
Cinergy, CG&E, and PSI
Jackson H. Randolph 68 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 51 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 51 Vice President and General Counsel of CG&E
- 1998
President, IBU of Cinergy - 1997
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
William J. Grealis (1) 53 Vice President and Chief Strategic Officer
of Cinergy, CG&E, and PSI - 1998
President, ESBU of Cinergy (2) - 1996 Vice
President of Cinergy - 1995 President of CG&E
(3) - 1995 President of Investments - 1995
President, Gas Business Unit of CG&E - 1995
Partner - Akin, Gump, Strauss, Hauer &
Feld (4) - 1978
J. Joseph Hale, Jr. 49 Vice President of CG&E and PSI - 1998
Vice President of Cinergy - 1996
General Manager, Marketing Operations of
CG&E - 1995
President of Cinergy Foundation, Inc. (5) -
1992
Donald B. Ingle, Jr. 49 Vice President of Cinergy, CG&E, and PSI
(2) - 1997
President, ESBU of Cinergy (2) - 1997
Contract Consultant - Investments - 1995
President and Chief Executive Officer -
CornerStone Industries, Inc. (4) - 1992
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1998 Office & Date Elected or in Job
Madeleine W. Ludlow 44 President, ECBU of Cinergy and Vice
President of Cinergy, CG&E, and PSI (6) -
1998
Vice President and Chief Financial Officer
of Cinergy, CG&E, and PSI - 1997
Vice President - Enterprise Diversified
Holdings Incorporated ("EDHI"), a
subsidiary of Public Service Enterprise
Group Incorporated (4) - 1996
Vice President and Treasurer - EDHI (4)
- 1992
William L. Sheafer 55 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 46 Vice President and Comptroller of Cinergy,
CG&E, and PSI - 1998
Comptroller of Cinergy, CG&E, and PSI (7) -
1997
Assistant Comptroller of CG&E - 1995
Assistant Comptroller of Cinergy and PSI -
1994
Assistant Controller of CG&E - 1991
Larry E. Thomas 53 Vice President of Cinergy, CG&E, and PSI -
1997
President, EDBU 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
Charles J. Winger 53 Vice President and Chief Financial Officer
of Cinergy, CG&E, and PSI (6) - 1998
Vice President of Cinergy - 1997
Vice President and Comptroller of Cinergy,
CG&E, and PSI (7) - 1997 Comptroller of
CG&E - 1995 Comptroller of Cinergy - 1994
Comptroller of Resources - 1988
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1998 Office & Date Elected or in Job
Cinergy and PSI
John M. Mutz 63 Vice President of Cinergy - 1995
President of PSI - 1994
President of Resources - 1993
Cinergy
John Bryant 52 Vice President of Cinergy - 1998
Managing Director of Cinergy Global Power
Services Limited, Cinergy's international
project development subsidiary (9) - 1997
Executive Generation Director - Midlands -
1996
Generation Director - Midlands - 1992
Michael J. Cyrus (10) 43 Chief Operating Officer, ECBU of Cinergy -
1998
Vice President of Cinergy - 1998
Senior Vice President - Electric
Clearinghouse, Inc. ("ECI") (4) - 1997
President - NGC Canada (4) - 1995
Executive Vice President - Novagas
Clearinghouse Ltd. (4) - 1995
Vice President, Energy Trading & Risk
Management - Natural Gas Clearinghouse
("NGC") (4) - 1994
Director, Option Trading - NGC (4) - 1993
M. Stephen Harkness 50 Vice President of Cinergy - 1996
Executive Vice President and Chief
Operating Officer of Trigen-Cinergy
Solutions LLC (11) - 1996
General Manager, Corporate Development
and Financial Services of Cinergy - 1994
Jerry W. Liggett 57 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
CG&E
James L. Turner 39 President of CG&E (12) - 1999
Vice President of Cinergy Services - 1997
Senior Counsel of Cinergy - 1995
Principal - Lewis & Kappes, P.C. (4)(13) -
1993
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at
Dec. 31,
Name 1998 Office & Date Elected or in Job
Jerome A. Vennemann 48 Secretary of CG&E (8) - 1998
Associate General Counsel of Cinergy, CG&E,
and PSI - 1996
Assistant Secretary of CG&E - 1995
Assistant Secretary of Cinergy and PSI -
1994
Senior Counsel of Cinergy, CG&E, and PSI -
1994
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) Prior to becoming President of Investments, Mr. Grealis was a partner in
the Washington, D.C., law firm of Akin, Gump, Strauss, Hauer & Feld. In
addition, prior to the merger, Mr. Grealis was President of PSI
Investments, Inc. on an interim basis beginning in 1992.
(2) Mr. Grealis relinquished the position of President of the ESBU during
May 1997, at which time he was succeeded by Mr. Ingle, who served as
acting President of the ESBU through September 1997. At that time, Mr.
Ingle was named President of the ESBU and Vice President of Cinergy,
CG&E, and PSI, all effective October 1, 1997.
(3) Mr. Grealis relinquished the position of President of CG&E effective
March 24, 1998.
(4) Non-affiliate of Cinergy.
(5) An affiliated public benefit corporation organized and operating
exclusively For charitable purposes.
(6) Effective April 1, 1998, Ms. Ludlow relinquished the additional title of
Chief Financial Officer and Mr. Winger was appointed Vice President and
Chief Financial Officer.
(7) Effective August 11, 1997, Mr. Steffen was appointed Comptroller of
Cinergy, CG&E, and PSI, succeeding Mr. Winger, who retained the office
of Vice President of Cinergy.
(8) Mr. Vennemann was named Secretary of CG&E effective April 22, 1998,
relinquishing the position of Assistant Secretary, and retaining the
position of Associate General Counsel.
(9) Name changed to Cinergy Global Power Services Limited from MPI
International Limited, effective May 1, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
(10) Prior to becoming Vice President effective April 22, 1998, Mr. Cyrus was
Senior Vice President of Trading and Operations with ECI, NGC's power
subsidiary in Houston, Texas, since 1997. Mr. Cyrus joined NGC in 1993,
holding various executive positions involving energy trading, marketing,
and risk management. Prior to serving as Senior Vice President of ECI,
Mr. Cyrus was President of NGC Canada and Executive Vice President of
Novagas Clearinghouse Ltd., where he had oversight responsibilities for
NGC's Canadian commercial operations.
(11) Joint venture company formed by Cinergy and Trigen Energy Corporation.
(12) In addition to serving as President of CG&E and as Vice President of
Cinergy Services, Mr. Turner has had full responsibility for Cinergy's
Government and Regulatory Affairs department since April 1998.
(13) Prior to joining Cinergy's Legal Department in 1995, Mr. Turner was a
principal in the Indianapolis law firm of Lewis & Kappes, P.C.,
representing industrial customers in utility regulatory and legislative
matters.
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. As of February
1, 1999, Cinergy's most recent dividend record date, there were 69,033 common
shareholders of record. The following table shows the high and low sales prices
per share, as applicable, and the dividends on common stock declared by Cinergy,
CG&E, PSI, and ULH&P for the past two years:
Cinergy CG&E(a) PSI(a) ULH&P(a)
Dividends Dividends
Market Price Declared Declared(b)
High Low Per Share In Thousands Per Share
1998 1st Quarter $38 11/16 $33 $.45 $42,600 $28,400 -
2nd Quarter 37 5/16 31 5/8 .45 42,600 40,399(c) -
3rd Quarter 38 7/8 30 13/16 .45 46,400 25,000 -
4th Quarter 39 7/8 33 3/4 .45 46,400 25,000 $14.50
1997 1st Quarter $35 3/4 $32 5/8 $.45 $42,600 $28,400 -
2nd Quarter 35 5/8 32 .45 42,600 28,400 -
3rd Quarter 35 1/4 32 5/16 .45 42,600 28,400 -
4th Quarter 39 1/8 32 .45 42,600 28,400 $17.00
(a) Market price for CG&E, PSI, and ULH&P is not applicable. 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.
(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.
(c) During the second quarter of 1998, PSI paid a non-cash dividend on common
stock of approximately $11,999,000.
See Note 2(b) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data" for a brief description of the registrant's
common stock dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA
Cinergy
1998 1997 1996 1995 1994
(in millions, except per share amounts)
Operating revenues (1) $5 876 $4 387 $3 276 $3 023 $2 888
Net income before extraordinary
item (1) 261 363 335 347 191
Net income (2) 261 253 335 347 191
Common stock
Earnings per share ("EPS") (3)
Net income before extraordinary
item 1.65 2.30 2.00 2.22 1.30
Net income 1.65 1.61 2.00 2.22 1.30
EPS-assuming dilution (3)
Net income before extraordinary
item 1.65 2.28 1.99 2.20 1.29
Net income 1.65 1.59 1.99 2.20 1.29
Dividends declared per share 1.80 1.80 1.74 1.72 1.50
Total assets (4) 10 298 8 858 8 725 8 103 8 037
Cumulative preferred stock of
subsidiaries subject to mandatory
redemption (5) - - - 160 210
Long-term debt (6) 2 604 2 151 2 326 2 347 2 615
Long-term debt due within
one year (6) 136 85 140 202 60
CG&E
1998 1997 1996 1995 1994
(in millions)
Operating revenues (1) $2 856 $2 452 $1 976 $1 848 $1 788
Net income (1) 216 239 227 236 158
Total assets (4) 5 459 4 914 4 844 5 081 5 069
Cumulative preferred stock subject
to mandatory redemption (5) - - - 160 210
Long-term debt (6) 1 220 1 324 1 381 1 518 1 738
Long-term debt due within
one year (6) 130 - 130 152 -
PSI
1998 1997 1996 1995 1994
(in millions)
Operating revenues (1) $2 403 $1 960 $1 332 $1 248 $1 114
Net income (1) 52 132 126 146 82
Total assets (4) 3 890 3 406 3 295 3 076 2 945
Long-term debt (6) 1 026 826 945 828 878
Long-term debt due within
one year (6) 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, 15, 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 management's 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. Forward-looking statements involve risks and uncertainties
which may cause actual results to differ materially from the forward-looking
statements. 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:
o Factors affecting 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.
o Legislative and regulatory initiatives regarding deregulation and
restructuring of the industry.
o The extent and timing of the entry of additional competition in electric or
gas markets and the effects of continued industry consolidation through the
pursuit of mergers, acquisitions, and strategic alliances.
o Challenges related to Year 2000 readiness, including success in
implementing the Cinergy Year 2000 Readiness Program, the effectiveness of
the Cinergy Year 2000 Readiness Program, and the Year 2000 readiness of
outside entities.
o 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.
o Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board ("FASB"), the Securities and Exchange
Commission ("SEC"), the Federal Energy Regulatory Commission ("FERC"),
state public utility commissions, state entities which regulate natural gas
transmission, gathering and processing, and similar entities with
regulatory oversight.
o Political, legal, and economic conditions and developments in the United
States ("US") and the foreign countries in which Cinergy Corp. ("Cinergy"
or "Company") or its subsidiaries or affiliates operate, including
inflation rates and monetary fluctuations.
o 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.
o The performance of projects undertaken by the non-traditional business and
the success of efforts to invest in and develop new opportunities.
o 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.
o Employee workforce factors, including changes in key executives, collective
bargaining agreements with union employees, or work stoppages.
o Legal and regulatory delays and other obstacles associated with mergers,
acquisitions, and investments in joint ventures.
o 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."
o Changes in international, federal, state, or local legislative
requirements, such as changes in tax laws or rates; environmental laws and
regulations.
Cinergy and its subsidiaries undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of changes in actual
results, changes in assumptions, or other factors affecting such statements.
Cinergy, CG&E, PSI, and ULH&P
THE COMPANIES
Cinergy, 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 The Cincinnati Gas & Electric Company ("CG&E") and PSI
Resources, Inc. Cinergy is the parent holding company of PSI Energy, Inc.
("PSI"), CG&E, Cinergy Investments, Inc. ("Investments"), Cinergy Global
Resources, Inc. ("Global Resources"), and Cinergy Services, Inc. ("Services").
PSI is a public utility primarily engaged in providing electric service in north
central, central, and southern Indiana. CG&E is a public utility primarily
engaged in providing electric and gas service in the southwestern portion of
Ohio and through its subsidiaries in adjacent areas in Kentucky and Indiana.
CG&E's principal subsidiary, The Union Light, Heat and Power Company ("ULH&P"),
is an operating utility primarily engaged in providing electric and gas service
in northern Kentucky. Investments holds virtually all of Cinergy's domestic
non-utility businesses and interests. Global Resources, formed in 1998, holds
Cinergy's international businesses and certain other interests. Services
provides Cinergy companies with a variety of administrative, management, and
support services.
Cinergy conducts its operations through various subsidiaries and affiliates. The
Company is functionally organized into four business units through which many of
its activities are conducted: Energy Commodities Business Unit ("ECBU"), Energy
Delivery Business Unit ("EDBU"), Energy Services Business Unit ("ESBU"), and the
International Business Unit ("IBU"). The traditional, vertically-integrated
utility functions have been realigned into the ECBU, EDBU, and ESBU. As the
industry continues its evolution, Cinergy will continually analyze its operating
structure and make adjustments as appropriate. In early 1999, certain
organizational changes were begun to further align the business units to reflect
Cinergy's strategic vision. Reference is made to Note 15 of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data"
for a discussion on financial information by business unit as of December 31,
1998.
FINANCIAL CONDITION
COMPETITIVE PRESSURES
ELECTRIC UTILITY INDUSTRY
Cinergy, CG&E, PSI, and ULH&P
Introduction
The electric utility industry is continuing to transition from a monopoly
cost-of-service regulated environment to an industry in which companies will
ultimately compete to be the retail customers' energy provider. This transition
will continue to impact the operations, structure, and profitability of Cinergy.
Energy companies are positioning themselves for full competition through the
pursuit of mergers and acquisitions, strategic alliances, and the development of
energy products and services. Cinergy's success in this transition is in large
part dependent on legislative and regulatory outcomes with respect to
electricity deregulation in its three franchise states: Ohio, Indiana, and
Kentucky, as well as other regions in the US where Cinergy chooses to compete in
the retail and wholesale markets.
Restructuring Process
Wholesale Markets The wholesale electric markets have been open to competition
since 1996 when the FERC issued Orders 888 and 889. These rules provided for
mandatory filing of open access/comparability transmission tariffs, functional
unbundling of all services, utilities' use of these filed tariffs for their own
bulk power transactions, establishment of an electronic bulletin board for
transmission availability and pricing information, and establishment of a
contract-based approach to recover stranded investments as a result of customer
choice at the wholesale level.
Competitors within the wholesale market include traditional utilities and
non-utility competitors such as exempt wholesale generators ("EWGs"),
independent power producers, and power marketers. Cinergy, through its ECBU, is
involved in wholesale power marketing and trading.
During late June 1998, Midwestern wholesale electric power markets experienced
unprecedented price volatility due to several factors, including unseasonably
hot weather, unplanned generating unit outages, transmission constraints, and
defaults by certain power marketers on their supply obligations. The
simultaneous occurrence of these events resulted in temporary but extreme price
spikes in the Midwestern electricity markets. During this period, Cinergy's
subsidiaries met both their statutory obligation to serve retail franchise
customers and contractual obligations with wholesale customers. Since the events
of June 1998, the Midwestern markets have continued to experience price
volatility and illiquidity. For further discussion, see the "Market Risk
Sensitive Instruments and Positions" section herein.
During 1998, the New York Mercantile Exchange ("NYMEX") began trading contracts
with delivery points located in the Midwest and Southern regions of the country.
Cinergy's transmission system is the delivery point for the Midwest region and
one of only four NYMEX delivery points in the US.
Retail Markets Regulation and the transition to competition at the retail (i.e.,
end-user) level currently remains under the jurisdiction of individual states.
(See State Developments for a discussion on the current status of customer
choice in each of Cinergy's franchise states.) In most states where
restructuring legislation has been enacted, all customers have been given the
right to choose an electricity supplier. The incumbent utility has retained the
right and obligation to provide the distribution and transmission of
electricity, which continues to remain a regulated service. Significant issues
facing state legislators, regulators, and incumbent franchise utilities in the
restructuring to a competitive retail market include:
o The responsibility for unrecovered costs of the utilities in excess of the
amounts which would be recovered under competitive market prices and the
mechanism to recover these costs.
o The period allowed for transition to full competition.
o The extent to which incumbent utilities continue to have the obligation to
serve during the transition period, or in the alternative, the extent to
which competitive bidding for existing franchise customers is required or
allowed.
o Default supplier responsibility following the transition period and the
compensation for the associated risk.
o The extent to which utilities are granted the flexibility to position
themselves for competition during the transition period, including the
right to sell assets and retain the proceeds from such sales.
o Resolution of potential market power issues either through forced
divestiture of generation and/or participation in a regional transmission
organization.
o The need for a power exchange or similar mechanism to establish a market
clearing price.
o Codes of conduct regarding the separation of the monopoly and non-monopoly
functions of a utility and the treatment of affiliate transactions.
o Restructuring of state tax laws applicable to utilities necessitated by the
disproportionate allocation of state tax liability to public utilities.
The anticipated restructuring of retail electric markets will create risks as
well as opportunities for utilities, e.g., the risks and opportunities arising
from the termination of the regulated Fuel Adjustment Clause, which provides
protection against escalation in fuel and purchased power costs. Additionally, a
number of implementation issues, including enhancements or replacements to
existing customer information and billing systems, will be required. Cinergy
will continue to focus on reducing costs and maintaining its status as a
low-cost provider of electricity as well as identifying and addressing the
likely implementation issues associated with retail customer choice.
Additionally, Cinergy will continue to execute its strategy of developing and
offering a portfolio of energy products and services for the retail market.
Cinergy continues to be an advocate of competition in retail electricity markets
and continues to pursue customer-choice legislation at both the state and
federal levels. Cinergy believes that the transition to competition can best
meet the interests of all stakeholders where the rules are prescribed to the
fullest extent possible in legislation that embodies the following:
o Price freezes that provide an opportunity for the utility to recover its
transition costs and provide immediate flexibility for the utility to
restructure its portfolio of supply assets in preparation for competition,
keeping any proceeds from the sale or other disposition of assets to offset
transition costs.
o A transition period with choice immediately available to all. During this
period customers can adapt to the rights and responsibilities associated
with choosing an alternative electricity supplier.
o Mitigation of market power issues through participation in a large,
regional transmission organization.
o Adequate recovery of regulatory assets.
Cinergy, CG&E, PSI, and ULH&P
State Developments
At present, a number of states have enacted legislation that will lead to
complete retail electric competition over 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 in return for recovery of
utility stranded costs, including the ability to securitize revenue streams
associated with such stranded costs.
Every state that has passed legislation has included a mechanism for the
recovery of some stranded investment. However, states have varied on the
methodology to be applied in determining the level of stranded investment, with
divestiture of generating assets being one such method.
As discussed below, the three states in which Cinergy operates electric
utilities are in various stages of addressing customer choice. None of these
states has yet passed legislation, but policymakers and stakeholders continue to
work to resolve the issues.
Cinergy and PSI
Indiana Customer-choice legislation was introduced in the Indiana General
Assembly in 1998 by a coalition of customer organizations and two investor-owned
utilities ("IOUs"), including Cinergy. After hearing and consideration by a
Senate committee, the bill was defeated in the full Senate.
Legislation proposed by a group of large industrial customers was introduced in
January 1999. At present, Cinergy continues to work with IOUs in Indiana and
other stakeholders to develop customer-choice legislation that can be enacted
into law in Indiana. The outcome of this effort is uncertain.
Cinergy and CG&E
Ohio Electric restructuring legislation was introduced in the Ohio legislature
during 1998. This legislation, "companion" electric restructuring bills (SB 237
and HB 732), proposed to afford choice to all retail electric customers in Ohio
beginning January 1, 2000. Neither bill was passed during the 1998 legislative
session.
During the third quarter of 1998, Ohio's IOUs, including CG&E, released a draft
bill that sets forth the utilities' proposed approach to comprehensive electric
restructuring in Ohio. Under the IOUs' proposal, choice to all retail electric
customers would be introduced by January 1, 2001. Rates would be frozen during a
transition period, a fixed charge for certain transition costs would continue
after the freeze period for a set time, and customers would be provided a
market-based "shopping credit" to stimulate the development of a competitive
market. The proposal also included a restructuring of the tax laws with respect
to electric utilities. In January 1999, a "place holder" bill was introduced in
both the House and Senate. These bills set forth a legislative intent to develop
comprehensive electric restructuring legislation in Ohio during 1999. Key
policymakers in the state continue to meet with the IOUs and other stakeholders
to see whether compromise legislation can be developed. It is uncertain whether
this effort will produce legislation in Ohio in 1999.
Cinergy, CG&E, and ULH&P
Kentucky House Joint Resolution 95, which required the formation of an executive
task force comprised of members from the Governor's office and the Kentucky
General Assembly to further study electric restructuring, was passed by the
Kentucky General Assembly and signed by the Governor in April 1998. Task force
members will study electric restructuring in anticipation of the next
legislative session, which occurs in January 2000.
Cinergy
United Kingdom
Transition to full competition in the United Kingdom's ("UK") electric utility
industry began with the industry's privatization in 1991. As a result of the
transition plan, larger users of electricity have been free to choose their
supplier since as early as 1991. In September 1998, a phase-in of choice for all
remaining customers commenced and is to be completed by March 1999. The power
suppliers sell power into a "pool" from which Regional Electric Companies
("RECs") purchase power for their customers through the supply segment of their
business. Midlands Electricity plc ("Midlands") is one of twelve RECs in the UK.
In November 1998, Midlands entered into an agreement to sell its power supply
business to one of the UK's primary power generation companies. The sale is
contingent upon UK government and regulatory approvals. Midlands' power supply
business purchases, markets, and supplies electricity to 2.2 million customers
in the UK.
After the sale, Midlands will continue to own and operate its electric
distribution business, which will remain regulated by the Office of Electricity
Regulation. Midlands' electric distribution business accounted for approximately
90% of its net income before interest and income taxes for the fiscal year ended
March 1998. All the RECs, including Midlands, are in the process of a
distribution price review. This process occurs every five years and is scheduled
to take effect April 1, 2000. The public must be notified six months prior to
any price changes; therefore, prices must be set and announced by October 1,
1999. (See Note 10 of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data" for an additional discussion of Cinergy's
investment in Midlands.)
Cinergy, CG&E, PSI, and ULH&P
Other Matters
Midwest ISO During 1998, the FERC approved the formation of a Midwest
Independent System Operator ("Midwest ISO"). The Midwest ISO is the result of
Cinergy's collaboration with other Midwestern utility companies to form an
Independent System Operator ("ISO") that will assume functional control of their
combined transmission systems and facilitate a reliable, efficient market for
electric power. The ISO will provide non-discriminatory open transmission access
consistent with FERC Order No. 888. The ISO will also be responsible for system
reliability and administration of a regional transmission tariff, which will
eliminate "pancaking" of transmission rates in the region. The Midwest ISO will
be governed by a recently-elected, disinterested Board of Directors.
In addition to the ISO concept, other utilities have proposed to transfer their
transmission assets to a "for profit" independent regional transmission company
("Transco"). Although Cinergy is not opposed to the formation of Transcos in the
long run, it believes that an ISO is a more efficient and effective interim
measure to immediately address market power issues and improve system
reliability.
Currently, there are 10 utility members participating in the Midwest ISO. The
Midwest ISO consists of 45,000 miles of transmission lines and covers portions
of 11 states, and includes over $6.5 billion of transmission investment, forming
one of the largest ISOs in the country. The Midwest ISO plans on beginning
operations in the year 2000.
Repeal of the PUHCA PUHCA limits registered public utility holding companies
such as Cinergy from competing for growth opportunities both domestically and
internationally. Under PUHCA, registered public utility holding companies are
limited in the amount of foreign investments and in domestic investments in
generation they can make. It also restricts business combinations through its
requirement that the electric systems of combining entities be "integrated."
Past efforts to repeal PUHCA have not been successful. In February 1999, a bill
to repeal significant parts of PUHCA - S. 313, was introduced in the US Senate.
Recently, the bill was voted out of the Senate Banking Committee without markup,
and now goes to the full Senate. While it is uncertain whether this bill will be
enacted into law, Cinergy continues to support the repeal of this act either as
part of comprehensive reform of the electric industry or as separate
legislation.
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. 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, 1998, 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 and results of operations of
the Company.
GAS UTILITY INDUSTRY
Cinergy and CG&E
Customer Choice Choice of gas supplier or pilot customer-choice programs are
operating in several states. CG&E currently participates in a gas
customer-choice program in Ohio. This program, which made customer choice
available to all residential and small commercial customers in November 1997,
was extended during 1998. Gas customers in approximately two-thirds of the state
of Ohio are now eligible to participate in this voluntary program. Large
industrial, commercial, and educational institution customers already had the
ability to select their own gas supplier. 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 gas transportation services for substantially all
customers within its franchise territory 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
Acquisition of ProEnergy
In June 1998, Cinergy, through Cinergy Capital & Trading, Inc. ("CC&T"),
acquired Producers Energy Marketing, LLC ("ProEnergy") from Apache Corporation
("Apache") and Oryx Energy Company ("Oryx"). ProEnergy has exclusive marketing
rights to North American gas production owned or controlled by Apache and Oryx,
which represents approximately 1.1 billion cubic feet per day of dedicated
natural gas supply. These supplies, combined with the active marketing of
third-party gas, are geographically diverse and are spread through the
Southwest, Rocky Mountains, Gulf Coast, Gulf of Mexico, and Michigan. The
acquisition was funded with cash and the issuance of 771,258 new shares of
Cinergy common stock.
Cinergy, CG&E, PSI, and ULH&P
SECURITIES RATINGS
The ratings as of February 28, 1999, provided by the major credit rating
agencies--Duff & Phelps Credit Rating Co. ("D&P"), Fitch IBCA ("Fitch"), Moody's
Investors Service ("Moody's"), and Standard & Poor's Ratings Services
("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+ BBB+ Baa1 BBB+
Junior Unsecured Debt BBB BBB+ Baa2 BBB+
Preferred Stock BBB BBB+ baa1 BBB
Commercial Paper D-1- F-1 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-1 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.
RATE ORDERS AND OTHER REGULATORY MATTERS
Cinergy and PSI
Indiana
Indiana Utility Regulatory Commission ("IURC") Orders - PSI's Retail Rate Order
and Demand-Side Management ("DSM") Order 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). The order reflects a return on common
equity of 11.0% and an overall rate of return on net original rate base of
8.21%. In settlement of a challenge by consumer groups to the September 1996
Order, the IURC approved a settlement agreement which reduced the original rate
increase by $2.1 million in August 1997.
