ITEM 1. BUSINESS
Cinergy, CG&E, PSI, and ULH&P
Organization
Cinergy, a Delaware corporation, is a registered holding company under the PUHCA. Cinergy was created in the October 1994 merger of Resources and CG&E. The business combination was accounted for as a pooling of interests. Following the merger, Cinergy became the parent holding company of PSI, CG&E, Investments, and Services.
Cinergy's two utility subsidiaries, CG&E and PSI, account for substantially all of Cinergy's total operating revenues and Cinergy's total assets.
Cinergy, CG&E, and ULH&P
CG&E
CG&E, an Ohio corporation, is a combination electric and gas public utility company with four wholly-owned utility subsidiaries, ULH&P, Miami Power Corporation (Miami), The West Harrison Gas and Electric Company (West Harrison), and Lawrenceburg. In addition, CG&E has two wholly-owned non- utility subsidiaries, KO Transmission and Tri-State Improvement Company (Tri- State).
CG&E and its utility subsidiaries are engaged in the production, transmission, distribution, and sale of electric energy and/or the sale and transportation of natural gas in the southwestern portion of Ohio and adjacent areas in Kentucky and Indiana. The area served with electricity, gas, or both covers approximately 3,000 square miles, has an estimated population of 1.8 million people, and includes the cities of Cincinnati and Middletown in Ohio, Covington and Newport in Kentucky, and Lawrenceburg in Indiana.
KO Transmission, a Kentucky corporation, will be used to acquire an interest in an interstate natural gas pipeline to which CG&E is entitled as a result of a settlement with the Columbia Gas Transmission Corp. KO Transmission will be engaged in the transportation of natural gas in interstate commerce between Kentucky and Ohio.
Tri-State, an Ohio corporation, is devoted to acquiring and holding property in Ohio, Kentucky, and Indiana for substations, electric and gas rights of way, office space, and other uses in CG&E's and its subsidiaries' utility operations.
ULH&P
ULH&P is engaged in the transmission, distribution, and sale of electric energy and/or 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 292,000 people, and includes the cities of Covington and Newport in Kentucky.
Cinergy and PSI
PSI
PSI, an Indiana corporation, is engaged in the production, transmission, distribution, and sale of electric energy in north central, central, and southern Indiana. It serves an estimated population of two million people located in 69 of the state's 92 counties including the cities of Bloomington, Columbus, Kokomo, Lafayette, New Albany, and Terre Haute.
PSI Energy Argentina, Inc. (PSI Energy Argentina), a wholly-owned subsidiary of PSI and an Indiana corporation, was formed to invest in foreign utility companies. PSI Energy Argentina is a member of a multinational consortium which has controlling ownership of Edesur S.A. (Edesur). Edesur is an electricity-distribution network serving the southern half of Buenos Aires, Argentina. Edesur provides distribution services to 2.1 million customers. PSI Energy Argentina owns a small equity interest in this project and provides operating and consulting services.
South Construction Company, Inc. (South Construction), a wholly-owned subsidiary of PSI and an Indiana corporation, has been used solely to hold legal title to real estate and interests in real estate which are either not used and useful in the conduct of PSI's business (such as undeveloped real estate of PSI abutting a PSI office building) or which has some defect in title which is unacceptable to PSI. Most of the real estate to which South Construction acquires title relates to PSI's utility business.
Cinergy
Investments
Investments, a Delaware corporation, is a non-utility subholding company that was formed to operate Cinergy's non-utility businesses and interests. Investments holds the following active non-utility subsidiaries and interests, which are more fully described below: Power International, formerly Enertech, its direct subsidiary, Bruwabel, and its indirect subsidiaries, Power International s.r.o. and Power Development s.r.o.; Cinergy Resources, Inc. (Cinergy Resources), formerly CG&E Resource Marketing, Inc.; CGE ECK, Inc. (CGE ECK) and its interest in ECK s.r.o.; PSI Recycling, Inc. (Recycling); PESCO; Wholesale Power; PSI Argentina, Inc. (PSI Argentina) and its subsidiary, Costanera; Cinergy Technology, Inc. (Technology), formerly PSI Environmental Corp.; and Cinergy Cooling Corp. (CoolCo).
Enertech was incorporated in Ohio in 1992 as a vehicle for CG&E to offer utility management consulting services and to pursue investment opportunities in energy-related areas, including DSM services, consulting, energy and fuel brokering, engineering services, construction and/or operation of generation, cogeneration, independent power production facilities, and project development. In July 1994, Enertech acquired Bruwabel and its subsidiaries for the purpose of pursuing design, engineering, and development work involving energy privatization projects, primarily in the Czech Republic. Subsequently, Enertech changed its name to Power International. While an office in the Czech Republic is still being maintained, activities in the Czech Republic and elsewhere have been reduced. Currently, Investments is exploring opportunities to sell Bruwabel and its subsidiaries and their assets, including the Vytopna Kromeriz Heating Plant which was acquired by Power Development s.r.o. in 1995. (See Note 13(d) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".) Cinergy Resources, a Delaware corporation, was formed to hold CG&E's interest in U.S. Energy Partners, a gas marketing partnership that was dissolved effective September 1, 1995. Upon dissolution, Cinergy Resources took its portion of the partnership assets to continue in the gas marketing business. Cinergy Resources will compete with traditional, regulated local distribution companies by offering "merchant service" (i.e., acquiring natural gas for resale to end-use customers) and will broker gas to industrial and large commercial customers.
CGE ECK, a Delaware corporation, was formed to hold an investment in ECK s.r.o., a Czech limited liability company which owns and operates a generating facility in the Czech Republic. At present, CGE ECK holds an approximate 3% interest in ECK s.r.o. and intends to dispose of that interest.
Recycling is an Indiana corporation which recycles metal from CG&E and paper, metal, and other materials from PSI, its largest single supplier, and other sources. Investments is actively pursuing the sale of Recycling.
PESCO was incorporated in Indiana to sell equipment and parts from a PSI generating plant which was canceled, the Marble Hill Nuclear Project. PESCO also purchased equipment for resale, brokered equipment, and sold equipment on consignment for others. In late 1995 and early 1996, PESCO sold its remaining assets and is in the process of discontinuing operations.
Wholesale Power, an Indiana corporation, was formed to engage in the business of brokering power, emission allowances, electricity futures, and related products and services and to provide consulting services in the wholesale power-related markets. In addition, Wholesale Power was formed to create, market, and maintain the services of an "electronic bulletin board" for the bulk power market. The use of the electronic bulletin board was limited in 1995 and is being phased out in 1996.
PSI Argentina was formed as an Indiana corporation to, among other things, own foreign generating facilities. In 1995, Costanera, a wholly-owned subsidiary of PSI Argentina, sold its equity interest in its only investment, the 1,260- mw Costanera power plant in Buenos Aires, Argentina. Costanera had obtained its interest in the plant as a member of a multi-national consortium which has controlling ownership of the plant.
Technology, an Indiana corporation, was created to manage Cinergy's existing non-regulated, technology-related investments, assess the market potential for non-regulated product and service development opportunities, and form key alliances for non-regulated product development.
CoolCo, incorporated in Ohio in February 1996, was formed to engage in the district cooling business. The City of Cincinnati awarded a non-exclusive franchise that will permit CoolCo to construct, install, maintain, and operate a chilled water system in the downtown business district of Cincinnati, Ohio. Construction of such system is expected to begin in the first half of 1996.
Cinergy, CG&E, PSI, and ULH&P
Services
Services, a Delaware corporation, is the service company for the Cinergy system, providing member companies with a variety of administrative, management, and support services.
Cinergy, CG&E, PSI, and ULH&P
Customer, Sales, and Revenue Data
The number of customers served at year-end and the percent of operating revenues derived from the sale of electricity and the sale and transportation of natural gas for each registrant for 1995 are as follows:
Operating Customers Revenues Registrant Electric Gas Electric Gas
Cinergy and subsidiaries 1,369,043 439,427 85% 13% CG&E and subsidiaries 719,227 439,427 77% 22% PSI 649,816 N/A 98% N/A ULH&P 113,874 73,680 72% 27%
Cinergy's utilities' service territory spans 86 counties in Ohio, Indiana, and Kentucky and includes approximately 840 cities, towns, unincorporated communities, and adjacent rural areas, including municipal utilities and rural electric cooperatives.
The service territory of CG&E and its utility subsidiaries, including ULH&P, is heavily populated and characterized by a stable residential customer base and a diverse mix of industrial customers. CG&E's and its utility subsidiaries' service territory spans 19 counties in Ohio, Indiana, and Kentucky (of which ULH&P serves six counties in Kentucky) and includes approximately 130 (44 for ULH&P) cities, towns, unincorporated communities, and adjacent rural areas, including municipal utilities and rural electric cooperatives. The area served by PSI is a residential, agricultural, and widely diversified industrial territory. PSI's service territory includes approximately 710 cities, towns, unincorporated communities, and adjacent rural areas, including municipal utilities and rural electric cooperatives. No one customer accounts for more than 5% of operating revenues for PSI, 5% of electric or gas operating revenues for CG&E and its utility subsidiaries, or 10% of electric or gas operating revenues for ULH&P. Sales of electricity and gas sales and transportation are affected by seasonal weather patterns, and, therefore, operating revenues and associated operating expenses are not distributed evenly during the year.
Cinergy, CG&E, and ULH&P
Financial Information by Business Segment
For financial information by business segment, see Note 16 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data". For a discussion of the potential divestiture of CG&E's, including ULH&P's, gas operations, see Note 13(f) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
Regulation
Cinergy, CG&E, PSI, and ULH&P
Cinergy, its utility subsidiaries, and certain of its non-utility subsidiaries are subject to regulation by the SEC under the PUHCA with respect to, among other things, issuances and sales of securities, acquisitions and sales of certain utility properties, acquisitions and retentions of interests in non- utility businesses, intrasystem sales of certain goods and services, the method of keeping accounts, and access to books and records. In addition, the PUHCA generally limits registered holding companies to a single "integrated" public utility system, which the SEC traditionally has interpreted to prohibit a registered holding company, with limited exceptions, from owning both gas and electric properties. (Refer to the information appearing under the captions "Repeal of the PUHCA" in the "Competitive Pressures" section and "Potential Divestiture of Gas Operations" in the "Regulatory Matters" section in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".)
CG&E, ULH&P, Miami, 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. In addition, services by KO Transmission will be rendered in accordance with terms and conditions and at rates contained in a gas tariff filed with the FERC. Transportation of gas between CG&E and ULH&P is subject to regulation by the FERC under the Natural Gas Act.
Cinergy, CG&E, and ULH&P
CG&E, as a public utility under the laws of Ohio, is also subject to regulation by the PUCO as to retail electric and gas rates, services, accounts, depreciation, issuance of securities, acquisitions and sales of certain utility properties, and in other respects as provided by Ohio law. Rates within municipalities in Ohio are subject to original regulation by the municipalities. The Ohio Power Siting Board, a division of the PUCO, has jurisdiction in Ohio over the location, construction, and initial operation of new electric generating facilities and certain electric and gas transmission lines presently utilized by CG&E. As to retail rates and other matters, ULH&P is regulated by the KPSC, and West Harrison and Lawrenceburg are regulated by the IURC.
Cinergy and PSI
PSI, as a public utility under the laws of Indiana, is also regulated by the IURC as to its retail rates, services, accounts, depreciation, issuance of securities, acquisitions and sales of certain utility properties, and in other respects as provided by Indiana law. Prior to the construction, purchase, or lease of a facility used for the generation of electricity, a public utility in Indiana must obtain from the IURC a certificate of public convenience and necessity.
Cinergy, CG&E, PSI, and ULH&P
Rate Matters
Refer to the information appearing under the caption "Regulatory Matters" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".
Power Supply
Cinergy, CG&E, PSI, and ULH&P
CG&E, PSI, and 27 other electric utilities in an eight-state area are participating in the East Central Area Reliability Coordination Agreement for the purpose of coordinating the planning and operation of generating and transmission facilities to provide for maximum reliability of regional bulk power supply. (Refer to the information appearing under the caption "Cinergy's Response to the Changing Competitive Environment" in the "Competitive Pressures" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of Cinergy's involvement in a coalition for operation of a regional transmission system.)
In addition to the intercompany tie between CG&E's and PSI's electric systems, Cinergy's electric system, which is operated by Services, is interconnected with the electric systems of Indiana Michigan Power Company, Columbus and Southern Ohio Electric Company, Ohio Power Company (all doing business as AEP), Central Illinois Public Service Company, East Kentucky, Hoosier Energy Rural Electric Cooperative, Inc., Indianapolis Power and Light Company, Kentucky Utilities Company, Louisville Gas & Electric Company (LG&E), NIPSCO, Southern Indiana Gas and Electric Company, The Dayton Power and Light Company, Ohio Valley Electric Corporation, and Tennessee Valley Authority.
Cinergy, CG&E, and PSI
CG&E and East Kentucky have an agreement for the interchange of electric power, subject to availability, during certain times of the year through March 2000. Under the agreement, CG&E, a summer peaking company, has the right to obtain up to 150 mw of electricity through March 31, 1997, and up to 50 mw from April 1, 1997, through March 31, 2000, from East Kentucky during the months of June, July, and August. East Kentucky, a winter peaking company, has the right to receive up to 150 mw through March 31, 1997, and up to 50 mw from April 1, 1997, through March 31, 2000, from CG&E in December, January, and February. In addition, PSI has a power supply relationship with WVPA and IMPA through power coordination agreements. WVPA and IMPA are also parties with PSI to a joint transmission and local facilities agreement.
Cinergy, CG&E, and ULH&P
ULH&P does not own or operate any electric generating facilities. Its requirements for electric energy are purchased from CG&E at rates regulated by the FERC.
Fuel Supply
Cinergy
Cinergy purchases approximately 23 million tons of coal annually for use by CG&E and PSI, which historically would rank Cinergy as the sixth largest utility coal purchaser in the United States.
Cinergy, CG&E, and PSI
A major portion of the coal required by CG&E and PSI is obtained through both long- and short-term coal supply agreements, with the remaining requirements purchased on the spot market. The prices to be paid under most of these contracts are subject to adjustment. In addition, some of these agreements include extension options and termination provisions pertaining to coal quality. The coal delivered under these contracts is primarily from mines located in Illinois, Indiana, and Pennsylvania for PSI and Ohio, Kentucky, West Virginia, and Pennsylvania for CG&E. CG&E and PSI monitor alternative sources to assure a continuing availability of economical fuel supplies. The companies intend to maintain the practice of purchasing a portion of their coal requirements on the spot market and will continue to investigate the least cost coal options in connection with their compliance with the CAAA (see the information appearing under the caption "Environmental Issues" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations").
The companies believe they will be able to obtain sufficient coal to meet future generating requirements. However, both CG&E and PSI are unable to predict the extent to which coal availability and price may ultimately be affected by future environmental requirements. Presently, CG&E and PSI expect the cost of coal to rise in the long run as the supply of more accessible and higher-grade coal diminishes and as mining, transportation, and other related costs continue an upward trend.
Cinergy, CG&E, and ULH&P
Gas Supply
Order 636 restructured the operations of gas pipelines and the supply portfolios of gas distribution companies. As gas pipelines unbundled their historic service of supply aggregation, gas distribution companies are entering into term (one year or more) contracts directly with producers and marketers, diminishing the once prominent spot market (see the information appearing under the caption "Order 636" in the "Competitive Pressures" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations").
CG&E and its utility subsidiaries, including ULH&P, now obtain the majority of their natural gas supply (91%) from firm supply agreements, with remaining volumes purchased in the spot market. These firm contracts feature dual levels of gas supply: base load for continuous supply for CG&E's and its utility subsidiaries' core requirements, and "swing" load, which is gas available on a daily basis to accommodate changes in demand. While a premium is paid for the swing load, the use of industry indices to price firm gas volumes on a monthly basis ensures that the price CG&E and its utility subsidiaries pay remains economically competitive.
Gas is transported on interstate pipelines either directly to CG&E's and its subsidiaries' distribution systems, or it is injected into pipeline storage facilities for withdrawal and delivery in the future. Most of CG&E's and its utility subsidiaries' gas supplies are sourced from the Gulf of Mexico coastal area. CG&E and its subsidiaries have also obtained limited supply sourced from the Appalachian region and the mid-continent (Arkansas - Oklahoma) basin, and from methane gas recovered from an Ohio landfill. Over the long term, natural gas is expected to retain its competitiveness with alternative fuels; however, the costs of discovery and development of new sources of supply,, among other things, will influence prices.
Cinergy, CG&E, PSI, and ULH&P
Competition
Refer to the information appearing under the caption "Competitive Pressures" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".
Cinergy, CG&E, PSI, and ULH&P
Capital Requirements
Refer to the information appearing under the caption "Capital Requirements" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".
Cinergy, CG&E, and PSI
Environmental Matters
Environmental compliance construction expenditures for 1996 for Cinergy and its subsidiaries are forecasted to be as follows:
Registrant Expenditures (in thousands)
CG&E and subsidiaries $309 PSI 51 Cinergy and subsidiaries $360
In addition, refer to the information appearing under the caption "Environmental Issues" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".
Employees
Cinergy
The number of employees of Cinergy and its subsidiaries at December 31, 1995, was 8,602, of whom 4,859 belonged to bargaining units. These bargaining unit employees were represented by labor agreements between CG&E and its subsidiaries, including ULH&P, or PSI and the applicable union organization. Of Cinergy's total employees, 3,236 employees were represented by the IBEW, 466 were represented by the USWA, and 1,157 were represented by the IUU. (For additional information, See Note 13(g) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
Employees assigned to Services at December 31, 1995, totaled 2,739, of whom 922 belonged to bargaining units. These bargaining unit employees were represented by the labor agreements previously discussed. Of Services' total employees, 455 were represented by the IUU and 467 were represented by the IBEW (158 were represented by the agreement with PSI and 309 were represented by the agreement with CG&E).
Cinergy and CG&E
The number of employees of CG&E and its subsidiaries at December 31, 1995, was 3,056, of whom CG&E employed 2,759, ULH&P employed 284, and Lawrenceburg employed 13.