In a separate order issued by the IURC in December 1996 ("December 1996 DSM
Order"), PSI was granted permission to recover $35 million per year for the four
years ending December 31, 2000, through a non-bypassable charge in PSI's retail
rates for previously incurred DSM costs and associated carrying costs. Further,
PSI is authorized to spend up to $8 million annually on ongoing DSM programs
through the year 1999 and to collect such amounts currently in retail rates.
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 expires 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 a previous coal supply agreement
between PSI and Exxon Coal and Minerals Company. The buyout charge, excluding
the portion applicable to joint owners, is being recovered through the wholesale
and retail fuel adjustment clauses, with carrying costs on unrecovered amounts,
through December 2002. (See Note 1(f) of the "Notes to Financial Statements" in
"Item 8. Financial Statements and Supplementary Data.")
Coal Gasification Contract Buyout Costs In November 1995, PSI and Destec Energy
Inc. ("Destec") entered into a 25-year contractual agreement for the provision
of coal gasification services at PSI's Wabash River Generating Station. The
agreement requires PSI to pay Destec a base monthly fee including certain
monthly operating expenses. PSI received authorization in the September 1996
Order for the inclusion of these costs in retail rates. In addition, PSI
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. Over the next five years, the base monthly fees and
expenses for the coal gasification service agreement are expected to total $212
million.
In September 1998, PSI reached agreement with Dynegy Inc. (Dynegy Inc. purchased
Destec in June 1997) to purchase the remainder of its 25-year contract for coal
gasification services for approximately $266 million. The proposed purchase,
which is contingent upon regulatory approval satisfactory to PSI, could be
completed in 1999. PSI is investigating its financing alternatives. The
transaction, if approved as proposed, is not expected to have a material impact
on PSI's earnings.
Currently, natural gas prices have fallen to a level which causes the synthetic
gas supply taken under the current gasification services agreement to be
substantially above market. If the buyout of the gasification services agreement
is approved, the combustion turbine will be fired with natural gas, or with
synthetic gas if it can be produced at a cost competitive with natural gas. In
nominal dollars, it is estimated that the total savings, primarily as a result
of the purchase, would be approximately $270 million over the life of the
contract.
Cinergy and CG&E
Ohio
Public Utilities Commission of Ohio ("PUCO") Order - CG&E's Gas Rate Order 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%. 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.
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.
Cinergy, CG&E, and ULH&P
SEC Order Authorizing the Retention of Gas Operations
In its 1994 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 November 1998, the SEC
issued an order unconditionally approving the retention of CG&E's gas
businesses.
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 operated by the ECBU). 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.
All required modifications to Cinergy's generating units to implement the Phase
I 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 to the extent a viable emission allowance market exists. This
cost-effective strategy will allow for meeting the 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. To meet NOx reductions required by Phase II,
additional burner modifications are planned on certain affected units in
addition to using a system-wide NOx emission averaging strategy.
Capital expenditures are forecast to be less than $10 million to comply with the
Phase II NOx reductions, substantially all of which are expected to be incurred
during 1999. These expenditures are included in the amounts provided in the
"Capital Requirements" section herein.
Ozone Transport Rulemaking In June 1997, the 37-state collaborative known as the
Ozone Transport Assessment Group made a wide range of recommendations to the EPA
to address the impact of ozone transport on serious nonattainment areas in the
Northeast, Midwest, and South. In late 1997, in response to this recommendation,
the EPA published its proposed call for revisions to State Implementation Plans
("SIPs") for statewide reductions in NOx emissions. In October 1998, the EPA
finalized its Ozone Transport Rule ("NOx SIP Call"). It applies to 22 states in
the eastern half of the US, including the three states in which the Cinergy
electric utilities operate, and also proposes a model NOx trading program. This
rule recommends that states reduce NOx emissions from primarily industrial and
utility sources to a certain limit by May 2003. The EPA gave the affected states
until September 30, 1999, to incorporate utility NOx reductions with a trading
program into their SIPs. If the states fail to revise their SIPs accordingly,
the EPA has proposed to implement a federal plan to accomplish NOx reductions by
May 2003.
Ohio, Indiana, a number of other states, and various industry groups, including
some of which Cinergy is a member, filed legal challenges to the NOx SIP Call in
late 1998. Ohio and Indiana have also provided preliminary indications that they
will seek fewer NOx reductions from the utility sector in their implementing
regulations than the EPA has budgeted in its rulemaking. The state implementing
regulations will need the EPA's approval. The current estimate of capital
expenditures required for compliance with the EPA limits in the new NOx SIP Call
is between $500 million and $700 million (in 1998 dollars) between now and 2003.
This estimate is significantly dependent on several factors, including the final
determination regarding both the timing and stringency of the final required NOx
reductions, the output of Cinergy's generating units, the availability of
adequate supplies of resources to construct the necessary control equipment, and
the extent to which a NOx allowance trading market develops, if any.
Ambient Air Standards and Regional Haze During 1997, the EPA revised the
National Ambient Air Quality Standards for ozone and fine particulate matter and
proposed rules for regional haze. The EPA is scheduled to finalize new regional
haze rules by the summer of 1999 and Congress, as part of the funding bill for
the Surface Transportation Act, combined the schedules for fine particulates and
regional haze implementation. These new rules increase the pressure for
additional NOx and SO2 emissions reductions. Depending on the ultimate outcome
of the NOx SIP Call, additional NOx reductions may be required from states by
2007 to address the new eight-hour ozone standard.
The EPA estimates it will take up to five years to collect sufficient ambient
air monitoring data to determine nonattainment areas. The states will then
determine the sources of these particulates and determine a regional emission
reduction plan. 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. At
this time, the exact amount and timing of required reductions cannot be
predicted.
Global Climate Change In December 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. On November 12, 1998, the
US signed the Kyoto Protocol. However, 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. The Kyoto Protocol, in its present form, is unlikely to be ratified by
the US Senate since it does not contain provisions requiring participation of
developing countries.
Significant uncertainty exists concerning both 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. The ECBU believes
that voluntary programs, such as the US Department of Energy ("DOE") 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. In November 1998, the EPA finalized its Mercury Information
Collection Request ("ICR"). Pursuant to the ICR, all generating units must
provide detailed information about coal use and mercury content. The EPA will
also select about 100 generating units for one-time stack sampling. At that
time, the EPA also announced that it would make its regulatory determination on
the need for additional regulation by the fourth quarter of 2000. It will
utilize the new information from the ICR, a new study by the National Academy of
Sciences, and other additional information. If more air toxics regulations are
issued, the compliance cost could be significant. The outcome or effects of the
EPA's determination cannot currently be predicted.
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
("CERCLA") with respect to certain manufactured gas plant ("MGP") sites, and
therefore is responsible for the costs of investigating and remediating these
sites.
In November 1998, NIPSCO, IGC, and PSI entered into an agreement which settled
the allocation of CERCLA liability for past and future costs among the three
companies, at seven MGP sites in Indiana. Similar agreements were reached
between IGC and PSI which allocate CERCLA liability at 14 MGP sites with which
NIPSCO had no involvement. These agreements conclude all CERCLA and similar
claims between the three companies relative to MGP sites. Pursuant to the
agreements, the parties are continuing to investigate and remediate the sites as
appropriate. In the case of some sites, the parties have applied to the Indiana
Department of Environmental Management for inclusion of such sites in the
Indiana Voluntary Remediation Program.
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 Notes 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
The regulated businesses of Cinergy (CG&E, ULH&P, and PSI) forecast construction
expenditures for 1999 and over the next five years (1999 - 2003) to be
approximately $194 million and $889 million for CG&E (including $29 million and
$120 million for ULH&P) and $192 million and $774 million for PSI, respectively.
The timing and amount of investments by Cinergy's non-regulated businesses is
dependent upon the development and favorable evaluation of opportunities.
The above forecast excludes the estimated expenditures necessary to comply with
the EPA's proposed stricter NOx emission control standards associated with the
22-state NOx SIP Call. Cinergy estimates that the capital costs for additional
NOx controls at its facilities could range between $500 million and $700 million
(in 1998 dollars) over the next five years. The above forecast also excludes any
capital expenditures that may be required for the construction of new generating
facilities.
In order to meet the power supply demands of its customers, the ECBU must
constantly assess the adequacy of its supply portfolio and determine which
supply alternatives to pursue to most effectively meet demands, hedge risks, and
satisfy regulatory requirements. Supply alternatives include investments in
existing facilities, investments in new facilities, and/or acquisitions of power
supply from the market. In addition, Cinergy's present demand requirements could
be impacted if customer-choice legislation is passed in any of the states in
which Cinergy has a regulated franchise. (All forecasted amounts, excluding NOx
compliance amounts, are in nominal dollars and reflect assumptions as to the
economy, capital markets, construction programs, legislative and regulatory
actions, frequency and timing of rate increases, and other related factors, all
or any of which may change significantly.)
Cinergy
Cinergy's mission is to reach the top five in our industry within three years on
five key dimensions - market capitalization, number of customers, electric and
gas commodity trading, international presence, and productivity. Cinergy has
entered into various growth initiatives in its pursuit of these goals. These
initiatives include, among others, energy marketing and trading, retail energy
products and services, and additional international investment. In addition,
Cinergy is working toward maximizing the value of its existing operations and
assets and continues to explore the potential for mergers, acquisitions, and
strategic alliances.
Certain legal and regulatory requirements, including PUHCA, limit Cinergy's
ability to invest in growth initiatives. PUHCA restricts the amount which can be
invested outside the regulated utility, including foreign utility company
("FUCO") investments and investments in domestic power plants that qualify as
"qualifying facilities" ("QFs") under the Public Utility Regulatory Policies Act
of 1978 or are certified as EWGs by the FERC. Under these restrictions, Cinergy
may invest or commit to invest (i) an amount equal to 100% of consolidated
retained earnings (defined under applicable SEC regulations as the average of
Cinergy's consolidated retained earnings for the four most recent quarterly
periods) in EWGs and FUCOs (equal to $949 million at December 31, 1998), and
(ii) an amount equal to 15% of consolidated capitalization ($942 million at
December 31, 1998) in QFs and other "energy-related" nonutility investments (as
defined in the applicable SEC regulation).
At December 31, 1998, under these SEC restrictions, Cinergy had available
capacity for additional EWG/FUCO investments of $332 million and available
capacity for additional QFs and "energy-related" nonutility investments of $524
million.
OTHER COMMITMENTS
Cinergy, CG&E, PSI, and ULH&P
Securities Redemptions Mandatory redemptions of long-term debt total $410
million ($251 million for CG&E and its subsidiaries, including $40 million for
ULH&P, and $159 million for PSI) during the period 1999 through 2003.
The maintenance and replacement fund provisions contained in PSI's first
mortgage bond indenture require cash payments, bond retirements, or pledges of
unfunded property additions each year based on an amount related to PSI's net
revenues. Cinergy will continue to evaluate opportunities for the refinancing of
outstanding securities beyond mandatory redemption requirements.
Cinergy
Guarantees At December 31, 1998, Cinergy had issued $286 million in guarantees
primarily related to the energy marketing and trading activities of its
subsidiaries and affiliates. In addition, Cinergy had guaranteed $258 million of
the debt securities of its subsidiaries and affiliates.
Cinergy, CG&E, PSI, and ULH&P
Year 2000 The Year 2000 issue generally exists because many computer systems and
applications, including those embedded in equipment and facilities, use two
digit rather than four digit date fields to designate an applicable year. As a
result, the systems and applications may not properly recognize dates including
and beyond the year 2000 or accurately process data in which such dates are
included, potentially causing data miscalculations and inaccuracies or
operational malfunctions and failures, which could materially affect a
business's financial condition, results of operations, and cash flows.
Cinergy has established a centrally-managed, company-wide initiative, known as
the Cinergy Year 2000 Readiness Program, to identify, evaluate, and address Year
2000 issues. The Cinergy Year 2000 Readiness Program, which began in the fourth
quarter of 1996, is generally focused on three elements that are integral to
this initiative: (1) business continuity; (2) risk management; and (3)
regulatory compliance. Business continuity includes providing reliable electric
and gas supply and service in a safe and cost-effective manner. This element
encompasses mission-critical generation, transmission, and distribution systems
and related infrastructure, as well as operational and financial information
technology ("IT") systems and applications, end-user computing resources, and
building systems (such as security, elevator, and heating and cooling systems).
Risk management includes a review of the Year 2000 readiness efforts of
Cinergy's critical suppliers, key customers and other principal business
partners, and, as appropriate, the development of joint business support,
contingency plans, and the inclusion of Year 2000 concerns as a regular part of
the due diligence process in any new business venture. Regulatory compliance
includes communications with regulatory agencies, other utilities, and various
industry groups. While this initiative is broad in scope, it has been structured
to identify and prioritize efforts for mission-critical electric and gas systems
and services and key business partners.
Under the Cinergy Year 2000 Readiness Program, Cinergy has established a target
date of June 30, 1999, for the remediation and testing of its mission-critical
generation, transmission, and distribution systems (gas and electric). An
innovative remediation and testing effort which Cinergy has initiated involves
operating several electric-generating units with post Year 2000 dates. Cinergy's
experience has been that those units have continued to operate without any
material adverse result relating to a Year 2000 issue. Cinergy's progress to
date ranges from approximately 90% regarding IT systems to approximately 75%
regarding assessment of critical suppliers.
Cinergy has also reviewed its existing contingency and business continuity plans
and modified them in light of the Year 2000 issue. Contingency planning to
maintain and restore service in the event of natural and other disasters
(including software and hardware-related problems) has been part of Cinergy's
standard operation for many years, and Cinergy is working to leverage this
experience in the review of existing plans to address Year 2000-related
challenges. These reviews have assessed the potential for business disruption in
various scenarios, including the most reasonably likely worst-case scenario, and
to provide for key operational back-up, recovery, and restoration alternatives.
Cinergy cannot guarantee that third parties on whom it depends for essential
goods and services (those where the interruption of the supply of such goods and
services could lead to issues involving the safety of employees, customers, or
the public, the continued reliable delivery of gas and/or electricity, and the
ability to comply with applicable laws or regulations) will convert their
mission-critical systems and processes in a timely manner. Failure or delay by
any of these third parties could significantly disrupt business. However, to
address this issue, Cinergy has established a supplier compliance program, and
is working with its critical suppliers in an effort to minimize such risks.
In addition, Cinergy is coordinating its findings and other issues with other
utilities and various industry groups via the Electric Power Research Institute
Year 2000 Embedded Systems Project and the Year 2000 Readiness Assessment
Program of the North American Electric Reliability Council ("NERC"), acting at
the request of the DOE. The DOE has asked NERC to report on the integrity of the
transmission system for North America and to coordinate and assess the
preparation of the electric systems in North America for the Year 2000. NERC
submitted its initial quarterly status report and coordination plan to the DOE
in September 1998, and a second quarterly status report for the fourth quarter
of 1998 was submitted on January 11, 1999.
Cinergy currently estimates that the total cost of assessment, remediation,
testing, and upgrading its systems as a result of the Year 2000 effort is
approximately $13 million. Approximately $11 million in expenses have been
incurred through December 31, 1998, for external labor, hardware and software
upgrades, and for Cinergy employees who are dedicated full-time to the Cinergy
Year 2000 Readiness Program. The timing of these expenses may vary and is not
necessarily indicative of readiness efforts or progress to date. Cinergy
anticipates that a portion of its Year 2000 expenses will not be incremental
costs, but rather, will represent the redeployment of existing IT resources.
Since its formation, Cinergy has incurred, and will continue to incur,
significant capital improvement costs related to planned system upgrades or
replacements required in the normal course of business. These costs have not
been accelerated as a result of the Year 2000 issue.
The above information is based on Cinergy's current best estimates, which were
derived using numerous assumptions of future events, including the availability
and future costs of certain technological and other resources, third-party
modification actions, and other factors. Given the complexity of these issues
and possible unidentified risks, actual results may vary materially from those
anticipated and discussed above. Specific factors that might cause such
differences include, among others, the ability to locate and correct all
affected computer code, the timing and success of remedial efforts of
third-party suppliers, and similar uncertainties.
The above information is a Year 2000 Readiness Disclosure pursuant to the
Federal Year 2000 Information and Readiness Disclosure Act.
CAPITAL RESOURCES
Cinergy, CG&E, PSI, and ULH&P
The regulated businesses of Cinergy forecast that their need for external funds
during the 1999 through 2003 period will primarily be for the refinancing of
existing securities. It is currently expected that funds required to pursue the
various non-regulated growth initiatives underway will be obtained primarily
through short-term borrowing and the issuance of long-term debt and/or equity
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
Currently, a substantial portion 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 operations could be subject to a higher
degree of volatility than under the present regulatory structure.
COMMON STOCK
Cinergy
During 1998, 1997, and 1996, Cinergy issued approximately 194,000; 66,000; and
15,000 new shares, respectively, of common stock pursuant to various stock-based
employee plans. In addition, Cinergy purchased approximately 861,000 and 1.7
million shares on the open market to satisfy the majority of its 1998 and 1997
obligations, respectively, under these plans. Cinergy currently plans to
continue using market purchases of common stock to satisfy the majority of its
obligations under these plans; however, given its future capital requirements,
it will continue to re-evaluate this decision. In the event Cinergy begins
issuing shares of common stock to satisfy these obligations, it has authority
under PUHCA to issue and sell through December 31, 2000, up to approximately 22
million additional shares of Cinergy common stock.
SHORT-TERM DEBT
Cinergy, CG&E, PSI, and ULH&P
Cinergy has authority under PUHCA to issue and sell, through December 31, 2002,
short-term notes, long-term unsecured debentures, and commercial paper in an
aggregate principal amount not to exceed $2 billion. The entire amount may be
outstanding as short-term debt; however, long-term unsecured debentures
outstanding may not exceed $400 million at any time. In connection with this
authority, Cinergy has established committed and uncommitted lines of credit, of
which $305 million remained unused and available at December 31, 1998.
Also at year-end, Global Resources had $100 million available under its
revolving credit facility.
As of December 31, 1998, Cinergy's utility subsidiaries had regulatory authority
to borrow up to $853 million ($453 for CG&E and its subsidiaries, including $50
million for ULH&P, and $400 million for PSI). Pursuant to this authority,
committed and uncommitted lines of credit have been established for CG&E and PSI
of which, $310 million and $249 million, respectively, remained unused and
available at December 31, 1998.
For a detailed discussion of the registrants' short-term indebtedness, refer to
Note 5 of the "Notes to Financial Statements" in "Item 8. Financial Statements
and Supplementary Data."
LONG-TERM DEBT
Cinergy, CG&E, PSI, and ULH&P
Under the authority mentioned above, Cinergy had long-term debt authorization of
$400 million, of which $200 million was issued and outstanding at December 31,
1998. CG&E has filed an application with the PUCO requesting authorization to
issue up to $200 million of additional long-term debt. As of December 31, 1998,
PSI and ULH&P had state regulatory authority for additional long-term debt
issuance of $350 million and $10 million, respectively. Regulatory approval to
issue additional amounts of securities will be requested as needed.
SALE OF ACCOUNTS RECEIVABLE
Cinergy, CG&E, PSI, and ULH&P
For a detailed discussion of the registrants' sale of accounts receivable, refer
to Note 6 of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data."
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Energy Commodities Sensitivity
Cinergy, CG&E, and PSI
The transactions associated with the energy marketing and trading activities
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. These
operations subject Cinergy to the risks and volatilities associated with the
energy commodities (primarily electricity and natural gas) which it markets and
trades. The wholesale energy marketing and trading business continues to be very
competitive. As the ECBU continues to develop and expand its energy marketing
and trading business, its exposure to movements in the price of electricity and
other energy commodities will become greater. As a result, Cinergy is likely to
be subject to future earnings volatility.
The energy marketing and trading activities of the ECBU principally consist of
CG&E's and PSI's power marketing and trading operation which markets and trades
over-the-counter contracts for the purchase and sale of electricity primarily in
the Midwest region of the US, where owned generation is located. These
activities are conducted by Services on behalf of CG&E and PSI. The power
marketing and trading operation consists of both physical and trading
activities. Transactions are designated as physical when there is intent and
ability to physically deliver the power from company-owned generation. All other
transactions are considered trading transactions. Substantially all of the
contracts in both the physical and trading portfolios commit Cinergy, CG&E,
and/or PSI to purchase or sell electricity at fixed prices in the future (i.e.,
fixed-price forward purchase and sales contracts, full requirements contracts).
The ECBU also markets and trades over-the-counter option contracts.
Substantially all of the contracts in the physical portfolio require settlement
by physical delivery of electricity. Contracts within the trading portfolio
generally require settlement by physical delivery or are netted out in
accordance with industry trading standards. The use of these types of physical
commodity instruments is designed to allow the ECBU to manage and hedge
contractual commitments, reduce exposure relative to the volatility of cash
market prices, and take advantage of selected arbitrage opportunities.
The ECBU 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, a net open position is created or allowed to
continue when it is believed 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. To the extent net open
positions exist, there is the risk that fluctuating market prices of electric
power may potentially impact Cinergy's, CG&E's, and/or PSI's financial condition
or results of operations adversely if prices do not move in the manner or
direction expected.
The ECBU measures the risk inherent in the trading portfolio utilizing
value-at-risk analysis and other methodologies, which utilize forward price
curves in electric power markets to quantify estimates of the magnitude and
probability of potential future losses related to open contract positions.
Predominantly all of the contracts in the physical portfolio require physical
delivery of electricity and generally do not allow for net cash settlement.
Therefore, these contracts are not included in the value-at-risk analysis. The
value-at-risk expresses the potential loss in fair value of the trading
portfolio over a particular period of time, with a specified likelihood of
occurrence, due to an adverse market movement. The value-at-risk is reported as
a percentage of operating income, based on a 95% confidence interval, utilizing
one-day holding periods. On a one day basis as of December 31, 1998, the
value-at-risk for the power trading activities was less than 1% of Cinergy's
1998 Consolidated Operating Income. The average value-at-risk, on a one-day
basis at the end of each quarter in 1998, for the power trading portfolio was
less than 2% of Cinergy's 1998 Consolidated Operating Income. The daily
value-at-risk for the power trading portfolio as of December 31, 1997, was also
less than 2% of Cinergy's 1998 Consolidated Operating Income. 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
The ECBU, through Cinergy's acquisitions of ProEnergy and Greenwich Energy
Partners, in 1998 and 1997, respectively, actively markets physical natural gas
and actively trades derivative commodity instruments, customarily settled in
cash, including futures, forwards, swaps, and options. The ESBU, through CRI,
utilizes derivative commodity instruments, customarily settled in cash,
primarily to hedge purchases and sales of natural gas. The aggregated
value-at-risk amounts associated with these trading and hedging activities,
utilizing 95% confidence intervals and one-day holding periods, were less than
$1 million as of December 31, 1998 and 1997. The market risk exposures of these
trading activities is not considered 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 the ESBU's trade accounts
receivable from electric and gas retail customers is limited due to the large
number of customers and diversified customer base of residential, commercial,
and industrial customers. Contracts within the physical portfolio of the ECBU's
power marketing and trading operations are primarily with traditional electric
cooperatives and municipalities and other IOUs.
Contracts within the trading portfolio of the power marketing and trading
operations are primarily with power marketers and other IOUs. As of December 31,
1998, approximately 73% of the activity within the trading portfolio represents
commitments with 10 counterparties. The majority of these contracts are for
terms of one year or less. As a result of the extreme volatility experienced in
the Midwest power markets during 1998, several new entrants into the market
began experiencing financial difficulties and failed to perform their
contractual obligations. As a result, the bad debt provisions of approximately
$13 million with respect to settled transactions were recorded during the year.
Counterparty credit exposure within the power trading portfolio is routinely
factored into the mark-to-market valuation. At December 31, 1998, credit
exposure within the power trading portfolio is not believed to be significant.
Prior to 1998, credit exposure due to nonperformance by counterparties was not
significant. As the competitive electric power market continues to develop,
counterparties will increasingly include new market entrants, such as other
power marketers, brokers, and commodity traders. This increased level of new
market entrants, as well as competitive pressures on existing market
participants, could increase the ECBU's exposure to credit risk with respect to
its power marketing and trading operation. As of December 31, 1998,
approximately 37% of the activity within the ECBU's physical gas marketing and
trading portfolio represents commitments with 10 counterparties. Credit risk
losses related to the ECBU's gas and other commodity physical and trading
operations have not been significant. Based on the types of counterparties and
customers with which transactions are executed, credit exposure within the gas
and other commodity trading portfolios at December 31, 1998, is not believed to
be significant.
Cinergy, CG&E, and PSI
Cinergy has established a risk management function and has implemented active
risk management policies and procedures to manage and minimize corporate and
business unit 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 guarantees 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 energy marketing and trading transactions subject to parameters established
by Cinergy's Risk Policy Committee. Market and credit risks are monitored by the
risk management and credit function, which operates separately from the business
units which originate or actively manage the market and credit risk exposures,
to ensure compliance with Cinergy's stated risk management policies and
procedures. These policies and procedures are periodically reviewed and
monitored 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. 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/pound 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 "Accumulated other comprehensive
loss", 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 semi-annual interest on the dollar notional
amount. At December 31, 1998, the estimated fair value of this swap was $(59)
million. This was partially offset by a $46 million currency translation gain to
date on Cinergy's investment in Midlands.
Cinergy also has exposure to fluctuations in the US dollar/Czech koruna exchange
rate through its investments in the Czech Republic. Cinergy has hedged the
exchange rate exposure related to certain of its Czech koruna ("CZK")
denominated investments through foreign exchange forward contracts. The
contracts require Cinergy to exchange 1,447 million Czech korunas for $40
million. When the Czech koruna strengthens relative to the dollar, the dollar
value of Cinergy's investment increases; however, the value of the foreign
exchange forward contracts decreases, offsetting the increase in the investment.
The reverse is true when the Czech koruna declines relative to the dollar.
Translation losses related to the contracts are recorded in "Accumulated other
comprehensive loss", which is reported as a separate component of common stock
equity in the Consolidated Financial Statements. At December 31, 1998, the
estimated aggregate fair value of these foreign exchange forward contracts was
$(7) million.
Cinergy has investments in various other countries where the net investments are
not hedged. The Company does have exposure to fluctuations in exchange rates
between the US dollar and the currencies of these countries. At December 31,
1998, Cinergy does not believe it has a material exposure to the currency risk
attributable to these investments.
The following table summarizes the details of the swap and the foreign exchange
forward contracts. (For presentation purposes, the pound sterling payment
obligation has been converted to US dollars using the dollar/pound sterling spot
exchange rate at December 31, 1998, of 1.66000. The interest rates are based on
the six-month LIBOR implied forward rates at December 31, 1998.)