CG&E and its subsidiaries have collective bargaining agreements with several union organizations. Of CG&E's and its subsidiaries' total employees 702 employees were represented by the IUU, 466 were represented by the USWA, and 1,214 were represented by the IBEW. The current contract between CG&E and the IUU will expire in March 1998. CG&E and its subsidiaries have a three-year contract with the USWA expiring May 15, 1997. The IBEW contract expires April 1, 1997.
Cinergy and PSI
The number of employees of PSI at December 31, 1995, was 2,807, of whom 1,555 were represented by the IBEW.
PSI's collective bargaining agreement with the IBEW will expire at the end of April 1996.
Cinergy and ULH&P
The number of employees of ULH&P at December 31, 1995, was 284, of whom 228 belonged to bargaining units. These bargaining unit employees were represented by the same labor agreements between CG&E and the applicable union organization. Of ULH&P's total employees, 58 employees were represented by the IBEW, 104 were represented by the USWA, and 66 were represented by the IUU.
The current contract between ULH&P and the IUU will expire in March 1998. ULH&P has three-year agreements with the USWA and IBEW that will expire May 15, 1997, and April 1, 1997, respectively.
ITEM 2.
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 14 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
Cinergy, CG&E, and PSI
At December 31, 1995, the Cinergy utility subsidiaries owned electric generating plants, or portions thereof in the case of jointly owned plants, with net capabilities (winter ratings) as shown in the following table:
Cinergy and CG&E
CG&E
CG&E's 1995 peak load, which occurred on August 14 and was exclusive of off- system transactions, was 4,509 mw. For the period 1996 through 2005, peak load and kwh sales are each forecasted to have annual growth rates of 2%. These forecasts reflect CG&E's load growth, alternative fuel choices, population growth, and housing starts. These forecasts exclude an assessment of DSM, non-firm power transactions, and any potential off-system, long-term firm power sales.
As of December 31, 1995, CG&E's transmission system consisted of 388 circuit miles of 345,000 volt line, 605 circuit miles of 138,000 volt line, 512 circuit miles of 69,000 volt line, and 117 circuit miles of lesser volt line, all within the states of Ohio and Kentucky. In addition, as of December 31, 1995, CG&E's distribution system consisted of 14,556 circuit miles, all within the state of Ohio. As of the same date, CG&E's transmission substations had a combined capacity of 14,845,000 kilovolt-amperes, and the distribution substations had a combined capacity of 5,964,000 kilovolt-amperes. A portion of CG&E's total transmission system is jointly owned, primarily in connection with its jointly owned electric generating units.
During 1995, almost all of the electricity generated by units owned by CG&E or in which it has an ownership interest was produced by coal-fired generating units. Those units generate most of the electric requirements of CG&E and its utility subsidiaries.
CG&E owns two propane/air peakshaving plants. Associated with these plants are two underground caverns, one with a seven million gallon capacity and one with an eight million gallon capacity. Both plants and storage caverns are located in Ohio and used primarily to augment CG&E's supply of natural gas during periods of peak demand and emergencies. CG&E also owns natural gas distribution systems consisting of 5,506 miles of mains and service lines in southwestern Ohio.
Cinergy and PSI
PSI
PSI's 1995 peak load, which occurred on August 14 and was exclusive of off- system transactions, was 5,274 mw. For the period 1996 through 2005, peak load and kwh sales are each forecasted to have annual growth rates of 2%. These forecasts reflect PSI's load growth, alternative fuel choices, population growth, and housing starts. These forecasts exclude an assessment of DSM, non-firm power transactions, and any potential off-system, long-term firm power sales.
As of December 31, 1995, PSI's transmission system consisted of 719 circuit miles of 345,000 volt line, 656 circuit miles of 230,000 volt line, 1,595 circuit miles of 138,000 volt line, and 2,427 circuit miles of 69,000 volt line, all within the state of Indiana. In addition, as of December 31, 1995, PSI's distribution system consisted of 19,264 circuit miles, all within the state of Indiana. As of the same date, PSI's transmission substations had a combined capacity of 21,608,000 kilovolt-amperes, and the distribution substations had a combined capacity of 6,142,000 kilovolt-amperes.
During 1995, almost all of PSI's kwh production was obtained from coal-fired and hydroelectric generation. Cinergy, CG&E, and ULH&P
ULH&P
As of December 31, 1995, ULH&P owned 104 circuit miles of 69,000 volt electric transmission line, an electric distribution system consisting of 2,504 circuit miles, and a gas distribution system consisting of 1,230 miles of mains and service lines in northern Kentucky. ULH&P also owns a propane/air peakshaving plant, a seven million gallon capacity underground cavern for the storage of liquid propane, and related liquid propane feeder lines, located in northern Kentucky and adjacent to one of the gas lines that transports natural gas to CG&E. The propane/air plant and cavern are used primarily to augment CG&E's and ULH&P's supply of natural gas during periods of peak demand and emergencies.
Cinergy and CG&E
Other Utility Subsidiaries
As of December 31, 1995, Lawrenceburg owned a gas distribution system consisting of 171 miles of mains and service lines in Indiana adjacent to the western part of CG&E's service area. Lawrenceburg is connected with and sells gas at wholesale to the city of Aurora, Indiana, and is also connected within Indiana with the lines of Texas Gas Transmission Corporation and Texas Eastern Transmission Corporation.
As of December 31, 1995, West Harrison owned a small electric distribution system consisting of 10 circuit miles in Indiana adjacent to CG&E's service area. As of the same date, Miami owned 40 miles of 138,000 volt transmission line connecting the lines of LG&E with those of CG&E.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Cinergy, CG&E, and PSI
Power International Litigation
See Note 13(d) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
Cinergy, CG&E, and PSI
Merger Litigation
In August 1995, AEP filed a petition in the United States Court of Appeals for the District of Columbia Circuit for review of the FERC's Merger Order. AEP has objected to the Merger Order alleging that the post-merger operations of Cinergy would require the use of AEP's transmission facilities on a continuous basis without compensation. AEP contends that the FERC, in issuing the Merger Order, did not adequately evaluate the impact on AEP or whether the need to use AEP's transmission facilities would interfere with Cinergy achieving merger benefits. In addition, AEP claims that the FERC failed to evaluate the extent to which the merged facilities' operations would be consistent with the integrated public utility concept of the PUHCA. CG&E and PSI have intervened in this action and have filed a Motion to Dismiss. At this time, Cinergy, CG&E, and PSI cannot predict the outcome of the appeal.
Cinergy, CG&E, and PSI
Shareholder Litigation
In March 1993, in conjunction with a proposed tender offer for Resources, IPALCO filed suit in the United States District Court for the Southern District of Indiana, Indianapolis Division (District Court), against Resources, Cinergy, PSI, CG&E, and James E. Rogers (at that time Mr. Rogers was an officer and director of Resources and PSI). In addition, in the weeks following, suits with claims similar to those of IPALCO were filed by purported shareholders of Resources. IPALCO's claim was subsequently dismissed in November 1993, and in November 1995, the District Court dismissed the shareholders' claims in accordance with the terms of a settlement agreement entered into by the parties.
ULH&P
ULH&P has no material pending legal proceedings.
Cinergy, CG&E, PSI, and ULH&P
In addition to the above litigation, see Notes 2, 13(b), 13(c), 13(e), and 13(f) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cinergy, CG&E, and PSI
None.
ULH&P
Omitted pursuant to instruction J(2)(c).
EXECUTIVE OFFICERS OF THE REGISTRANTS (at February 29, 1996)
Age at Dec. 31, Name 1995 Office & Date Elected or in Job
Cinergy, CG&E, and PSI
Jackson H. Randolph 65 Chairman of Cinergy, CG&E, and PSI - 1995 Chairman and Chief Executive Officer of Cinergy, CG&E, and PSI - 1994 Chairman, President, and Chief Executive Officer of CG&E - 1993 President and Chief Executive Officer of CG&E - 1986
James E. Rogers 48 Vice Chairman, President, and Chief Executive Officer of Cinergy - 1995 Vice Chairman and Chief Executive Officer of CG&E and PSI - 1995 Vice Chairman, President, and Chief Operating Officer of Cinergy - 1994 Vice Chairman and Chief Operating Officer of CG&E and PSI - 1994 Chairman and Chief Executive Officer of Resources - 1993 Chairman, President, and Chief Executive Officer of PSI - 1990
Terry E. Bruck 50 Group Vice President, Transmission and Distribution of Cinergy, CG&E, and PSI - 1995 Group Vice President, Wholesale Power and Transmission Operations of CG&E and PSI - 1995 Group Vice President, Wholesale Power and Transmission Operations of Cinergy - 1994 Vice President, Electric Operations of CG&E - 1988
Cheryl M. Foley 48 Vice President, General Counsel, and Secretary of CG&E - 1995 Vice President, General Counsel, and Secretary of Cinergy - 1994 Vice President, General Counsel, and Secretary of PSI and Resources - 1991 Vice President and General Counsel of Resources - 1990
J. Wayne Leonard 45 Group Vice President and Chief Financial Officer of CG&E and PSI - 1995 Group Vice President and Chief Financial Officer of Cinergy - 1994 Senior Vice President and Chief Financial Officer of PSI and Resources - 1992 Vice President and Chief Financial Officer of PSI and Resources - 1989
Stephen G. Salay 58 Group Vice President, Power Operations of CG&E and PSI - 1995 Group Vice President, Power Operations of Cinergy - 1994 Vice President, Electric Production and Fuel Supply of CG&E - 1988
William L. Sheafer 52 Treasurer of Cinergy and PSI - 1994 Treasurer of CG&E - 1987
George H. Stinson 50 Vice President, Corporate Services of Cinergy, CG&E, and PSI - 1995 Vice President of Cinergy - 1995 President of CG&E - 1994 Vice President, Gas Operations of CG&E - 1991 Manager, Gas Operations of CG&E - 1990
Larry E. Thomas 50 Group Vice President and Chief Transformation Officer of Cinergy, CG&E, and PSI - 1995 Group Vice President, Reengineering and Operations Services of CG&E and PSI - 1995 Group Vice President, Reengineering and Operations Services of Cinergy - 1994 Senior Vice President and Chief Operations Officer of PSI - 1992 Senior Vice President and Chief Operating Officer, Customer Operations of PSI - 1990
Charles J. Winger 50 Comptroller of CG&E - 1995 Comptroller of Cinergy - 1994 Comptroller of Resources - 1988 Comptroller of PSI - 1984
Cinergy and CG&E
William J. Grealis 1/ 50 President of CG&E - 1995 Vice President of Cinergy - 1995 President, Gas Business Unit of CG&E - 1995 President of Investments - 1995 Partner - Akin, Gump, Strauss, Hauer & Feld 2/ - 1978
Cinergy and PSI
John M. Mutz 3/ 60 Vice President of Cinergy - 1995 President of PSI - 1994 President of Resources - 1993 President - Lilly Endowment, Inc. 2/ - 1989
ULH&P
Omitted pursuant to instruction J(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/ Non-affiliate of Cinergy.
3/ Prior to becoming President of Resources, Mr. Mutz was President of Lilly Endowment, Inc., a private philanthropic foundation located in Indianapolis, Indiana, and also served two terms as lieutenant governor of Indiana.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Cinergy, CG&E, PSI, and ULH&P
Cinergy's common stock is listed on the New York Stock Exchange and has unlisted trading privileges on the Boston, Chicago, Cincinnati, Pacific, and Philadelphia exchanges. As of February 5, 1996, Cinergy's most recent dividend record date, there were 80,550 common shareholders of record. Trading of CG&E's and Resources' common stock ended at the close of the market October 24, 1994. Trading of Cinergy's common stock began upon the opening of the market October 25, 1994. The following table shows the high and low sales prices per share, if applicable, and the dividends on common stock declared by CG&E, Resources, PSI, ULH&P, and Cinergy for the past two years:
Market Price (a) Dividends Declared High Low (per share) (in thousands) CG&E 4th Quarter $23 3/8 $21 7/8 $ .3272 (b) $15 267 (c) 3rd Quarter 23 1/4 20 7/8 .43 2nd Quarter 23 7/8 21 .43 1st Quarter 27 3/4 23 5/8 .43
Resources 4th Quarter 23 1/2 22 .1805 (b) 3rd Quarter 23 1/8 20 3/4 .31 2nd Quarter 23 1/8 19 5/8 .31 1st Quarter 26 5/8 22 3/4 .31
PSI 4th Quarter 10 376 (c) 3rd Quarter 16 174 (c) 2nd Quarter 16 622 (c) 1st Quarter 15 970 (c)
ULH&P 4th Quarter 6.00
Cinergy 4th Quarter 24 20 3/4 .1028 (b)
CG&E 4th Quarter 56 600 (c) 3rd Quarter 55 400 (c) 2nd Quarter 55 900 (c) 1st Quarter 51 650 (c)
ULH&P 4th Quarter 6.00
Cinergy 4th Quarter 31 1/8 27 3/4 .43 3rd Quarter 27 7/8 25 1/4 .43 2nd Quarter 27 24 5/8 .43 1st Quarter 25 1/4 23 3/8 .43
(a) Market price for PSI and ULH&P for 1994 and for CG&E, PSI, and ULH&P for 1995 is not applicable.
(b) The prorated fourth quarter dividends for CG&E and Resources were determined by multiplying that portion of each company's regular quarterly dividend by a fraction equal to the number of days from their last respective common dividend payment dates (August 15, 1994, for CG&E; September 1, 1994, for Resources) to and including the closing date of the merger, divided by the number of days in the quarterly period for each respective company (92 for CG&E; 91 for Resources). These respective prorated dividends were in addition to, but paid separately from, the fourth quarter dividend on Cinergy common stock, which was determined by prorating Cinergy's 43-cents per share quarterly dividend for the remainder of the quarter ending November 15, 1994.
(c) All of PSI's 1994 dividends were paid to Resources. CG&E's 1994 fourth quarter dividend of $15,276,000 and all of CG&E's 1995 dividends were paid to Cinergy.
See Notes 3(b) and 4(c) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for a brief description of common dividend restrictions.
All CG&E and PSI common stock is held by Cinergy and all ULH&P common stock is held by CG&E; therefore, there is no public trading market for their common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Cinergy
1995 1994 1993 1992 1991 (in millions, except per share amounts)
Operating revenues (1) $3 031 $2 898 $2 843 $2 613 $2 640 Net income (1) 347 191 63 271 202 Common stock Earnings per share (1) 2.22 1.30 .43 1.91 1.46 Dividends declared per share 1.72 1.50 1.46 1.39 1.33
Total assets (2) 8 220 8 150 7 804 7 133 6 681 Cumulative preferred stock of subsidiaries subject to mandatory redemption (3) 160 210 210 210 192 Long-term debt (4) 2 531 2 715 2 645 2 547 2 376 Long-term debt due within one year 202 60 - 46 115
CG&E 1995 1994 1993 1992 1991 (in millions)
Operating revenues (1) $1 848 $1 788 $1 752 $1 553 $1 518 Net income (loss)(1) 236 158 (9) 202 207
Total assets (2) 5 177 5 182 5 144 4 802 4 584 Cumulative preferred stock subject to mandatory redemption (3) 160 210 210 210 167 Long-term debt (4) 1 703 1 838 1 829 1 810 1 734 Long-term debt due within one year 152 - - 7 25
PSI 1995 1994 1993 1992 1991 (in millions)
Operating revenues (1) $1 248 $1 114 $1 092 $1 066 $1 120 Net income (1) 146 82 125 107 30
Total assets (2) 3 076 2 945 2 645 2 300 2 093 Cumulative preferred stock subject to mandatory redemption (3) - - - - 26 Long-term debt (4) 828 878 816 737 642 Long-term debt due within one year 50 60 - 40 90
Cinergy, CG&E, and PSI
(1) See Notes 1, 2, and 16 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
(2) See Notes 1(d) and 7 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
(3) Includes $39.5 million, $36.5 million, and $3 million in 1991 for Cinergy, CG&E, and PSI, respectively, to be redeemed within one year. Also, see Note 4 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
(4) See Note 5 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
In addition, see "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cinergy, CG&E, PSI, and ULH&P
THE COMPANIES
Cinergy is a registered holding company under the PUHCA. Cinergy was created in the October 1994 merger of Resources and CG&E. The business combination was accounted for as a pooling of interests. Following the merger, Cinergy became the parent holding company of PSI, previously Resources' utility subsidiary, CG&E, Investments, and Services.
FINANCIAL CONDITION
COMPETITIVE PRESSURES
Electric Utility Industry
Cinergy, CG&E, PSI, and ULH&P
Introduction The primary factor influencing the future profitability of Cinergy is the changing competitive environment for energy services, including the impact of emerging technologies, and the related commoditization of electric power markets. Changes in the industry include increased competition in wholesale power markets and ongoing pressure for "customer choice" by large industrial customers and, ultimately, by all retail customers.
Pressures for Customer Choice Extending choice to end-user customers, also referred to as retail wheeling, would allow customers within a particular utility's service territory to "unbundle" their purchase decisions. Customers would be able to buy power as a commodity directly from another source and buy distribution service over the power lines of the local utility for delivery. The regulatory and legislative reform to facilitate this result is primarily driven by: (1) large industrial energy users; (2) the emergence of new suppliers in the competitive markets; and (3) increasing evidence from other regulated industries that wherever effective competition is feasible, it can yield lower costs and a wider range of customer options and services than traditional cost-of-service regulation. Industrial customers are intensifying their efforts to change the regulatory process so that they may access the lower-cost power necessary to remain competitive in the global marketplace. The current restrictions on access to low-cost power are exacerbated by traditional cost-of-service regulation which has produced average industrial rates to customers that vary substantially across the United States (from less than 3 cents per kwh to approximately 10 cents per kwh).