Expected Maturity Date
There-
1999 2000 2001 2002 2003 after Total
Currency Swap ($US Equivalent in millions)
Receive principal ($US) $ - $ - $ - $500 $ - $ - $500
Average interest
receive rate (variable) - % - % - % 5.3% - % - % 5.3%
Pay principal (pound
sterling UK) $ - $ - $ - $548 $ - $ - $548
Average interest
pay rate (partially
variable, partially
fixed) - % - % - % 6.0% - % - % 6.0%
Foreign Exchange Forward Contracts ($US Equivalent in millions)
Receive $US/Pay CZK $ 40 $ - $ - $ - $ - $ - $ 40
Average contractual
exchange rate(CZK/$US) 36.2 - - - - - 36.2
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, 1998, this included (i)
short-term bank loans and commercial paper totaling $637 million ($5 million for
CG&E and $90 million for PSI), (ii) $267 million of pollution control related
debt ($184 million for CG&E and $83 million for PSI) which is classified as
"Notes payable and other short-term obligations" on Cinergy's, CG&E's, and PSI's
respective Consolidated Balance Sheets, and (iii) a $253 million sale of
accounts receivable ($166 million sold by CG&E and its subsidiaries, including
$16 million sold by ULH&P, and $87 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, 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 "Notes payable and other short-term obligations" on
Cinergy's, CG&E's, and PSI's respective Consolidated 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 the
amounts sold). At December 31, 1998 and 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, 1998:
Expected Maturity Date
There- Fair
1999 2000 2001 2002 2003 after Total Value
(in millions)
Liabilities
Cinergy and Subsidiaries
Long-term Debt (a)
Fixed rate $137 $ 32 $ 90(d) $124 $177(e) $2 097 $2 657 $2 830
Average interest rate (b) 6.0% 5.7% 5.2% 7.3% 6.2% 7.0% 6.8%
Other (c) $ - $ - $ - $ - $ - $ 100 $ 100 $ 104
Average interest rate (b) - % - % - % - % - % 6.5% 6.5%
Capital Lease
Variable rate $ - $ - $ 22 $ - $ - $ - $ 22 $ 22
Average interest rate (b) - % - % 5.3% - % - % - % 5.3%
CG&E and Subsidiaries
Long-term Debt (a)
Fixed rate $130 $ - $ 1 $100 $120(e) $ 902 $1 253 $1 311
Average interest rate (b) 5.9% - % 9.8% 7.3% 6.3% 6.9% 6.8%
Other (c) $ - $ - $ - $ - $ - $ 100 $ 100 $ 104
Average interest rate (b) - % - % - % - % - % 6.5% 6.5%
Capital Lease
Variable rate $ - $ - $ 22 $ - $ - $ - $ 22 $ 22
Average interest rate (b) - % - % 5.3% - % - % - % 5.3%
PSI
Long-term Debt (a)
Fixed rate $ 7 $ 32 $ 89(d) $ 24 $ 57 $ 836 $1 045 $1 134
Average interest rate (b) 7.0% 5.7% 5.2% 7.6% 5.9% 7.3% 7.0%
ULH&P
Long-term Debt (a)
Fixed rate $ 20 $ - $ - $ - $ 20 $ 35 $ 75 $ 78
Average interest rate (b) 6.5% - % - % - % 6.1% 7.0% 6.6%
(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 1998. 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.
(d) 6.00% Debentures due December 14, 2016, reflected as maturing in 2001 as
the interest rate resets on December 14, 2001.
(e) 6.35% Debentures due June 15, 2038, reflected as maturing in 2003 as the
interest rate resets on June 15, 2003.
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 one interest rate swap agreement, Cinergy has effectively fixed the
interest rate on the pound sterling denominated obligation created by the
currency swap discussed above. This contract requires Cinergy to pay
semi-annually a fixed rate and receive a floating rate through February 2002.
The notional amount of the swap is 280 million pounds sterling. The fair value
of the swap was approximately $(19) million at December 31, 1998. 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, 1998, the fair value of this
swap decreased from $(3) million at December 31, 1997 primarily due to a
projected decline in the average variable interest rate received on the dollar
denominated leg of the swap over its remaining term.
At December 31, 1998, CG&E had an interest rate swap agreement outstanding
related to its sale of accounts receivable. The contract has a notional amount
of $100 million and requires CG&E to pay a fixed rate and receive a floating
rate. PSI had three interest rate swap agreements outstanding with notional
amounts of $100 million each. One contract, with two years remaining of a
four-year term, requires PSI to pay a floating rate and receive a fixed rate.
The other two contracts, with six-month terms, require PSI to pay a fixed rate
and receive a floating rate. The floating rate is based on applicable LIBOR. At
December 31, 1998 and 1997, the fair values of these interest rate swaps were
not significant. The following table presents notional principal amounts and
weighted average interest rates by contractual maturity dates for the interest
rate swaps of Cinergy, CG&E, and PSI. The variable rates are the average implied
forward rates during the contracts based on a December 31, 1998 one month
commercial paper index yield curve for CG&E and the six month LIBOR yield curve
at December 31, 1998 for Cinergy and PSI. Although Cinergy's swaps require
payments to be made in pounds sterling, the table reflects the dollar equivalent
notional amounts based on spot market foreign currency exchange rates at
December 31, 1998.
Expected Maturity Date
There- Fair
1999 2000 2001 2002 2003 after Total Value
Interest Rate ($US Equivalent in millions)
Derivatives
Interest Rate Swaps
Receive fixed/pay
variable ($US) $ - $100 $ - $ - $ - $ - $100 $ 2
Average pay rate 5.2% 5.1% - % - % - % - % 5.1%
Average receive rate 6.1% 6.1% - % - % - % - % 6.1%
Receive variable/pay
fixed ($US) $200 $ - $ - $ - $ - $ - $200 $ (1)
Average pay rate 5.5% - % - % - % - % - % 5.5%
Average receive rate 5.1% - % - % - % - % - % 5.1%
Receive variable/pay
fixed (pound
sterling UK) $ - $ - $ - $465(a)$ - $ - $465(a) $(19)
Average pay rate - % - % - % 7.1% - % - % 7.1%
Average receive rate - % - % - % 6.0% - % - % 6.0%
(a) Notional converted to US dollars using the Sterling spot exchange rate at
December 31, 1998, of 1.66000.
ACCOUNTING CHANGES
Cinergy, CG&E, PSI, and ULH&P
During the second quarter of 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("Statement 133"). Statement 133 requires companies to record
derivative instruments, as defined in Statement 133, as assets or liabilities,
measured at fair value. The statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. The
standard is effective for fiscal years beginning after June 15, 1999, and
Cinergy expects to adopt the provisions of Statement 133 in the first quarter of
2000. The Company has not yet quantified the impact of adopting Statement 133 on
its consolidated financial statements. However, Statement 133 could increase
volatility in earnings and other comprehensive income.
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 . . . . . . . . . . 49
Cinergy
Consolidated Statements of Income for the three years
ended December 31, 1998. . . . . . . . . . . . . . . . . . 51
Consolidated Balance Sheets at December 31,
1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . 52
Consolidated Statements of Changes in Common Stock
Equity for the three years ended December 31, 1998 . . . . 54
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998. . . . . . . . . . . . 55
Results of Operations. . . . . . . . . . . . . . . . . . . . 56
CG&E
Consolidated Statements of Income for the three years
ended December 31, 1998. . . . . . . . . . . . . . . . . . 62
Consolidated Balance Sheets at December 31,
1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . 63
Consolidated Statements of Changes in Common Stock
Equity for the three years ended December 31, 1998 . . . . 65
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998. . . . . . . . . . . . 66
Results of Operations. . . . . . . . . . . . . . . . . . . . 67
PSI
Consolidated Statements of Income for the three years
ended December 31, 1998. . . . . . . . . . . . . . . . . . 72
Consolidated Balance Sheets at December 31,
1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . 73
Consolidated Statements of Changes in Common Stock
Equity for the three years ended December 31, 1998 . . . . 75
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998. . . . . . . . . . . . 76
Results of Operations. . . . . . . . . . . . . . . . . . . . 77
ULH&P
Statements of Income for the three years ended
December 31, 1998. . . . . . . . . . . . . . . . . . . . . 81
Balance Sheets at December 31, 1998 and 1997 . . . . . . . . 82
Statements of Changes in Common Stock Equity
for the three years ended December 31, 1998. . . . . . . . 84
Statements of Cash Flows for the three years ended
December 31, 1998. . . . . . . . . . . . . . . . . . . . . 85
Results of Operations. . . . . . . . . . . . . . . . . . . . 86
Notes to Financial Statements . . . . . . . . . . . . . . . . . 88
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Cinergy. . . . . . . . . . . . . . . . . . . . . . . . . . 155
CG&E . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
PSI. . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . . . 158
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, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, as listed in the index
on page 48. These financial statements and the schedules referred to below are
the responsibility of management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cinergy Corp., The Cincinnati
Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power
Company as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for its energy trading and risk management
activities effective December 31, 1998.
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 48 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 28, 1999
Cinergy Corp.
and Subsidiaries
CINERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
1998 1997 1996
(in thousands, except per share amounts)
Operating Revenues
Electric $4 747 235 $3 861 698 $2 768 706
Gas 1 060 664 491 145 474 035
Other 68 395 34 258 33 446
5 876 294 4 387 101 3 276 187
Operating Expenses
Fuel and purchased and exchanged
power 2 846 323 1 912 793 872 088
Gas purchased 857 010 266 158 249 116
Other operation and maintenance 1 006 382 869 867 838 218
Depreciation and amortization 325 515 306 922 294 852
Taxes other than income taxes 274 635 265 693 258 375
5 309 865 3 621 433 2 512 649
Operating Income 566 429 765 668 763 538
Equity in Earnings of Unconsolidated
Subsidiaries 51 484 60 392 25 430
Other Income and (Expenses) - Net 10 346 (1 534) (16 652)
Interest 243 587 236 319 215 603
Income Before Taxes 384 672 588 207 556 713
Income Taxes (Note 11) 117 187 213 000 198 736
Preferred Dividend Requirements
of Subsidiaries 6 517 12 569 23 180
Net Income Before Extraordinary Item $ 260 968 $ 362 638 $ 334 797
Extraordinary Item - Equity Share of
Windfall Profits Tax (Less Applicable
Income Taxes of $0) (Note 17) - (109 400) -
Net Income $ 260 968 $ 253 238 $ 334 797
Average Common Shares Outstanding 158 238 157 685 157 678
Earnings Per Common Share (Note 16)
Net income before extraordinary item $1.65 $2.30 $2.00
Net income $1.65 $1.61 $2.00
Earnings Per Common Share - Assuming
Dilution (Note 16)
Net income before extraordinary item $1.65 $2.28 $1.99
Net income $1.65 $1.59 $1.99
Dividends Declared Per Common Share $1.80 $1.80 $1.74
The accompanying notes as they relate to Cinergy Corp. are an integral part of
these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1998 1997
(dollars in thousands)
Current Assets
Cash and temporary cash investments $ 100 154 $ 53 310
Restricted deposits 3 587 2 319
Notes receivable 64 110
Accounts receivable less accumulated provision
for doubtful accounts of $25,622 at December
31, 1998, and $10,382 at December 31, 1997
(Note 6) 580 305 413 516
Materials, supplies, and fuel - at average cost 202 747 163 156
Prepayments and other 74 849 38 171
Energy risk management assets (Note 1(c)) 969 000 -___
1 930 706 670 582
Utility Plant - Original Cost
In service
Electric 9 222 261 8 981 182
Gas 786 188 746 903
Common 186 364 186 078
10 194 813 9 914 163
Accumulated depreciation 4 040 247 3 800 322
6 154 566 6 113 841
Construction work in progress 189 883 183 262
Total utility plant 6 344 449 6 297 103
Other Assets
Regulatory assets (Note 1(f)) 970 767 1 076 851
Investments in unconsolidated
subsidiaries (Note 10) 574 401 537 720
Other 478 472 275 897
2 023 640 1 890 468
$10 298 795 $8 858 153
The accompanying notes as they relate to Cinergy Corp. are an integral part of
these consolidated financial statements.
CINERGY CORP.
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31
1998 1997
(dollars in thousands)
Current Liabilities
Accounts payable $ 668 860 $ 488 716
Accrued taxes 228 347 187 033
Accrued interest 51 679 46 622
Notes payable and other short-term
obligations (Note 5) 903 700 1 114 028
Long-term debt due within one year (Note 4) 136 000 85 000
Energy risk management liabilities (Note 1(c)) 1 117 146 -
Other 93 376 79 193
3 199 108 2 000 592
Non-Current Liabilities
Long-term debt (Note 4) 2 604 467 2 150 902
Deferred income taxes (Note 11) 1 091 075 1 248 543
Unamortized investment tax credits 156 757 166 262
Accrued pension and other postretirement
benefit costs (Note 9) 315 147 297 142
Other 298 370 277 523
4 465 816 4 140 372
Total liabilities 7 664 924 6 140 964
Cumulative Preferred Stock of Subsidiaries (Note 3)
Not subject to mandatory redemption 92 640 177 989
Common Stock Equity (Note 2)
Common stock - $.01 par value;
authorized shares - 600,000,000;
outstanding shares - 158,664,532 in 1998
and 157,744,658 in 1997 1 587 1 577
Paid-in capital 1 595 237 1 573 064
Retained earnings 945 214 967 420
Accumulated other comprehensive loss (807) (2 861)
Total common stock equity 2 541 231 2 539 200
Commitments and Contingencies (Note 12)
$10 298 795 $8 858 153
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)
Accumulated
Other Total Total
Common Paid-in Retained Comprehensive Comprehensive Common Stock
Stock Capital Earnings Loss Income Equity
Balance at December 31, 1995 $1 577 $1 597 050 $ 951 290 $(1 074) $2 548 843
Comprehensive income
Net income 334 797 $334 797 334 797
Other comprehensive income, net of tax
effect of $179
Foreign currency translation adjustment (131) (131)
Minimum pension liability adjustment (179) (179)
Other comprehensive loss total (310) (310)
Comprehensive income total $334 487
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 51 for
per share amounts) (274 358) (274 358)
Costs of reacquisition of preferred stock
of subsidiary (18 391) (18 391)
Other (338) 188 (150)
Balance at December 31, 1996 $1 577 $1 590 735 $ 993 526 $(1 384) $2 584 454
Comprehensive income
Net income 253 238 $253 238 253 238
Other comprehensive income, net of tax
effect of $1,595
Foreign currency translation adjustment (394) (394)
Minimum pension liability adjustment (1 083) (1 083)
Other comprehensive loss total (1 477) (1 477)
Comprehensive income total $251 761
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 51 for
per share amounts) (283 866) (283 866)
Other (267) 4 522 4 255
Balance at December 31, 1997 $1 577 $1 573 064 $ 967 420 $(2 861) $2 539 200
Comprehensive income
Net income 260 968 $260 968 260 968
Other comprehensive income, net of tax
effect of $(1,813)
Foreign currency translation adjustment 2 160 2 160
Minimum pension liability adjustment (106) (106)
Other comprehensive income total 2 054 2 054
Comprehensive income total $263 022
Issuance of 919,874 shares of common stock - net 10 30 225 30 235
Treasury shares purchased (3) (15 426) (15 429)
Treasury shares reissued 3 7 325 7 328
Dividends on common stock (see page 51 for
per share amounts) (284 703) (284 703)
Other 49 1 529 1 578
Balance at December 31, 1998 $1 587 $1 595 237 $ 945 214 $ (807) $2 541 231
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
(in thousands)
Operating Activities
Net income $ 260 968 $ 253 238 $ 334 797
Items providing or (using) cash currently:
Depreciation and amortization 325 515 306 922 294 852
Wabash Valley Power Association, Inc.
settlement 80 000 - (80 000)
Deferred income taxes and investment tax
credits - net (107 835) 67 638 47 912
Unrealized loss from energy risk management
activities 135 000 15 000 -
Equity in earnings of unconsolidated
subsidiaries (45 374) (35 239) (25 430)
Extraordinary item - equity share of windfall
profits tax - 109 400 -
Allowance for equity funds used during
construction (1 668) (98) (1 225)
Regulatory assets - net 46 856 33 605 (17 135)
Changes in current assets and current liabilities
Restricted deposits (1 268) (598) (358)
Accounts and notes receivable (45 811) (217 157) 132 749
Materials, supplies, and fuel (33 484) 21 817 44 005
Accounts payable 44 535 183 296 37 281
Accrued taxes and interest 46 371 (21 414) (1 289)
Other current assets and liabilities (9 495) (36 582) 52 749
Other items - net 29 698 53 750 (8 161)
Net cash provided by operating activities 724 008 733 578 810 747
Financing Activities
Change in short-term debt (245 413) 191 811 572 417
Issuance of long-term debt 785 554 100 062 150 217
Redemption of long-term debt (384 520) (336 312) (237 183)
Funds on deposit from issuance of long-term debt - - 973
Retirement of preferred stock of subsidiaries (85 299) (16 269) (212 487)
Issuance of common stock 3 724 2 066 311
Dividends on common stock (283 884) (283 866) (274 358)
Net cash used in financing activities (209 838) (342 508) (110)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (368 609) (328 055) (323 013)
Acquisition of businesses (net of cash acquired) (63 412) - -
Investments in unconsolidated subsidiaries (35 305) (29 032) (503 349)
Net cash used in investing activities (467 326) (357 087) (826 362)
Net increase (decrease) in cash and temporary
cash investments 46 844 33 983 (15 725)
Cash and temporary cash investments at beginning
of period 53 310 19 327 35 052
Cash and temporary cash investments at end of
period $ 100 154 $ 53 310 $ 19 327
Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
Interest (net of amount capitalized) $ 229 501 $ 235 948 $ 207 393
Income taxes 179 677 140 655 141 917
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - CINERGY
Operating Revenues
Electric Operating Revenues
The components of electric operating revenues and the related kilowatt-hour
("kwh") sales are shown below:
Revenue Kwh Sales
1998 1997 1996 1998 1997 1996
($ and kwh in millions)
Retail $2,553 $2,455 $2,438 46,983 45,327 45,121
Sales for resale 2,140 1,368 297 77,558 57,454 12,399
Other 54 39 34 - - -
Total $4,747 $3,862 $2,769 124,541 102,781 57,520
Electric operating revenues increased $885 million (23%) for 1998, when compared
to 1997. This increase was primarily due to increased volumes and a higher
average price per kwh received on non-firm power sales for resale transactions
related to the energy marketing and trading operations. There was also an
increase in the average price per kwh paid for the corresponding purchases of
purchased and exchanged power described below. Also contributing to the increase
were higher retail kwh sales due to the warmer weather during 1998 when compared
to 1997 and growth in the average number of residential and commercial
customers.
Higher non-firm power sales for resale due to increased activity in the energy
marketing and trading operations significantly contributed to the $1.1 billion
(39%) increase in electric operating revenues in 1997, when compared to 1996.
Also contributing to the increase was a full year's effects of PSI's retail rate
increases approved in the September 1996 Order, as amended in August 1997, the
December 1996 DSM Order, and the return of approximately $13 million to
customers in 1996 in accordance with an order issued in February 1995 by the
IURC ("February 1995 Order"). This order required all retail operating income
above a certain rate of return to be refunded to customers. Partially offsetting
these increases was the reduction in fuel revenue due to a lower average cost of
fuel used in electric production.
Gas Operating Revenues
The components of gas operating revenues and the related thousand cubic feet
("mcf") sales are shown below:
Revenue Mcf Sales
1998 1997 1996 1998 1997 1996
($ and mcf in millions)
Sales for resale $ 659 $ - $ - 338 - -
Retail 357 454 440 55 69 75
Transportation 41 32 28 58 54 49
Other 4 5 6 - - -
Total $1,061 $491 $474 451 123 124
Gas operating revenues increased $570 million in 1998, as compared to 1997. This
increase was primarily due to the gas operating revenues of ProEnergy, which was
acquired in June 1998. Partially offsetting this increase was a decline in
retail sales due to lower mcf volumes reflecting, in part, the milder weather
during the first quarter of 1998, and a reduction in the average number of
full-service residential, commercial and industrial customers. Transportation
revenues increased as full-service customers continued the move away from full
service to purchasing gas directly from suppliers, using transportation services
provided by CG&E.
The gas rate increase of 2.5% (approximately $9 million annually) approved by
the PUCO in the December 1996 Order and a higher average cost per mcf of gas
purchased contributed to the $17 million (4%) increase in gas operating revenues
in 1997, as compared to 1996. These increases were partially offset by a decline
in retail sales due to lower mcf volumes reflecting milder weather during 1997.
Other Revenues
Other revenues increased $34 million in 1998, as compared to 1997. This increase
was primarily the result of increased sales and new initiatives by the
non-regulated businesses operated by the various business units.
Operating Expenses
Fuel and Purchased and Exchanged Power
The components of fuel and purchased and exchanged power are shown below:
1998 1997 1996
(in millions)
Fuel $ 723 $ 693 $713
Purchased and exchanged power 2,123 1,220 159
Total $2,846 $1,913 $872
Electric fuel costs increased $30 million (4%) in 1998, when compared to 1997,
and declined $20 million (3%) in 1997, when compared to 1996.
An analysis of these fuel costs is shown below:
1998 1997
(in millions)
Previous year's fuel expense $693 $713
Increase (Decrease) due to change in:
Price of fuel (23) 7
Deferred fuel cost 22 (55)
Kwh generation 28 28
Other 3 -_
Current year's fuel expense $723 $693
Purchased and exchanged power expense increased $903 million (74%) and $1.1
billion in 1998 and 1997, respectively. These increases primarily reflect
increased purchases of non-firm power for resale to others as a result of
increased activity in the energy marketing and trading operations and an
increase in the average price paid per kwh. Also recorded in 1998 were $135
million of unrealized losses related to the 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 energy marketing
and trading operations.)
Gas Purchased
Gas purchased increased $591 million in 1998, as compared to 1997. This is
primarily due to the gas purchased expenses of ProEnergy, which was acquired in
June 1998. Slightly offsetting this increase was a decrease in the volumes of
gas purchased by CG&E, due to lower demand, and a lower average cost per mcf of
gas purchased by CG&E.
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.
Other Operation and Maintenance
The components of other operation and maintenance expenses are shown below:
1998 1997 1996
(in millions)
Other operation $ 814 $693 $644
Maintenance 192 177 194
Total $1,006 $870 $838
Other operation expenses increased $121 million (17%) in 1998, as compared to
1997. This increase is primarily due to the one-time charge of $80 million
recorded during the second quarter of 1998, reflecting the implementation of a
1989 settlement of a dispute with the Wabash Valley Power Association, Inc.
("WVPA"). (See Note 18 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data.") This increase was also the result
of increased growth and new initiatives by the non-regulated businesses operated
by the various business units. Maintenance expenses increased $15 million (8%)
in 1998, as compared to 1997. This increase is due to an increase in boiler
plant maintenance, an increase in general plant expenses, and an increase in
distribution line maintenance costs resulting from storm damage during the
second quarter of 1998.
Other operation expenses increased $49 million (8%) in 1997, as compared to
1996. This increase is primarily due to higher other operation expenses relating
to the PSI 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. The effect of discontinuing deferral of
certain DSM-related costs also added to the increase. Maintenance expenses
decreased $17 million (9%) in 1997, as compared to 1996. This decrease is
primarily attributable to reduced outage related charges and other maintenance
costs associated with the electric production facilities. Reduced maintenance
costs associated with the electric transmission and distribution facilities in
the PSI territory also contributed to the decrease for 1997.
Depreciation and Amortization
Depreciation and amortization increased $19 million (6%) in 1998, as compared to
1997. This increase is primarily attributable to amortization of phase-in
deferrals reflecting the PUCO ordered phase-in plan for the William H. Zimmer
Generating Station ("Zimmer"). (See Note 1(f) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")
Equity in Earnings of Unconsolidated Subsidiaries
The decrease in equity in earnings of unconsolidated subsidiaries of $9 million
(15%) for 1998, as compared to 1997, is partially due to a decline in the
earnings of Midlands, as a result of milder weather conditions and a penalty
imposed on each electric distribution company caused by the delay in opening the
electricity supply business to competition.
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 Income and (Expenses) - Net
The $12 million change in other income and (expenses) - net for 1998, as
compared to 1997, is primarily due to a gain on the sale of Cinergy's interest
in a foreign subsidiary. This gain is partially offset by a litigation
settlement.
The $15 million change in other income and (expenses) - net for 1997, as
compared to 1996, is due, in part, to charges in 1996 of approximately $14
million associated with the disallowance of information system costs related to
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.
Interest
The $21 million (10%) increase in interest expense in 1997, as compared to 1996,
is due to higher short-term borrowings used to fund the redemption of first
mortgage bonds by CG&E and Cinergy's investments in non-regulated companies,
including Avon Energy.
Income Taxes
Income taxes decreased $96 million (45%) in 1998, as compared to 1997, due to a
decrease in taxable income over the prior year and the increased utilization of
foreign tax credits.
Preferred Dividend Requirements of Subsidiaries
The decrease in preferred dividend requirements of subsidiaries of $6 million
(48%) for 1998, as compared to 1997, is primarily attributable to PSI's
redemption of all outstanding shares of its 7.44% Series Cumulative Preferred
Stock on March 1, 1998.