While customer efforts at industry reform have resulted in some success, the emergence of new competitors to the local franchise utility has become an equally effective force for change. This new competition was facilitated by the Energy Policy Act of 1992 (Energy Act), which granted the FERC authority to order wholesale transmission access. New competitors include power marketers, power brokers, and local franchise utilities that now sell power in regional or national markets. To date, the FERC has granted approximately 150 power marketers the ability to sell at market-based rates and accepted several utilities' general sales tariffs that allow for sales anywhere in the United States. Cinergy's non-firm power sales tariff was accepted by the FERC in December 1995, and an affiliated power marketer of Cinergy was given authorization to begin transacting business in September 1995. Additionally, utilities are using merger and acquisition strategies to achieve expanded scale and scope to support a regional or national market strategy. For example, since the beginning of 1995, there were seven mergers involving major investor-owned utilities announced in the industry, representing nearly $28 billion of combined market value.
Brokers are intermediaries between buyers and sellers (i.e., they do not take title to the power). Power marketers are entities licensed by the FERC to conduct bulk power trades at market-based prices. They manage portfolios of power contracts (to which they have title) and owned generation and package energy products for customers of bulk power, including price risk management contracts such as options on fixed-price energy or guaranteed fixed-price contracts.
Despite increased activity by utilities and new competitors to respond to the demands of industrial customers for greater choice and lower prices, the pace of legislative and regulatory restructuring appears to have slowed somewhat in 1995. Many states continue to examine the complex technical and economic issues restructuring presents. Among other things, states are considering the trade-offs between achieving long-run economic efficiency and potential short- term wealth transfers between customers and shareholders (see further discussion below) or among customers, as well as the potential impact (if any) of restructuring on other socially desirable objectives like clean air or energy efficiency.
The most difficult issue polarizing the debate on the future competitive framework of the industry is the transition from the old order to the new and who will bear the costs of historical utility investments or past commitments incurred under cost-of-service regulation. If the generation component of the industry's business was immediately brought to market and priced at competitive wholesale prices, it is likely that many utilities would currently be unable to recover a large percentage of their fixed costs. Other costs such as investments in energy efficiency (DSM investments) could also become "stranded" (i.e., unrecoverable at competitive market prices) in this scenario. The financial impact on the industry of alternative scenarios for a transition to market prices is highly dependent upon: (1) the speed of the transition; (2) the clearing price for electricity in a fully competitive market; and (3) customer behavior (e.g., loyalty) when afforded potentially lower-cost alternatives.
Because of the complex nature of electric power flows, the variety of state- by-state regulations, and the potential inability or unwillingness to shut down high-cost plants (e.g., nuclear) in a fully competitive market, great uncertainty exists as to the time frame required for the future price of electricity in a commodity market to rise to long-run marginal cost (e.g., full cost of new resources) and, importantly, how close to short-term marginal cost (e.g., fuel and variable operating expenses) prices may fall in the interim. For example, depending upon the scenario, Moody's has quantified the stranded investment issue for the industry at between $50 billion and $300 billion (with the most likely result approximately $135 billion), while S&P has estimated a total exposure of between $10 billion and $26 billion (6% and 16%, respectively) of total industry annual revenues. The Oak Ridge National Laboratory has quantified the industry financial impact at $6 billion for every 1 mill (tenth of a cent) change in market price.
The position that all prudent past investments and commitments must be honored has received support from regulators at the FERC and in the state of California, both of which have provided for the recovery of utility stranded investments (see further discussion of each of these proposals herein), although that position varies from state to state. For example, a recent survey of 90 state utility commissioners from 40 states concluded that approximately 50% agreed with allowing recovery of stranded costs at the state level, while 26% disagreed with recovery, and the remaining 24% were uncertain.
Cinergy's Response to the Changing Competitive Environment Cinergy supports increased competition in the electric utility industry. Cinergy believes that competition would benefit electric customers and the economy as a whole. At the same time, Cinergy possesses competitive advantages (e.g., low-cost generation) that could work to the benefit of its shareholders in a competitive environment. However, these advantages could be substantially eroded by restrictive regulations that lag the development of a competitive market and limit the Company's ability to preempt the competition in responding to customer needs. As such, Cinergy has chosen to take a leadership role in state and Federal debates on industry reform.
However, Cinergy believes there are two substantial impediments to realizing the potential efficiencies of competition in the generation segment of the business: (1) resolving the issue of stranded costs associated with past utility commitments and (2) recognizing states' rights, concerns, and authority in regulating a product that flows in interstate commerce. While Cinergy is among the lowest-cost producers nationwide and has been recognized by both Moody's and S&P as having little exposure to stranded investment, Cinergy nevertheless recognizes the legitimacy of the industry's equity argument for recovery of at least some of the costs associated with past commitments and the importance of resolving this issue in the interest of moving the debate to more important issues like how to achieve the potential economic efficiencies that competition offers and what regulatory and structural reforms are necessary to achieve those results. Cinergy remains concerned that even low-cost producers, under certain scenarios, could face difficult if not ruinous competition in an excess capacity market that was created at least in part by past government policies. Cinergy has approximately $1 billion of regulatory assets (past costs incurred for which regulators have promised recovery in the future) that could be at risk, at least in part, in some scenarios. At the same time, Cinergy believes that full recovery of the industry's potential stranded investment is unrealistic to expect in a market where certain customers can bypass stranded cost mechanisms (e.g., self-generation), is politically infeasible, and is neither necessarily equitable nor efficient.
Additionally, Cinergy believes that efficient competition cannot be achieved if neighboring states reach substantially different conclusions concerning items such as the transition rules, the timetables for implementation, universal service to customers, and reliability standards. Such state-by- state disparity would provide inequitable advantages to some competitors while unduly harming others' ability to compete in the marketplace. While Cinergy believes that satisfactory results cannot be achieved without a broad national consensus for the long-term goal and a time frame for getting there, Cinergy does not believe a total preemption of states' rights on this issue is either politically feasible or necessary.
Cinergy intends to pursue aggressively a national solution that will recognize the legitimacy of certain claims to past costs (within some level of cost and demonstrated prudence) and provide a required framework for states to align their regulations and policies within a specified time frame. The framework would require a consistent transition to full competition for generation in all markets, thus minimizing the current fragmentation resulting from the initiatives of multiple regulators and regulations.
As further evidence of its leadership in the restructuring of the electric utility industry, in February 1996, Cinergy and several other midwestern utilities announced the formation of a coalition to create and develop a multi-state transmission region operated by an independent system operator (ISO). The coalition, which Cinergy believes is likely to expand in membership, is proposing a midwest ISO which would ensure non-discriminating open transmission access, develop a regional transmission tariff, and ensure system reliability. Cinergy believes the formation of ISOs will be a major step toward facilitating competition in the electric utility industry and potentially more mergers among utilities (i.e., reduced market power concerns).
For an electric utility to be successful in this competitive environment, it is critical that regulatory reform in all segments of the business keeps pace with the competitive realities facing electric utilities and their customers in not only generation, but also transmission, distribution, and energy services activities. Strict adherence to traditional, cost-based rate-of- return regulation will both significantly disadvantage a utility's ability to compete successfully to supply customer needs and result in a failure to realize the potential economic efficiencies from restructuring. For example, performance-based regulation (e.g., price caps) would result in better economic incentives to control costs and likely add substantial flexibility for the franchise utility in the transition to a fully competitive environment.
Legislation allowing significant flexibility was passed (Senate Bill 637) in Indiana in 1995. The Company intends to pursue similar flexibility in all markets where it conducts business.
Federal Developments
Mega-NOPR The Energy Act granted the FERC the authority to order wholesale transmission access. Acting on that authority, in March 1995, the FERC took a substantial step toward assuring increased competition in the electric industry by issuing the mega-NOPR.
Cinergy was the first utility in the country to file its comments endorsing the mega-NOPR, reaffirming its support for the FERC's authority to order utilities owning transmission systems to provide access to other entities at rates and terms comparable to those provided to affiliated companies. As proposed, the FERC's mega-NOPR would, among other things, provide for mandatory filing of open access/comparability transmission tariffs, provide for functional unbundling of all services, require utilities to use the filed tariffs for their own bulk power transactions, establish an electronic bulletin board for transmission availability and pricing information, and establish a contract-based approach to recovering any potential stranded costs as a result of customer choice at the wholesale level. A final order is expected to be issued during the first half of 1996.
Repeal of the PUHCA After a year-long review of its continuing regulation of public utility holding companies under the PUHCA, in June 1995, the SEC endorsed recommendations for reform of the PUHCA. The recommendations call for repeal and, pending repeal, significant administrative reform of the 60- year-old statute. While the report offers three alternative approaches to repeal and legislative reform, the SEC's preferred option is repeal coupled with a transition period of one year or longer and a transfer of certain consumer-protection provisions of the PUHCA to the FERC.
The report further recommends that, pending consideration of legislative options, the SEC take prompt administrative action, by rulemaking and on a case-by-case basis, to modernize and simplify regulation under the PUHCA, with particular reference to financing transactions, diversification into non- utility businesses, utility mergers and acquisitions, and the PUHCA's "integration" standards. In the latter regard, the report recommends a changed interpretation of the PUHCA to permit registered holding companies to own combination electric and gas utility companies, provided the affected states agree. Subsequent to the issuance of the report, the SEC adopted rule changes exempting various types of financing transactions by utility and non- utility subsidiaries of registered holding companies. The SEC also proposed a rule that would exempt investments by registered systems in specified "energy- related companies", subject to certain conditions.
In October 1995, a bill was introduced in the United States Senate providing for the repeal of the PUHCA. The bill is pending before Congress. In addition, various members of Congress have indicated their support for industry restructuring. One view that has been publicly stated in Congress is that the repeal of the PUHCA and the orderly transition to open competition should be considered comprehensively rather than piecemeal. Hearings have been initiated in Congress for a comprehensive review of the electric utility industry and the role Congress should play in fostering competition. Cinergy supports the repeal of the PUHCA, either as part of comprehensive reform of the electric utility industry or as separate legislation.
Cinergy, CG&E, PSI, and ULH&P
State Developments During 1995, 40 states initiated or took part in formal or informal processes, held hearings, and/or passed legislation addressing retail wheeling, restructuring, competition, alternative regulation, or closely related issues concerning electric utility industry restructuring.
Cinergy and CG&E
Ohio The PUCO has been actively examining issues raised by continuing competitive pressures. The Chairman of the PUCO has publicly stated his desire to make progress toward enhancing competition in Ohio, but with the objective of doing it right and not necessarily first. In late 1994, the PUCO formed an electric competition roundtable that meets on an informal basis to address competition, restructuring, performance-based regulation, and related issues, with a stated mission of "promoting increased competitive options for Ohio businesses that do not unduly harm the interests of utility company shareholders or ratepayers". In 1995, the roundtable participants submitted principles for a customer choice pilot program for interruptible buy-through service. The PUCO issued the proposed guidelines for comments in late 1995 and issued final guidelines in February 1996.
Additionally, two recent actions of the PUCO provide support for maintaining the financial integrity of the utilities in the state. In October 1995, the PUCO approved a stipulated rate plan which could improve the competitive position of a major utility in the state by the end of a 10-year moratorium period, including provisions for accelerating depreciation and amortization of the utility's nuclear plants and regulatory assets, respectively. In November 1995, the PUCO staff recommended a rate increase for another "at risk" utility that is conditioned upon the increase being utilized to achieve a significant reduction in the utility's uneconomic generating assets.
Finally, a retail wheeling bill was introduced in the Ohio legislature that would, if passed, require utilities to develop retail wheeling plans by January 1, 1998, and provide flexibility to propose alternatives to traditional cost-of-service ratemaking methodologies. The bill is expected to be considered during the 1996 legislative session.
Cinergy, CG&E, and PSI
Indiana The IURC has taken several steps to investigate the desirability of retail competition in the state. A legislative regulatory flexibility committee was established by Senate Bill 637. Senate Bill 637 also allows the IURC to approve utility alternative regulation proposals upon a showing that, among other things, traditional regulation in a particular service sector is no longer needed.
Additionally, the IURC has sponsored informal competition forums that are designed to develop a better understanding of issues related to expanding the competitive market on both the wholesale and retail levels. While various parties have participated in this process, the Citizens Action Coalition of Indiana, Inc. (CAC)(a non-profit organization representing customers) has called for electric utilities to make a new "covenant" with customers. The CAC outlines eight principles intended to balance various economic and environmental interests at stake in the debate. Among other things, the covenant would include a voluntary pledge by utilities that: customers' bills will not increase; the environment will not be polluted; universal service will be provided; construction of new power plants will be avoided; and customers will not be harmed by utility self-dealing.
Cinergy, CG&E, and ULH&P
Kentucky There has been considerably less activity and interest in industry restructuring in Kentucky. This situation is generally attributed to the fact that Kentucky is one of the lowest-cost states in the country for electric service. While large volume customers have circulated a draft of a retail wheeling bill, Cinergy does not believe such legislation, if introduced, would receive much attention in 1996.
Cinergy, CG&E, PSI, and ULH&P
Other States In addition to the states in which Cinergy operates, significant developments in other states have occurred during 1995. Not surprisingly, the higher-cost regions of the country have been most interested in facilitating the more rapid development of a competitive market for electric utilities. For example, in December 1995, California regulators adopted a hybrid plan for restructuring the state's electric services industry. The plan will simultaneously create an ISO, a wholesale power exchange, and direct access (customer choice) phased in over five years beginning on January 1, 1998. The plan further provides for a non-bypassable competitive transition charge on all retail customers to ensure utilities the opportunity for full recovery of their stranded investments by 2005. Several aspects of the plan require enabling legislation to be passed in California prior to restructuring. The plan contemplates the continuation of state regulation over the transmission and distribution segments of the industry.
In the northeastern United States, Massachusetts, Connecticut, New Hampshire, and Rhode Island have all recently issued guidelines or principles for industry restructuring, authorized restructuring studies, or created retail wheeling pilot programs. In particular, the restructuring principles issued in August 1995 by the Massachusetts state commission provide for the largest utilities in the state to file negotiated restructuring plans in February 1996 to provide for a transition to full competition, including provisions for functional unbundling and retail wheeling. A major utility in the region has already filed a plan that provides for customer choice, transition to a competitive market, restructuring, lower prices to customers in the interim, and the recovery for shareholders of all stranded costs.
At the same time, the traditionally low-cost Midwest has also been exploring how competition can efficiently and effectively be implemented for the benefit of customers. In Wisconsin, a revised proposal by a state commissioner focuses on some of the social issues and economic trade-offs involved in restructuring the industry. The plan has established the year 2000 as a target date for implementation of restructuring in that state, modifying the previously adopted "building block" approach. The proposal would create an ISO for the transmission system, while the distribution system would continue to be subject to commission jurisdiction. Other provisions of the proposal include a request for utilities to file plans for establishing functional separation of the generation, transmission, and distribution business units, commission certification of new market entrants, continuation of the winter moratorium on disconnections, a permanent commitment to low-income and universal service programs, priority generation service for Wisconsin customers, and the transfer of the risk of decisions on power generation from customers to shareholders.
The state of Michigan has proposed a thorough review of existing state laws and the comprehensive changes to those laws that would be required to facilitate competition in the electric utility industry. Additionally, Michigan has also mandated retail wheeling experiments for two of the large utility companies in the state, scheduled to begin at the time of each respective utility's next capacity solicitation. In Illinois, the legislature has passed a resolution establishing a joint legislative committee to study and recommend policy changes regarding competition. At least two of Illinois' investor-owned utilities have recently filed two proposed retail wheeling pilot programs with the state commission.
Cinergy, CG&E, PSI, and ULH&P
Cinergy's Future - Others' Views The major credit rating agencies continue to recognize the risk of the imminent restructuring of the electric utility industry. In August 1995, Moody's issued a report entitled "Stranded Costs Will Threaten Credit Quality of U.S. Electrics", wherein Moody's notes its belief that a substantial amount of fixed costs approved for recovery under the traditional regulatory regime is likely to be stranded. In November 1995, S&P issued its report, "Direct Access Threatens Electric Utility Revenues", in which S&P estimated the potential loss of annual revenues in the industry. However, Cinergy has received praise and some measure of optimism for its position in a more competitive environment. As part of the November 1995 upgrade of Cinergy's operating subsidiaries' debt and preferred stock, Moody's expressed its opinion that Cinergy "will have no exposure to stranded costs" and that "Cinergy is expected to be a formidable competitor because of its low production costs". All such models used to predict potential exposure to stranded costs are extremely sensitive to the assumed future market clearing price. In its July 1995 upgrade of Cinergy's operating subsidiaries' debt and preferred stock, S&P commented that "the business position evaluation of all the Cinergy operating units is now high average" reflecting "low electric production costs, efficient coal-fired equipment, relatively low rates, a well positioned gas operation, the absence of nuclear challenges, a healthy service territory, and a balanced capital structure".
Certain sell-side equity analysts continue to rank Cinergy highly as a utility possessing a strong competitive profile and aggressive and innovative management, with some considering Cinergy to be well positioned to outperform the market in the competitive arena. Cinergy believes the opinions of these rating agencies and equity analysts further support its position that its competitive strategy and agenda will be successful.
Cinergy, CG&E, and ULH&P
Gas Utility Industry
Order 636 In 1992, the FERC issued Order 636 which restructured operations between interstate gas pipelines and their customers for gas sales and transportation services. Order 636 mandated changes to the way CG&E and its utility subsidiaries purchase gas supplies and contract for transportation and storage services, resulting in increased risks in meeting the gas demands of their customers.
CG&E and its utility subsidiaries have responded to the supply risks and opportunities of Order 636 by introducing innovations to their supply strategy. These innovations include: contracting with major producers and marketers for firm gas supply agreements with flexible, extremely market sensitive pricing, marketing short-term unused pipeline capacity and storage gas to other companies throughout the country through use of electronic bulletin boards, and restructuring their allotment of interstate pipeline capacity among delivering pipelines.
Order 636 also allowed pipelines to recover transition costs they incurred in complying with the order from customers, including CG&E and its utility subsidiaries. In July 1994, the PUCO issued an order approving a stipulation between CG&E and its residential and industrial customer groups providing for recovery of these pipeline transition costs. CG&E is presently recovering its Order 636 transition costs pursuant to a PUCO-approved tariff. CG&E and its utility subsidiaries, including ULH&P, recover such costs through their gas cost recovery mechanisms.