Preferred dividend requirements of subsidiaries decreased $11 million (46%) in
1997, when compared to 1996. This decrease is 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
Extraordinary item - equity share of windfall profits tax represents the
one-time charge for the windfall profits tax levied against Midlands as recorded
in 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
1998 1997 1996
(in thousands)
Operating Revenues
Electric $2 452 692 $1 956 256 $1 502 008
Gas 403 431 495 620 474 041
2 856 123 2 451 876 1 976 049
Operating Expenses
Fuel and purchased and exchanged
power 1 407 136 896 025 417 451
Gas purchased 199 683 266 123 249 116
Other operation and maintenance 392 841 398 336 426 374
Depreciation and amortization 191 109 180 191 177 839
Taxes other than income taxes 217 691 211 303 207 904
2 408 460 1 951 978 1 478 684
Operating Income 447 663 499 898 497 365
Other Income and (Expenses) - Net (1 291) (6 156) (11 699)
Interest 102 238 115 828 122 550
Income Before Taxes 344 134 377 914 363 116
Income Taxes (Note 11) 128 322 138 761 135 936
Net Income 215 812 239 153 227 180
Preferred Dividend Requirement 858 868 10 643
Costs of Reacquisition of
Preferred Stock (Note 3(b)) - - 18 391
Net Income Applicable to
Common Stock $ 214 954 $ 238 285 $ 198 146
The accompanying notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1998 1997
(dollars in thousands)
Current Assets
Cash and temporary cash investments $ 26 989 $ 2 349
Restricted deposits 1 173 1 173
Notes receivable from affiliated companies 84 358 27 193
Accounts receivable less accumulated provision
for doubtful accounts of $17,607 at December
31, 1998, and $9,199 at December 31, 1997
(Note 6) 205 060 193 549
Accounts receivable from affiliated companies 22 635 35 507
Materials, supplies, and fuel - at average cost 115 294 107 967
Prepayments and other 40 158 31 827
Energy risk management assets (Note 1(c)) 484 500 -
980 167 399 565
Utility Plant - Original Cost
In service
Electric 4 806 958 4 700 631
Gas 786 188 746 903
Common 186 364 186 078
5 779 510 5 633 612
Accumulated depreciation 2 147 298 2 008 005
3 632 212 3 625 607
Construction work in progress 119 993 118 133
Total utility plant 3 752 205 3 743 740
Other Assets
Regulatory assets (Note 1(f)) 627 035 667 765
Other 100 061 103 368
727 096 771 133
$5 459 468 $4 914 438
The accompanying notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31
1998 1997
(dollars in thousands)
Current Liabilities
Accounts payable $ 282 743 $ 249 538
Accounts payable to affiliated companies 13 166 10 821
Accrued taxes 151 455 149 129
Accrued interest 20 571 25 430
Notes payable and other short-term
obligations (Note 5) 189 283 289 000
Notes payable to affiliated companies 17 020 12 253
Long-term debt due within one year (Note 4) 130 000 -
Energy risk management liabilities (Note 1(c)) 558 573 -
Other 26 422 29 950
1 389 233 766 121
Non-Current Liabilities
Long-term debt (Note 4) 1 219 778 1 324 432
Deferred income taxes (Note 11) 771 145 794 396
Unamortized investment tax credits 110 801 116 966
Accrued pension and other postretirement
benefit costs (Note 9) 146 361 180 566
Other 134 990 100 576
2 383 075 2 516 936
Total liabilities 3 772 308 3 283 057
Cumulative Preferred Stock (Note 3)
Not subject to mandatory redemption 20 717 20 793
Common Stock Equity (Note 2)
Common stock - $8.50 par value;
authorized shares - 120,000,000; outstanding
shares - 89,663,086 in 1998 and 1997 762 136 762 136
Paid-in capital 553 926 534 649
Retained earnings 351 505 314 553
Accumulated other comprehensive loss (1 124) (750)
Total common stock equity 1 666 443 1 610 588
Commitments and Contingencies (Note 12)
$5 459 468 $4 914 438
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)
Accumulated
Other Total Total
Common Paid-in Retained Comprehensive Comprehensive Common Stock
Stock Capital Earnings Loss Income Equity
Balance at December 31, 1995 $762 136 $339 101 $427 226 $1 528 463
Comprehensive income
Net income 227 180 $227 180 227 180
Comprehensive income total $227 180
Contribution from parent
company 197 207 197 207
Dividends on preferred stock (10 643) (10 643)
Dividends on common stock (377 969) (377 969)
Costs of reacquisition of
preferred stock (18 391) (18 391)
Other (32) (32)
Balance at December 31, 1996 $762 136 $536 276 $247 403 $1 545 815
Comprehensive income
Net income 239 153 $239 153 239 153
Other comprehensive income,
net of tax effect of $404
Minimum pension liability
adjustment (750) (750)
Other comprehensive loss
total $ (750) (750)
Comprehensive income total $238 403
Dividends on preferred stock (871) (871)
Dividends on common stock (170 400) (170 400)
Other (1 627) (732) (2 359)
Balance at December 31, 1997 $762 136 $534 649 $314 553 $ (750) $1 610 588
Comprehensive income
Net income 215 812 $215 812 215 812
Other comprehensive income,
net of tax effect of $201
Minimum pension liability
adjustment (374) (374)
Other comprehensive loss
total $ (374) (374)
Comprehensive income total $215 438
Dividends on preferred stock (859) (859)
Dividends on common stock (178 000) (178 000)
Contribution from parent company
for reallocation of taxes 19 253 19 253
Other 24 (1) 23
Balance at December 31, 1998 $762 136 $553 926 $351 505 $(1 124) $1 666 443
The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial
statements.
THE CINCINNATI GAS & ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
(in thousands)
Operating Activities
Net income $ 215 812 $ 239 153 $ 227 180
Items providing or (using) cash currently:
Depreciation and amortization 191 109 180 191 177 839
Deferred income taxes and investment tax
credits - net (27 045) 16 443 18 929
Unrealized loss from energy risk management
activities 73 000 2 000 -
Allowance for equity funds used during
construction (1 647) (98) (1 225)
Regulatory assets - net 4 606 6 472 3 513
Changes in current assets and current
liabilities
Accounts and notes receivable (55 788) (105 829) 156 182
Materials, supplies, and fuel (7 327) 6 872 2 437
Accounts payable 35 550 81 569 19 587
Accrued taxes and interest (2 533) (272) 10 165
Other current assets and liabilities (5 359) (1 637) (10 106)
Other items - net 40 782 4 257 56 664
Net cash provided by operating activities 461 160 429 121 661 165
Financing Activities
Change in short-term debt (94 950) 86 662 30 591
Issuance of long-term debt 243 186 100 062 -
Redemption of long-term debt (220 409) (290 612) (162 583)
Retirement of preferred stock (52) (234) -
Dividends on preferred stock (859) (871) (10 643)
Dividends on common stock (178 000) (170 400) (377 969)
Net cash used in financing activities (251 084) (275 393) (520 604)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (185 436) (156 499) (142 053)
Net cash used in investing activities (185 436) (156 499) (142 053)
Net increase (decrease) in cash and temporary
cash investments 24 640 (2 771) (1 492)
Cash and temporary cash investments at beginning
of period 2 349 5 120 6 612
Cash and temporary cash investments at end of
period $ 26 989 $ 2 349 $ 5 120
Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
Interest (net of amount capitalized) $ 101 897 $ 115 801 $ 117 848
Income taxes 125 704 106 154 109 034
The accompanying notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.
RESULTS OF OPERATIONS - CG&E
Operating Revenues
Electric Operating Revenues
The components of electric operating revenues and the related kwh sales are
shown below:
Revenue Kwh Sales
1998 1997 1996 1998 1997 1996
($ and kwh in millions)
Retail $1,392 $1,315 $1,366 22,657 21,992 22,075
Sales for resale 1,046 623 123 37,861 26,640 6,096
Other 15 18 13 - - -
Total $2,453 $1,956 $1,502 60,518 48,632 28,171
Electric operating revenues increased by $497 million (25%) in 1998 when
compared to 1997. This increase was primarily due to increased volumes and a
higher average price per kwh received on non-firm power sales for resale
transactions related to the energy marketing and trading operations. There was
also an increase in the average price per kwh paid for the corresponding
purchases of purchased and exchanged power described below. Also contributing to
the increase were higher retail kwh sales due to the warmer weather during 1998
when compared to 1997 and growth in the average number of residential and
commercial customers.
Higher non-firm power sales for resale due to increased activity in energy
marketing and trading operations significantly contributed to the $454 million
(30%) increase in electric operating revenues in 1997, when compared to 1996.
Partially offsetting this increase was the reduction in fuel revenue due to a
lower average cost of fuel used in electric production.
Non-system kwh sales (and related revenues and expenses) resulting from energy
marketing and trading operations are allocated 50%/50% between CG&E and PSI
pursuant to the operating agreement filed with the companies' regulators.
Gas Operating Revenues
The components of gas operating revenues and the related mcf sales are shown
below:
Revenue Mcf Sales
1998 1997 1996 1998 1997 1996
($ and mcf in millions)
Retail $357 $454 $440 56 69 75
Transportation 41 33 28 58 54 49
Other 5 9 6 - - -
Total $403 $496 $474 114 123 124
Gas operating revenues decreased $93 million (19%) in 1998, as compared to 1997,
reflecting a decline in retail mcf sales due to the milder weather during the
first quarter of 1998 and a decrease in the average number of full-service
residential, commercial, and industrial customers. Partially offsetting the
decline was an increase in transportation revenues, as full-service customers
continued the move away from full service to purchasing gas directly from
suppliers, using transportation services provided by CG&E.
The gas rate increase of 2.5% ($9 million annually) approved by the PUCO in the
December 1996 Order and a higher average cost per mcf of gas purchased
contributed to the $22 million (5%) increase in gas operating revenues in 1997,
as compared to 1996. These increases were partially offset by a decline in
retail sales reflecting milder weather during 1997.
Operating Expenses
Fuel and Purchased and Exchanged Power
The components of fuel and purchased and exchanged power are shown below:
1998 1997 1996
(in millions)
Fuel $ 339 $300 $349
Purchased and exchanged power 1,068 596 68
Total $1,407 $896 $417
Electric fuel costs increased $39 million (13%) in 1998, when compared to 1997,
and decreased $49 million (14%) in 1997, when compared to 1996.
An analysis of these fuel costs is shown below:
1998 1997
(in millions)
Previous year's fuel expense $300 $349
Increase (Decrease) due to change in:
Price of fuel (4) 8
Deferred fuel cost 33 (50)
Kwh generation 10 (7)
Current year's fuel expense $339 $300
Purchased and exchanged power expense increased $472 million (79%) and $528
million in 1998 and 1997, respectively. These increases primarily reflect
increased purchases of non-firm power for resale to others as a result of
increased activity in energy marketing and trading operations and an increase in
the average price paid per kwh. Also recorded in 1998 were $73 million of
unrealized losses related to the energy 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 energy marketing and trading
operations.)
Gas Purchased
Gas purchased decreased $66 million (25%) in 1998, as compared to 1997,
reflecting a decrease in the volumes of gas purchased, due to lower demand, and
a lower average cost per mcf of 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.
Other Operation and Maintenance
The components of other operation and maintenance expenses are shown below:
1998 1997 1996
(in millions)
Other operation $300 $308 $330
Maintenance 93 90 96
Total $393 $398 $426
Other operation expenses decreased $22 million (7%) in 1997, as compared to
1996. This decrease was primarily due to the effect of charges in 1996 for early
retirement and severance programs and the December 1996 Order. Partially
offsetting this decrease was the effect of curtailing certain deferrals
associated with DSM programs for new participants after December 31, 1996.
Maintenance expenses declined $6 million (6%) in 1997, as compared to 1996,
primarily due 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.
Depreciation and Amortization
In 1998, depreciation and amortization increased $11 million (6%), as compared
to 1997. This increase was primarily due to the amortization of phase-in
deferrals reflecting the PUCO ordered phase-in plan for Zimmer. (See Note 1(f)
of the "Notes to Financial Statements" in "Item 8. Financial Statements and
Supplementary Data.")
Other Income and (Expenses) - Net
The change in other income and (expenses) - net of $5 million for 1998, as
compared to 1997, is largely due to an increase in interest income resulting
from an increase in the balance of short-term loans to affiliated companies
through Cinergy's money pool arrangement and an adjustment recorded in 1997
related to the sale of certain assets.
The $6 million change in other income and (expenses) - net for 1997, as compared
to 1996, is due primarily to charges in 1996 of approximately $14 million
associated with the disallowance of information system costs related to 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.
Interest
The decrease in interest expense of $14 million (12%) in 1998, as compared to
1997, is due to decreases in both interest on long-term debt and other interest
expense. The decrease in interest expense on long-term debt is primarily due to
a net redemption of approximately $86 million of long-term debt during the
period of March 1997 through December 1998. The decrease in other interest is
due to a reduction in average short-term borrowings.
The decrease in interest expense of $7 million (5%) in 1997, as compared to
1996, is primarily due to a decrease in long-term debt which is partially offset
by an increase in other interest. The decrease in interest on long-term debt is
primarily due to the redemptions and maturities of long-term debt in 1996 and
1997. The increase in other interest 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 requirement decreased $10 million (92%) in 1997, when
compared to 1996. This decrease is 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.")
PSI Energy, Inc.
and Subsidiary
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
1998 1997 1996
(in thousands)
Operating Revenues
Electric $2 403 038 $1 960 395 $1 331 962
Operating Expenses
Fuel and purchased and exchanged
power 1 547 511 1 059 173 519 901
Other operation and maintenance 509 138 431 355 366 181
Depreciation and amortization 130 604 126 731 117 013
Taxes other than income taxes 54 541 53 721 49 911
2 241 794 1 670 980 1 053 006
Operating Income 161 244 289 415 278 956
Other Income and (Expenses) - Net 3 300 4 624 3 101
Interest 89 359 84 454 79 188
Income Before Taxes 75 185 209 585 202 869
Income Taxes (Note 11) 23 147 77 380 77 191
Net Income $ 52 038 $ 132 205 $ 125 678
Preferred Dividend Requirement 5 659 11 701 12 537
Net Income Applicable to
Common Stock $ 46 379 $ 120 504 $ 113 141
The accompanying notes as they relate to PSI Energy, Inc. are an integral part
of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1998 1997
(dollars in thousands)
Current Assets
Cash and temporary cash investments $ 18 788 $ 18 169
Restricted deposits 2 414 1 146
Notes receivable 73 110
Notes receivable from affiliated companies 17 024 21 998
Accounts receivable less accumulated provision
for doubtful accounts of $7,893 at December
31, 1998, and $1,183 at December 31, 1997
(Note 6) 225 449 197 898
Accounts receivable from affiliated companies 384 6 384
Materials, supplies, and fuel - at average cost 80 445 55 189
Prepayments and other 31 461 4 438
Energy risk management assets (Note 1(c)) 484 500 -
860 538 305 332
Electric Utility Plant - Original Cost
In service 4 415 303 4 280 551
Accumulated depreciation 1 892 949 1 792 317
2 522 354 2 488 234
Construction work in progress 69 891 65 129
Total electric utility plant 2 592 245 2 553 363
Other Assets
Regulatory assets (Note 1(f)) 343 731 409 086
Other 93 012 138 650
436 743 547 736
$3 889 526 $3 406 431
The accompanying notes as they relate to PSI Energy, Inc. are an integral part
of these consolidated financial statements.
PSI ENERGY, INC.
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31
1998 1997
(dollars in thousands)
Current Liabilities
Accounts payable $ 217 959 $ 212 833
Accounts payable to affiliated companies 30 145 41 326
Accrued taxes 58 901 69 304
Accrued interest 28 335 21 369
Notes payable and other short-term
obligations (Note 5) 173 162 190 600
Notes payable to affiliated companies 102 946 16 435
Long-term debt due within one year (Note 4) 6 000 85 000
Energy risk management liabilities (Note 1(c)) 558 573 -
Other 2 227 2 560
1 178 248 639 427
Non-Current Liabilities
Long-term debt (Note 4) 1 025 659 826 470
Deferred income taxes (Note 11) 364 049 403 535
Unamortized investment tax credits 45 956 49 296
Accrued pension and other postretirement
benefit costs (Note 9) 112 387 116 576
Other 115 656 176 271
1 663 707 1 572 148
Total liabilities 2 841 955 2 211 575
Cumulative Preferred Stock (Note 3)
Not subject to mandatory redemption 71 923 157 196
Common Stock Equity (Note 2)
Common stock - without par value; $.01 stated
value; authorized shares - 60,000,000;
outstanding shares - 53,913,701 in 1998
and 1997 539 539
Paid-in capital 410 739 400 893
Retained earnings 564 865 637 814
Accumulated other comprehensive loss (495) (1 586)
Total common stock equity 975 648 1 037 660
Commitments and Contingencies (Note 12)
$3 889 526 $3 406 431
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)
Accumulated
Other Total Total
Common Paid-in Retained Comprehensive Comprehensive Common Stock
Stock Capital Earnings Loss Income Equity
Balance at December 31, 1995 $539 $403 253 $626 349 $(1 074) $1 029 067
Comprehensive income
Net income 125 678 $125 678 125 678
Other comprehensive income,
net of tax effect of $109
Minimum pension liability
adjustment (179) (179)
Other comprehensive loss
total (179) (179)
Comprehensive income total $125 499
Dividends on preferred stock (12 629) (12 629)
Dividends on common stock (112 076) (112 076)
Other (306) 20 (286)
Balance at December 31, 1996 $539 $402 947 $627 342 $(1 253) $1 029 575
Comprehensive income
Net income 132 205 $132 205 132 205
Other comprehensive income,
net of tax effect of $203
Minimum pension liability
adjustment (333) (333)
Other comprehensive loss
total (333) (333)
Comprehensive income total $131 872
Dividends on preferred stock (11 795) (11 795)
Dividends on common stock (113 600) (113 600)
Other (2 054) 3 662 1 608
Balance at December 31, 1997 $539 $400 893 $637 814 $(1 586) $1 037 660
Comprehensive income
Net income 52 038 $ 52 038 52 038
Other comprehensive income,
net of tax effect of $(666)
Minimum pension liability
adjustment 1 091 1 091
Other comprehensive income
total 1 091 1 091
Comprehensive income total $ 53 129
Dividends on preferred stock (6 187) (6 187)
Dividends on common stock (106 800) (106 800)
Non-cash dividend on common stock (11 999) (11 999)
Contribution from parent company
for reallocation of taxes 9 823 9 823
Other 23 (1) 22
Balance at December 31, 1998 $539 $410 739 $564 865 $ (495) $ 975 648
The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.
PSI ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
(in thousands)
Operating Activities
Net income $ 52 038 $132 205 $125 678
Items providing or (using) cash currently:
Depreciation and amortization 130 604 126 731 117 013
WVPA settlement 80 000 - (80 000)
Deferred income taxes and investment tax
credits - net (57 130) 35 661 29 925
Unrealized loss from energy risk management
activities 62 000 13 000 -
Allowance for equity funds used during
construction (21) - -
Regulatory assets - net 42 250 27 134 (20 648)
Changes in current assets and current
liabilities
Restricted deposits (1 268) (596) (336)
Accounts and notes receivable (16 850) (149 290) 2 722
Materials, supplies, and fuel (25 256) 14 944 41 343
Accounts payable (7 086) 126 979 10 363
Accrued taxes and interest (3 437) (6 578) 6 704
Other current assets and liabilities (20 856) (15 801) (843)
Other items - net 21 900 17 431 4 656
Net cash provided by operating activities 256 888 321 820 236 577
Financing Activities
Change in short-term debt 69 073 22 120 (13 616)
Issuance of long-term debt 200 228 - 150 217
Redemption of long-term debt (164 111) (45 700) (74 600)
Funds on deposit from issuance of long-term debt - - 973
Retirement of preferred stock (85 247) (16 035) (15 116)
Dividends on preferred stock (6 187) (11 795) (12 629)
Dividends on common stock (106 800) (113 600) (112 076)
Net cash used in financing activities (93 044) (165 010) (76 847)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (163 225) (141 552) (172 341)
Net cash used in investing activities (163 225) (141 552) (172 341)
Net increase (decrease) in cash and temporary
cash investments 619 15 258 (12 611)
Cash and temporary cash investments at beginning
of period 18 169 2 911 15 522
Cash and temporary cash investments at end of
period $ 18 788 $ 18 169 $ 2 911
Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
Interest (net of amount capitalized) $ 78 752 $ 82 959 $ 76 655
Income taxes 63 957 58 671 37 048
The accompanying notes as they relate to PSI Energy, Inc. are an integral part
of these consolidated financial statements.
RESULTS OF OPERATIONS - PSI
Operating Revenues
The components of electric operating revenues and the related kwh sales are
shown below:
Revenue Kwh Sales
1998 1997 1996 1998 1997 1996
($ and kwh in millions)
Retail $1,161 $1,140 $1,071 24,326 23,335 23,046
Sales for resale 1,206 787 239 43,966 33,317 10,451
Other 36 33 22 - - -
Total $2,403 $1,960 $1,332 68,292 56,652 33,497
Operating revenues increased by $443 million (23%) in 1998, when compared to
1997. This increase was primarily due to increased volumes and a higher average
price per kwh received on non-firm power sales for resale transactions related
to energy marketing and trading operations. There was also an increase in the
average price per kwh paid for the corresponding purchases of purchased and
exchanged power described below. Also contributing to the increase were higher
retail kwh sales due to the warmer weather during 1998 when compared to 1997 and
growth in the average number of residential and commercial customers.
Higher non-firm power sales for resale due to increased activity in energy
marketing and trading operations significantly contributed to the $628 million
(47%) increase in electric operating revenues in 1997, when compared to 1996.
Also contributing to the increase was a full year's effects of PSI's retail rate
increases approved in the September 1996 Order, as amended in August 1997, the
December 1996 DSM Order, and the return of approximately $13 million to
customers in 1996 in accordance with the February 1995 Order. This order
required all retail operating income above a certain rate of return to be
refunded to customers.
Non-system kwh sales (and related revenues and expenses) resulting from energy
marketing and trading operations are allocated 50%/50% between CG&E and PSI
pursuant to the operating agreement filed with the companies' regulators.
Operating Expenses
Fuel and Purchased and Exchanged Power
The components of fuel and purchased and exchanged power are shown below:
1998 1997 1996
(in millions)
Fuel $ 382 $ 393 $364
Purchased and exchanged power 1,166 666 156
Total $1,548 $1,059 $520
Electric fuel costs decreased $11 million (3%) in 1998 and increased $29 million
(8%) in 1997.
An analysis of these fuel costs is shown below:
1998 1997
(in millions)
Previous year's fuel expense $393 $364
Increase (Decrease) due to change in:
Price of fuel (19) (2)
Deferred fuel cost (11) (5)
Kwh generation 19 36
Current year's fuel expense $382 $393
Purchased and exchanged power expense increased $500 million (75%) and $510
million in 1998 and 1997, respectively. These increases primarily reflect
increased purchases of non-firm power for resale to others as a result of
increased activity in energy marketing and trading operations and an increase in
the average price paid per kwh. Also recorded in 1998 were $62 million of
unrealized losses related to the energy 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 energy marketing and trading
operations.)
Other Operation and Maintenance
The components of other operation and maintenance expenses are shown below:
1998 1997 1996
(in millions)
Other operation $409 $345 $269
Maintenance 100 86 97
Total $509 $431 $366
Other operation expenses increased $64 million (19%) in 1998, as compared to
1997. This increase is primarily due to the one-time charge of $80 million
recorded during the second quarter of 1998, reflecting the implementation of a
1989 settlement of a dispute with WVPA (see Note 18 of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data").
Maintenance expenses increased $14 million (16%) in 1998, as compared to 1997,
primarily due to an increase in boiler plant maintenance and an increase in
distribution line maintenance costs resulting from storm damage during the
second quarter of 1998.
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. The effect of discontinuing deferral of
certain DSM-related costs also added to the increase. These increases were
partially offset by the effect of charges in 1996 for early retirement and
severance programs. Maintenance expenses declined $11 million (11%) in 1997, as
compared to 1996, primarily due to reduced outage related charges and other
maintenance costs associated with electric production facilities. This decrease
was also the result of reduced maintenance costs associated with electric
transmission and distribution facilities.
Depreciation and Amortization
Depreciation and amortization increased $10 million (8%) in 1997, as compared to
1996. This increase was primarily due to amortization of post-in-service
deferred operating expenses. This reflects 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.
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.
Interest
The increase in interest expense of $5 million (6%) for 1998, as compared to
1997, is due to an increase of $9 million in interest on long-term debt, which
is partially offset by a decrease of $3 million in other interest expense. The
increase in interest on long-term debt is due primarily to the net issuance of
approximately $163 million of long-term debt during the period from March 1998
to December 1998. The decrease in other interest expense is primarily due to a
reduction in average short-term borrowings and lower short-term interest rates.
In 1997, interest expense increased $5 million (7%) when compared to 1996
primarily due to an increase in long-term debt. The increase in interest on
long-term debt is primarily due to the net issuance of approximately $100
million of long-term debt during 1996 and 1997.
Preferred Dividend Requirement
The decrease in preferred dividend requirement of $6 million (52%) for 1998, as
compared to 1997, is primarily attributable to PSI's redemption of all
outstanding shares of its 7.44% Series Cumulative Preferred Stock on March 1,
1998.
The Union Light, Heat and Power Company
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF INCOME
1998 1997 1996
(in thousands)
Operating Revenues
Electric $191 359 $192 774 $190 900
Gas 65 454 78 848 76 868
256 813 271 622 267 768
Operating Expenses
Electricity purchased from parent
company for resale 142 567 145 906 143 839
Gas purchased 32 804 44 354 41 185
Other operation and maintenance 37 131 36 917 35 931
Depreciation 13 148 12 369 11 909
Taxes other than income taxes 3 993 4 055 4 036
229 643 243 601 236 900
Operating Income 27 170 28 021 30 868
Other Income and (Expenses) - Net (1 242) (1 850) (1 425)
Interest 4 604 4 768 4 661
Income Before Taxes 21 324 21 403 24 782
Income Taxes (Note 11) 7 774 8 486 10 186
Net Income $ 13 550 $ 12 917 $ 14 596
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
BALANCE SHEETS
ASSETS
December 31
1998 1997
(dollars in thousands)
Current Assets
Cash and temporary cash investments $ 3 244 $ 546
Accounts receivable less accumulated provision
for doubtful accounts of $1,248 at December
31, 1998, and $996 at December 31, 1997
(Note 6) 14 125 7 308
Accounts receivable from affiliated companies 666 446
Materials, supplies, and fuel - at average cost 8 269 6 094
Prepayments and other 308 385
26 612 14 779
Utility Plant - Original Cost
In service
Electric 232 222 204 111
Gas 164 040 155 167
Common 18 908 19 073
415 170 378 351
Accumulated depreciation 143 386 133 213
271 784 245 138
Construction work in progress 11 444 14 346
Total utility plant 283 228 259 484
Other Assets
Regulatory assets (Note 1(f)) 10 978 11 065
Other 3 767 6 262
14 745 17 327
$324 585 $291 590
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31
1998 1997
(dollars in thousands)
Current Liabilities
Accounts payable $ 5 903 $ 11 097
Accounts payable to affiliated companies 14 986 19 712
Accrued taxes 3 216 6 332
Accrued interest 1 959 1 286
Notes payable to affiliated companies 31 817 23 487
Long-term debt due within one year (Note 4) 20 000 -
Other 4 247 4 364
82 128 66 278
Non-Current Liabilities
Long-term debt (Note 4) 54 553 44 671
Deferred income taxes (Note 11) 26 134 26 211
Unamortized investment tax credits 4 238 4 516
Accrued pension and other postretirement
benefit costs (Note 9) 11 678 14 044
Amounts due to customers - income taxes 8 959 6 566
Other 8 077 6 391
113 639 102 399
Total liabilities 195 767 168 677
Common Stock Equity (Note 2)
Common stock - $15.00 par value;
authorized shares - 1,000,000; outstanding
shares - 585,333 in 1998 and 1997 8 780 8 780
Paid-in capital 19 525 18 683
Retained earnings 100 513 95 450
Total common stock equity 128 818 122 913
Commitments and Contingencies (Note 12)
$324 585 $291 590
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)
Total
Common Paid-in Retained Common Stock
Stock Capital Earnings Equity
Balance at 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 at 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 at December 31, 1997 $8 780 $18 683 $ 95 450 $122 913
Net income 13 550 13 550
Dividends on common stock (8 487) (8 487)
Contribution from parent for
reallocation of taxes 843 843
Other (1) - (1)
Balance at December 31, 1998 $8 780 $19 525 $100 513 $128 818
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CASH FLOWS
1998 1997 1996
(in thousands)
Operating Activities
Net income $13 550 $12 917 $14 596
Items providing or (using) cash currently:
Depreciation 13 148 12 369 11 909
Deferred income taxes and investment
tax credits - net (261) (6 124) 9 857
Allowance for equity funds used during
construction (142) (97) 8
Regulatory assets 3 100 (1 500)
Changes in current assets and current
liabilities
Accounts and notes receivable (4 820) 4 507 20 758
Materials, supplies, and fuel (2 175) 973 (1 339)
Accounts payable (9 920) 2 020 (4 690)
Accrued taxes and interest (2 443) 7 920 (1 494)
Other current assets and liabilities (40) (899) 615
Other items - net 3 268 6 242 (7 169)
Net cash provided by operating activities 10 168 39 928 41 551
Financing Activities
Change in short-term debt 8 330 (7 162) 7 606
Issuance of long-term debt 40 066 - -
Redemption of long-term debt (10 118) - (26 083)
Dividends on common stock (8 487) (9 951) (4 975)
Net cash provided by (used in)
financing activities 29 791 (17 113) (23 452)
Investing Activities
Construction expenditures (less allowance for
equity funds used during construction) (37 261) (23 466) (18 652)
Net cash used in investing activities (37 261) (23 466) (18 652)
Net increase (decrease) in cash and temporary
cash investments 2 698 (651) (553)
Cash and temporary cash investments at beginning
of period 546 1 197 1 750
Cash and temporary cash investments at end of
period $ 3 244 $ 546 $ 1 197
Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
Interest (net of amount capitalized) $ 3 635 $ 4 490 $ 4 667
Income taxes 11 305 2 859 1 240
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
RESULTS OF OPERATIONS - ULH&P
Operating Revenues
Electric Operating Revenues
Electric operating revenues decreased $1 million (1%) in 1998, when compared to
1997. This decrease primarily reflects revisions of ULH&P's estimate of unbilled
revenue recorded during 1998, which resulted in a decrease in electric operating
revenues of $2 million.