Customer Choice In a January 1996 gas filing in Ohio (see additional discussion in Note 2(b) of the "Notes to Financial Statements" in "Item 8.
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, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, as listed in the index on page 46. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental financial statement schedules listed in the index on page 47 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 25, 1996
RESULTS OF OPERATIONS - CINERGY
Kwh Sales
Cinergy's total kwh sales in 1995, as compared to 1994, increased 4.1%, reflecting increased sales to all retail customer classes. Contributing significantly to this increase were higher residential and commercial sales due to warmer weather during the 1995 summer cooling season and colder weather during the fourth quarter of 1995. Additionally, increased sales to industrial customers, reflecting growth in the primary metals and chemicals sectors, contributed to the increased kwh sales level. These increases were offset, in part, by a decline in non-firm power sales for resale.
Total kwh sales increased 2.8% in 1994, as compared to 1993, due in large part to non-firm power sales for resale, reflecting third party, short-term power sales to other utilities through PSI's system and direct power sales by PSI to other utilities. This increase was partially offset by CG&E's reduced power sales to other utilities in 1994. Also significantly contributing to the total kwh sales levels were increased sales to industrial customers. This increase reflected growth in the primary metals and transportation equipment sectors. Commercial sales increased due, in part, to new customers. A decrease in residential sales resulted from the milder weather experienced during the third and fourth quarters of 1994.
A return to more normal weather contributed to the 5.3% increase in total kwh sales in 1993, as compared to 1992. In addition, growth in the primary metals and transportation equipment sectors resulted in increased industrial sales. Partially offsetting these increases was a reduction in non-firm power sales for resale, which reflected a significant decrease in third party, short-term power sales to other utilities through PSI's system.
Year-to-year changes in kwh sales for each major class of customers are shown below:
Increase (Decrease) from Prior Year
1995 1994 1993_ Retail Residential 5.8 % (1.7)% 10.3 % Commercial 4.3 1.9 6.3 Industrial 4.6 4.6 4.2
Total retail 4.9 1.6 6.9
Sales for resale Firm power obligations 1.7 2.5 2.6 Non-firm power transactions (1.3) 14.4 (5.3)
Total sales for resale (.4) 10.5 (2.8)
Total sales 4.1 2.8 5.3
Cinergy currently forecasts a 2% annual compound growth rate in kwh sales over the 1996 through 2005 period. This forecast does not reflect the effects of DSM programs and excludes non-firm power sales for resale and any potential new off-system, long-term firm power sales.
Mcf Sales and Transportation
Total gas sales and transportation volumes increased 8.6% in 1995, as compared to 1994. Increased sales to residential customers, resulting from colder weather during the fourth quarter of 1995 and an increase in the number of customers, contributed to higher retail sales. Additionally, increases in commercial and industrial transportation volumes, which resulted from customers electing to purchase gas directly from suppliers, more than offset declines in industrial and commercial sales. The increased transportation volumes mainly reflect industrial demand for gas transportation services in the primary metals, food products, and paper products sectors.
The milder weather experienced in 1994 contributed to a decrease in residential and commercial gas sales volumes and led to the decrease in total Mcf sales and transportation of 1.2% in 1994, as compared to 1993. An increase in gas transportation volumes to industrial customers, mainly in the primary metals sector, partially offset this decrease.
The increase in retail Mcf sales of 5.4% in 1993, when compared to 1992, was primarily attributable to higher residential and commercial sales volumes as a result of the return to more normal weather during the 1993 heating season and the addition of a number of customers to CG&E's gas system during the year. Gas transportation volumes for 1993 increased largely as a result of additional industrial demand for gas transportation services in the primary metals sector. The increase in Mcf transported more than offset the decrease in Mcf sold to industrial customers.
Year-to-year changes in Mcf sales for each major class of customers and Mcf transportation volumes are shown below:
Increase (Decrease) from Prior Year
1995 1994 1993_
Retail Residential 10.5 % (10.2)% 9.5 % Commercial (2.0) (1.5) 1.1 Industrial (26.6) (9.9) (.8)
Total retail 1.5 (6.7) 5.4
Gas transported 24.4 13.9 12.7
Total gas sold and transported 8.6 (1.2) 7.2
Operating Revenues
ELECTRIC OPERATING REVENUES
Higher retail kwh sales, PSI's electric rate increases which became effective in February 1995 and March 1995, and a full year's effect of CG&E's electric rate increase which became effective in May 1994, significantly contributed to the $165 million (6.7%) increase in electric operating revenues for 1995, when compared to 1994.
Electric operating revenues increased $82 million (3.4%) in 1994, as compared to 1993, as a result of CG&E's electric rate increases which became effective in May 1993, August 1993, and May 1994, PSI's increased kwh sales, and the effects of PSI's $31 million refund to retail customers accrued in June 1993 as a result of the settlement of the IURC's April 1990 Order.
Electric operating revenues increased $155 million (7.0%) in 1993 primarily as a result of greater kwh sales and electric rate increases granted to CG&E in 1993 and 1992. These increases were partially offset by the refund resulting from the settlement of the April 1990 Order.
An analysis of electric operating revenues for the past three years is shown below:
1995 1994 1993_ (in millions)
Previous year's electric operating revenues $2 456 $2 374 $2 219 Increase (Decrease) due to change in: Price per kwh Retail 54 32 12 Sales for resale Firm power obligations (1) 1 (1) Non-firm power transactions 4 - 10 Total change in price per kwh 57 33 21
Kwh sales Retail 109 34 138 Sales for resale Firm power obligations 1 2 2 Non-firm power transactions (1) 14 (5) Total change in kwh sales 109 50 135
Other (1) (1) (1)
Current year's electric operating revenues $2 621 $2 456 $2 374
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from producers and utilizing CG&E facilities to transport the gas (see the "Mcf Sales and Transportation" section) continues to put downward pressure on gas operating revenues. When Cinergy sells gas, the sales price reflects the cost of gas purchased by Cinergy to support the sale plus the costs to deliver the gas. When gas is transported, Cinergy does not incur any purchased gas costs but delivers gas the customer has purchased from other sources. Since providing transportation services does not necessitate recovery of gas purchased costs, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues.
In 1995, gas operating revenues declined $32 million (7.1%), as compared to 1994, as a result of the aforementioned trend toward increased transportation services and the operation of fuel adjustment clauses reflecting a lower average cost of gas purchased.
Gas operating revenues decreased $27 million (5.7%) in 1994, as compared to 1993, due to the operation of fuel adjustment clauses which reflected a lower average cost of gas purchased during the latter part of 1994 and a reduction in total volumes sold and transported.
In 1993, gas operating revenues increased $75 million (19.1%) as a result of rate increases granted in 1993, higher volumes of gas sold, and the operation of fuel adjustment clauses reflecting an increase in the average cost of gas purchased.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs, Cinergy's largest operating expense, remained relatively constant in 1995, showing less than a 1% increase when compared to 1994.
An analysis of these fuel costs for the past three years is shown below:
1995 1994 1993 (in millions)
Previous year's fuel expense $713 $733 $707 Increase (Decrease) due to change in: Price of fuel (25) (39) (2) Kwh generation 29 19 28
Current year's fuel expense $717 $713 $733
Gas Purchased In 1995, gas purchased expense decreased $42 million (16.9%), as compared to 1994, reflecting a decline in the average cost per Mcf of gas purchased of 17.2%.
A reduction in the average cost per Mcf of gas purchased (5.1%) and lower volumes purchased (6.8%) contributed to the decline in gas purchased expense of $33 million (11.6%) in 1994, as compared to 1993.
Gas purchased expense increased $53 million (23.0%) in 1993 as a result of an increase in the average cost per Mcf of gas purchased of 17.5% and an increase in volumes purchased of 4.7%.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $13 million (35.6%) in 1994, as compared to 1993, reflecting an increase in third party, short-term power sales to other utilities through PSI's system and increased purchases of other non-firm power by PSI primarily to serve its own load.
In 1993, PSI increased its purchases of non-firm power primarily to serve its own load, which resulted in an increase in purchased and exchanged power costs of $16 million (78.0%).
OTHER OPERATION
In 1995, other operation expenses decreased $29 million (5.2%), as compared to 1994. Charges of $62 million in 1994 for Merger Costs and other expenditures which cannot be recovered from customers under the merger savings sharing mechanisms authorized by regulators significantly contributed to the decrease. In addition, emphasis on achieving merger savings and other cost reductions led to lower operating costs for 1995. These decreases were partially offset by the recognition of postretirement benefit costs on an accrual basis, an increase in the ongoing level of DSM expenses, and the amortization of deferred postretirement benefit costs, deferred Merger Costs, and deferred DSM costs, all of which are being recovered in revenues pursuant to the February 1995 Order.
Other operation expenses increased $107 million (23.4%) in 1994, as compared to 1993, due to a number of factors including the previously discussed charges of $62 million, fuel litigation expenses of $8 million incurred by PSI, and increased electric production and distribution expenses.
MAINTENANCE
Maintenance costs decreased $19 million (9.3%) in 1995, as compared to 1994, primarily due to improved scheduling of routine maintenance on electric generating units. Lower maintenance costs on gas and electric distribution facilities also contributed to this decrease.
Increased maintenance on a number of PSI's generating stations and the initial costs of PSI's new distribution line clearing program resulted in increased maintenance expenses of $8 million (4.2%) in 1994.
DEPRECIATION
In 1995, depreciation expense decreased $15 million (5.0%), when compared to 1994, due in large part to the adoption of lower depreciation rates for PSI effective in March 1995. This decrease was partially offset by the effect of additions to utility plant.
Depreciation expense increased $16 million (5.6%) in 1994, as compared to 1993, primarily as a result of additions to electric utility plant.
Depreciation expense increased $21 million (8.1%) in 1993 primarily due to a full year's effect of the first five units of Woodsdale which were placed in commercial operation in 1992, the sixth unit which was placed in commercial operation in 1993, and other additions to electric utility plant.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect various deferrals of depreciation, operation and maintenance expenses (exclusive of fuel costs), and property taxes on certain generating units and other utility plant from the in-service date until the related plant is reflected in retail rates, net of amortization of these deferrals as they are recovered through retail rates. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
PHASE-IN DEFERRED DEPRECIATION AND RETURN AND AMORTIZATION OF PHASE-IN DEFERRALS
Phase-in deferred depreciation, phase-in deferred return, and amortization of phase-in deferrals reflect the PUCO-ordered phase-in plan for Zimmer. (See Note 1(f) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $12 million (4.9%) in 1995, $15 million (6.5%) in 1994, and $13 million (5.8%) in 1993, primarily due to increased property taxes resulting from a greater investment in taxable property (including Zimmer and Woodsdale) and higher property tax rates.
Other Income and Expenses - Net
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on certain generating units and other utility plant from the in-service date until the related plant is reflected in retail rates. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
REDUCTION OF LOSS RELATED TO THE JUNE 1987 ORDER
The December 1993 Order resolved open issues related to the June 1987 Order which addressed the effect on PSI of the 1987 reduction in the Federal income tax rate. The December 1993 Order provided for PSI to refund $119 million to its retail customers, which was a reduction of $20 million from the loss previously recognized.
WRITE-OFF OF A PORTION OF ZIMMER
In the May 1992 Order authorizing the rate phase-in plan for Zimmer, the PUCO disallowed from rates approximately $230 million of Zimmer costs. Upon appeal, the Supreme Court of Ohio upheld the PUCO's decision, and CG&E wrote off Zimmer costs of approximately $223 million, net of taxes, in November 1993.
OTHER - NET
Other - net increased $32 million in 1995, as compared to 1994, due in part to $4 million of interest on an income tax refund related to prior years, a $10 million gain on the sale of Cinergy's investment in an Argentine utility, and charges of $17 million in 1994 for merger-related and other expenditures which cannot be recovered from customers.
In 1994, other - net increased $12 million, as compared to 1993, primarily as a result of the write-off during 1993 of $22 million related to the defense against the IPALCO hostile takeover attempt. The increase was offset, in part, by the charges in 1994 of $17 million previously discussed.
The decrease in other - net of $38 million in 1993, as compared to 1992, was primarily the result of the previously discussed write-off of IPALCO defense costs in 1993.
RESULTS OF OPERATIONS - CG&E
Kwh Sales
Kwh sales for 1995 increased 15.3% over 1994, reflecting increased sales to all customer classes. Significantly contributing to this increase were higher non-firm power sales for resale primarily due to increased sales to PSI, as a result of the coordination of CG&E's and PSI's electric dispatch systems. Higher residential and commercial sales resulted primarily from warmer weather during the 1995 summer cooling season and colder weather during the fourth quarter of 1995. Additionally, increased sales to industrial customers were mainly attributable to growth in the primary metals and chemicals sectors.
CG&E's total kwh sales in 1994, as compared to 1993, decreased 1.2%, due in large part to reduced power sales to other utilities in 1994 and decreased residential sales resulting from milder weather experienced during the third and fourth quarters of 1994. This decrease was partially offset by increased kwh sales to industrial customers reflecting growth in the primary metals and machinery sectors.
A return to more normal weather contributed to the 5.3% increase in total kwh sales in 1993, as compared to 1992. In addition, growth in the primary metals, transportation equipment, and chemicals sectors resulted in increased industrial sales.
Year-to-year changes in kwh sales for each major class of customers are shown below:
Increase (Decrease) from Prior Year
1995 1994 1993 Retail Residential 3.8% (2.0)% 8.6 % Commercial 3.4 2.3 5.4 Industrial 3.9 4.3 2.4
Total retail 3.8 1.1 5.8
Sales for resale Firm power obligations 6.3 1.7 6.1 Non-firm power transactions 211.8 (29.3) (.4)
Total sales for resale 172.6 (24.9) 1.1
Total sales 15.3 (1.2) 5.3
CG&E currently forecasts a 2% annual compound growth rate in kwh sales over the 1996 through 2005 period. This forecast does not reflect the effects of DSM programs and excludes non-firm power sales for resale and any potential new off-system, long-term firm power sales.
Mcf Sales and Transportation
Total gas sales and transportation volumes increased 8.6% in 1995, as compared to 1994. Increased sales to residential customers, resulting from colder weather during the fourth quarter of 1995 and an increase in the number of customers, contributed to higher retail sales. Additionally, increases in commercial and industrial transportation volumes, which resulted from customers electing to purchase gas directly from suppliers, more than offset declines in industrial and commercial sales. The increased transportation volumes mainly reflect industrial demand for gas transportation services in the primary metals, food products, and paper products sectors.
The milder weather experienced in 1994 contributed to a decrease in residential and commercial gas sales volumes and led to the decrease in total Mcf sales and transportation of 1.2% in 1994, as compared to 1993. An increase in gas transportation volumes to industrial customers, mainly in the primary metals sector, partially offset this decrease.
The increase in retail Mcf sales of 5.4% in 1993, when compared to 1992, was primarily attributable to higher residential and commercial sales volumes as a result of the return to more normal weather during the 1993 heating season and the addition of a number of customers to CG&E's gas system during the year. Gas transportation volumes for 1993 increased largely as a result of additional industrial demand for gas transportation services in the primary metals sector. The increase in Mcf transported more than offset the decrease in Mcf sold to industrial customers.
Year-to-year changes in Mcf sales for each major class of customers and Mcf transportation volumes are shown below:
Increase (Decrease) from Prior Year
1995 1994 1993
Retail Residential 10.5 % (10.2)% 9.5 % Commercial (2.0) (1.5) 1.1 Industrial (26.6) (9.9) (.8)
Total retail 1.5 (6.7) 5.4
Gas transported 24.4 13.9 12.7
Total gas sold and transported 8.6 (1.2) 7.2
Operating Revenues
ELECTRIC OPERATING REVENUES
Electric operating revenues increased $91 million (6.8%) in 1995, as compared to 1994. This increase reflects the higher kwh sales, as previously discussed and a full year's effect of CG&E's electric rate increase which became effective in May 1994. This increase was partially offset by the operation of fuel adjustment clauses reflecting a lower average cost of fuel used in electric production.
CG&E's electric rate increases which became effective in May 1993, August 1993, and May 1994 substantially contributed to the increase in electric operating revenues of $64 million (4.9%) in 1994, as compared to 1993.
Electric operating revenues increased $123 million (10.6%) in 1993 primarily as a result of greater kwh sales and electric rate increases granted to CG&E in 1993 and 1992.
An analysis of electric operating revenues for the past three years is shown below:
1995 1994 1993 (in millions) Previous year's electric operating revenues $1 346 $1 282 $1 159 Increase (Decrease) due to change in: Price per kwh Retail (10) 55 49 Sales for resale Firm power obligations 1 - - Non-firm power transactions (9) 3 5 Total change in price per kwh (18) 58 54
Kwh sales Retail 49 14 66 Sales for resale Firm power obligations 1 - 1 Non-firm power transactions 60 (9) 1 Total change in kwh sales 110 5 68
Other (1) 1 1 Current year's electric operating revenues $1 437 $1 346 $1 282
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from producers and utilizing CG&E facilities to transport the gas (see the "Mcf Sales and Transportation" section) continues to put downward pressure on gas operating revenues. When Cinergy sells gas, the sales price reflects the cost of gas purchased by Cinergy to support the sale plus the costs to deliver the gas. When gas is transported, Cinergy does not incur any purchased gas costs but delivers gas the customer has purchased from other sources. Since providing transportation services does not necessitate recovery of gas purchased costs, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues.
In 1995, gas operating revenues declined $32 million (7.1%), as compared to 1994, as a result of the aforementioned trend toward increased transportation services and the operation of fuel adjustment clauses reflecting a lower average cost of gas purchased.
Gas operating revenues decreased $27 million (5.7%)in 1994, as compared to 1993, due to the operation of fuel adjustment clauses which reflected a lower average cost of gas purchased during the latter part of 1994 and a reduction in total volumes sold and transported.