Electric operating revenues increased $2 million (1%) in 1997. The increase in
1997 was partially due to the effect of an order issued by the KPSC in July
1996. This order authorized a decrease in electric rates, retroactive to July
1995, reflecting a reduction in the cost of electricity purchased from CG&E.
Partially offsetting this increase was a decline in kwh sales.
Gas Operating Revenues
The components of gas operating revenues and the related mcf sales are shown
below:
Revenue Mcf Sales
1998 1997 1996 1998 1997 1996
($ and mcf in thousands)
Retail $60,503 $74,437 $72,768 9,479 11,208 11,995
Transportation 3,999 3,373 2,657 3,636 3,729 3,074
Other 952 1,038 1,443 147 185 184
Total $65,454 $78,848 $76,868 13,262 15,122 15,253
Gas operating revenues decreased $13 million (17%) in 1998, as compared to 1997,
primarily due to a decrease in mcf volumes sold. Also contributing to the
decline was a decrease in the average price per mcf of gas purchased.
The $2 million (3%) increase in gas operating revenues in 1997, as compared to
1996, was due to a higher average cost per mcf of gas purchased.
Operating Expenses
Electricity Purchased from Parent Company for Resale
Electricity purchased decreased $3 million (2%) for 1998, when compared to 1997.
This decrease reflects lower volumes purchased from CG&E.
Gas Purchased
Gas purchased decreased $12 million (26%) in 1998, as compared to 1997. This
decrease reflects a decline in the average cost per mcf of gas purchased and
lower volumes of 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.
Depreciation
In 1998, depreciation expense increased $.8 million (6%), as compared to 1997,
due to additions to depreciable plant.
Other Income and (Expenses) - Net
Other income and (expenses) - net changed $.6 million in 1998, as compared to
1997, due, in part, to decreased expenses associated with the sales of accounts
receivable.
Other income and (expenses) - net changed $.4 million in 1997, as compared to
1996, due primarily to increased expenses associated with the sales of accounts
receivable in 1996.
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
The Cincinnati Gas & Electric Company ("CG&E") and PSI Resources, Inc.
("Resources"). Cinergy's utility subsidiaries are CG&E and PSI Energy, Inc.
("PSI"). CG&E, an Ohio combination electric and gas public utility company, 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 public 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 is derived from the sale of electricity and the
sale and transportation of natural gas.
Cinergy's non-utility subsidiaries are Cinergy Investments, Inc.
("Investments"), Cinergy Services, Inc. ("Services"), and Cinergy Global
Resources, Inc. ("Global Resources"). Investments, a Delaware corporation, is a
non-utility subholding company that holds virtually all of Cinergy's domestic
non-utility businesses and interests. Services, a Delaware corporation, is the
service company for the Cinergy system, providing member companies with a
variety of administrative, management, and support services. Global Resources, a
Delaware corporation, was formed in May 1998, and holds Cinergy's international
businesses and certain other interests.
Cinergy conducts its operations through various subsidiaries and affiliates. The
Company is functionally organized into four business units through which many of
its activities are conducted: Energy Commodities Business Unit ("ECBU"), Energy
Delivery Business Unit ("EDBU"), Energy Services Business Unit ("ESBU"), and the
International Business Unit ("IBU"). The traditional, vertically-integrated
utility functions have been realigned into the ECBU, EDBU, and ESBU. Each of
these business units is described in detail along with certain financial
information by business unit as of December 31, 1998, in Note 15. As the
industry continues its evolution, Cinergy will continually analyze its operating
structure and make adjustments as appropriate. In early 1999, certain
organizational changes were begun to further align the business units to reflect
Cinergy's strategic vision.
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. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosures 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.
The Statements of Income in this report have been reclassified in order to
present the operations of all consolidated, non-regulated entities as a
component of operating income. Prior to this reclassification, the operations of
such entities were reflected in "Other Income and Expenses - Net." Similarly,
"Income Taxes" now includes the income taxes associated with the non-regulated
entities. These changes had no effect on net income. Additionally, the Balance
Sheets have been reformatted. Prior years' data has been reclassified to conform
to the current year's presentation.
Cinergy, CG&E, and PSI
(c) Energy Marketing and Trading Cinergy's energy marketing and trading
operations, conducted primarily through its ECBU, markets and trades
electricity, natural gas, and other energy-related products. The power marketing
and trading operation has both physical and trading activities. Generation not
required to meet native load requirements is available to be sold to third
parties, either under long-term contracts, such as full requirements
transactions or firm forward sales contracts, or in short-term and spot market
transactions. When transactions are entered into, each transaction is designated
as either a physical or trading transaction. In order for a transaction to be
designated as physical, there must be intent and ability to physically deliver
the power from company-owned generation. Physical transactions are accounted for
on a settlement basis. All other transactions are considered trading
transactions and are accounted for using the mark-to-market method of
accounting. Under the mark-to-market method of accounting, these trading
transactions are reflected at fair value as "Energy risk management assets" and
"Energy risk management liabilities". Changes in fair value, resulting in
unrealized gains and losses, are reflected in "Fuel and purchased and exchanged
power". Revenues and costs for all transactions are recorded gross in the
Consolidated Statements of Income as contracts are settled. Revenues are
recognized in "Operating Revenues - Electric" and costs are recorded in "Fuel
and purchased and exchanged power".
Although physical transactions are entered with the intent and ability to settle
the contract with company-owned generation, it is likely, that from time to
time, due to numerous factors such as generating station outages, native load
requirements, and weather, power used to settle the physical transactions will
be required to be purchased on the open market. Depending on the factors giving
rise to these open market purchases, the cost of such purchases could be in
excess of the associated revenues. Losses such as this will be recognized as the
power is delivered. In addition, physical contracts are subject to permanent
impairment tests. At December 31, 1998, management has concluded that no
physical contracts are impaired.
At December 31, 1998, the trading portfolio consisted of "Energy risk management
assets" of $969 million ($484.5 million each for CG&E and PSI) and "Energy risk
management liabilities" of $1,117 million (approximately $558.5 million each for
CG&E and PSI). Prior to December 31, 1998, the transactions now included in the
trading portfolio were accounted for and valued at the aggregate lower of cost
or market. Under this method, only the net value of the entire portfolio was
recorded as a liability in the Consolidated Balance Sheets. The net liability
was not significant at December 31, 1997.
Contracts in the trading portfolio are valued at end-of-period market prices,
utilizing factors such as closing exchange prices, broker and over-the-counter
quotations, and model pricing. Model pricing considers time value and volatility
factors underlying any options and contractual commitments. Management expects
that some of these obligations, even though considered as trading contracts,
will ultimately be settled from time to time by using company-owned generation.
The cost of this generation is typically below the market prices at which the
trading portfolio has been valued.
Because of the volatility currently experienced in the power markets, and the
factors discussed above pertaining to both the physical and trading activities,
volatility in future earnings (losses) from period to period in the ECBU is
likely.
As a result of the acquisitions of Producers Energy Marketing, LLC ("ProEnergy")
in 1998 and Greenwich Energy Partners in 1997, the ECBU also physically markets
natural gas and trades natural gas and other energy-related products. All of
these operations are accounted for on the mark-to-market method of accounting.
Revenues and costs from physical marketing are recorded gross in the
Consolidated Statements of Income as contracts are settled due to the exchanging
of title to the natural gas throughout the earnings process. Realized revenues
for 1998 were approximately $650 million. There were no such revenues prior to
1998. All non-physical transactions are recorded net in the Consolidated
Statements of Income. Energy risk management assets and liabilities and gross
margins from trading activities were not significant at December 31, 1998 and
1997 or for each of the three years ended December 31, 1998.
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 and its subsidiaries utilize foreign exchange forward contracts and
currency swaps to hedge certain of their net investments in foreign operations.
Accordingly, any translation gains or losses related to the foreign exchange
forward contracts or the principal exchange on the currency swaps are recorded
in "Accumulated other comprehensive loss", which is a separate component of
Common Stock Equity. Aggregate translation losses related to these instruments
are reflected in Current Liabilities 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" as realized over the life of the agreement.
Cinergy, CG&E, PSI, and ULH&P
(e) 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.
Cinergy, CG&E, PSI, and ULH&P
(f) Regulation Cinergy, its utility subsidiaries, and certain of its non-utility
subsidiaries are subject to regulation by the Securities and Exchange Commission
("SEC") under the PUHCA. 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, 1998, 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. The regulatory assets of CG&E and its
utility subsidiaries and PSI as of December 31 are as follows:
1998 1997
CG&E(1) PSI Cinergy CG&E(1) PSI Cinergy
(in millions)
Amounts due from customers -
income taxes (2) $331 $ 26 $357 $350 $ 24 $ 374
Post-in-service carrying costs and
deferred operating expenses 128 43 171 135 44 179
Coal contract buyout costs - 99 99 - 122 122
Deferred demand-side management ("DSM")
costs 40 43 83 39 71 110
Phase-in deferred return and
depreciation (3) 75 - 75 90 - 90
Deferred merger costs 16 69 85 16 74 90
Unamortized costs of reacquiring
debt 34 29 63 36 30 66
Coal gasification services expenses - 19 19 - 22 22
Other 3 16 19 2 22 24
Total $627 $344 $971 $668 $409 $1 077
(1) Includes $11 million related to ULH&P (for DSM, unamortized costs of
reacquiring debt and other regulatory assets) at both December 31, 1998, and
1997.
(2) Income tax provisions reflected in customer rates are regulated by the
various regulatory commissions overseeing the regulated business operations of
CG&E and its utility subsidiaries and PSI. In accordance with the provisions of
Statement 71, Cinergy, CG&E, and PSI have recorded a net regulatory asset
representing the probable recovery from customers of additional income taxes
established under Statement 109. ULH&P has recorded a regulatory liability
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.
(3) Pursuant to an order from the Public Utilities Commission of Ohio, CG&E is
recovering this asset over a seven-year period which began in May 1995.
CG&E has previously received regulatory orders authorizing the recovery of $553
million (including $4 million for ULH&P) of its total regulatory assets at
December 31, 1998. PSI has previously received regulatory orders authorizing the
recovery of $334 million of its total regulatory assets at December 31, 1998.
The recovery of these assets is being reflected in rates charged to customers
over periods ranging from 1 to 29 years, 1 to 33 years, and 4 to 22 years for
CG&E, PSI, and ULH&P, respectively. Both CG&E (including ULH&P) and PSI will
request recovery of additional amounts in future proceedings. These proceedings,
if any, may be related to the transition to customer choice in each applicable
jurisdiction.
Cinergy, CG&E, PSI, and ULH&P
(g) 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
(h) AFUDC In accordance with the uniform systems of accounts prescribed by
regulatory authorities, Cinergy's utility subsidiaries capitalize AFUDC, a
non-cash income item, which is defined by the FERC as including "the net cost
for the period of construction of borrowed funds used for construction purposes
and a reasonable rate on other funds when so used." The borrowed funds component
of AFUDC, which is recorded on a pre-tax basis, is as follows:
1998 1997 1996
(in millions)
Cinergy and its subsidiaries $7.5 $5.4 $6.2
CG&E and its subsidiaries 5.5 4.6 3.9
ULH&P .6 .2 .1
PSI 2.0 .8 2.3
AFUDC accrual rates are compounded semi-annually and were as follows:
1998 1997 1996
Cinergy average 6.6% 6.3% 7.1%
CG&E and its utility
subsidiaries average 7.1 6.4 8.7
ULH&P average 6.1 6.9 8.8
PSI average 5.6 5.9 5.4
Cinergy, CG&E, PSI, and ULH&P
(i) 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:
1998 1997 1996
CG&E and its utility subsidiaries
Electric 2.9% 2.9% 2.9%
Gas 2.9 2.9 2.8
Common 2.6 3.0 3.0
ULH&P
Electric 3.4 3.3 3.3
Gas 3.1 3.1 3.1
Common 5.0 5.0 5.1
PSI 3.0 3.0 3.0
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
(j) Operating Revenues and Fuel Costs Cinergy's utility subsidiaries record
revenues for electric and gas service provided during the month, including sales
unbilled at the end of each month. The costs of electricity and gas purchased
and fuel used in electric production are expensed as recovered through revenues
and any portion of these costs recoverable or refundable in future periods is
deferred in either "Accounts receivable" or "Accounts payable" in the
accompanying Balance Sheets. Indiana law subjects the recovery of fuel costs to
a determination that such recovery will not result in earning a return in excess
of that allowed by the Indiana Utility Regulatory Commission ("IURC") in its
last general rate order.
Cinergy, CG&E, PSI, and ULH&P
(k) 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 and
Note 18 for information concerning a non-cash financing transaction.
Cinergy
(l) Translation of Foreign Currency All assets and liabilities reported in the
balance sheets of foreign subsidiaries whose functional currency is other than
the United States ("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 recorded in "Accumulated other comprehensive loss", which is a separate
component of common stock equity.
Cinergy, CG&E, and PSI
(m) Accounting Changes Effective with the first quarter of 1998, Cinergy and its
subsidiaries adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements.
Comprehensive income per Statement 130 is defined as "the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources."
In December 1998, the Company implemented the provisions of the Emerging Issues
Task Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." For a detailed discussion of the Company's
energy trading and risk management activities, refer to Note 1(c).
2. Common Stock
Cinergy
(a) Changes in Common Stock Outstanding
The following table reflects the shares of Cinergy common stock reserved for
issuance at December 31, 1998, and shares issued in 1998, 1997, and 1996 for the
Company's stock-based plans.
Shares
Reserved at Shares Issued
Dec. 31, 1998 1998 1997 1996
1996 Long-term Incentive
Compensation Plan ("LTIP") 6 956 386 - 43 614 -
Stock Option Plan 4 366 186 192 591 22 219 15 007
Performance Shares Plan ("PSP") 771 301 - - 492
Employee Stock Purchase
and Savings Plan 1 931 378 1 006 - -
401(k) Savings Plans 6 469 373 - - -
Dividend Reinvestment and
Stock Purchase Plan 1 798 486 - - -
Directors' Deferred
Compensation Plan 200 000 - - -
Cinergy retired 44,981; 304; and 6,511 shares of common stock in 1998, 1997, and
1996, respectively, primarily representing shares tendered as payment for the
exercise of previously granted stock options.
In June 1998, Cinergy issued 771,258 shares of new common stock to acquire
ProEnergy.
CG&E, PSI, and ULH&P
Cinergy owns all of the common stock of CG&E and PSI, and all of ULH&P's common
stock is held by CG&E.
Cinergy, CG&E, and PSI
(b) Dividend Restrictions 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 1998, 1997,
and 1996, compensation cost related to Cinergy's stock-based compensation plans,
before income taxes, recognized in the Consolidated Statements of Income was $1
million, $6 million, and $2 million, respectively.
Net income and earnings per share ("EPS") for 1998, 1997, and 1996, 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:
1998 1997 1996
(in millions, except per share amounts)
Net income - as reported $261 $253 $335
- pro forma $258 $251 $334
EPS - as reported $1.65 $1.61 $2.00
- pro forma $1.63 $1.59 $1.99
Diluted EPS - as reported $1.65 $1.59 $1.99
- pro forma $1.62 $1.58 $1.99
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
EPS 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 with the exception of participants that retire. Their shares
become vested upon retirement. Participants' shares that are not vested become
forfeited when the participant leaves Cinergy. 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 1998 and 1997, 41,129 and 425,938 performance-based restricted
shares at a weighted average price of $34.69 and $29.95, respectively, were
granted to certain key employees. As of December 31, 1998, Cinergy held a total
of 442,941 performance-based restricted shares. 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 1998 and 1997 is summarized as follows:
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
Outstanding, beginning of year 369 600 $33.60 - -
Granted 471 400 38.19 369 600 $33.60
Forfeited (68 000) 36.06 - -
Outstanding, end of year 773 000 $36.19 369 600 $33.60
Exercisable, end of year 11 600 $36.05 - -
Weighted average fair value of
options granted during the year $4.68 $3.54
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:
1998 1997
Risk-free interest rate 5.6% 6.2%
Expected dividend yield 4.8% 5.4%
Expected lives 5.6 yrs. 5.4 yrs.
Expected common stock variance 1.8% 1.7%
The price range for the options outstanding under the LTIP at December 31, 1998,
was $33.50 - $38.59 and the weighted average contractual life was 8.7 years.
(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. The activity under this plan has predominantly consisted
of the issuance of stock options. Options are granted at the fair market value
of the shares on the date of grant. Options generally 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 1998, 1997, and 1996 is summarized as follows:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
Outstanding, beginning of year 2 954 475 $23.79 3 334 637 $23.57 3 653 085 $22.47
Granted 480 000 36.88 - - 220 000 29.75
Exercised (430 961) 21.62 (380 162) 21.71 (513 448) 18.16
Forfeited (100 000) 26.92 - - (25 000) -
Outstanding, end of year 2 903 514 $26.17 2 954 475 $23.79 3 334 637 $23.57
Exercisable, end of year 1 535 514 $23.61 1 389 975 $22.58 1 131 637 $21.34
Weighted average fair value of
options granted during the year $4.53 $ - $3.07
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 1998 and 1996 (no
options were granted during 1997), were as follows:
1998 1996
Risk-free interest rate 5.6% 6.3%
Expected dividend yield 4.8% 5.8%
Expected lives 6.5 yrs. 6.5 yrs.
Expected common stock variance 2.0% 1.8%
Price ranges, along with certain other information, for options outstanding
under the Stock Option Plan at December 31, 1998, are as follows:
Outstanding Exercisable
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Contractual Exercise
Price Range Number Price Life Number Price
$13.15 - $17.35 99 638 $15.35 1.1 yrs. 99 638 $15.35
$22.88 - $25.19 2 034 213 $23.61 6.0 yrs. 1 286 213 $23.73
$28.44 - $36.88 769 663 $29.15 7.1 yrs. 149 663 $34.00
(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 5%. Any
funds not applied toward the purchase of shares are returned to the participant.
A participant may elect to terminate participation in the plan at any time.
Participation also will terminate if the participant's employment with Cinergy
ceases. Upon termination of participation, all funds, including interest, are
returned to the participant without penalty. The current offering period began
January 1, 1997, and ended February 28, 1999. The purchase price for all shares
under this offering is $31.83. The previous offering period ended December 31,
1996, with a purchase price of $21.73. 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 1998, 1997, and 1996 is
summarized as follows:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
Outstanding, beginning
of year 326 367 $31.83 - $ - 490 787 $21.73
Granted - 31.83 338 947 31.83 - -
Exercised (3,342) 31.83 (95) 31.83 (414 284) 21.73
Forfeited (25 651) 31.83 (12 485) 31.83 (76 503) 21.73
Outstanding, end of year 297 374 $31.83 326 367 $31.83 - $ -
Weighted average fair value of
options granted during the year $ - $3.08 $ -
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 5.9%
Expected dividend yield 5.4%
Expected lives 2.0 yrs.
Expected common stock variance 1.6%
3. Preferred Stock of Subsidiaries
Cinergy, CG&E, and PSI
(a) Schedule of Cumulative Preferred Stock
December 31
1998 1997
CG&E (dollars in thousands)
Not subject to mandatory redemption
Par value $100 per share - authorized 6,000,000 shares - outstanding
4% Series 169,834 shares in 1998 and 1997 $ 16 983 $ 16 983
4 3/4% Series 37,335 shares in 1998 and 38,096 shares in 1997 3 734 3 810
Total 20 717 20 793
PSI
Not subject to mandatory redemption
Par value $25 per share - authorized 5,000,000 shares - outstanding
4.32% Series 169,161 shares in 1998 and 1997 4 229 4 229
4.16% Series 148,763 shares in 1998 and 1997 3 719 3 719
7.44% Series 3,408,712 shares in 1997 - 85 218
Par value $100 per share - authorized 5,000,000 shares - outstanding
3 1/2% Series 39,748 shares in 1998 and 40,302 shares in 1997 3 975 4 030
6 7/8% Series 600,000 shares in 1998 and 1997 60 000 60 000
Total 71 923 157 196
Total - Cinergy
Total not subject to mandatory redemption $ 92 640 $177 989
Cinergy, CG&E, and PSI
(b) Changes in Cumulative Preferred Stock Outstanding
1998 1997 1996
Par Shares Par Shares Par Shares Par
Series Value Retired Value Retired Value Retired Value
(in thousands) (in thousands) (in thousands)
Not Subject to Mandatory Redemption
CG&E 4 % $100 - $ - 1 $ 1 100 165 $10 016
4 3/4 100 761 76 3 525 352 88 379 8 838
PSI 7.15 100 - - 158 640 15 864 - -
3 1/2 100 554 55 265 26 276 29
7.44 25 3 408 712 85 218 - - 591 288 14 782
4.32 25 - - 1 - - -
Subject to Mandatory Redemption
CG&E 7 7/8% $100 - $ - - $ - 800 000 $80 000
7 3/8 100 - - - - 800 000 80 000
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, made a capital contribution to CG&E of all the
shares, and CG&E subsequently 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 EPS applicable to common stock for Cinergy.
4. Long-term Debt
Cinergy, CG&E, PSI, and ULH&P
(a) Schedule of Long-term Debt (excluding amounts reflected in current
liabilities)
December 31
1998 1997
(dollars in thousands)
Cinergy
Other Long-term Debt
6.53% Debentures due December 16, 2008 $ 200 000 $ -
Unamortized Discount (87) -
Total - Cinergy 199 913 -
Global Resources
Other Long-term Debt
6.20% Debentures due November 3, 2008 150 000 -
Other 9 443 -
Total Other Long-term Debt 159 443 -
Unamortized Premium and Discount - Net (326) -
Total - Global Resources 159 117 -
December 31
1998 1997
(dollars in thousands)
CG&E and Subsidiaries
CG&E
First Mortgage Bonds
5.80% Series due February 15, 1999 - 110 000
7 3/8% Series due May 1, 1999 - 50 000
7 3/8% Series due November 1, 2001 - 60 000
7 1/4% Series due September 1, 2002 100 000 100 000
6.45% Series due February 15, 2004 110 000 110 000
8 1/2% Series due September 1, 2022 - 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 604 700 924 700
Pollution Control Notes
6.50% due November 15, 2022 12 721 12 721
Other Long-term Debt
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 London
Interbank Offered Rate ("LIBOR") - based floating rate
at any interest rate payment date between October 1, 1999
and October 1, 2002) 100 000 100 000
6.40% Debentures due April 1, 2008 100 000 -
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
6.35% Debentures due June 15, 2038 100 000 -
Total Other Long-term Debt 550 000 350 000
Unamortized Premium and Discount - Net (3 396) (8 860)
Total - CG&E 1 164 025 1 278 561
ULH&P
First Mortgage Bonds
6 1/2% Series due August 1, 1999 - 20 000
8% Series due October 1, 2003 - 10 000
Total First Mortgage Bonds - 30 000
Other Long-term Debt
6.11% Debentures due December 8, 2003 20 000 -
6.50% Debentures due April 30, 2008 20 000 -
7.65% Debentures due July 15, 2025 15 000 15 000
Total Other Long-term Debt 55 000 15 000
Unamortized Premium and Discount - Net (447) (329)
Total - ULH&P 54 553 44 671
Lawrenceburg Gas Company
First Mortgage Bonds
9 3/4% Series due October 1, 2001 1 200 1 200
Total - CG&E and Subsidiaries 1 219 778 1 324 432
December 31
1998 1997
(dollars in thousands)
PSI
First Mortgage Bonds
Series S, 7%, due January 1, 2002 - 26 429
Series Y, 7 5/8%, due January 1, 2007 - 24 140
Series QQ, 8 1/4%, due June 15, 2013 (Pollution Control) - 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 154 195 227 764
Secured Medium-term Notes
Series A, 7.15% to 8.88%, due January 6, 1999 to
June 1, 2022 284 000 290 000
Series B, 5.22% to 8.26%, due September 19, 2000
to August 22, 2022 195 000 195 000
(Series A and B, 7.83% weighted average interest rate
and 14 year weighted average remaining life)
Total Secured Medium-term Notes 479 000 485 000
Other Long-term Debt
Series 1994A Promissory Note, non-interest bearing,
due January 3, 2001 19 825 19 825
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
6.00% Debentures due December 14, 2016
(Redeemable in whole or in part at the option of the
holders on December 14, 2001) 50 000 -
6.50% Synthetic Putable Yield Securities due August 1, 2026 50 000 -
7.25% Junior Maturing Principal Securities due March 15, 2028 100 000 -
6.00% Rural Utilities Service ("RUS") Obligation payable in
annual installments 85 620 -
Total Other Long-term Debt 405 445 119 825
Unamortized Premium and Discount - Net (12 981) (6 119)
Total - PSI 1 025 659 826 470
Total - Cinergy and Subsidiaries $2 604 467 $2 150 902
Total - Cinergy Corp. Consolidated
First Mortgage Bonds $ 760 095 $1 183 664
Secured Medium-term Notes 479 000 485 000
Pollution Control Notes 12 721 12 721
Other Long-term Debt 1 369 888 484 825
Unamortized Premium and Discount - Net (17 237) (15 308)
Total Long-term Debt $2 604 467 $2 150 902
Cinergy, CG&E, PSI, and ULH&P
(b) Mandatory Redemption and Other Requirements
Long-term debt maturities for the next five years (excluding callable and/or
putable debt) are as follows:
Cinergy and CG&E and
Subsidiaries Subsidiaries PSI ULH&P
(in millions)
1999 $137 $130 $ 7 $20
2000 32 - 32 -
2001 40 1 39 -
2002 124 100 24 -
2003 77 20 57 20
$410 $251 $159 $40
Maintenance and replacement fund provisions contained in PSI's first mortgage
bond indenture require cash payments, bond retirements, or pledges of unfunded
property additions each year based on an amount related to PSI's net revenues.
5. Notes Payable and Other Short-term Obligations
Cinergy, CG&E, PSI, and ULH&P
Notes payable and other short-term obligations (excluding notes payable to
affiliated companies) and weighted average interest rates were as follows:
Cinergy
December 31, 1998 December 31, 1997
Weighted Weighted
Established Average Established Average
Lines Outstanding Rate Lines Outstanding Rate
(in millions) (in millions)
Cinergy
Committed lines
Acquisition line $ 160 $160 5.61% $ 350 $ 350 6.25%
Revolving line 600 245 5.68 400 89 6.27
Commercial paper - 50 5.78 - 161 6.19
Uncommitted lines 45 50* 5.84 - -
Utility subsidiaries
Committed lines 300 - - 270 30 6.09
Uncommitted lines 410 95 5.90 360 206 6.19
Pollution control notes 267 267 3.83 244 244 4.08
Non-utility subsidiary 138 37 13.11 115 34 7.20
Total $1 920 $904 5.20% $1 739 $1 114 5.78%
* Excess over Established Line represents amount sold by dealers to other
investors.
CG&E
December 31, 1998 December 31, 1997
Weighted Weighted
Established Average Established Average
Lines Outstanding Rate Lines Outstanding Rate
(in millions) (in millions)
Committed lines $100 $ - - $ 85 $ 15 6.13%
Uncommitted lines 215 5 5.28% 190 90 6.19
Pollution control notes 184 184 3.78 184 184 4.08
Total $499 $189 3.83% $459 $289 4.85%
PSI
December 31, 1998 December 31, 1997
Weighted Weighted
Established Average Established Average
Lines Outstanding Rate Lines Outstanding Rate
(in millions) (in millions)
Committed lines $200 $ - - $185 $ 15 6.06%
Uncommitted lines 195 90 5.93% 170 116 6.19
Pollution control notes 83 83 3.94 60 60 4.08
Total $478 $173 4.98% $415 $191 5.52%
Cinergy, CG&E, PSI, and ULH&P
Cinergy and its utility subsidiaries have arranged committed lines ("unsecured
lines of credit"), as well as uncommitted lines (short-term borrowings on an "as
offered" basis) with various banks. The established committed lines include $106
million designated as backup for certain of the uncommitted lines at December
31, 1998. Further, the committed lines are maintained by commitment fees, which
were immaterial during the 1996 through 1998 period.
Cinergy, CG&E, and PSI
Cinergy's committed lines are comprised of an acquisition line and a revolving
line. The established revolving line also provides credit support for Cinergy's
commercial paper program, which is limited to a maximum outstanding principal
amount of $400 million. The proceeds from the commercial paper sales were used
for general corporate purposes. Proceeds from the sale of Cinergy's 6.53%
debentures were used to reduce the acquisition line to the year-end level of
$160 million.
CG&E and PSI also have the capacity to issue commercial paper that must be
supported by committed lines of the respective company. Neither CG&E nor PSI
issued commercial paper in 1998 or 1997.
Amounts outstanding under the committed lines for Cinergy, the utility
subsidiaries, and the non-utility subsidiary 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.
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
Global Resources established a $100 million revolving credit agreement in 1998,
which is due to expire in March 1999.
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 and its utility subsidiaries 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, 1998 and December 31, 1997, see "Notes payable to affiliated
companies" on the Consolidated Balance Sheets for CG&E and PSI and the Balance
Sheets for ULH&P.
6. Sale of Accounts Receivable
Cinergy, CG&E, PSI, and ULH&P
In 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. As of December 31, 1998, $253 million
($166 million by CG&E and its subsidiaries, including $16 million by ULH&P, and
$87 million by PSI), net of reserves, has been sold. 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, 1998 and 1997.
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 computer, communications,
and transportation equipment and office space. Total rental payments on
operating leases for each of the past three years were are follows:
1998 1997 1996
(in millions)
Cinergy and subsidiaries $42 $36 $31
CG&E and subsidiaries 21 18 18
PSI 21 18 13
ULH&P 3 1 2
Future minimum lease payments required under operating leases with remaining,
non-cancelable lease terms in excess of one year as of December 31, 1998, are as
follows:
Cinergy and CG&E and
Subsidiaries Subsidiaries PSI ULH&P*
(in millions, ULH&P in thousands)
1999 $ 38 $11 $10 $135
2000 31 9 8 84
2001 22 8 7 25
2002 14 7 5 25
2003 10 5 4 20
After 2003 36 21 11 114
$151 $61 $45 $403
* Excludes amounts applicable to CG&E's non-cancelable leases allocated to
ULH&P.
Cinergy and CG&E
(b) Capital Lease
In 1996, CG&E entered into a sale-leaseback agreement for certain equipment at
Woodsdale Generating Station. 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 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, included in
Non-Current Liabilities, 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. Cinergy has also
hedged certain of its net investments in the Czech Republic utilizing foreign
exchange forward contracts. Translation gains and losses related to the forward
foreign exchange contracts and the principal exchange on the currency swap have
primarily been recorded in "Accumulated other comprehensive loss", which is
reported as a separate component of common stock equity in the Consolidated
Financial Statements of Cinergy. At December 31, 1998, aggregate translation
losses of approximately $49 million, related to the foreign exchange forward
contracts and the principal exchange of the currency swap, have been reflected
in Current Liabilities in the Consolidated Balance Sheets of Cinergy. At
December 31, 1998, the fair value of these contracts was approximately $(66)
million.
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. Cinergy has effectively fixed the interest rate
applicable to the pound sterling denominated leg of its currency swap for its
remaining term through an interest rate swap agreement. This contract requires
Cinergy to pay a fixed rate and receive a floating rate. This contract has a
total notional principal amount of 280 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. The fair value of this interest rate swap
agreement at December 31, 1998, was approximately $(19) million.
At December 31, 1998, CG&E had an interest rate swap agreement outstanding
related to its sale of accounts receivable. The contract has a notional amount
of $100 million and requires CG&E to pay a fixed rate and receive a floating
rate. PSI had three interest rate swap agreements outstanding with notional
amounts of $100 million each. One contract, with two years remaining of a
four-year term, requires PSI to pay a floating rate and receive a fixed rate.
The other two contracts, with six-month terms, require PSI to pay a fixed rate
and receive a floating rate. The floating rate is based on applicable LIBOR. At
December 31, 1998, the fair values of these interest rate swap agreements 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
1998 1997
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) $ 2 740 $ 2 934 $ 2 236 $ 2 337
CG&E and Subsidiaries
First mortgage bonds and
other long-term debt (includes
amounts reflected as long-term
debt due within one year) $ 1 350 $ 1 415 $ 1 324 $ 1 355
PSI
First mortgage bonds and
other long-term debt (includes
amounts reflected as long-term
debt due within one year) $ 1 032 $ 1 134 $ 912 $ 982
ULH&P
First mortgage bonds and
other long-term debt $74 553 $78 145 $44 671 $45 591
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 New York Stock Exchange, 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 the ESBU's trade accounts
receivable from electric and gas retail customers is limited due to the large
number of customers and diversified customer base of residential, commercial,
and industrial customers. Contracts within the physical power portfolio of the
ECBU's power marketing and trading operations are primarily with traditional
electric cooperatives and municipalities and other investor-owned utilities.
Contracts within the trading portfolio of the power marketing and trading
operations are primarily with power marketers and other investor-owned
utilities. As of December 31, 1998, approximately 73% of the activity within the
trading portfolio represents commitments with 10 counterparties. The majority of
these contracts are for terms of one year or less. As a result of the extreme
volatility experienced in the Midwest power markets during 1998, several new
entrants into the market began experiencing financial difficulties and failed to
perform their contractual obligations. As a result, the bad debt provisions of
approximately $13 million with respect to settled transactions were recorded
during the year. Counterparty credit exposure within the power trading portfolio
is routinely factored into the mark-to-market valuation. At December 31, 1998,
credit exposure within the power trading portfolio is not believed to be
significant. Prior to 1998, credit exposure due to nonperformance by
counterparties was not significant. As the competitive electric power market
continues to develop, counterparties will increasingly include new market
entrants, such as other power marketers, brokers, and commodity traders. This
increased level of new market entrants, as well as competitive pressures on
existing market participants, could increase the ECBU's exposure to credit risk
with respect to its power marketing and trading operation. As of December 31,
1998, approximately 37% of the activity within the ECBU's physical gas marketing
and trading portfolio represents commitments with 10 counterparties. Credit risk
losses related to the ECBU's gas and other commodity physical and trading
operations have not been significant. Based on the types of counterparties and
customers with which transactions are executed, credit exposure within the gas
and other commodity trading portfolios is not believed to be significant.
Potential exposure to credit risk also exists from Cinergy's use of financial
derivatives such as currency swaps, foreign exchange forward contracts, 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 and Other Postretirement Benefits
Cinergy, CG&E, PSI, and ULH&P
Cinergy's defined benefit pension plans cover substantially all US 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.
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. The
reconfiguration of the pension plans did not have a significant impact on the
Company's financial condition or results of operations.
Cinergy's pension plan funding policy for US employees is to contribute annually
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. The pension plans' assets consist of
investments in equity and fixed income securities.
Cinergy provides certain health care and life insurance benefits to retired US
employees and their eligible dependents, if the retiree has met minimum age and
service requirements. 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
US 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. CG&E does not pre-fund its obligations for these postretirement
benefits. PSI is pre-funding its obligations as authorized by the IURC.
Cinergy's benefit plans' cost for 1998, 1997, and 1996 included the following
components:
Other
Pension Postretirement
Benefits Benefits
1998 1997 1996 1998 1997 1996
(in millions)
Service cost $21.8 $19.8 $21.2 $ 4.1 $ 3.1 $ 5.8
Interest cost 71.6 67.8 61.6 16.1 16.3 18.7
Expected return on plans'
assets (66.9) (62.8) (61.2) - - -
Amortization of transition
obligation/(asset) (1.3) (1.3) (1.3) 5.0 5.0 8.4
Amortization of prior service
cost 4.4 4.4 4.5 - - -
Recognized actuarial loss - (.3) (.3) .4 .3 .3
Net periodic benefit cost $29.6 $27.6 $24.5 $25.6 $24.7 $33.2
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.
Other
Pension Postretirement
Benefits Benefits
1998 1997 1996 1998 1997 1996
Actuarial Assumptions:
Discount rate 6.75% 7.5% 8.0% 6.75% 7.5% 8.0%
Rate of future compensation
increase 3.75% 4.5% 5.0% n/a n/a n/a
Rate of return on plans' assets 9.00% 9.0% 9.0% n/a n/a n/a
For measurement purposes, a 7% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 5% for 2004 and remain at that level thereafter.
The following table provides a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ended
December 31, 1998, and a statement of the funded status as of December 31 of
both years.
Other
Pension Postretirement
Benefits Benefits
1998 1997 1998 1997
(in millions)
Change in benefit obligation
Benefit obligation at beginning of period $960.3 $ 877.4 $221.9 $ 211.0
Service cost 21.8 19.8 4.1 3.1
Interest cost 71.6 67.8 16.1 16.3
Amendments 1.0 - - -
Actuarial gain 53.6 65.4 17.4 3.7
Benefits paid (56.2) (70.1) (13.0) (12.2)
Benefit obligation at end of period 1 052.1 960.3 246.5 221.9
Change in plan assets
Fair value of plan assets at beginning
of period 888.1 764.1 - -
Actual return on plan assets 9.9 186.6 - -
Employer contribution 23.5 7.5 13.0 12.2
Benefits paid (56.2) (70.1) (13.0) (12.2)
Fair value of plan assets at end
of period 865.3 888.1 - -
Funded status (186.8) (72.2) (246.5) (221.9)
Unrecognized prior service cost 43.3 46.6 - -
Unrecognized net actuarial (gain)/loss (24.1) (134.6) 40.3 22.6
Unrecognized net plan assets (7.1) (8.5) 65.8 70.9
Accrued benefit cost at December 31 $(174.7) $(168.7) $(140.4) $(128.4)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
(in millions)
Effect on total of service and interest
cost components $ 2.8 $(2.4)
Effect on postretirement benefit
obligation 26.7 (23.7)
In addition, the Company sponsors non-qualified pension plans that cover
officers, certain other key employees, and non-employee directors. Cinergy's
non-qualified pension plans are not currently funded. Cinergy may begin to fund
certain of these plans through a rabbi trust in 1999.
The pension benefit obligations and pension expense under these plans were:
1998 1997
(in millions)
Pension benefit obligations $31.4 $24.6
Pension expense 4.5 4.1
Cinergy
10. Investments in Unconsolidated Subsidiaries
Except for Cinergy's 50% investment in Avon Energy Partners Holdings ("Avon
Energy"), which holds Midlands Electricity plc ("Midlands"), investments in
unconsolidated subsidiaries are not significant.
Summarized financial information for Avon Energy is as follows:
December 31
1998 1997
(in millions)
Assets
Current assets $ 568 $ 676
Property, plant, and equipment 1 974 1 890
Other assets 2 111 2 148
Total assets $4 653 $4 714
Liabilities and Shareholders' Equity
Other liabilities $1 639 $2 175
Long-term debt 1 896 1 533
Total common shareholders' equity 1 118 1 006
Total liabilities and shareholders' equity $4 653 $4 714
Cinergy's investments in unconsolidated
subsidiaries: Avon Energy $ 556 $ 505
Other companies 18 33
Total investments in unconsolidated
subsidiaries $ 574 $ 538
December 31
1998 1997 1996
(in millions)
Operating revenues $2 406 $2 176 $1 132
Net income before extraordinary item $ 105 $ 127 $ 50
Extraordinary item - windfall profits
tax (less applicable income taxes of $0) $ - $ (219) $ -
Net income (loss) $ 105 $ (92) $ 50
Cinergy's equity in earnings of Avon Energy
before extraordinary item $ 57 $ 63 $ 25
Cinergy's equity in extraordinary item - (109) -
Cinergy's equity in earnings of: Avon Energy $ 57 $ (46) $ 25
Other companies (6) (3) -
Total equity in the earnings of unconsolidated
subsidiaries $ 51 $ (49) $ 25
During 1997 Cinergy received $25 million of dividends from Avon Energy.
In November 1998, Midlands announced the sale of its electric supply business to
National Power PLC ("National Power"). National Power will acquire all of the
assets of Midlands' supply business and assume its liabilities, including
obligations under all Midlands power purchase agreements for approximately $300
million, plus an adjustment for working capital at financial closing. The sale
is subject to approval by Great Britain's Department of Trade and Industry and
Office of Electricity Regulation and is expected in the second quarter of 1999.
Midlands will continue to own and operate its distribution business as well as
interests in various generation stations.
11. Income Taxes
Cinergy
The significant components of Cinergy's net deferred income tax liability at
December 31, 1998, and 1997, are as follows:
1998 1997
(in millions)
Deferred Income Tax Liability
Utility plant $1 104.2 $1 076.8
Unamortized costs of reacquiring debt 21.2 24.4
Deferred operating expenses and carrying
costs 73.3 75.0
Amounts due from customers - income taxes 121.7 129.4
Deferred DSM costs 22.8 31.7
Investments in unconsolidated subsidiaries - 55.0
Other 51.0 47.9
Total deferred income tax liability 1 394.2 1 440.2
Deferred Income Tax Asset
Unamortized investment tax credits 57.0 60.5
Accrued pension and other benefit costs 89.0 63.3
Net energy risk management liabilities 54.5 -
RUS obligations 29.5 3.8
Investments in unconsolidated subsidiaries 13.1 -
Other 60.0 64.1
Total deferred income tax asset 303.1 191.7
Net Deferred Income Tax Liability $1 091.1 $1 248.5
CG&E
The significant components of CG&E's net deferred income tax liability at
December 31, 1998, and 1997, are as follows:
1998 1997
(in millions)
Deferred Income Tax Liability
Utility plant $694.4 $683.3
Unamortized costs of reacquiring debt 10.5 11.1
Deferred operating expenses and
carrying costs 55.2 62.0
Amounts due from customers - income taxes 114.6 121.9
Deferred DSM costs 13.2 11.7
Other 43.9 43.9
Total deferred income tax liability 931.8 933.9
Deferred Income Tax Asset
Unamortized investment tax credits 39.5 41.7
Accrued pension and other benefit costs 41.3 39.2
Net energy risk management liabilities 26.3 -
Other 53.6 58.6
Total deferred income tax asset 160.7 139.5
Net Deferred Income Tax Liability $771.1 $794.4
PSI
The significant components of PSI's net deferred income tax liability at
December 31, 1998, and 1997, are as follows:
1998 1997
(in millions)
Deferred Income Tax Liability
Electric utility plant $409.8 $393.5
Unamortized costs of reacquiring debt 10.7 13.3
Amounts due from customers - income taxes 7.1 7.5
Deferred operating expenses and accrued
carrying costs 18.1 13.0
Deferred DSM costs 9.6 20.0
Other 4.6 3.7
Total deferred income tax liability 459.9 451.0
Deferred Income Tax Asset
Unamortized investment tax credits 17.5 18.8
Accrued pension and other benefit costs 20.7 24.1
Net energy risk management liabilities 28.2 -
RUS obligations 29.5 3.8
Other - .8
Total deferred income tax asset 95.9 47.5
Net Deferred Income Tax Liability $364.0 $403.5
ULH&P
The significant components of ULH&P's net deferred income tax liability at
December 31, 1998, and 1997, are as follows:
1998 1997
(in thousands)
Deferred Income Tax Liability
Utility plant $34 442 $34 001
Unamortized costs of reacquiring debt 1 390 1 463
Deferred fuel costs 1 557 -
Other 2 626 2 546
Total deferred income tax liability 40 015 38 010
Deferred Income Tax Asset
Unamortized investment tax credits 1 720 1 832
Amounts due to customers - income taxes 3 616 2 650
Deferred fuel costs - 508
Accrued pension and other benefit costs 2 658 2 397
Other 5 887 4 412
Total deferred income tax asset 13 881 11 799
Net Deferred Income Tax Liability $26 134 $26 211
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, 1998. 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
1998 1997 1996
(in millions)
Current Income Taxes
Federal $209.0 $133.3 $143.4
State 16.9 12.1 7.5
Total current income taxes 225.9 145.4 150.9
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 25.3 26.7 61.6
DSM costs (8.8) (8.5) (1.9)
Pension and other benefit costs (3.3) .9 (28.2)
Litigation settlement - 1.8 26.2
RUS obligations (22.5) (3.5) -
Unrealized energy risk management losses (49.4) (1.5) -
Fuel costs (1.0) 4.4 8.8
Other items - net (32.0) 54.5 (15.4)
Total deferred federal income taxes (91.7) 74.8 51.1
State (7.4) 2.4 6.5
Total deferred income taxes (99.1) 77.2 57.6
Investment Tax Credits - Net (9.6) (9.6) (9.8)
Total Income Taxes $117.2 $213.0 $198.7
CG&E
1998 1997 1996
(in millions)
Current Income Taxes
Federal $151.7 $117.1 $115.5
State 3.9 5.2 1.5
Total current income taxes 155.6 122.3 117.0
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 14.7 13.6 36.6
DSM costs .8 7.5 .6
Pension and other benefit costs 5.0 (2.8) (17.0)
Unrealized energy risk management losses (25.2) (.7)
Fuel costs (1.5) (5.5) 10.8
Other items - net (14.5) 11.6 (8.1)
Total deferred federal income taxes (20.7) 23.7 22.9
State (.4) (1.0) 2.2
Total deferred income taxes (21.1) 22.7 25.1
Investment Tax Credits - Net (6.2) (6.2) (6.2)
Total Income Taxes $128.3 $138.8 $135.9
PSI
1998 1997 1996
(in millions)
Current Income Taxes
Federal $69.8 $35.0 $41.3
State 10.5 6.8 6.0
Total current income taxes 80.3 41.8 47.3
Deferred Income Taxes
Federal
Depreciation and other electric utility
plant-related items 10.7 13.3 25.0
DSM costs (9.6) (16.1) (2.5)
Pension and other benefit costs (1.9) 3.7 (11.2)
Litigation settlement - 6.2 26.2
RUS Obligations (22.5) (3.5) -
Unrealized energy risk management losses (24.2) (.8) -
Fuel costs .5 9.9 (2.0)
Coal contract buyout 3.1 5.5 -
Coal gasification payments (1.0) 7.7 -
Other items - net (3.1) 9.9 (6.3)
Total deferred federal income taxes (48.0) 35.8 29.2
State (5.8) 3.3 4.3
Total deferred income taxes (53.8) 39.1 33.5
Investment Tax Credits - Net (3.4) (3.5) (3.6)
Total Income Taxes $23.1 $77.4 $77.2
ULH&P
1998 1997 1996
(in thousands)
Current Income Taxes
Federal $6 699 $11 607 $ 416
State 1 336 3 002 (87)
Total current income taxes 8 035 14 609 329
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items 420 847 1 506
Pension and other benefit costs 319 - (277)
Fuel costs 820 (5 486) 6 111
Unamortized costs of reacquiring debt (58) (122) 458
Service company allocations (1 376) (36) -
Other items - net (415) 48 291
Total deferred federal income taxes (290) (4 749) 8 089
State
Depreciation and other utility plant-
related items 196 287 425
Fuel costs 211 (1 404) 1 570
Other items - net (99) 23 55
Total deferred state income taxes 308 (1 094) 2 050
Total deferred income taxes 18 (5 843) 10 139
Investment Tax Credits - Net (279) (280) (282)
Total Income Taxes $7 774 $ 8 486 $10 186
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
1998 1997 1996
(in millions)
Statutory federal income tax provision $129.0 $196.4 $181.8
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (9.6) (9.6) (9.8)
Depreciation and other utility plant-
related differences 10.4 11.7 14.1
Preferred dividend requirements of
subsidiaries 2.3 4.4 8.5
Foreign tax adjustments (20.0) (13.2) (11.1)
Other - net (4.4) 8.8 1.2
Federal income tax expense $107.7 $198.5 $184.7
CG&E
1998 1997 1996
(in millions)
Statutory federal income tax provision $119.2 $130.8 $125.8
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (6.2) (6.2) (6.2)
Depreciation and other utility plant-
related differences 9.0 9.8 11.7
Other - net 2.8 .1 .9
Federal income tax expense $124.8 $134.5 $132.2
PSI
1998 1997 1996
(in millions)
Statutory federal income tax provision $ 24.7 $ 69.8 $ 67.4
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (3.4) (3.5) (3.6)
Other - net (2.9) 1.0 3.1
Federal income tax expense $ 18.4 $ 67.3 $ 66.9
ULH&P
1998 1997 1996
(in thousands)
Statutory federal income tax provision $6 937 $6 823 $7 987
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits (279) (280) (282)
Depreciation and other utility plant-
related differences (168) 96 358
Other - net (360) (61) 160
Federal income tax expense $6 130 $6 578 $8 223
12. Commitments and Contingencies
(a) Construction
Cinergy, CG&E, PSI, and ULH&P
Construction expenditures for the 1999 through 2003 period are forecast to be
approximately $889 million for CG&E (including $120 million for ULH&P) and $774
million for PSI. These forecasted amounts exclude the estimated expenditures
necessary to comply with the stricter nitrogen oxide ("NOx") emission control
standards proposed by the United States Environmental Protection Agency ("EPA").
(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.
PSI acquired four of the sites from Northern Indiana Public Service Company
("NIPSCO") in 1931 and at the same time it sold NIPSCO the sites located in
Goshen and Warsaw, Indiana. In 1945, PSI sold 19 of these sites (including the
four it acquired from NIPSCO) to Indiana Gas and Water Company, Inc. (now
Indiana Gas Company, Inc. ("IGC")). One of the 19 sites, the one located in
Rochester, Indiana, was later sold by IGC to NIPSCO.
IGC and NIPSCO both made claims against PSI, contending that PSI is a
Potentially Responsible Party under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") with respect to the 21 MGP sites, and
therefore legally responsible for the costs of investigating and remediating
these sites. Moreover, in August 1997, NIPSCO filed suit against PSI in federal
court, 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.
In November 1998, NIPSCO, IGC, and PSI entered into a Site Participation and
Cost Sharing Agreement by which they settled allocation of CERCLA liability for
past and future costs, among the three companies, at seven MGP sites in Indiana.
Pursuant to this agreement, NIPSCO's lawsuit against PSI was dismissed. The
parties have assigned one of the parties lead responsibility for managing
further investigation and remediation activities at each of the sites. Similar
agreements were reached between IGC and PSI which allocate CERCLA liability at
14 MGP sites with which NIPSCO had no involvement. These agreements conclude all
CERCLA and similar claims between the three companies relative to MGP sites.
Pursuant to the agreements and applicable laws, the parties are continuing to
investigate and remediate the sites as appropriate. Investigation and cleanup of
some of the sites is subject to oversight by the Indiana Department of
Environmental Management ("IDEM").
PSI has placed its insurance carriers on notice of IGC's, NIPSCO's, and the
IDEM's claims related to MGP sites. In April 1998, PSI filed suit in Hendricks
County Circuit Court against its general liability insurance carriers seeking,
among other matters, a declaratory judgment that its insurance carriers are
obligated to defend MGP claims against PSI or pay PSI's costs of defense and to
indemnify PSI for its costs of investigating, preventing, mitigating, and
remediating damage to property and paying claims associated with MGP sites. PSI
cannot predict the outcome of this litigation.
Based upon the work performed to date, PSI has accrued costs for the sites
related to investigation, remediation, and groundwater monitoring. Estimated
costs of certain remedial activities are accrued when such costs are reasonably
estimable. PSI does not believe it can provide an estimate of the reasonably
possible total remediation costs for any site prior to completion of a remedial
investigation/feasibility study and the development of some sense of the timing
for the implementation of the potential remedial alternatives, to the extent
such remediation may be required. Accordingly, the total costs that may be
incurred in connection with the remediation of all sites, to the extent
remediation is necessary, cannot be determined at this time. These future costs
at the 21 Indiana MGP sites, 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 the 21 MGP sites could be material to Cinergy's and
PSI's financial condition or results of operations.