In 1993, gas operating revenues increased $75 million (19.1%) as a result of rate increases granted in 1993, higher volumes of gas sold, and the operation of fuel adjustment clauses reflecting an increase in the average cost of gas purchased.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs remained relatively constant in 1995, showing less than a 1% increase when compared to 1994.
An analysis of these fuel costs for the past three years is shown below:
1995 1994 1993 (in millions)
Previous year's fuel expense $325 $333 $321 Increase (Decrease) due to change in: Price of fuel (20) (9) (8) Kwh generation 22 1 20
Current year's fuel expense $327 $325 $333
Gas Purchased In 1995, gas purchased expense decreased $42 million (16.9%), as compared to 1994, reflecting a decline in the average cost per Mcf of gas purchased of 17.2%.
A reduction in the average cost per Mcf of gas purchased (5.1%) and lower volumes purchased (6.8%) contributed to the decline in gas purchased expense of $33 million (11.6%) in 1994, as compared to 1993.
Gas purchased expense increased $53 million (23.0%) in 1993 as a result of an increase in the average cost per Mcf of gas purchased of 17.5% and an increase in volumes purchased of 4.7%.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power costs increased $36 million in 1995, as compared to 1994, reflecting increased purchases from PSI resulting from the coordination of PSI's and CG&E's electric dispatch systems. These increases were partially offset by a decline in third party, short-term power sales to other utilities.
OTHER OPERATION
In 1995, other operation expenses decreased $44 million (13.1%), as compared to 1994. Charges of $52 million in 1994 for Merger Costs and other expenditures which cannot be recovered from customers under the merger savings sharing mechanism authorized by the PUCO, significantly contributed to the decrease. In addition, emphasis on achieving merger savings and other cost reductions led to lower operating costs for 1995. The decrease was partially offset by the write-off of obsolete inventory in December 1995.
Other operation expenses increased $79 million (30.5%) in 1994, as compared to 1993, due to a number of factors including the previously discussed charges of $52 million and increased electric production and distribution expenses.
The $15 million (6.1%) increase in other operation expense in 1993 was due to a number of factors, including wage increases, the adoption of two accounting standards involving postemployment and postretirement benefits, and increases in gas production expenses.
MAINTENANCE
The decrease in maintenance expense of $12 million (11.3%) in 1995, as compared to 1994, was primarily attributable to improved scheduling of routine maintenance on electric generating units. Lower maintenance costs on gas and electric distribution facilities also contributed to the decline.
DEPRECIATION
Depreciation expense increased $11 million (7.8%) in 1993 primarily due to a full year's effect of the first five units of Woodsdale which were placed in commercial operation in 1992 and the sixth unit which was placed in commercial operation in 1993.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect various deferrals of depreciation, operation and maintenance expenses (exclusive of fuel costs), and property taxes on certain generating units and other utility plant from the in-service date until the related plant is reflected in retail rates, net of amortization of these deferrals as they are recovered through retail rates. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
PHASE-IN DEFERRED DEPRECIATION AND RETURN AND AMORTIZATION OF PHASE-IN DEFERRALS
Phase-in deferred depreciation, phase-in deferred return, and amortization of phase-in deferrals reflect the PUCO-ordered phase-in plan for Zimmer. (See Note 1(f) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $6 million (3.2%) in 1995, $14 million (7.6%) in 1994, and $9 million (5.3%) in 1993, primarily due to increased property taxes resulting from a greater investment in taxable property (including Zimmer and Woodsdale) and higher property tax rates.
Other Income and Expenses - Net
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on certain generating units from the in-service date until the related plant is reflected in retail rates. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
WRITE-OFF OF A PORTION OF ZIMMER
In the May 1992 Order authorizing the rate phase-in plan for Zimmer, the PUCO disallowed from rates approximately $230 million of Zimmer costs. Upon appeal, the Supreme Court of Ohio upheld the PUCO's decision, and CG&E wrote off Zimmer costs of approximately $223 million, net of taxes, in November 1993.
OTHER - NET
The increase in other - net of $11 million in 1995, as compared to 1994, is due in part to $4 million of interest on an income tax refund related to prior years and charges of $12 million in 1994 for merger-related and other expenditures which cannot be recovered from customers.
PREFERRED DIVIDEND REQUIREMENT
CG&E's preferred dividend requirement decreased $5 million (21.0%) for 1995, as compared to 1994. The decrease was attributable to the early redemption of 400,000 shares of $100 par value, 9.28% Series Cumulative Preferred Stock in April 1994, along with the early redemption of 400,000 and 500,000 shares of $100 par value Cumulative Preferred Stock, 7.44% Series and 9.15% Series, respectively, on July 1, 1995.
RESULTS OF OPERATIONS - PSI
Kwh Sales
Kwh sales in 1995, as compared to 1994, increased 6.3%, reflecting increased sales to all customer classes. Contributing significantly to this increase were higher residential and commercial sales due to warmer weather during the 1995 summer cooling season, colder weather during the fourth quarter of 1995, and an increase in the number of residential and commercial customers. Increased sales to industrial customers, reflecting growth in the primary metals, chemicals, and food products sectors, also contributed to the increased kwh sales level. This increase also reflects higher non-firm power sales for resale resulting from an increase in sales to CG&E reflecting the coordination of PSI's and CG&E's electric dispatch systems.
Total kwh sales increased 6.3% in 1994, as compared to 1993, due in large part to non-firm power sales for resale, reflecting third party, short-term power sales to other utilities through PSI's system and direct power sales by PSI to other utilities. Also contributing to the total kwh sales levels were increased sales to industrial customers. This increase reflected growth in the primary metals and transportation equipment sectors. A decrease in residential sales resulted from the milder weather experienced during the third and fourth quarters of 1994.
New customers and a return to more normal weather contributed to the 3.6% increase in total kwh sales in 1993, as compared to 1992. In addition, growth in the primary metals, transportation equipment, precision instruments, and photographic and optical goods sectors resulted in increased industrial sales. Partially offsetting these increases was a reduction in non-firm power sales for resale, which reflected a significant decrease in sales associated with third party, short-term power sales to other utilities through PSI's system.
Year-to-year changes in kwh sales for each major class of customers are shown below:
Increase (Decrease) from Prior Year
1995 1994 1993 Retail Residential 7.9% (1.4)% 12.2 % Commercial 5.2 1.4 7.2 Industrial 5.1 4.9 5.5
Total retail 6.0 2.0 8.0
Sales for resale Firm power obligations 1.1 2.6 2.2 Non-firm power transactions 10.2 33.5 (15.4)
Total sales for resale 7.4 22.4 (9.8)
Total sales 6.3 6.3 3.6
PSI currently forecasts a 2% annual compound growth rate in kwh sales over the 1996 through 2005 period. This forecast does not reflect the effects of DSM programs and excludes non-firm power sales for resale and any potential new off-system, long-term firm power sales. Operating Revenues
Higher kwh sales and electric rate increases which became effective in February 1995 and March 1995 significantly contributed to the $134 million (12.1%) increase in operating revenues for 1995, when compared to 1994.
Operating revenues increased $22 million (1.9%) in 1994, as compared to 1993, as a result of increased kwh sales, the effects of a $31 million refund to retail customers accrued in June 1993 as a result of the settlement of the April 1990 Order, and increased fuel costs. Partially offsetting these increases were the 1.5% retail rate reduction resulting from the IURC's December 1993 Order and the return of approximately $11 million (an increase of $9 million when compared to 1993) to customers in connection with certain provisions of Indiana law which limit the level of retail operating income as determined in quarterly fuel adjustment clause proceedings.
In 1993, operating revenues increased $26 million (2.5%), as compared to 1992, reflecting increased kwh sales which were offset, in part, by the refund resulting from the settlement of the April 1990 Order.
An analysis of operating revenues for the past three years is shown below:
1995 1994 1993 (in millions)
Previous year's operating revenues $1 114 $1 092 $1 066 Increase (Decrease) due to change in: Price per kwh Retail 68 (23) (38) Sales for resale Firm power obligations (1) 2 (1) Non-firm power transactions 1 - 7 Total change in price per kwh 68 (21) (32)
Kwh sales Retail 55 18 71 Sales for resale Firm power obligations 1 2 2 Non-firm power transactions 9 23 (12) Total change in kwh sales 65 43 61
Other 1 - (3)
Current year's operating revenues $1 248 $1 114 $1 092
Operating Expenses
FUEL
Fuel costs, PSI's largest operating expense, remained relatively constant in 1995, showing less than a 1% increase when compared to 1994.
An analysis of these fuel costs for the past three years is shown below:
1995 1994 1993 (in millions)
Previous year's fuel expense $387 $400 $386 Increase (Decrease) due to change in: Price of fuel (5) (30) 5 Kwh generation 7 17 9
Current year's fuel expense $389 $387 $400
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power costs increased $22 million (54.3%) in 1995, as compared to 1994, reflecting increased purchases from CG&E as a result of the coordination of PSI's and CG&E's electric dispatch systems. These increases were partially offset by a decline in third party, short-term power sales to other utilities.
Purchased and exchanged power increased $17 million (70.6%) in 1994, as compared to 1993, reflecting an increase in third party, short-term power sales to other utilities through PSI's system and increased purchases of other non-firm power by PSI primarily to serve its own load.
In 1993, PSI increased its purchases of non-firm power primarily to serve its own load, which resulted in an increase in purchased and exchanged power costs of $11 million (76.8%), as compared to 1992.
OTHER OPERATION
In 1995, other operation expenses increased $15 million (7.2%), as compared to 1994. This increase was due to a number of factors, including the recognition of postretirement benefit costs on an accrual basis, an increase in the ongoing level of DSM expenses, and the amortization of deferred postretirement benefit costs, deferred Merger Costs, and deferred DSM costs, all of which are being recovered in revenues pursuant to the February 1995 Order. These increases were partially offset by charges of $10 million in 1994 for severance benefits to former officers of PSI which cannot be recovered from customers under the merger savings sharing mechanisms authorized by the IURC. In addition, emphasis on achieving merger savings and other cost reductions also partially offset the increase in other operation expenses.
Other operation expenses increased $26 million (14.2%) in 1994, as compared to 1993, due to a number of factors including the previously discussed charges of $10 million and fuel litigation expenses of $8 million.
MAINTENANCE
Maintenance costs decreased $7 million (7.1%) in 1995, as compared to 1994, primarily due to improved scheduling of routine maintenance on generating units and lower maintenance costs on transmission and distribution facilities.
Maintenance on a number of PSI's generating stations and the initial costs of a new distribution line clearing program resulted in increased maintenance expenses of $10 million (12.1%) in 1994.
DEPRECIATION
In 1995, depreciation expense decreased $17 million (12.3%), when compared to 1994, due in large part to the adoption of lower depreciation rates effective in March 1995. This decrease was partially offset by the effect of additions to utility plant.
Additions to electric utility plant led to increases in depreciation expense of $11 million (8.6%), and $10 million (8.3%) in 1994 and 1993, respectively.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect the deferral of depreciation on certain major projects, primarily environmental in nature, from the in-service date until the related projects are reflected in retail rates, net of amortization of these deferrals as they are recovered. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $6 million (11.9%) in 1995, as compared to 1994, primarily due to increased property taxes resulting from a greater investment in taxable property.
Other Income and Expenses - Net
ALLOWANCE FOR EQUITY FUNDS USED DURING CONSTRUCTION
In 1995, allowance for equity funds used during construction decreased $4 million (95.9%), as compared to 1994, primarily due to a decrease in the average balance of CWIP.
A decrease of $7 million (62.1%) in allowance for equity funds used during construction in 1994, as compared to 1993, was due to an increase in borrowings of short-term debt which resulted in a decrease in the equity rate.
The equity component of AFUDC increased in 1993, as compared to 1992, primarily as a result of increased construction.
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on certain major projects, primarily environmental in nature, from the in-service date until the related projects are reflected in retail rates. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data".)
REDUCTION OF LOSS RELATED TO THE JUNE 1987 ORDER
The December 1993 Order resolved open issues related to the June 1987 Order which addressed the effect on PSI of the 1987 reduction in the Federal income tax rate. The December 1993 Order provided for PSI to refund $119 million to its retail customers, which was a reduction of $20 million from the loss previously recognized.
Interest
ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION
Allowance for borrowed funds used during construction decreased $5 million (55.0%) in 1995, as compared to 1994, primarily as a result of a decrease in the average balance of CWIP which was partially offset by an increase in the debt component of the AFUDC rate.
The Union Light, Heat and Power Company
RESULTS OF OPERATIONS - ULH&P
Kwh Sales
ULH&P's total kwh sales in 1995, as compared to 1994, increased 7.2% reflecting increased sales to all customer classes. The increase in residential and commercial kwh sales was due to warmer weather during the 1995 summer cooling season and colder weather during the fourth quarter of 1995 and an increase in the average number of customers. The increased industrial sales primarily reflect growth in the primary metals sector.
Total kwh sales increased 2.8% in 1994, as compared to 1993, primarily due to increased retail sales to commercial and industrial customers. Industrial sales reflected a higher level of economic activity, including growth in the primary metals, industrial machinery, food products, and rubber and plastic products sectors. The increase in commercial sales was due, in part, to new customers. A decrease in residential sales resulted from the milder weather experienced during the third and fourth quarters of 1994.
A return to more normal weather contributed to the 5.8% increase in total kwh sales in 1993, as compared to 1992. In addition, growth in the food products, industrial machinery, transportation equipment, and fabricated metal products sectors resulted in increased industrial sales.
Year-to-year changes in kwh sales for each major class of customers are shown below:
Increase (Decrease) from Prior Year
1995 1994 1993 Retail Residential 10.0% (4.6)% 6.6% Commercial 5.6 6.0 5.8 Industrial 5.2 7.2 4.4
Total retail 7.2 2.8 5.9
Firm power sales for resale 7.4 5.1 4.7
Total sales 7.2 2.8 5.8
ULH&P currently forecasts a 2% annual compound growth rate in kwh sales over the 1996 through 2005 period. This forecast does not reflect the effects of DSM programs and excludes any potential new off-system, long-term firm power sales.
Mcf Sales and Transportation
Mcf gas sales and transportation volumes increased 8.6% for 1995, as compared to 1994. The colder weather during the fourth quarter of 1995 primarily attributed to the increase in residential and commercial sales. These increases were partially offset by a decline in industrial sales resulting from customers electing to purchase directly from suppliers, creating additional demand for transportation services provided by ULH&P. The increased transportation volumes mainly reflect industrial demand for gas transportation services in the paper products sector. The milder weather experienced in 1994 contributed to a decrease in residential gas sales volumes and led to the decrease in total Mcf sales and transportation of 4.3%, as compared to 1993. The increase in gas transportation more than offset the decrease in industrial sales volumes and was attributable to additional demand for gas transportation services by industrial customers mainly in the primary metals, paper products, and food products sectors.
The increase in Mcf sales and transportation of 5.8% in 1993, when compared to 1992, was attributable to higher sales to retail customers. This increase was primarily attributable to higher sales to residential customers caused by the return to more normal weather during the 1993 heating season and the addition of a number of customers to ULH&P's gas system during the year. Gas transportation volumes for 1993 decreased largely as a result of lower industrial demand for gas transportation services in the paper products sector. However, the decrease in Mcf transported was more than offset by the increase in Mcf sold to industrial customers.
Year-to-year changes in Mcf sales for each major class of customers and Mcf transportation volumes are shown below:
Increase (Decrease) from Prior Year
1995 1994 1993
Retail Residential 9.5 % (11.2)% 8.2 % Commercial 3.8 4.1 4.1 Industrial (8.4) (9.2) 23.9
Total retail 6.0 (6.6) 8.3
Gas transported 24.3 12.9 (10.5)
Total gas sold and transported 8.6 (4.3) 5.8
Operating Revenues
ELECTRIC OPERATING REVENUES
Electric operating revenues increased $9.6 million (5.4%) in 1995, and $1.9 million (1.1%) in 1994. These increases reflect higher kwh sales, as previously discussed. In 1993, electric operating revenues increased $16.0 million (10.0%) due to an increase in kwh sales and the full effect of a rate increase that became effective in May 1992.
An analysis of electric operating revenues for the past three years is shown below:
1995 1994 1993 (in thousands) Previous year's electric operating revenues $177 564 $175 712 $159 690 Increase (Decrease) due to change in: Price per kwh Retail (3 934) (3 095) 6 355 Firm power sales for resale 24 170 82 Total change in price per kwh (3 910) (2 925) 6 437
Kwh sales Retail 13 363 4 761 9 196 Firm power sales for resale 157 92 78 Total change in kwh sales 13 520 4 853 9 274
Other 6 (76) 311 Current year's electric operating revenues $187 180 $177 564 $175 712
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from producers and utilizing ULH&P facilities to transport the gas (see the "Mcf Sales and Transportation" section) continues to put downward pressure on gas operating revenues. When ULH&P sells gas, the sales price reflects the cost of gas purchased by ULH&P to support the sale plus the costs to deliver the gas. When gas is transported, ULH&P does not incur any purchased gas costs but delivers gas the customer has purchased from other sources. Since providing transportation services does not necessitate recovery of gas purchased costs, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues.
Gas operating revenues declined $1.7 million (2.3%) in 1995, as compared to 1994 as a result of the aforementioned trend toward increased transportation services and the operation of fuel adjustment clauses reflecting a lower average cost of gas purchased.
In 1994, gas operating revenues decreased $3.8 million (5.0%), as compared to 1993, primarily as a result of a decline in total volumes sold and transported of 4.3%. This decrease was partially offset by the effect of a gas rate increase which became effective in mid-1993.
Gas operating revenues increased $13.1 million (21.0%) in 1993 due to the operation of the fuel adjustment clause reflecting an increase in the cost of gas purchased, the mid-1993 rate increase, and a 5.8% increase in total volumes sold and transported.
Operating Expenses
ELECTRICITY PURCHASED FROM PARENT COMPANY FOR RESALE
Electricity purchased increased $7.4 million (5.5%) in 1995 due to an 8.1% increase in volumes purchased. In 1993, electricity purchased increased $7.1 million (5.6%) due to a 6.3% increase in volumes purchased.
GAS PURCHASED
In 1995, gas purchased expense decreased $3.8 million (9.3%) from 1994 primarily due to a 13.7% decrease in the average cost per Mcf of gas purchased. Gas purchased expense in 1994 decreased $2.9 million (6.6%) due to a 5.2% decrease in volumes purchased. In 1993, gas purchased expense increased $8.0 million (22.5%) due to an 11.8% increase in the average cost per Mcf of gas purchased and to a 9.5% increase in volumes purchased.
OTHER OPERATION
In 1995, other operation expense decreased $1.6 million (4.9%), as compared to 1994, due, in part, to decreased gas and electric distribution expenses and decreased gas production expenses. In 1994, other operation expense increased $1.9 million (6.2%), as compared to 1993, due primarily to increased gas and electric distribution expenses and increased wages and benefits. Other operation expense decreased $1.2 million (3.8%) in 1993 due to a number of factors including reduced electric and gas distribution expenses and cost control efforts.
MAINTENANCE
Maintenance expense decreased $.9 million (16.3%) in 1995 and $.8 million (12.7%) in 1994 primarily as a result of reduced maintenance costs on gas and electric distribution facilities.
DEPRECIATION
Depreciation expense increased $.8 million (7.5%) in 1995, as compared to 1994, primarily due to additions to electric and gas plant in service. Increases in 1994 and 1993 of $.8 million (8.5%) and $1.5 million (18.0%), respectively, were due to increases in depreciable plant in service and the adoption of higher depreciation rates on gas and common plant in accordance with a KPSC rate order issued in 1993.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Cinergy, CG&E, PSI, and ULH&P
(a) Consolidation Policy Cinergy, a Delaware corporation, was created in the October 1994 merger of Resources and CG&E. Cinergy's subsidiaries are CG&E, PSI, Investments, and Services. The accompanying Financial Statements include the accounts of Cinergy and its subsidiaries after elimination of significant intercompany transactions and balances.
At merger consummation, each outstanding share of common stock of Resources and CG&E was exchanged for 1.023 shares and one share, respectively, of Cinergy common stock, resulting in the issuance of approximately 148 million shares of Cinergy common stock, par value $.01 per share. The outstanding preferred stock and debt securities of CG&E, its utility subsidiaries (including ULH&P), and PSI were not affected by the merger. The merger was accounted for as a pooling of interests, and the Financial Statements, along with the related notes, are presented as if the merger was consummated as of the beginning of the earliest period presented.
Resources' and CG&E's consolidated operating revenues and net income for the nine months ended September 30, 1994, and the year ended December 31, 1993, were as follows:
Resources CG&E Eliminations(i) Cinergy (in millions)
Nine months ended September 30, 1994 (unaudited) Operating revenues $ 849(ii) $1 363 $ (7) $2 205 Net income 60 146 - 206
Year ended December 31, 1993 Operating revenues 1 102(ii) 1 752 (10) 2 844 Net income (loss) 97 (34)(iii) - 63
(i) Eliminations of intercompany power sales. (ii) Reflects reclassifications from previously reported amounts to conform to the 1995 presentation. (iii) Reflects write-off of a portion of Zimmer ($223 million, net of taxes).
Cinergy, CG&E, PSI, and ULH&P
(b) Nature of Operations Cinergy is a registered holding company under the PUHCA. CG&E, an Ohio combination electric and gas utility, and its four wholly-owned utility subsidiaries (including ULH&P, a Kentucky combination electric and gas utility) are primarily engaged in the production, transmission, distribution, and sale of electric energy and/or the sale and transportation of natural gas in the southwestern portion of Ohio and adjacent areas in Kentucky and Indiana. PSI, an Indiana electric utility and previously Resources' utility subsidiary, is engaged in the production, transmission, distribution, and sale of electric energy in north central, central, and southern Indiana. Investments, a Delaware corporation, is a non- utility subholding company that was formed to operate Cinergy's 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. The majority of Cinergy's operating revenues are derived from the sale of electricity and the sale and transportation of natural gas.
Cinergy, CG&E, PSI, and ULH&P
(c) Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates are also required with respect to the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (See Note 13.)
Cinergy, CG&E, PSI, and ULH&P
(d) Regulation Cinergy, its utility subsidiaries, and certain of its non- utility subsidiaries are subject to regulation by the SEC under the PUHCA. Cinergy's utility subsidiaries are also subject to regulation by the FERC and the state utility commissions of Ohio, Kentucky, and Indiana. The accounting policies of Cinergy's utility subsidiaries conform to the accounting requirements and ratemaking practices of these regulatory authorities and to generally accepted accounting principles, including the provisions of Statement 71.
Under the provisions of Statement 71, regulatory assets represent probable future revenue associated with deferred costs to be recovered from customers through the ratemaking process. The following regulatory assets of PSI and CG&E and its utility subsidiaries are reflected in the Balance Sheets as of December 31:
1995 1994 PSI CG&E 1/ Cinergy PSI CG&E 1/ Cinergy (in millions)
Amounts due from customers - income taxes $ 27 $397 $ 424 $ 27 $382 $ 409 Post-in-service carrying costs and deferred operating expenses 39 148 187 30 155 185 Phase-in deferred return and depreciation - 100 100 - 101 101 Deferred DSM costs 110 19 129 94 10 104 Deferred merger costs 42 15 57 38 12 50 Unamortized costs of reacquiring debt 34 40 74 37 33 70 Postretirement benefit costs 21 4 25 21 4 25 1992 workforce reduction costs - 8 8 - 17 17 Other 13 29 42 9 35 44
Total $286 $760 $1 046 $256 $749 $1 005
1/ Includes $7 million and $5 million related to ULH&P at December 31, 1995 and 1994, respectively.
PSI has previously received regulatory orders authorizing the recovery of $149 million of its total regulatory assets at December 31, 1995, and is currently requesting recovery of an additional $119 million. CG&E has previously received regulatory orders authorizing the recovery of $701 million (including $3 million for ULH&P) of its total regulatory assets at December 31, 1995, and is currently requesting recovery of an additional $11 million. Both PSI and CG&E (including ULH&P) will request recovery of additional amounts in future rate proceedings in each applicable jurisdiction. (See Note 2.)
See Note 1(e), (f), (g), (h), (i), (j), and (k) for additional information regarding amounts due from customers - income taxes, phase-in deferred return and depreciation, deferred DSM costs, post-in-service carrying costs and deferred operating expenses, deferred merger costs, costs of reacquiring debt, and 1992 workforce reduction costs, respectively. For additional information regarding postretirement benefit costs, see Note 11.
Certain criteria must be met in order to continue to apply 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 reporting regulatory assets. Although Cinergy's utility subsidiaries' current regulatory orders and regulatory environment fully support the continued recognition of their regulatory assets, the ultimate outcome of the changing competitive environment discussed in the "Competitive Pressures" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" could result in Cinergy's utility subsidiaries discontinuing application of Statement 71 for all or part of their business. Such an event would require the write-off of the portion of any regulatory asset for which sufficient regulatory assurance of future recovery no longer exists. No evidence currently exists that would support a write-off of any portion of Cinergy's utility subsidiaries' regulatory assets.
In March 1995, the FASB issued Statement 121, which is effective in January 1996 for Cinergy and its utility subsidiaries. Statement 121, which addresses the identification and measurement of asset impairments for all enterprises, will be particularly relevant for electric utilities as a result of the potential for deregulation of the generation segment of the business. Statement 121 requires recognition of impairment losses on long-lived assets when book values exceed expected future cash flows. Based on the regulatory environment in which Cinergy currently operates, compliance with the provisions of Statement 121 is not expected to have an adverse effect on its financial condition or results of operations. However, this conclusion may change in the future as competitive pressures and potential restructuring influence the electric utility industry.
Cinergy and its utility subsidiaries intend to continue their pursuit of competitive strategies that mitigate the potential impact of these issues on the financial condition of the companies (see the "Competitive Pressures" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations").
Cinergy, CG&E, PSI, and ULH&P
(e) Federal and State Income Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities. Investment tax credits utilized to reduce Federal income taxes payable have been deferred for financial reporting purposes and are being amortized over the useful lives of the property which gave rise to such credits.
Income tax provisions reflected in customer rates are regulated by the various regulatory commissions overseeing the regulated business operations of PSI, CG&E, and its utility subsidiaries. To the extent deferred income taxes are not reflected in rates charged to customers, income taxes payable in future years are recoverable from customers as paid. The future revenues associated with these amounts are reflected in the accompanying Financial Statements as a regulatory asset based on the probable recovery through customers' rates in future periods. Conversely, to the extent deferred income taxes recovered in rates exceed amounts payable in future periods, such amounts are reflected in the accompanying Financial Statements as "Income taxes refundable through rates" on the basis of their probable repayment in future years.
Cinergy and CG&E
(f) Phase-in Deferred Return and Depreciation In the first three years of a rate phase-in plan for Zimmer included in the May 1992 Order by the PUCO, rates charged to customers did not fully recover depreciation expense and return on investment. In accordance with the provisions of the May 1992 Order, this deficiency has been deferred on the Consolidated Balance Sheets and is being recovered over a seven-year period beginning in May 1995.
Cinergy, CG&E, PSI, and ULH&P
(g) DSM In February 1995, the IURC issued the February 1995 Order approving a rate settlement agreement among PSI and certain intervenors which authorized the recovery of DSM expenditures deferred through July 1993 ($35 million), together with carrying costs. In addition, base rates include recovery of $23 million of DSM expenditures on an annual basis. Under the February 1995 Order, current deferral of DSM expenditures is the amount by which actual annual expenditures exceed the base level of $23 million. If DSM expenditures in any calendar year are less than the $23 million in base rates, the unamortized balance of deferred DSM expenditures is reduced by such difference. In its current retail rate proceeding, PSI has requested recovery of DSM expenditures deferred between July 1993 and August 1995, together with carrying costs, and an increase in the ongoing annual expense level from $23 million to $39 million (see Note 2(a)). DSM expenditures subsequent to August 1995 in excess of the annual ongoing level in base rates are being deferred, with carrying costs, for recovery in a subsequent rate proceeding.
In the August 1993 Order, CG&E was authorized to recover approximately $5 million annually of costs associated with DSM programs for residential customers. In 1995, the PUCO authorized the deferral, with carrying costs, of the expenditures associated with a number of approved DSM programs to the extent such expenditures are in excess of the $5 million already being recovered. CG&E is also requesting PUCO approval to defer the costs of additional DSM programs. Additionally, the KPSC has authorized recovery of costs related to various DSM programs of ULH&P.
Cinergy, CG&E, and PSI
(h) Post-in-service Carrying Costs and Deferred Operating Expenses CG&E received various orders from the PUCO which permitted the deferral of carrying costs and non-fuel operating expenses (including depreciation) for Zimmer and Woodsdale. Effective with the dates of the PUCO's orders reflecting the units in customer rates, the deferrals of post-in-service carrying costs are being recovered over the lives of the applicable units and the deferred non-fuel operating expenses are being recovered over a 10-year period.
PSI received authority from the IURC for the accrual of the debt component of carrying costs (to the extent not recovered currently in retail rates) and the deferral of depreciation expense on certain major projects, primarily environmental in nature, including the Clean Coal Project and a scrubber at Gibson. These deferrals are either being recovered currently over the remaining lives of the related assets in accordance with the February 1995 Order, have been requested for recovery in PSI's current retail rate proceeding, or will be requested for recovery in a subsequent PSI retail rate proceeding.
Cinergy, CG&E, PSI, and ULH&P
(i) Merger Costs CG&E and its utility subsidiaries are deferring the non- PUCO electric jurisdictional portion of Merger Costs for future recovery in customer rates, including $6 million requested for recovery in CG&E's current gas rate proceeding. In accordance with the February 1995 Order, PSI is deferring Merger Costs it incurs through October 31, 1996, and is recovering the deferrals over a 10-year period as an offset against merger savings. In 1994, CG&E and PSI completed voluntary workforce reduction programs. As a result of the programs, the Cinergy subsidiaries incurred a combined pre-tax cost of approximately $28.8 million ($17.4 million for CG&E and its subsidiaries($1.8 million for ULH&P), including $15.6 million of additional pension costs further discussed in Note 10, and $11.4 million for PSI). In the third quarter of 1994, CG&E expensed $11 million representing the PUCO electric jurisdictional portion of these costs. The remaining $6.4 million of costs have been deferred as costs to achieve merger savings. The cost of PSI's voluntary workforce reduction program was deferred as a cost to achieve merger savings.
Cinergy, CG&E, PSI, and ULH&P
(j) Debt Discount, Premium, and Issuance Expenses and Costs of Reacquiring Debt Debt discount, premium, and issuance expenses on outstanding long-term debt of Cinergy's utility subsidiaries are amortized over the lives of the respective issues.
In accordance with established ratemaking practices, Cinergy's utility subsidiaries have deferred costs (principally call premiums) from the reacquisition of long-term debt and are amortizing such amounts over periods ranging from one to 25 years (three to 17 years for PSI, one to 25 years for CG&E and its subsidiaries, and 24 years for ULH&P).
Cinergy, CG&E, and ULH&P
(k) 1992 Workforce Reduction Costs In 1992, CG&E and its subsidiaries incurred $30.4 million (of which approximately $3 million related to ULH&P) in connection with a workforce reduction program. In accordance with the August 1993 Order, CG&E is recovering the majority of these costs through rates over a three-year period. ULH&P is recovering the gas portion of these costs through rates over a 10-year period.
Cinergy, CG&E, PSI, and ULH&P
(l) Utility Plant Utility plant is stated at the original cost of construction, which includes 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
(m) AFUDC Cinergy's utility subsidiaries capitalize AFUDC, a non-cash income item, which is defined in the regulatory system of accounts prescribed by the FERC as including "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used". AFUDC accrual rates were as follows, and are compounded semi- annually:
1995 1994 1993 Cinergy Average 7.9% 6.9% 9.2% CG&E and utility subsidiaries Average 8.8 9.1 8.3 ULH&P Average 7.0 5.9 8.8 PSI 7.0 6.4 9.5
Cinergy, CG&E, PSI, and ULH&P
(n) Depreciation and Maintenance Provisions for depreciation are determined by using the straight-line method applied to the cost of depreciable plant in service. The rates are based on periodic studies of the estimated service lives and net cost of removal of the properties. The depreciation rates for utility plant during each of the following three years were:
1995 1994 1993_
PSI 3.1% 3.8% 3.8% CG&E and its utility subsidiaries Electric 2.9 2.9 2.9 Gas 2.8 2.8 2.7 Common 3.4 3.4 3.3 ULH&P Electric 3.3 3.3 3.4 Gas 3.1 3.1 2.9 Common 5.1 5.1 4.1
In accordance with the February 1995 Order, revised depreciation rates for PSI were implemented in March 1995. This change resulted in a decrease in annual depreciation expense of approximately $30 million.
In a July 1993 rate order, the KPSC authorized changes in depreciation accrual rates on ULH&P's gas and common plant. The changes resulted in an increase in depreciation expense of approximately $.5 million for 1993.
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
(o) Operating Revenues and Fuel Costs Cinergy's utility subsidiaries recognize revenues for electric and gas service rendered during the month, which include revenues for sales unbilled at the end of each month. The costs of electricity and gas purchased and the cost of fuel used in electric production are expensed as recovered through revenues, and any portion of these costs recoverable or refundable in future periods is deferred in the accompanying Balance Sheets. In accordance with the settlement agreement approved in the February 1995 Order and the Indiana statute in effect at the time of the settlement agreement, PSI's recovery of fuel costs is subject to a determination that such recovery will not result in PSI earning a return in excess of that allowed in the February 1995 Order. Cinergy, CG&E, and ULH&P
(p) Order 636 In 1992, the FERC issued Order 636 which restructured operations between interstate gas pipelines and their customers for gas sales and transportation services. Order 636 also allowed pipelines to recover transition costs they incurred in complying with the order from customers, including CG&E and its utility subsidiaries. In July 1994, the PUCO issued an order approving a stipulation between CG&E and its residential and industrial customer groups providing for recovery of these pipeline transition costs. CG&E presently is recovering its Order 636 transition costs pursuant to a PUCO-approved tariff. CG&E's utility subsidiaries, including ULH&P, recover such costs through their gas cost recovery mechanisms. These costs are deferred as incurred by CG&E and its utility subsidiaries and amortized as recovered from customers.
Cinergy, CG&E, PSI, and ULH&P
(q) Statements of Cash Flows All temporary cash investments with maturities of three months or less, when acquired, are reported as cash equivalents. Cinergy and its subsidiaries had no material non-cash investing or financing transactions during the years 1993 through 1995.
Cinergy, CG&E, PSI, and ULH&P
(r) Reclassification Certain amounts in the 1993 and 1994 Financial Statements have been reclassified to conform to the 1995 presentation.
2. Rates
Cinergy and PSI
(a) PSI's Current Retail Rate Proceeding PSI currently has pending before the IURC a retail rate increase request of 11.1% ($111.2 million annually). Major components of the increase include the costs of the Clean Coal Project, increased DSM costs, the costs of a scrubber at Gibson, and other investments in utility plant. Both the Clean Coal Project and the scrubber at Gibson were previously approved by the IURC. The request also reflects a return on common equity of 11.9%, before the 100 basis points additional common equity return allowed as a merger savings sharing mechanism in the February 1995 Order, with an 8.6% overall rate of return on net original cost rate base. The UCC filed testimony with the IURC recommending a 4.7% ($47.3 million annually) retail rate increase. The primary differences between PSI's request and the UCC's proposal are the requested return on common equity and DSM costs. The UCC recommended the requested increase in DSM costs be excluded from this proceeding and addressed in a separate currently pending proceeding specifically established to review PSI's current and proposed DSM programs. An order in the rate proceeding is anticipated by the end of the second quarter of 1996. Cinergy cannot predict what action the IURC may take with respect to this proposed rate increase. (See Note 17 for an event subsequent to the date of the auditor's report.)