Cinergy, CG&E, and ULH&P
(iii) CG&E and its Utility Subsidiaries CG&E and its utility subsidiaries
are aware of potential sites where MGP activities 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 these MGP sites.
Cinergy, CG&E, and PSI
(c) Ozone Transport Rulemaking
In October 1998, the EPA finalized its Ozone Transport Rule ("NOx SIP Call"). It
applies to 22 states in the eastern half of the US, including the three states
in which the Cinergy electric utilities operate. This rule recommends that
states reduce NOx emissions from primarily industrial and utility sources to a
certain limit by May 2003. Ohio, Indiana, a number of other states, and various
industry groups, including some of which Cinergy is a member, filed legal
challenges to the NOx SIP Call in late 1998. Ohio and Indiana have also provided
preliminary indications that they will seek fewer NOx reductions from the
utility sector in their implementing regulations than the EPA has budgeted in
its rulemaking. The state implementing regulations will need the EPA's approval.
Under the current provisions of the NOx SIP Call, the estimate for compliance
with the EPA limits is currently $500 million to $700 million (in 1998 dollars)
between now and 2003. This estimate is significantly dependent on several
factors, including the final determination regarding both the timing and
stringency of the final required NOx reductions, the output of CG&E's and PSI's
generating units, the availability of an adequate supply of resources to
construct the necessary control equipment, and the extent to which a NOx
allowance trading market develops, if any.
Cinergy
(d) Uch Project
Midlands (of which the Company owns 50%) has a 40% ownership interest in a 586
megawatts ("MW") power project in Pakistan ("Uch project" or "Uch") which was
originally scheduled to begin commercial operation in late 1998. In July 1998,
the Pakistani government-owned utility issued a notice of intent to terminate
certain key project agreements relative to the Uch project. The notice asserts
that various forms of corruption were involved in the original granting of the
agreements to the Uch investors by a predecessor government. The Company
believes that this notice is similar to notices received by a number of other
independent power projects in Pakistan.
The Uch investors, including a subsidiary of Midlands, strongly deny the
allegations and have pursued all available legal options to enforce their
contractual rights under the project agreements. Physical construction of the
project is complete; however, commercial operations have been delayed pending
resolution of the dispute. In December 1998, the Pakistani government offered to
withdraw its notice.
Through its 50% ownership of Midlands, the Company's current investment in the
Uch project is approximately $32 million. In addition, project lenders could
require investors to make additional capital contributions to the project under
certain conditions. The Company's share of these additional contributions is
approximately $12 million. At the present time, the Company cannot predict the
ultimate outcome of this matter.
Cinergy and PSI
(e) Expiration of Bargaining Agreement
Our collective-bargaining agreement with the International Brotherhood of
Electrical Workers Local No. 1393, covering approximately 1,470 employees, will
expire on May 1, 1999. Management has developed contingency plans for service to
continue in the event of a work stoppage. In the unlikely event of a work
stoppage, incremental related costs would be incurred, but would not be expected
to have a material impact on operating income.
Cinergy, CG&E, and PSI
13. Jointly-Owned Plant
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. PSI is a joint owner of Gibson Generating
Station ("Gibson") Unit 5 with Wabash Valley Power Association, Inc. ("WVPA")
and 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. The Consolidated Statements of
Income reflect CG&E's and PSI's portions of all operating costs associated with
the jointly-owned facilities.
CG&E's and PSI's investments in jointly-owned plant are as follows:
1998
Utility Construction
Plant in Accumulated Work in
Share Service Depreciation Progress
(dollars in millions)
CG&E
Production
Miami Fort Station (Units 7 and 8) 64.00% $ 216 $120 $4
W.C. Beckjord Station (Unit 6) 37.50 41 26 1
J.M. Stuart Station 39.00 273 128 2
Conesville Station (Unit 4) 40.00 73 39 2
William H. Zimmer Station 46.50 1 218 275 5
East Bend Station 69.00 333 172 2
Killen Station 33.00 187 91 -
Transmission Various 64 32 1
PSI
Production:
Gibson (Unit 5) 50.05 206 102 3
Transmission and local facilities 94.62 2 1 -
14. Quarterly Financial Data (unaudited)
Cinergy
Basic Diluted
Earnings Earnings
Operating Operating Net (Loss) (Loss)
Quarter Ended Revenues (a) Income (a) Income(Loss) Per Share Per Share
(in millions, except per share amounts)
1998
March 31 $1 348 $226 $106 $ .67 $ .67
June 30 1 168 3(b,d) (25)(b,d) (.16)(b,d) (.16)(b,d)
September 30 1 976 204(e) 109 (e) .69 (e) .69 (e)
December 31 1 384 133(f) 71 (f) .45 (f) .45 (f)
Total $5 876 $566 $261 $1.65 $1.65
1997
March 31 $1 039 $215 $114 $ .72 $ .72
June 30 872 142 56 .35 .34
September 30 1 361 183 (27)(c) (.16)(c) (.17)(c)
December 31 1 115 226 110 .70 .70
Total $4 387 $766 $253 $1.61 $1.59
CG&E
Operating Operating Net
Quarter Ended Revenues Income (a) Income
(in millions)
1998
March 31 $ 767 $141 $ 71
June 30 590 43(b) 13(b)
September 30 884 147(e) 79(e)
December 31 615 117(f) 53(f)
Total $2 856 $448 $216
1997
March 31 $ 614 $143 $ 68
June 30 487 92 38
September 30 712 114 52
December 31 639 151 81
Total $2 452 $500 $239
PSI
Operating Operating Net
Quarter Ended Revenues Income (Loss)(a) Income (Loss)
(in millions)
1998
March 31 $ 592 $ 90 $ 43
June 30 511 (29)(b,d) (31)(b,d)
September 30 807 65 (e) 27 (e)
December 31 493 35 (f) 13 (f)
Total $2 403 $161 $ 52
1997
March 31 $ 424 $ 74 $ 33
June 30 391 55 24
September 30 651 77 40
December 31 494 83 35
Total $1 960 $289 $132
Cinergy, CG&E, PSI
(a) For a discussion of the reclassification of amounts disclosed in prior
reports, see Note 1 (b).
(b) In the second quarter of 1998, Cinergy recorded charges of $65 million,
pretax ($58 million for CG&E and $7 million for PSI) related to power marketing
and trading operations which constitutes, after tax, $.26 per share, basic and
diluted. For a discussion of the energy marketing and trading operations, see
Note 1(c).
(c) For a discussion of the windfall profits tax levied against Midlands, which
was recorded in the third quarter of 1997 as an extraordinary item, see Note 17.
Net income, basic EPS, and diluted EPS during the third quarter of 1997, before
the extraordinary item, were $83 million, $.53, and $.52, respectively. Total
net income, basic EPS, and diluted EPS for 1997, before the extraordinary item,
were $363 million, $2.30, and $2.28, respectively.
(d) In the second quarter of 1998, Cinergy, through PSI, recorded a charge
against earnings of $80 million ($50 million after tax or $.32 per share basic
and diluted) for a settlement related to the Marble Hill nuclear project. For a
discussion of this settlement, see Note 18.
(e) In the third quarter of 1998, Cinergy recorded charges of $20 million,
pretax ($(5) million for CG&E and $25 million for PSI) related to power
marketing and trading operations which constitutes, after tax, $.08 per share,
basic and diluted. For a discussion of the energy marketing and trading
operations, see Note 1(c).
(f) In the fourth quarter of 1998, Cinergy recorded charges of $50 million,
pretax ($20 million for CG&E and $30 million for PSI) related to power marketing
and trading operations which constitutes, after tax, $.20 per share, basic and
diluted. For a discussion of the energy marketing and trading operations, see
Note 1(c).
Cinergy, CG&E, PSI, and ULH&P
15. Financial Information by Business Segment
During 1998, Cinergy and its subsidiaries adopted the provisions of Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 requires
disclosure about reportable operating segments in annual and interim condensed
financial statements. These operating segments are based on products and
services, geography, legal structure, management structure or any manner in
which management disaggregates a company.
Cinergy's reportable segments are strategic business units which were formed
during the second half of 1996 and began operating as separately identifiable
business units in 1997. Each business unit has its own management structure,
headed by a business unit president who reports directly to the chief executive
officer of Cinergy. Each business unit and its responsibilities as of December
31, 1998, is described in detail below.
The ECBU operates and maintains, exclusive of certain jointly-owned plant, all
of the Company's domestic electric generation facilities. In addition to the
production of electric power, all energy risk management, marketing, and
proprietary arbitrage trading, with the exception of electric and gas retail
sales, is conducted through the ECBU. Revenues from external customers are
derived from the ECBU's marketing, trading, and risk management activities.
Intersegment revenues are derived from the sale of electric power to the ESBU.
The EDBU plans, constructs, operates, and maintains the Company's transmission
and distribution systems. Revenues from customers other than end-users are
primarily derived from the transmission of electric power through the Company's
transmission system. Intersegment revenues are derived from sale of electric and
gas transmission and distribution services to the ESBU.
The ESBU provides gas and electric energy as well as gas supply risk management
services to end-users. The ESBU also manages the development and the sales and
marketing of new end-use energy-related products and services. All of the ESBU's
revenues are derived from the sales of such services and products to external
customers. All electric energy sold to end-users is purchased from the ECBU. In
addition to energy-related products and services, the ESBU also sells other
end-use products and services, such as telephone services, through joint-venture
affiliates. Other products and services offered through joint-venture affiliates
include the construction and sale or lease of cogeneration and trigeneration
facilities to large commercial/industrial customers and energy management
services to third parties.
The IBU directs and manages all of the Company's international business
holdings, which include wholly-owned subsidiaries and equity investments.
Revenues and equity earnings from unconsolidated companies are primarily derived
from energy-related businesses.
Transfer pricing for sales of electric energy and sales of electric and gas
transmission and distribution services between the ECBU, ESBU, and EDBU are
derived from the operating utilities' retail and wholesale rate structures.
The following financial information by business unit, product and service, and
geographic area for the years ending December 31, 1998, 1997, and 1996, is as
follows:
Business Units
1998
All Reconciling
Cinergy Business Units Other Eliminations
ECBU EDBU ESBU IBU Total (1) (2) Consolidated
(in millions)
Operating Revenues -
External Customers $2,726 $ 34 $3,107 $ 9 $ 5,876 $ - $ - $ 5,876
Intersegment Revenues 1,782 724 - - 2,506 - (2,506) -
Depreciation and Amortization (3) 197 123 4 2 326 - - 326
Equity in Earnings of
Unconsolidated Subsidiaries (1) - (4) 56 51 - - 51
Interest Expense (net) (4) 95 88 3 51 237 7 - 244
Income Taxes - - - - - 117 - 117
Segment Profit (Loss) 151 225 4 16 396 (135) - 261
Total Segment Assets 5,476 3,754 275 751 10,256 43 - 10,299
Investments in Unconsolidated
Subsidiaries - - 8 566 574 - - 574
Total Expenditures for Long-
Lived Assets 109 227 17 - 353 17 - 370
(1) The all other category represents miscellaneous corporate items, including
income taxes, which are not allocated to business units for purposes of
segment profit measurement.
(2) The reconciling eliminations category eliminates the intersegment revenues
of the ECBU and the EDBU.
(3) The components of Depreciation and Amortization include depreciation of
fixed assets, amortization of intangible assets, amortization of phase-in
deferrals, and amortization of post-in-service deferred operating expenses.
(4) Interest income is deemed immaterial.
1997
All Reconciling
Cinergy Business Units Other Eliminations
ECBU EDBU ESBU IBU Total (1) (2) Consolidated
(in millions)
Operating Revenues -
External Customers $1,287 $ 27 $3,071 $ 2 $4,387 $ - $ - $4,387
Intersegment Revenues 1,688 727 - - 2,415 - (2,415) -
Depreciation and Amortization
(3) 184 118 5 - 307 - - 307
Equity in Earnings of
Unconsolidated Subsidiaries - - (3) 63 60 - - 60
Interest Expense (net) (4) 108 86 4 38 236 - - 236
Income Taxes - - - - - 213 - 213
Segment Profit (Loss) Before
Extraordinary Item 330 224 4 22 580 (217) - 363
Extraordinary Item (5) - - - (109) (109) - - (109)
Segment Profit (Loss) 330 224 4 (87) 471 (217) - 254
Total Segment Assets 4,380 3,617 279 562 8,838 20 - 8,858
Investments in Unconsolidated
Subsidiaries - - 3 535 538 - - 538
Total Expenditures for Long-
Lived Assets 79 224 12 - 315 13 - 328
(1) The all other category represents miscellaneous corporate items, including
income taxes, which are not allocated to business units for purposes of
segment profit measurement.
(2) The reconciling eliminations category eliminates the intersegment revenues
of the ECBU and the EDBU.
(3) The components of Depreciation and Amortization include depreciation of
fixed assets, amortization of intangible assets, amortization of phase-in
deferrals, and amortization of post-in-service deferred operating expenses.
(4) Interest income is deemed immaterial. (5) Windfall Profits Tax (see
Note 17).
1996
All Reconciling
Cinergy Business Units Other Eliminations
ECBU EDBU ESBU IBU Total (1) (2) Consolidated
(in millions)
Operating Revenues -
External Customers $ 210 $ 23 $3,043 $ - $3,276 $ - $ - $3,276
Intersegment Revenues 1,678 733 - - 2,411 - (2,411) -
Depreciation and Amortization
(3) 175 115 5 - 295 - - 295
Equity in Earnings of
Unconsolidated Subsidiaries - - - 25 25 - - 25
Interest Expense (net) (4) 101 91 6 18 216 - - 216
Income Taxes - - - - - 199 - 199
Segment Profit (Loss) 308 208 16 7 539 (204) - 335
Total Segment Assets 4,399 3,424 283 605 8,711 14 - 8,725
Investments in Unconsolidated
Subsidiaries - - - 593 593 - - 593
Total Expenditures for
Long-Lived Assets 100 206 17 593 916 1 - 917
(1) The all other category represents miscellaneous corporate items, including
income taxes, which are not allocated to business units for purposes of
segment profit measurement.
(2) The reconciling eliminations category eliminates the intersegment revenues
of the ECBU and the EDBU.
(3) The components of Depreciation and Amortization include depreciation of
fixed assets, amortization of intangible assets, amortization of phase-in
deferrals, and amortization of post-in-service deferred operating expenses.
(4) Interest income is deemed immaterial.
Products and Services
(in millions)
Revenues
Traditional Utility Energy Marketing and Trading Other
Year Electric Gas Total Electric Gas Total Consolidated
1998 $2,696 $435 $3,131 $2,066 $665 $2,731 $14 $5,876
1997 2,579 519 3,098 1,283 - 1,283 6 4,387
1996 2,568 505 3,073 200 - 200 3 3,276
Cinergy's core products and services focus on providing traditional utility
services (the supply of electric energy and gas supply) and energy marketing and
trading services.
Geographic Areas and Long-Lived Assets
(in millions)
Revenues
International
Year Domestic UK All Other(1) Total Consolidated
1998 $5,867 $ - $9 $9 $5,876
1997 4,385 - 2 2 4,387
1996 3,276 - - - 3,276
Long-Lived Assets
International
Year Domestic UK All Other(1) Total Consolidated
1998 $7,302 $501 $209 $710 $8,012
1997 7,267 505 42 547 7,814
1996 7,302 593 10 603 7,905
(1) During 1998, the IBU acquired the assets of two district heating plants
(approximately 816 MW combined) in the Czech Republic. The assets and
the results of operations of these international investments are
consolidated into the company's financial statements, while the
remaining international long-lived assets of the IBU are accounted for
as equity method investments. As a result, revenues from the IBU are
not significant.
Cinergy's core service territory and asset base is located in the southwestern
portion of Ohio, including adjacent areas in Kentucky, and the north central,
central, and southern regions of Indiana. Cinergy's energy marketing and trading
function provides energy risk management, marketing, and trading services
throughout the US. Abroad, Cinergy owns a 50% interest in Midlands, a regional
electric company located in the United Kingdom ("UK"). In addition to its
ownership interest in Midlands, Cinergy also has other equity investments in
Europe, Africa, and Asia and is actively developing other energy-related
projects.
Cinergy
16. Earnings Per Share
A reconciliation of earnings per common share ("basic EPS") to earnings per
common share assuming dilution ("diluted EPS") is presented below:
Income Shares
(Numerator) (Denominator) EPS
(in millions, except per share amounts)
1998 Earnings per common share:
Net income $261 158 $1.65
Effect of dilutive securities:
Common stock options 1
EPS--assuming dilution:
Net income
plus assumed conversions $261 159 $1.65
1997
Earnings per common share:
Net income before extraordinary item (a) $363 158 $2.30
Effect of dilutive securities:
Common stock options 1
EPS--assuming dilution:
Net income before extraordinary
item plus assumed conversions(a) $363 159 $2.28
1996
Net income $335
Less: costs of reacquisition of
preferred stock of subsidiary 18
Earnings per common share:
Net income applicable to common
stock 317 158 $2.00
Effect of dilutive securities:
Common stock options 1
EPS--assuming dilution:
Net income applicable to common
stock plus assumed conversions $317 159 $1.99
(a) The after-tax EPS impact of the extraordinary item - equity share of
windfall profits tax in 1997 was $.69 for both basic and diluted EPS.
Options to purchase shares of common stock are excluded from the calculation of
EPS--assuming dilution when the exercise prices of these options are greater
than the average market price of the common shares during the year. For 1998,
approximately one million shares, with an average exercise price of
approximately $38.00 per share, were excluded from the EPS-assuming dilution
calculation.
For 1997 and 1996, shares excluded for this calculation were immaterial.
Cinergy
17. Extraordinary Item - Equity Share of Windfall Profits Tax
During the third quarter of 1997, a windfall profits tax was enacted into law in
Great Britain. This tax was levied against a limited number of British
companies, including Midlands, which had previously been owned and operated by
the government. The tax was intended to be a recovery of funds by the government
due to the undervaluing of companies, such as Midlands, when they were
privatized by the government via public stock offerings several years ago.
Cinergy's share of the tax was approximately 67 million pounds sterling ($109
million or $.69 per share, basic and diluted). 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 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 and PSI
18. WVPA Settlement
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. During
1998, PSI reached agreement on all matters with the relevant parties and, as a
result, recorded a liability to the RUS. PSI will repay the obligation to the
RUS with interest over a 35-year term. The net proceeds from a 35-year power
sales agreement with WVPA will be used to fund the principal and interest on the
obligation to the RUS. Assumption of the liability (recorded as long-term debt
in the Consolidated Balance Sheet) resulted in a charge against earnings of $80
million ($50 million after tax or $.32 per share basic and diluted) in the
second quarter of 1998.
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"), 1999 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,
1999, included:
Jackson H. Randolph Mr. Randolph, age 68, is Chairman of CG&E. He has served as
a director of CG&E since 1983, and his current term as director expires April
20, 1999.
James E. Rogers Mr. Rogers, age 51, 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 20, 1999.
James L. Turner Mr. Turner, age 39, is President of CG&E. He has served as a
director of CG&E since February 15, 1999, and his current term expires April 20,
1999.
PSI
Reference is made to PSI Energy, Inc.'s ("PSI") 1999 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 14 through 18 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 1999 Proxy Statement with respect to executive
compensation.
CG&E
Reference is made to Cinergy's 1999 Proxy Statement with respect to executive
compensation information pertaining to the "Board Compensation Committee Report
on Executive Compensation" and "Deferred Compensation Agreements."
All other information with respect to executive compensation, including
"Compensation of Directors," "Summary Compensation Table," "Option/Stock
Appreciation Rights ("SAR") Grants Table," "Aggregated Option/SAR Exercises and
Year End Option/SAR Values Table," "Pension Benefits," "Employment Agreements
and Severance Arrangements," "Compensation Committee Interlocks and Insider
Participation," and "Performance Graph," is set forth below under the respective
heading.
Compensation of Directors
Directors who are not employees (the "non-employee directors") receive an annual
retainer fee of $8,000 plus a fee of $1,000 for each CG&E board of directors'
meeting attended; however, any non-employee director of CG&E, who also serves as
a non-employee director of Cinergy or any of its affiliates, shall neither
receive such annual retainer fee, nor any compensation for attendance at any
CG&E board meeting that is held concurrently or consecutively with a meeting of
the board of directors of Cinergy. Directors who are also employees of Cinergy
or any of its subsidiaries (Messrs. Randolph, Rogers, and Turner) 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 units, dividends are credited to the individual director's plan
account and thereby acquire additional such units, at the same time and rate as
dividends are paid to holders of Cinergy common stock. The deferred units are
distributed to the director as shares of Cinergy common stock at the time of
retirement from the appropriate board. Amounts deferred in cash earn interest at
the rate per annum, adjusted quarterly, equivalent to the interest rate for a
one-year certificate of deposit as quoted in The Wall Street Journal for the
first business day of the calendar quarter, and are paid to the director at the
time of retirement from the appropriate board.
Cinergy has maintained an unfunded Retirement Plan for Directors under which
non-employee directors of Cinergy, Cinergy Services, Inc. ("Services"), CG&E, or
PSI have accrued retirement benefits based upon their years of service. Prior
service by non-employee directors of CG&E, PSI, or PSI Resources, Inc. also was
credited under this plan. Under the terms of this plan, non-employee directors
with five or more years of service have been entitled to receive annual
retirement compensation in an amount equal to the applicable board of directors'
annual 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 board meeting
multiplied by five, with the compensation paid for as many years as the person
served as a director.
In December 1998, Cinergy's board of directors amended and restated the
Retirement Plan for Directors to eliminate future benefit accruals. The board
also adopted a new Cinergy Corp. Directors' Equity Compensation Plan, an
equity-based compensation plan for non-employee directors, intended to supersede
the Retirement Plan for Directors on a going forward basis. Each of the plans is
subject to approval by Cinergy's shareholders at their annual meeting to be held
on April 21, 1999.
The amended and restated Retirement Plan for Directors is an unfunded plan under
which each participant who retires as a director, or dies while serving as a
director, after January 1, 1999, has elected either to have his accrued benefit
converted to units representing shares of Cinergy common stock, or to receive an
annual cash payment equal to the fees in effect on December 31, 1998. Each
participant who retired prior to January 1, 1999 (i.e., a former director
already in "pay" status), will receive an annual cash payment equal to the fees
in effect on the date preceding his or her retirement as a director.
The Directors' Equity Compensation Plan is an unfunded plan under which each
non-employee director of Cinergy will receive, beginning December 31, 1999, an
annual award equivalent to 450 shares of Cinergy common stock. Non-employee
directors of CG&E are not eligible to participate in this plan. Although this
plan permits the payment of cash awards at the discretion of Cinergy's board of
directors, the board fully anticipates that all awards under the Directors'
Equity Compensation Plan will be paid in shares of Cinergy common stock.
Summary Compensation Table
The following table sets forth the compensation of the chief executive officer
and the other four most highly compensated executive officers (these five
executive officers are sometimes collectively referred to as the "named
executive officers") for services to Cinergy and its subsidiaries during the
calendar years ended December 31, 1998, 1997, and 1996.
Long-Term Compensation
Annual Compensation Awards Payouts
1996
Long-term
Other Incentive All
Annual Restricted Securities Compensation Other
Compen- Stock Underlying Plan ("LTIP") Compen-
Name and Salary Bonus(1) sation Awards(2) Options/SARs Payouts(3) sation(4)
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
James E. Rogers 1998 810,000 619,200 47,041 0 535,400 0 138,329
Vice Chairman 1997 700,008 337,504 17,039 1,951,169 55,400 0 126,956
and Chief Executive 1996 625,000 607,518 3,697 0 0 849,750 108,108
Officer
Jackson H. Randolph 1998 585,000 321,750 13,405 0 0 0 98,157
Chairman of the Board 1997 585,000 321,750 14,575 0 0 0 88,181
1996 535,000 321,750 10,675 0 0 675,212 120,512
William J. Grealis 1998 396,900 180,590 25,643 0 20,700 0 34,313
Vice President 1997 378,000 113,400 13,094 728,443 20,700 0 15,550
1996 343,200 205,920 8,828 0 0 246,048 35,611
Larry E. Thomas 1998 352,848 169,367 9,678 0 18,400 0 16,594
Vice President 1997 336,048 100,814 11,502 647,575 18,400 0 15,809
1996 294,350 176,610 5,030 0 0 252,285 36,162
Cheryl M. Foley 1998 326,988 156,954 18,023 0 15,200 0 15,147
Vice President and 1997 304,176 91,253 8,745 535,202 15,200 0 11,945
General Counsel 1996 264,504 158,702 2,006 0 0 241,305 79,400
(1) Amounts appearing in this column reflect the Annual Incentive Plan award
earned during the year listed and paid in the following year.
(2) Amounts appearing in this column reflect the dollar values of restricted
stock awards, determined by multiplying the number of shares in each award
by the closing market price of the Company's common stock as of the
effective date of grant. The aggregate number of all restricted stock
holdings and values at calendar year ended December 31, 1998, determined by
multiplying the number of shares by the year end closing market price, are
as follows: Mr. Rogers - 58,462 shares ($2,009,631); Mr. Grealis - 21,826
shares ($750,269); Mr. Thomas - 19,403 shares ($666,978); and Ms. Foley -
16,036 shares ($551,238). Dividends are retained by the Company for the
duration of the three-year performance cycle; upon settlement of the
restricted stock awards, dividends will be paid in shares of the Company's
common stock based on the number of shares of restricted stock actually
earned and the fair market value of the Company's common stock on the
settlement date.
(3) Amounts appearing in this column reflect the values of the shares earned
under the Company's Performance Shares Plan during the 1994-1997 and
1996-1999 performance cycles that were ended during 1996 in transition to
the Value Creation Plan.
(4) Amounts appearing in this column for 1998 include for Messrs. Rogers,
Randolph, Grealis, and Thomas, and Ms. Foley, respectively: (i) employer
matching contributions under 401(k) plan and related excess benefit plan of
$24,300, $17,550, $11,907, $10,585, and $9,810; and (ii) insurance premiums
paid with respect to executive/group-term life insurance of $245, $752,
$22,406, $6,009, and $5,337. Also includes for Mr. Rogers deferred
compensation in the amount of $50,000, and for Messrs. Rogers and Randolph,
respectively, above-market interest on amounts deferred pursuant to
deferred compensation agreements of $48,955 and $63,447, and benefits under
split dollar life insurance agreements of $14,829 and $16,408.
Option/SAR Grants Table
The following table sets forth information concerning individual grants of
options to purchase the Company's common stock made to the named executive
officers during 1998.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
% of
Number of Securities Total
Underlying Options/SARs Exercise
Options/SARs Granted to or Base
Granted Employees in Price Expiration 5% 10%
Name (#) Fiscal Year ($/Sh) Date ($) ($)
James E. Rogers 55,400 5.82% 38.59375 1/1/2008 1,344,558 3,407,654
480,000 50.45% 36.87500 3/24/2008 11,424,000 28,675,200
William J. Grealis 20,700 2.18% 38.59375 1/1/2008 502,389 1,273,257
Larry E. Thomas 18,400 1.93% 38.59375 1/1/2008 446,568 1,131,784
Cheryl M. Foley 15,200 1.60% 38.59375 1/1/2008 368,904 934,952
Aggregated Option/SAR Exercises and Year End Option/SAR Values Table
The following table sets forth information concerning: (i) stock options
exercised by the named executive officers during 1998, including the value
realized (i.e., the spread between the exercise price and market price on the
date of exercise); and (ii) the numbers of shares for which options were held as
of December 31, 1998, including the value of "in-the-money" options (i.e., the
positive spread between the exercise prices of outstanding stock options and the
closing market price of the Company's common stock on December 31, 1998, which
was $34.375 per share).
Number of Value of
Securities Underlying Unexercised
Unexercised In-The-Money
Options/SARs at Options/SARs at
Year End Year End
Shares Acquired Value (#) ($)
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
James E. Rogers 0 n/a 195,629/640,800 2,249,734/623,475
Jackson H. Randolph 8,742 102,992 91,258/50,000 1,049,467/575,000
William J. Grealis 2,650 28,156 73,237/61,400 736,947/219,363
Larry E. Thomas 31,588 478,800 62,516/56,800 718,934/246,100
Cheryl M. Foley 20,000 223,126 20,000/50,400 230,000/243,300
Pension Benefits
The pension benefits payable at retirement to each of the named executive
officers are provided under the terms of the Cinergy Corp. Non-union Employees'
Pension Plan, a non-contributory, defined benefit pension plan (the "Cinergy
Pension Plan"), plus certain supplemental plans or agreements. Pension benefits
previously earned under the terms of the former CG&E and PSI pension plans are
fully preserved for participants under the terms of the Cinergy Pension Plan.
Under the terms of the Cinergy Pension Plan, the retirement income payable to a
pensioner is 1.1% of final average pay plus 0.5% of final average pay in excess
of covered compensation, times the number of years of plan participation through
35 years, plus 1.4% of final average pay times the number of years of plan
participation over 35 years. Final average pay is the average annual salary,
based upon retirement anniversary date, during the employee's three consecutive
years producing the highest such average within the last ten anniversary years
immediately preceding retirement, plus any short-term incentive and/or deferred
compensation. Covered compensation is the average social security taxable wage
base over a period of up to 35 years. The Internal Revenue Service ("IRS")
annually establishes a dollar limit, indexed to inflation, of the amount of pay
permitted for consideration under the terms of such plans, which for 1998 was
$160,000.
The Cinergy Excess Pension Plan is designed to restore pension benefits to those
individuals whose benefits under the Cinergy Pension Plan would otherwise exceed
the limits imposed by the IRS. Each of the named executive officers is covered
under the terms of the Cinergy Excess Pension Plan.
The pension plan table set forth below illustrates the estimated annual benefits
payable as a straight-life annuity under both Cinergy plans to participants who
retire at age 62. Such benefits are not subject to any deduction for social
security or other offset amounts.
Years of Service
Compensation 5 10 15 20 25 30 35 40
$ 500,000 $ 39,045 $ 78,085 $117,130 $156,170 $195,215 $234,255 $ 273,300 $ 312,340
600,000 47,045 94,085 141,130 188,170 235,215 282,255 329,300 376,340
700,000 55,045 110,085 165,130 220,170 275,215 330,255 385,300 440,340
800,000 63,045 126,085 189,130 252,170 315,215 378,255 441,300 504,340
900,000 71,045 142,085 213,130 284,170 355,215 426,255 497,300 568,340
1,000,000 79,045 158,085 237,130 316,170 395,215 474,255 553,300 632,340
1,100,000 87,045 174,085 261,130 348,170 435,215 522,255 609,300 696,340
1,200,000 95,045 190,085 285,130 380,170 475,215 570,255 665,300 760,340
1,300,000 103,045 206,085 309,130 412,170 515,215 618,255 721,300 824,340
1,400,000 111,045 222,085 333,130 444,170 555,215 666,255 777,300 888,340
1,500,000 119,045 238,085 357,130 476,170 595,215 714,255 833,300 952,340
1,600,000 127,045 254,085 381,130 508,170 635,215 762,255 889,300 1,016,340
1,700,000 135,045 270,085 405,130 540,170 675,215 810,255 945,300 1,080,340
1,800,000 143,045 286,085 429,130 572,170 715,215 858,255 1,001,300 1,144,340
The accrued annual retirement benefit payable to Mr. Randolph is based upon
credited service of 40 years. The estimated credited years of service at age 62
for each of the remaining named executive officers are as follows: Mr. Rogers,
20 years; Mr. Grealis, 12 years; Mr. Thomas, 37 years; and Ms. Foley, 19 years.
Effective January 1, 1999, the Cinergy Supplemental Retirement Plan was amended,
restated and renamed the Cinergy Supplemental Executive Retirement Plan (the
"SERP"). One part of the SERP, the "Mid-career Benefit," is designed to provide
coverage to executives who will not qualify for full retirement benefits under
the Cinergy Pension Plan. For retirement on or after age 62, the Mid-career
Benefit is an amount equal to that which a covered employee with 35 years of
participation would have received under the Cinergy Pension Plan and the Cinergy
Excess Pension Plan, reduced by the actual benefit provided by those plans, and
further reduced by 50% of the employee's age 62 social security benefit. Messrs.
Rogers and Grealis, and Ms. Foley are covered under the terms of the Mid-career
Benefit portion of the SERP.
The second part of the SERP, the "Senior Executive Supplement," is designed to
provide selected senior officers of Cinergy and its subsidiaries an opportunity
to earn a retirement benefit that will replace 60% of their final pay. Each
participant accrues a retirement income replacement percentage at the rate of 4%
per year from the date of hire (maximum of 15 years). The Senior Executive
Supplement is an amount equal to a maximum of 60% of the employee's final
average pay (as defined in the Cinergy Pension Plan) or the final 12 months of
base pay and Annual Incentive Plan pay, reduced by the actual benefits provided
under the Cinergy Pension Plan, the Cinergy Excess Pension Plan, and the
Mid-career Benefit, and further reduced by 50% of the employee's estimated age
62 social security benefit. Messrs. Rogers, Grealis, and Thomas, and Ms. Foley
are covered under the terms of the Senior Executive Supplement, and the
estimated retirement income replacement percentage for each is 60%, 48%, 60%,
and 60%, respectively.
Moreover, Mr. Randolph has a Supplemental Executive Retirement Income Agreement
under which he or his beneficiary will receive an annual supplemental retirement
benefit of $511,654 in monthly installments of $42,638, for 180 months beginning
December 1, 2000.
The Cinergy Executive Supplemental Life Insurance Program provides key
management personnel, including the named executive officers, with additional
life insurance coverage during employment and with post-retirement deferred
compensation. At the later of age 50 or retirement, the participant's life
insurance coverage under the program is canceled. At that time, the participant
receives the total amount of coverage in the form of deferred compensation
payable in ten equal annual installments of $15,000 per year.
Employment Agreements and Severance Arrangements
Mr. Rogers has an employment agreement which was effective October 24, 1994, and
was amended and restated in its entirety effective September 22, 1998. Pursuant
to the terms of his agreement, Mr. Rogers served as Vice Chairman, President,
and Chief Operating Officer of Cinergy until November 30, 1995, and since that
time, has served as Vice Chairman, President, and Chief Executive Officer. Mr.
Rogers' agreement currently is automatically extended for an additional year on
each annual anniversary date, unless either Cinergy or Mr. Rogers gives timely
notice otherwise. During the term of his agreement, Mr. Rogers receives a
minimum annual base salary of $810,000. Under the terms of his employment
agreement, Mr. Rogers was credited with 25 years of participation in the
Mid-career Benefit portion of the SERP as of his 50th birthday. He has been or
will be credited with an additional two years of participation on each birthday
through his 55th, provided that he is employed by Cinergy as of each birthday.
Mr. Rogers' employment agreement also provides that if he retires on or after
age 55 he will be entitled to receive annual retirement income for his lifetime
equal to the greater of 60% of his final average pay, or 60% of his base pay and
Annual Incentive Plan pay for the final 12 months immediately preceding his
retirement.
Mr. Randolph has an employment agreement which commenced on October 24, 1994.
Pursuant to the terms of his agreement, Mr. Randolph served as Chairman and
Chief Executive Officer of Cinergy until November 30, 1995, at which time he
relinquished the position of Chief Executive Officer. He will continue to serve
as Chairman of the Board of Cinergy until November 30, 2000, the expiration date
of his agreement. During the term of his agreement, Mr. Randolph receives a
minimum annual base salary of $465,000.
If the employment of Messrs. Rogers or Randolph (each sometimes individually
referred to as the "executive") is terminated as a result of death, his
beneficiary will receive a lump sum cash amount equal to the sum of (a) the
executive's annual base salary through the termination date to the extent not
previously paid, (b) a pro rata portion of the benefit under Cinergy's Annual
Incentive Plan calculated based upon the termination date, and (c) any
compensation previously deferred but not yet paid to the executive (with accrued
interest or earnings thereon) and any unpaid accrued vacation pay. Mr. Rogers'
beneficiary will also receive an amount equal to his vested accrued benefit
under the Value Creation Plan. In addition to these accrued amounts, if Cinergy
terminates the executive's employment without "cause" or the executive
terminates his employment for "good reason" (as each is defined in the
employment agreements), Cinergy will pay to the executive (a) a lump sum cash
amount equal to the present value of his annual base salary and benefit under
Cinergy's Annual Incentive Plan payable through the end of the term of
employment, at the rate and applying the same goals and factors in effect at the
time of notice of such termination, (b) the value of all benefits to which the
executive would have been entitled had he remained in employment until the end
of the term of employment under Cinergy's Executive Supplemental Life Insurance
Program (and also including the Value Creation Plan in the case of Mr. Rogers),
(c) the value of all deferred compensation and all executive life insurance
benefits whether or not then vested or payable, and (d) medical and welfare
benefits for the executive and his family through the end of the term of
employment. If the executive's employment is terminated by Cinergy for cause or
by the executive without good reason, the executive will receive unpaid annual
base salary accrued through the termination date and any accrued deferred
compensation.
Mr. Grealis has an employment agreement which commenced on January 16, 1995, and
currently is automatically extended for an additional year on each January 1,
unless either Cinergy or Mr. Grealis gives timely notice otherwise. During the
term of his agreement, Mr. Grealis receives a minimum annual base salary of
$288,000. Under his employment agreement, Mr. Grealis will receive annual
retirement income of no less than $283,000 payable as a straight-life annuity at
age 62.
Mr. Thomas has an employment agreement which currently is automatically extended
for an additional year on each January 1, unless either Cinergy or Mr. Thomas
gives timely notice otherwise. During the term of his agreement, Mr. Thomas
receives a minimum annual base salary of $240,000. Under his employment
agreement, if Mr. Thomas retires on or after age 55 he will be entitled to
receive annual retirement income equal to that which a covered employee with 35
years of participation would have received under Cinergy's Pension Plan and
Excess Pension Plan.
Ms. Foley has an employment agreement which currently is automatically extended
for an additional year on each January 1, unless either Cinergy or Ms. Foley
gives timely notice otherwise. During the term of her agreement, Ms. Foley
receives a minimum annual base salary of $230,000.
If the employment of Messrs. Grealis or Thomas, or Ms. Foley (each sometimes
individually referred to as the "officer") is terminated as a result of death,
for cause, or by the officer without good reason, the officer or the officer's
beneficiary will be paid a lump sum cash amount equal to (a) the officer's
unpaid annual base salary through the termination date, (b) a pro rata portion
of the officer's award under Cinergy's Annual Incentive Plan, (c) the officer's
vested accrued benefits under the Value Creation Plan, and (d) any unpaid
deferred compensation (including accrued interest or earnings) and unpaid
accrued vacation pay. If, instead, the officer's employment is terminated prior
to a change in control (as defined) without cause or by the officer for good
reason, the officer will be paid (a) a lump sum cash amount equal to the present
value of the officer's annual base salary and target annual incentive cash award
payable through the end of the term of the agreement, at the rate and applying
the same goals and factors in effect at the time of notice of such termination,
(b) the present value of all benefits to which the officer would have been
entitled had the officer remained in employment until the end of the term of the
agreement under the Value Creation Plan and Executive Supplemental Life
Insurance Program, (c) the value of all deferred compensation and all executive
life insurance benefits whether or not vested or payable, and (d) continued
medical and welfare benefits through the end of the term of the agreement.
Each of the named executive officers participates in Cinergy's Annual Incentive
Plan, Stock Option Plan, LTIP, Excess Pension Plan, SERP, and Executive
Supplemental Life Insurance Program (with the exception of Mr. Randolph who does
not participate in the LTIP or SERP), participates in all other retirement and
welfare benefit plans applicable generally to Company employees and executives,
and receives other fringe benefits.
If the employment of any named executive officer is terminated after a change in
control, the officer will be paid a lump sum cash payment equal to the greater
of (i) three times the sum of his annual base salary immediately prior to the
date of his termination of employment or, if higher, the date of the change in
control, plus all incentive compensation or bonus plan amounts in effect prior
to the date of his termination of employment or, if higher, prior to the change
in control, and (ii) the present value of all annual base salary, bonuses and
incentive compensation, and retirement benefits that would otherwise be due
under the agreement, plus deferred compensation and executive life insurance
benefits. In addition, the officer will be provided life, disability, accident
and health insurance benefits for thirty-six months, reduced to the extent
comparable benefits are received, without cost, by the officer. In addition to
the above, Messrs. Rogers and Randolph will receive their benefits under their
deferred compensation agreements (discussed below) and split dollar life
insurance agreements.
Compensation Committee Interlocks and Insider Participation
Mr. Schiff, Chairman of the Board of Cincinnati Financial Corporation, an
insurance holding company, serves on the Cinergy Compensation Committee and Mr.
Randolph, Chairman of the Board of Cinergy and certain of its subsidiaries,
including CG&E, serves on the board of directors of Cincinnati Financial
Corporation.
Performance Graph
The following line graph compares the cumulative total shareholder return of
CG&E common stock 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, 1994, through October 24,
1994, the final trading date of CG&E common stock, and assumes a $100 investment
on January 1, 1994, and dividend reinvestment.
Omitted is a line graph illustrating the following data.
1/1/94 10/24/94
CG&E Common Stock $100.00 $ 88.00
S&P Electric Utilities Index $100.00 $ 83.00
S&P 500 Stock Index $100.00 $100.00
PSI
Reference is made to PSI's 1999 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 1999 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, 1998.
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 February 28,
1999. The beneficial ownership of Cinergy's common stock held by each director
and named executive officer as of February 28, 1999, is set forth in the
following table.
Amount and Nature
Name of Beneficial Owner (1) of Beneficial Ownership (2)
Cheryl M. Foley 82,887 shares
William J. Grealis 111,926 shares
Jackson H. Randolph 214,875 shares
James E. Rogers 407,279 shares
Larry E. Thomas 133,677 shares
James L. Turner 2,632 shares
All directors and executive 1,152,994 shares
officers as a group (representing 0.73% of the class)
(1) No individual listed beneficially owned more than 0.257% 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: Ms. Foley -
20,000; Mr. Grealis - 73,237; Mr. Randolph - 91,258; Mr. Rogers - 195,629;
Mr. Thomas - 62,516; and all directors and executive officers as a group -
528,707.
PSI
Reference is made to PSI's 1999 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).
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", page 48 of this report, for an index of the financial
statements and financial statement schedules included in this report.
(b) Reports on Form 8-K.
The following report on Form 8-K was filed during the quarter ended December 31,
1998:
Date of Report Items Filed
Cinergy
October 15, 1998 Item 5. Other Events
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 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, a Delaware corporation. (Exhibit
to Cinergy's 1993 Form 10-K in File No. 1-11377.)
3-b *By-laws of Cinergy as amended October 15, 1998. (Exhibit to Cinergy's
October 15, 1998, Form 8-K in File No. 1-11377.)
Exhibit
Designation Nature of Exhibit
CG&E
3-c *Amended Articles of Incorporation of 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, 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,
effective July 10, 1997. (Exhibit to Cinergy's 1997 Form 10-K in File No.
1-11377.)
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. (Exhibit to Cinergy's 1997 Form 10-K in File No. 1-11377.)
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 *Twenty-fifth Supplemental Indenture between PSI and The First National
Bank of Chicago dated September 1, 1978. (Exhibit to File No. 2-62543.)
4-c *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.)
Exhibit
Designation Nature of Exhibit
4-d *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-e *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-f *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-g *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-h *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-i *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-j *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-k *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-l *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-m *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-n *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.)
4-o *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-p *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.)
Exhibit
Designation Nature of Exhibit
4-q *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-r *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-s *Third Supplemental Indenture dated as of March 15, 1998, between PSI and
The Fifth Third Bank, as Trustee. (Exhibit to Cinergy's 1997 Form 10-K in
File No. 1-11377.)
4-t *Fourth Supplemental Indenture dated as of August 5, 1998, between PSI and
The Fifth Third Bank, as Trustee. (Exhibit to PSI's June 30, 1998, Form
10-Q in File No. 1-3543.)
4-u #Fifth Supplemental Indenture dated as of December 15, 1998, between PSI
and The Fifth Third Bank, as Trustee. (Exhibit to PSI's 1998 Form 10-K in
File No. 1-3543.)
4-v #Unsecured Promissory Note dated October 14, 1998, between PSI and the
Rural Utilities Service. (Exhibit to PSI's 1998 Form 10-K in File No.
1-3543.)
4-w *Loan Agreement between PSI and the Indiana Department Finance Authority
dated as of July 15, 1998. (Exhibit to PSI's June 30, 1998, Form 10-Q in
File No. 1-3543.)
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 *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-z *Thirty-third Supplemental Indenture between CG&E and The Bank of New York
dated as of September 1, 1992. (Exhibit to CG&E's Registration Statement
No. 33-53578.)
4-aa *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-bb *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-cc *Thirty-sixth Supplemental Indenture between CG&E and The Bank of New York
dated as of February 15, 1994. (Exhibit to CG&E's Registration Statement
No. 33-52335.)
Exhibit
Designation Nature of Exhibit
4-dd *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-ee *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-ff *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-gg *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-hh *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-ii *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-jj *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-kk *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-ll *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-mm *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-nn *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-oo *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-pp *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.)
Exhibit
Designation Nature of Exhibit
4-qq *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.)
4-rr *Fourth Supplemental Indenture between CG&E and The Fifth Third Bank dated
as of April 1, 1998. (Exhibit to CG&E's March 31, 1998, Form 10-Q in File
No. 1-1232.)
4-ss *Fifth Supplemental Indenture between CG&E and The Fifth Third Bank dated
as of June 9, 1998. (Exhibit to CG&E's June 30, 1998, 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 *Fifth Supplemental Indenture between ULH&P and The Bank of New York dated
as of January 1, 1967. (Exhibit to CG&E's Registration Statement No.
2-60961.)
4-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.)
4-yy *Second Supplemental Indenture between ULH&P and The Fifth Third Bank dated
as of April 30, 1998. (Exhibit to ULH&P's March 31, 1998, Form 10-Q in File
No. 2-7793.)
4-zz #Third Supplemental Indenture between ULH&P and The Fifth Third Bank dated
as of December 8, 1998. (Exhibit to ULH&P's 1998 Form 10-K in File No.
2-7793.)
Cinergy
4-aaa*Base Indenture dated as of October 15, 1998, between Cinergy Global
Resources, Inc. ("Global Resources") and The Fifth Third Bank as Trustee.
(Exhibit to Cinergy's September 30, 1998, Form 10-Q in File No. 1-11377.)
4-bbb*First Supplemental Indenture dated as of October 15, 1998, between Global
Resources and The Fifth Third Bank as Trustee. (Exhibit to Cinergy's
September 30, 1998, Form 10-Q in File No. 1-11377.)
Exhibit
Designation Nature of Exhibit
4-ccc#Indenture dated as of December 16, 1998, between Cinergy and The Fifth
Third Bank. (Exhibit to Cinergy's 1998 Form 10-K in File No. 1-11377.)
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 *+Second Amended and Restated Employment Agreement dated September 22,
1998, between Cinergy, Services, CG&E, and PSI and James E. Rogers.
(Exhibit to Cinergy's September 30, 1998, Form 10-Q in File No. 1-11377.)
10-c *+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-d *+First Amendment to Employment Agreement dated January 1, 1997, among
Cinergy, CG&E, Services, Investments, PSI, and William J. Grealis. (Exhibit
to Cinergy's 1997 Form 10-K in File No. 1-11377.)
10-e *+Employment Agreement dated October 24, 1994, among Cinergy, Services,
CG&E, PSI, and Larry E. Thomas. (Exhibit to Cinergy's 1995 Form 10-K in
File No. 1-11377.)
10-f *+First Amendment to Employment Agreement dated October 24, 1994, among
Cinergy, Services, CG&E, PSI, and Larry E. Thomas. (Exhibit to Cinergy's
1995 Form 10-K in File No. 1-11377.)
10-g #+Second Amendment to Employment Agreement dated January 29, 1997, among
Cinergy, Services, CG&E, PSI, and Larry E. Thomas. (Exhibit to Cinergy's
1998 Form 10-K in File No. 1-11377.)
10-h *+Third Amendment to Employment Agreement dated May 1, 1998, among Cinergy,
Services, CG&E, PSI, and Larry E. Thomas. (Exhibit to Cinergy's June 30,
1998, Form 10-Q in File No. 1-11377.)
10-i *+Employment Agreement dated October 24, 1994, among Cinergy, Services,
CG&E, PSI, and Cheryl M. Foley. (Exhibit to Cinergy's, 1995 Form 10-K in
File No. 1-11377.)
10-j *+First Amendment to Employment Agreement dated October 24, 1994, among
Cinergy, Services, CG&E, PSI, and Cheryl M. Foley. (Exhibit to Cinergy's
1995 Form 10-K in File No. 1-11377.)
Exhibit
Designation Nature of Exhibit
10-k #+Second Amendment to Employment Agreement dated January 29, 1997, among
Cinergy, Services, CG&E, PSI, and Cheryl M. Foley. (Exhibit to Cinergy's
1998 Form 10-K in File No. 1-11377.)
10-l *+Employment Agreement dated April 22, 1997, among Cinergy, Services, CG&E,
PSI, and Madeleine W. Ludlow. (Exhibit to Cinergy's 1997 Form 10-K in File
No. 1-11377.)
10-m *+Employment Agreement dated October 1, 1997, among Cinergy, Services,
CG&E, PSI, and Donald B. Ingle, Jr. (Exhibit to Cinergy's 1997 Form 10-K in
File No. 1-11377.)
Cinergy and PSI
10-n *+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.)
10-o *+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-p #+Second Amendment to Employment Agreement dated January 29, 1997, among
Cinergy, PSI, and John M. Mutz. (Exhibit to Cinergy's 1998 Form 10-K in
File No. 1-11377.)
10-q #+Third Amendment to Employment Agreement dated June 1, 1998, among
Cinergy, PSI, and John M. Mutz. (Exhibit to Cinergy's 1998 Form 10-K in
File No. 1-11377.)
10-r #+Fourth Amendment to Employment Agreement dated December 31, 1998, among
Cinergy, PSI, and John M. Mutz. (Exhibit to Cinergy's 1998 Form 10-K in
File No. 1-11377.)
10-s *+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-t *+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-u *+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-v *+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.)
Exhibit
Designation Nature of Exhibit
10-w *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-x *+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-y *+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-z *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.)
10-aa*+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-bb*+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-cc*+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-dd*+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-ee*+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-ff*+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-gg*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-hh*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.)
Exhibit
Designation Nature of Exhibit
10-ii*+Amended and Restated Supplemental Executive Retirement Income Agreement
between CG&E and certain executive officers. (Exhibit to Cinergy's 1997
Form 10-K in File No. 1-11377.) Cinergy
10-jj*+1997 Amendments to Various Compensation and Benefit Plans of Cinergy,
adopted January 30, 1997. (Exhibit to Cinergy's 1997 Form 10-K in File No.
1-11377.)
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.)
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.)
Exhibit
Designation Nature of Exhibit
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.)
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, 1998
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
1998 $10 382 $29 430 $4 022 $ 18 212 $ - $25 622
1997 $10 618 $12 582 $5 609 $ 18 427 $ - $10 382
1996 $94 409 (1) $22 341 $9 503 $115 635 $ - $10 618
(1) Includes $84,049 for the Wabash Valley Power Association, Inc. ("WVPA")
Marble Hill receivable. See Note 18 of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data."
THE CINCINNATI GAS & ELECTRIC COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
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
1998 $9 199 $16 131 $ 4 021 $11 744 $ - $17 607
1997 $9 178 $ 6 484 $ 5 609 $12 072 $ - $ 9 199
1996 $9 615 $17 297 $ 6 669 $24 403 $ - $ 9 178
PSI ENERGY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
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
1998 $ 1 183 $13 178 $ - $ 6 468 $ - $7 893
1997 $ 1 269 $ 6 098 $ - $ 6 184 $ - $1 183
1996 $84 517 (1) $ 5 041 $2 834 $91 123 $ - $1 269
(1) Includes $84,049 for the WVPA Marble Hill receivable. See Note 18 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, 1998
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
1998 $ 996 $1 861 $ 583 $2 192 $ - $1 248
1997 $1 024 $1 579 $ 691 $2 298 $ - $ 996
1996 $1 035 $1 862 $1 577 $3 450 $ - $1 024
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: February 28, 1999
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
Phillip R. Cox Director
Kenneth M. Duberstein Director
George C. Juilfs Director
Melvin Perelman Director
Thomas E. Petry Director
Mary L. Schapiro Director
John J. Schiff, Jr. Director
Philip R. Sharp Director
Van P. Smith 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
Cinergy and ULH&P
Cheryl M. Foley Vice President, General Counsel, and Director
Secretary of Cinergy
CG&E and ULH&P
James L. Turner President and Director
PSI
John M. Mutz President and Director
ULH&P
Madeleine W. Ludlow 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 February 28, 1999
James E. Rogers Executive Officer, and Director
Attorney-in-fact for all President of Cinergy
the foregoing persons (Principal Executive Officer)
/s/Charles J. Winger Vice President and February 28, 1999
Charles J. Winger Chief Financial Officer
Director of ULH&P
(Principal Financial Officer)
/s/John P. Steffen Vice President and Comptroller February 28, 1999
John P. Steffen (Principal Accounting Officer)