Cinergy and CG&E
(b) CG&E's Current Gas Rate Proceeding In January 1996, CG&E filed a request with the PUCO supporting a gas rate increase of 7.8% ($26.7 million annually). The increase, anticipated to be effective in November 1996, is being requested, in part, to recover capital investments made since CG&E's last gas rate increase in 1993. The proposed rate design includes a pilot program that would allow 8,000 to 12,000 residential customers to choose their natural gas supplier with CG&E providing transportation services to the customers' premises. Settlement discussions with gas customer representatives, which began in July 1995, are ongoing. Cinergy cannot predict the outcome of the settlement discussions nor what actions the PUCO may take with respect to the proposed rate increase.
3. Common Stock
(a) Changes in Common Stock Outstanding
Cinergy
The following table reflects the shares of Cinergy common stock reserved for issuance at December 31, 1995, and issued in 1995, 1994, and 1993, for the Company's stock-based plans, including previous plans of Resources and CG&E. Shares issued prior to merger consummation have been adjusted for Resources' merger conversion ratio of 1.023.
Shares Reserved at Shares Issued Dec. 31, 1995 1995 1994 1993
401(k) Savings Plans 6 469 373 1 222 379 1 458 631 1 152 096
Dividend Reinvestment and Stock Purchase Plan 1 798 486 935 711 1 127 881 944 168
Directors' Deferred Compensation Plan 200 000 - 77 61 266
Performance Shares Plan* 771 793 28 207 27 116 28 447
Employee Stock Purchase and Savings Plan 1 932 384 1 010 140 039 244
Stock Option Plan 4 596 003 403 997 25 575 139 026
*A long-term incentive compensation plan for certain participants designated by the Compensation Committee of Cinergy's Board of Directors.
In addition to the issuances of common stock previously discussed, Resources issued 1,118,671 shares of common stock in 1993 to the trustee of its two Master Trust Agreements as required as a result of the announcement of the merger. Prior to consummation of the merger in October 1994, Resources issued an additional 16,518 shares to the trustee and distributed 98,400 shares (reflected in the above table as shares issued in 1994) to participants of certain benefit plans. As a result of the merger consummation, in December 1994, Cinergy retired the remaining 1,036,789 shares held by the trustee.
In December 1994, Cinergy publicly issued 7,089,000 shares of common stock under a shelf registration statement for the sale of up to eight million shares. In addition, upon consummation of the merger, Cinergy awarded five shares of common stock to all non-officer employees for additional issuances under this shelf registration statement of 43,605 shares and 10 shares in 1994 and 1995, respectively. During 1995, Cinergy retired 119,211 shares of common stock, primarily representing shares tendered as payment for the exercise of previously granted stock options.
CG&E
CG&E issued 1,601,003 shares of common stock in 1994 (prior to the merger), and 1,673,058 shares in 1993, for its stock-based compensation and dividend reinvestment plans. After merger consummation, the common stock issued to CG&E's 401(k) Savings Plans is Cinergy common stock rather than CG&E common stock, and CG&E's Dividend Reinvestment and Stock Purchase Plan was merged into and replaced by Cinergy's Dividend Reinvestment and Stock Purchase Plan.
ULH&P
All of ULH&P's common stock is held by CG&E.
Cinergy, CG&E, and PSI
(b) Dividend Restrictions Cinergy owns all of the common stock of CG&E and PSI. The ability of Cinergy to pay dividends to holders of Cinergy common stock is 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 or if they are in arrears in the redemption of preferred stock pursuant to mandatory redemption requirements. 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 Option Plan The Stock Option Plan, which succeeded a similar plan of Resources, is designed to align executive compensation with shareholder interests. Under the Stock Option Plan, incentive and non-qualified stock options and stock appreciation rights may be granted to key employees, officers, and outside directors. Common stock granted under the Stock Option Plan may not exceed five million shares. Options are granted at the fair market value of the shares on the date of grant, except that non-qualified stock options were granted to two executive officers under Resources' stock option plan at an option price equal to 91% of the fair market value of the shares at the date of grant. Options vest over five years and have a purchase term of up to 10 years. All options granted prior to November 1993, but not previously vested, became vested upon approval of the merger by Resources' shareholders. No incentive stock options may be granted under the plan after October 24, 2004.
The Stock Option Plan activity for 1993, 1994, and 1995, adjusted for Resources' merger conversion ratio of 1.023, is summarized as follows:
Range of Shares Subject Option Prices to Option Per Share
Balance at December 31, 1992 1 186 554 $12.26 to 17.35 Options Exercised (139 026) 12.26 to 16.56
Balance at December 31, 1993 1 047 528 $12.50 to 17.35 Options Granted 1 387 500 22.88 Options Exercised (25 575) 13.14 to 16.56
Balance at December 31, 1994 2 409 453 $12.50 to 22.88 Options Granted 1 672 500 24.31 to 28.81 Options Exercised _(403 997) 12.50 to 17.35
Balance at December 31, 1995 3 677 956 $12.50 to 28.81
Shares Reserved for Future Grants At December 31, 1993 1 368 263 At December 31, 1994 2 590 547 At December 31, 1995 918 047
In addition, 45,000 options were granted to various employees in January 1996, at an option price of $31.56 per share.
No stock appreciation rights have been granted under this plan. The total options exercisable at December 31, 1995, 1994, and 1993, were 895,456, 1,021,953, and 1,047,528, respectively.
4. Preferred Stock of Subsidiaries
Cinergy, CG&E, and PSI
Cinergy, CG&E, and PSI
(b) Changes in Cumulative Preferred Stock Outstanding Changes in cumulative preferred stock outstanding during 1995, 1994, and 1993, were as follows:
Shares Issued Par (Retired) Value (in thousands) Not subject to mandatory redemption Par value $100 per share CG&E 7.44 % Series (400 000) $(40 000) PSI 3 1/2% Series (329) (32) Subject to mandatory redemption Par value $100 per share CG&E 9.15 % Series (500 000) (50 000)
Not subject to mandatory redemption Par value $100 per share CG&E 9.28 % Series (400 000) (40 000) PSI 3 1/2% Series (598) (60)
Not subject to mandatory redemption Par value $25 per share PSI 7.44 % Series 4 000 000 100 000 Par value $100 per share PSI 3 1/2% Series (237) (24) 8.52 % Series (211 190) (21 119) 8.38 % Series (162 520) (16 252) 8.96 % Series (216 900) (21 690) 6 7/8% Series 600 000 60 000
Cinergy and CG&E
(c) Cumulative Preferred Stock with Mandatory Redemption In each of 1998, 1999, and 2000, CG&E is required to redeem $4 million of its 7 3/8% Series Cumulative Preferred Stock, which is subject to mandatory redemption each August 1, beginning in 1998, in an amount sufficient to retire 40,000 shares, at a price of $100 per share, plus accrued dividends. In addition, CG&E, at its option, may redeem up to a like amount of shares in any given year, at a price of $100 per share. CG&E may satisfy this sinking fund requirement, in whole or in part, by crediting shares acquired during the year. To the extent CG&E does not satisfy the sinking fund obligation in any year, such obligation must be satisfied in the succeeding year or years. CG&E may not purchase or otherwise acquire for value or pay dividends on its common stock if it is in arrears in the redemption of preferred stock pursuant to the mandatory sinking fund requirements.
Cinergy, CG&E, PSI, and ULH&P 5. Long-term Debt
Cinergy, CG&E, PSI, and ULH&P
(b) Mandatory Redemption and Other Requirements Long-term debt maturities for the next five years are as follows:
Cinergy and CG&E and Subsidiaries Subsidiaries PSI ULH&P (in millions)
1996 $ 50 $ - $ 50 $ - 1997 140 130 10 - 1998 36 - 36 - 1999 187 180 7 20 2000 31 - 31 - $444 $310 $134 $20
In January 1996, CG&E retired $5 million principal amount of its 10.20% first mortgage bonds (due December 1, 2020). Additionally, CG&E redeemed in February 1996, the remaining $131.5 million principal amount of these bonds at a price of 100% through the M&R Fund provision of its first mortgage bond indenture. ULH&P also redeemed, in February 1996, $9 million principal amount of its 10 1/4% first mortgage bonds (due November 15, 2020) at a price of 107.20% and the remaining $6 million principal amount of such bonds at a price of 100% through its M&R Fund provision. The first mortgage bonds retired in January and February 1996 by CG&E and ULH&P have been classified as "Long-term debt due within one year" in the appropriate Balance Sheets. M&R Fund provisions contained in CG&E's, PSI's, and ULH&P's first mortgage bond indentures require cash payments, bond retirements, or pledges of unfunded property additions each year based on a formularized amount related to the net revenues of the respective company.
6. Notes Payable
Cinergy, CG&E, PSI, and ULH&P
Cinergy's subsidiaries had regulatory authority to borrow up to $838 million ($438 million for CG&E and its subsidiaries, including $35 million for ULH&P, and $400 million for PSI) as of December 31, 1995. In connection with this authority, Committed Lines have been established which permit borrowings of up to $322 million ($106 million for CG&E and its subsidiaries, including $30 million for ULH&P, and $215 million for PSI), of which $182 million ($106 million for CG&E and its subsidiaries, including $30 million for ULH&P, and $74 million for PSI) remained unused at December 31, 1995. CG&E and PSI also issue commercial paper from time to time. All outstanding commercial paper is supported by Committed Lines of the respective company. Additionally, pursuant to this authority, Uncommitted Lines are arranged with various banks. All Uncommitted Lines provide for maturities of up to 365 days with various interest rate options.
Amounts outstanding under the Committed Lines would become immediately due upon an event of default which includes non-payment, default under other agreements governing company indebtedness, bankruptcy, or insolvency. Certain of the Uncommitted Lines have similar default provisions. The lines are maintained by compensating balances or commitment fees. Commitment fees for the Committed Lines were immaterial during the 1993 through 1995 period.
To better manage cash and working capital requirements, Cinergy's utility subsidiaries, including CG&E, PSI, and ULH&P, participate in a money pooling arrangement. Under the money pool, participants with surplus short-term funds, whether from internal sources, bank loans, or commercial paper sales, provide short-term loans to other system companies at rates that approximate the costs of the funds in the money pool. The SEC's approval, pursuant to the PUHCA, of the money pool extends through May 31, 1997.
In addition, Cinergy has a $100 million credit facility which expires in September 1997 and was unused at December 31, 1995. The facility may be increased to a maximum of $300 million, and the Company has an annual option of extending the term of the facility by one year. This credit facility will be used for general corporate purposes and funding non-utility business ventures.
The weighted average interest rates on short-term borrowings outstanding at December 31, 1995 and 1994, were as follows:
1995 1994_ Cinergy and subsidiaries 5.97% 6.11% CG&E and subsidiaries - 6.14 PSI 5.97 6.11 ULH&P - 6.14
7. Sale of Accounts Receivable
Cinergy, CG&E, PSI, and ULH&P
In January 1996, CG&E, PSI, and ULH&P entered into an agreement to sell, on a revolving basis, undivided percentage interests in certain of their accounts receivable up to an aggregate maximum of $350 million. PSI had a similar agreement, which expired in January 1996, to sell up to $90 million of its accounts receivable. Accounts receivable on the Consolidated Balance Sheets of Cinergy and PSI are net of a $90 million and $87 million interest sold under the prior PSI agreement at December 31, 1995 and 1994, respectively.
8. Leases
Cinergy, CG&E, PSI, and ULH&P
Cinergy and its subsidiaries have entered into operating lease agreements covering various facilities and properties, including office space and computer, communications, and transportation equipment. Total rental payments on operating leases for each of the past three years were as follows:
1995 1994 1993 (in millions) Cinergy and subsidiaries $36 $36 $35 CG&E and subsidiaries 22 22 22 PSI 14 14 13 ULH&P 5 5 4
Future minimum lease payments required under operating leases with remaining, non-cancelable lease terms in excess of one year as of December 31, 1995, are as follows:
Cinergy and CG&E and Subsidiaries Subsidiaries PSI ULH&P* (in millions, ULH&P in thousands)
1996 $28 $13 $12 $35 1997 22 10 9 24 1998 14 5 6 12 1999 7 4 3 - 2000 5 2 1 - After 2000 20 17 3 - $96 $51 $34 $71
* Excludes amounts applicable to CG&E's non-cancelable leases allocated to ULH&P. Cinergy, CG&E, PSI, and ULH&P
9. Fair Values of Financial Instruments
The estimated fair values of Cinergy's and its subsidiaries' financial instruments were as follows (this information does not purport to be a valuation of the companies as a whole):
December 31 December 31 1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value_ (in millions; ULH&P in thousands) Financial Instruments
Cinergy and Subsidiaries First mortgage bonds and other long-term debt (includes amounts due within one year) $ 2 733 $ 2 837 $ 2 776 $ 2 718 Cumulative preferred stock of subsidiary - subject to mandatory redemption 160 163 210 221
CG&E and Subsidiaries First mortgage bonds and other long-term debt (includes amounts due within one year) $ 1 855 $ 1 912 $ 1 838 $ 1 806 Cumulative preferred stock - subject to mandatory redemption 160 163 210 221
PSI First mortgage bonds and other long-term debt (includes amounts due within one year) $ 878 $ 925 $ 938 $ 912
ULH&P First mortgage bonds and other long-term debt (includes amounts due within one year) $69 377 $72 804 $89 238 $91 361
The following methods and assumptions were used to estimate the fair values of each major class of financial instruments:
Cash and temporary cash investments, restricted deposits, and notes payable Due to the short period to maturity, the carrying amounts reflected on the Balance Sheets approximate fair values.
First mortgage bonds and other long-term debt The fair values of long-term debt issues were estimated based on the latest quoted market prices or, if not listed on the New York Stock Exchange (NYSE), on the present value of future cash flows. The discount rates used approximate the incremental borrowing costs for similar instruments.
Cumulative preferred stock - subject to mandatory redemption The aggregate fair value of preferred stock subject to mandatory redemption was based on the latest closing prices quoted on the NYSE for each series or, if no trades occurred during the period, on the present value of future cash flows using discount rates that approximate the incremental borrowing costs for similar instruments.
10. Pension Plans
Cinergy, CG&E, PSI, and ULH&P
The defined benefit pension plans of Cinergy's subsidiaries cover substantially all employees meeting certain minimum age and service requirements. Plan benefits are determined under a final average pay formula with consideration of years of participation, age at retirement, and the applicable average Social Security wage base or benefit amount.
The funding policies of the operating subsidiaries are to contribute annually to the plans an amount which is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes. Contributions applicable to the 1995, 1994, and 1993 plan years for Cinergy's subsidiaries were $15.4 million, $3.5 million, and $11.3 million, respectively. Of these amounts, CG&E and its subsidiaries contributed $6.8 million and $3.1 million for the 1995 and 1993 plan years, respectively. There were no contributions made for the 1994 plan year by CG&E and its subsidiaries. PSI's contributions were $8.6 million, $3.5 million, and $8.2 million for the 1995, 1994, and 1993 plan years, respectively. The plans' assets consist of investments in equity and fixed income securities.
Cinergy
Cinergy's pension cost for 1995, 1994, and 1993 included the following components: 1995 1994 1993 (in millions)
Benefits earned during the period $ 18.5 $ 19.4 $ 16.9 Interest accrued on projected benefit obligations 61.4 54.9 53.9 Actual (return) loss on plans' assets (119.3) 8.0 (69.9) Net amortization and deferral 61.1 (66.3) 15.4
Net periodic pension cost $ 21.7 $ 16.0 $ 16.3
CG&E and ULH&P
CG&E's and its subsidiaries' (including ULH&P's) pension cost for 1995, 1994, and 1993 included the following components: 1995 1994 1993 (in millions)
Benefits earned during the period $ 9.8 $ 10.7 $ 9.2 Interest accrued on projected benefit obligations 38.8 35.1 34.5 Actual (return) loss on plans' assets (71.9) 5.6 (31.4) Net amortization and deferral 35.5 (43.2) (4.7)
Net periodic pension cost $ 12.2 $ 8.2 $ 7.6
PSI
PSI's pension cost for 1995, 1994, and 1993 included the following components:
1995 1994 1993 (in millions)
Benefits earned during the period $ 8.7 $ 8.7 $ 7.7 Interest accrued on projected benefit obligation 22.6 19.8 19.4 Actual (return) loss on plan assets (47.4) 2.4 (38.5) Net amortization and deferral 25.6 (23.1) 20.1
Net periodic pension cost $ 9.5 $ 7.8 $ 8.7
Cinergy, CG&E, and ULH&P
During 1994, CG&E and its subsidiaries (including ULH&P) recognized an additional $15.6 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. This amount represents the costs associated with additional benefits extended in connection with a voluntary workforce reduction program (see Note 1(i)).
Cinergy, CG&E, PSI, and ULH&P 1995 1994 1993 Actuarial Assumptions: For determination of projected benefit obligations Discount rate 7.50% 8.50% 7.50% Rate of increase in future compensation PSI 4.50 5.50 4.50-5.00 CG&E and subsidiaries 4.50 5.50 5.00
For determination of pension cost Rate of return on plans' assets PSI 9.00 9.00 9.00 CG&E and subsidiaries 9.50 9.50 9.50
Cinergy
The following table reconciles the plans' funded status with amounts recorded in the Consolidated Financial Statements. Under the provisions of Statement 87, certain assets and obligations of the plans are deferred and recognized in the Consolidated Financial Statements in subsequent periods.
The following table reconciles the plans' funded status with amounts recorded in the Consolidated Financial Statements of CG&E. Under the provisions of Statement 87, certain assets and obligations of the plans are deferred and recognized in the Financial Statements in subsequent periods.
PSI
The following table reconciles the plan's funded status with amounts recorded in the Consolidated Financial Statements. Under the provisions of Statement 87, certain assets and obligations of the plan are deferred and recognized in the Consolidated Financial Statements in subsequent periods.
1995 1994 (in millions) Actuarial present value of benefits Vested benefits $(238.6) $(197.5) Non-vested benefits (9.6) (8.0)
Accumulated benefit obligation (248.2) (205.5)
Effect of future compensation increases (65.5) (67.3)
Projected benefit obligation (313.7) (272.8)
Plan's assets at fair value 291.3 256.3
Projected benefit obligation in excess of plan's assets (22.4) (16.5)
Remaining balance of plan's net assets existing at date of initial application of Statement 87 to be recognized as a reduction of pension cost in future periods (5.0) (5.7)
Unrecognized net loss resulting from experience different from that assumed and effects of changes in assumptions 4.8 5.7
Prior service cost not yet recognized in net periodic pension cost 15.7 17.2
Prepaid (Accrued) pension cost at December 31 $ (6.9) $ .7
11. Other Postretirement Benefits
Cinergy, CG&E, PSI, and ULH&P
Cinergy's subsidiaries provide certain health care and life insurance benefits to retired employees and their eligible dependents. The health care benefits include medical coverage and prescription drugs. Additionally, PSI provides dental benefits. PSI employees must meet minimum age and service requirements to be eligible for these postretirement benefits. All retirees of CG&E and its subsidiaries are eligible to receive health care benefits, while life insurance is provided to retirees who participated in the plans and earned the right to postretirement life insurance benefits prior to January 1, 1991. The health care and dental benefits provided are subject to certain limitations, such as deductibles and co-payments. Neither CG&E and its subsidiaries nor PSI currently pre-fund their obligations for these postretirement benefits; however, PSI, in connection with the settlement which resulted in the February 1995 Order, agreed to begin pre-funding.
Postretirement benefit cost for 1995, 1994, and 1993 included the following components:
Cinergy
Health Life Care Insurance Total (in millions) Benefits earned during the period $ 4.4 $ .1 $ 4.5 Interest accrued on APBO 15.6 2.2 17.8 Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $28.1 $2.6 $30.7
Benefits earned during the period $ 5.2 $ .2 $ 5.4 Interest accrued on APBO 13.8 2.2 16.0 Net amortization and deferral .1 - .1 Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $27.2 $2.7 $29.9
Benefits earned during the period $ 4.3 $ .2 $ 4.5 Interest accrued on APBO 13.4 2.1 15.5 Amortization of transition obligations 8.1 .3 8.4
Net periodic postretirement benefit cost $25.8 $2.6 $28.4
CG&E and ULH&P
Health Life Care Insurance Total (in millions) Benefits earned during the period $ .4 $ .1 $ .5 Interest accrued on APBO 4.5 2.0 6.5 Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $7.5 $2.5 $10.0
Benefits earned during the period $ .9 $ .1 $ 1.0 Interest accrued on APBO 3.9 2.0 5.9 Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $7.4 $2.5 $ 9.9
Benefits earned during the period $1.0 $ .1 $ 1.1 Interest accrued on APBO 4.2 2.0 6.2 Amortization of transition obligation 2.6 .4 3.0
Net periodic postretirement benefit cost $7.8 $2.5 $10.3 PSI
Health Life Care Insurance Total (in millions) Benefits earned during the period $ 4.0 $ - $ 4.0 Interest accrued on APBO 11.1 .2 11.3 Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $20.6 $ .1 $20.7
Benefits earned during the period $ 4.3 $ .1 $ 4.4 Interest accrued on APBO 9.9 .2 10.1 Net amortization and deferral .1 - .1 Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $19.8 $ .2 $20.0
Benefits earned during the period $ 3.3 $ .1 $ 3.4 Interest accrued on APBO 9.2 .1 9.3 Amortization of transition obligation 5.5 (.1) 5.4
Net periodic postretirement benefit cost $18.0 $ .1 $18.1 Cinergy, CG&E, PSI, and ULH&P
The following tables reconcile the APBO of the health care and life insurance plans with amounts recorded in the Financial Statements. Under the provisions of Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (Statement 106), certain obligations of the plans are deferred and recognized in the Financial Statements in subsequent periods.
Cinergy Health Life Care Insurance Total_ (in millions) Actuarial present value of benefits Fully eligible active plan participants $ (11.7) $ (1.1) $ (12.8) Other active plan participants (112.0) (2.7) (114.7) Retirees and beneficiaries (99.2) (26.4) (125.6) Projected APBO (222.9) (30.2) (253.1) Unamortized transition obligations 137.1 .7 137.8 Unrecognized prior service cost (.3) - (.3) Unrecognized net loss resulting from experience different from that assumed and effects of changes in assumptions 26.1 .5 26.6 Accrued postretirement benefit obligations at December 31, 1995 $ (60.0) $(29.0) $ (89.0)
Actuarial present value of benefits Fully eligible active plan participants $ (11.4) $ (.9) $ (12.3) Other active plan participants (84.3) (2.3) (86.6) Retirees and beneficiaries (92.0) (23.5) (115.5) Projected APBO (187.7) (26.7) (214.4) Unamortized transition obligations 145.2 1.0 146.2 Unrecognized net (gain) loss resulting from experience different from that assumed and effects of changes in assumptions 2.2 (2.6) (.4) Accrued postretirement benefit obligations at December 31, 1994 $ (40.3) $(28.3) $ (68.6)
Increasing the health care cost trend rate by one percentage point in each year would increase the APBO by approximately $37 million and $27 million for 1995 and 1994, respectively, and the aggregate of the service and interest cost components of the postretirement benefit cost for each of 1995, 1994, and 1993 by approximately $3.4 million, $3.7 million, and $3.4 million, respectively.
CG&E and ULH&P
Health Life Care Insurance Total_ (in millions) Actuarial present value of benefits Fully eligible active plan participants $ (2.7) $ (.9) $ (3.6) Other active plan participants (32.0) (2.0) (34.0) Retirees and beneficiaries (30.5) (24.5) (55.0) Projected APBO (65.2) (27.4) (92.6) Unamortized transition obligation 43.4 2.9 46.3 Unrecognized net loss resulting from experience different from that assumed and effects of changes in assumptions 4.4 .1 4.5 Accrued postretirement benefit obligation at December 31, 1995 $ (17.4) $(24.4) $ (41.8)
Actuarial present value of benefits Fully eligible active plan participants $ (2.2) $ (.8) $ (3.0) Other active plan participants (26.3) (1.8) (28.1) Retirees and beneficiaries (25.2) (21.7) (46.9) Projected APBO (53.7) (24.3) (78.0) Unamortized transition obligation 46.1 3.3 49.4 Unrecognized net (gain) resulting from experience different from that assumed and effects of changes in assumptions (5.2) (2.7) (7.9) Accrued postretirement benefit obligation at December 31, 1994 $ (12.8) $(23.7) $ (36.5)
Increasing the health care cost trend rate by one percentage point in each year would increase the APBO by approximately $12.7 million and $10.0 million for 1995 and 1994, respectively, and the aggregate of the service and interest cost components of the postretirement benefit cost for 1995 by approximately $1.0 million and each of 1994 and 1993 by approximately $1.2 million.
PSI
Health Life Care Insurance Total_ (in millions) Actuarial present value of benefits Fully eligible active plan participants $ (9.0) $ (.2) $ (9.2) Other active plan participants (80.0) (.7) (80.7) Retirees and beneficiaries (68.7) (1.9) (70.6) Projected APBO (157.7) (2.8) (160.5) Unamortized transition obligation 93.7 (2.2) 91.5 Unrecognized prior service cost (.3) - (.3) Unrecognized net loss resulting from experience different from that assumed and effects of changes in assumptions 21.7 .4 22.1 Accrued postretirement benefit obligation at December 31, 1995 $ (42.6) $ (4.6) $ (47.2)
Actuarial present value of benefits Fully eligible active plan participants $ (9.2) $ (.1) $ (9.3) Other active plan participants (58.0) (.5) (58.5) Retirees and beneficiaries (66.8) (1.8) (68.6) Projected APBO (134.0) (2.4) (136.4) Unamortized transition obligation 99.1 (2.3) 96.8 Unrecognized net loss resulting from experience different from that assumed and effects of changes in assumptions 7.4 .1 7.5 Accrued postretirement benefit obligation at December 31, 1994 $ (27.5) $ (4.6) $ (32.1)
Increasing the health care cost trend rate by one percentage point in each year would increase the APBO by approximately $24 million and $17 million for 1995 and 1994, respectively, and the aggregate of the service and interest cost components of the postretirement benefit cost for each of 1995, 1994, and 1993 by approximately $2.4 million, $2.5 million, and $2 million, respectively.
Cinergy, CG&E, PSI, and ULH&P
The following assumptions were used to determine the APBO:
1995 1994 1993 Discount rate 7.50% 8.50% 7.50%
Health care cost trend rate, gradually declining to 5% CG&E and subsidiaries 8.00-11.00% 9.00-12.00% 10.00-13.00% PSI 8.00-10.00 8.00-12.00 8.00-12.00
Year ultimate trend rates achieved CG&E and subsidiaries 2002 2002 2002 PSI 2007 2007 2007
Cinergy, CG&E, and ULH&P
The majority of CG&E's and its subsidiaries' postretirement benefit costs are subject to PUCO jurisdiction. The PUCO has authorized CG&E to recover these costs on an accrual basis. Prior to the recovery of these health care costs in customers' rates on an accrual basis, the PUCO authorized CG&E to defer for future recovery the difference between postretirement benefit costs determined in accordance with the provisions of Statement 106 and the costs determined in accordance with CG&E's previous accounting practice. CG&E's deferrals totaled $4 million as of December 31, 1995. CG&E is requesting authorization for recovery of the gas portion of these costs in its current gas rate proceeding. CG&E will request authorization to begin recovering the electric portion of these costs in its next retail rate proceeding.
Cinergy and PSI
In accordance with the February 1995 Order, PSI is recovering the cost of postretirement benefits other than pensions on an accrual basis. Prior to the recovery of these costs in customers' rates on an accrual basis, the difference between postretirement benefit costs determined in accordance with the provisions of Statement 106 and the costs determined in accordance with PSI's previous accounting practice was deferred for future recovery. PSI's deferrals totaled $21 million as of December 31, 1995. Commencing in February 1995, approximately $6 million of costs deferred for the period January 1, 1993, through July 31, 1993, are being recovered over a five-year period. Recovery over a five-year period of the remaining deferrals is being requested in PSI's current retail rate proceeding.
12. Income Taxes
Cinergy, CG&E, PSI, and ULH&P
Cinergy and its subsidiaries comply with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement 109). Statement 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities.
The significant components of each registrant's net deferred income tax liability at December 31, 1995, and 1994, are as follows:
Cinergy
1995 1994 (in millions)
Deferred Income Tax Liabilities Utility plant $ 981.8 $ 947.8 Unamortized costs of reacquiring debt 28.8 26.1 Deferred operating expenses and carrying costs 86.6 87.8 Amounts due from customers - income taxes 143.4 112.1 Deferred DSM costs 47.3 39.8 Other 36.4 47.2 Total deferred income tax liabilities 1 324.3 1 260.8
Deferred Income Tax Assets Unamortized investment tax credits 67.5 70.8 Litigation settlement 29.8 29.8 Deferred fuel costs 13.0 13.1 Accrued pension and other benefit costs 41.1 33.7 Other 52.0 42.3 Total deferred income tax assets 203.4 189.7
Net Deferred Income Tax Liability $1 120.9 $1 071.1
CG&E
1995 1994 (in millions)
Deferred Income Tax Liabilities Utility plant $663.8 $639.8 Unamortized costs of reacquiring debt 14.2 10.3 Deferred operating expenses and carrying costs 76.2 76.4 Amounts due from customers - income taxes 139.8 108.5 Deferred DSM costs 5.6 2.6 Other 25.5 37.1 Total deferred income tax liabilities 925.1 874.7
Deferred Income Tax Assets Unamortized investment tax credits 46.1 47.9 Deferred fuel costs 8.1 10.0 Accrued pension and other benefit costs 28.7 27.6 Other 46.8 42.1 Total deferred income tax assets 129.7 127.6
Net Deferred Income Tax Liability $795.4 $747.1
PSI
1995 1994_ (in millions)
Deferred Income Tax Liabilities Electric utility plant $315.7 $308.0 Unamortized costs of reacquiring debt 14.6 15.8 Deferred operating expenses and accrued carrying costs 12.5 11.4 Deferred DSM costs 41.7 37.2 Other 13.0 13.7 Total deferred income tax liabilities 397.5 386.1
Deferred Income Tax Assets Unamortized investment tax credits 21.4 22.9 Litigation settlement 29.8 29.8 Accrued pension and other benefit costs 13.4 6.1 Other 1.0 2.6 Total deferred income tax assets 65.6 61.4
Net Deferred Income Tax Liability $331.9 $324.7
ULH&P
1995 1994 (in thousands)
Deferred Income Tax Liabilities Utility plant $32 104 $30 637 Other 3 852 3 740 Total deferred income tax liabilities 35 956 34 377
Deferred Income Tax Assets Unamortized investment tax credits 2 060 2 175 Amounts due to customers - income taxes 1 904 1 810 Deferred fuel costs 1 857 1 773 Accrued pension and other benefit costs 2 365 2 179 Other 4 042 3 214 Total deferred income tax assets 12 228 11 151
Net Deferred Income Tax Liability $23 728 $23 226 Cinergy, CG&E, PSI, and ULH&P
A summary of Federal and state income taxes charged (credited) to income and the allocation of such amounts is as follows:
Cinergy 1995 1994 1993 (in millions)
Current Income Taxes Federal $175.3 $104.1 $ 49.1 State 10.4 6.5 1.3 Total current income taxes 185.7 110.6 50.4
Deferred Income Taxes Federal Depreciation and other utility plant- related items 53.8 62.2 58.4 Loss related to the June 1987 Order - (5.2) 45.9 Property taxes - (13.3) (9.3) DSM costs 12.0 14.5 11.7 Write-off of a portion of Zimmer - - (11.0) Pension and other benefit costs (20.8) (12.5) (4.2) Deferred operating expenses and carrying costs (1.6) (1.6) 4.7 Other items - net (6.6) (5.4) 3.2 Total deferred Federal income taxes 36.8 38.7 99.4
State 1.7 2.7 7.5 Total deferred income taxes 38.5 41.4 106.9
Investment Tax Credits - Net (10.1) (10.4) (10.3)
Total Income Taxes $214.1 $141.6 $147.0
Allocated to: Operating income $219.4 $152.2 $172.6 Other income and expenses - net (5.3) (10.6) (25.6) $214.1 $141.6 $147.0
CG&E
1995 1994 1993 (in millions)
Current Income Taxes Federal $102.4 $ 82.3 $ 61.8 State 2.5 1.5 2.0 Total current income taxes 104.9 83.8 63.8
Deferred Income Taxes Federal Depreciation and other utility plant- related items 33.9 42.9 48.4 Property taxes - (11.3) (11.3) Unrecovered gas costs - net 3.8 (6.8) .7 Pension and other benefit costs (10.7) (8.4) (5.5) Write-off of a portion of Zimmer - - (11.0) Deferred fuel costs - net (1.3) 5.3 (4.2) Deferred operating expenses and carrying costs (1.6) (1.6) 4.7 DSM costs 3.6 1.9 1.2 Other items - net 4.4 (2.8) 6.3 Total deferred Federal income taxes 32.1 19.2 29.3
State .8 .6 .5
Total deferred income taxes 32.9 19.8 29.8
Investment Tax Credits - Net (6.0) (6.1) (6.1)
Total Income Taxes $131.8 $ 97.5 $ 87.5
Allocated to: Operating income $136.4 $104.1 $109.0 Other income and expenses - net (4.6) (6.6) (21.5) $131.8 $ 97.5 $ 87.5 PSI
1995 1994 1993 (in millions)
Current Income Taxes Federal $71.4 $22.0 $ .6 State 7.5 5.5 .4 Total current income taxes 78.9 27.5 1.0
Deferred Income Taxes Federal Depreciation and other electric utility plant-related items 19.9 19.2 9.6 Loss related to the June 1987 Order - (5.2) 45.9 Property taxes - (2.0) 2.0 DSM costs 8.4 12.6 10.6 Pension and other benefit costs (10.1) (1.8) - Deferred fuel costs - net (6.0) .7 (1.8) Other items - net (4.0) 2.8 (.9) Total deferred Federal income taxes 8.2 26.3 65.4
State 1.1 2.2 7.0 Total deferred income taxes 9.3 28.5 72.4
Investment Tax Credits - Net (4.1) (4.3) (4.2)
Total Income Taxes $84.1 $51.7 $69.2
Allocated to: Operating income $85.0 $50.4 $64.9 Other income and expenses - net (.9) 1.3 4.3 $84.1 $51.7 $69.2 ULH&P 1995 1994 1993 (in thousands)
Current Income Taxes Federal $5 955 $2 746 $3 580 State 1 324 498 1 126 Total current income taxes 7 279 3 244 4 706
Deferred Income Taxes Federal Depreciation and other utility plant- related items 1 382 1 727 1 664 Unrecovered gas costs - net (277) (741) 575 Pension and other benefit costs (381) (349) (329) Deferred fuel costs - net (257) 764 (685) Unamortized costs of reacquiring debt 808 - - Other items - net (556) 280 (147) Total deferred Federal income taxes 719 1 681 1 078
State Depreciation and other utility plant- related items 390 656 431 Other items - net (172) (8) (222) Total deferred state income taxes 218 648 209
Total deferred income taxes 937 2 329 1 287
Investment Tax Credits - Net (285) (287) (288)
Total Income Taxes $7 931 $5 286 $5 705
Allocated to: Operating income $7 887 $5 342 $5 751 Other income and expenses - net 44 (56) (46) $7 931 $5 286 $5 705
Cinergy, CG&E, PSI, and ULH&P
Federal income taxes, computed by applying the statutory Federal income tax rate to book income before Federal income tax, are reconciled to Federal income tax expense reported in the Statements of Income for each registrant as follows:
Cinergy 1995 1994 1993 (in millions)
Statutory Federal income tax provision $191.2 $109.8 $ 68.1 Increases (Reductions) in taxes resulting from: Amortization of investment tax credits (10.1) (10.4) (10.0) Depreciation and other utility plant- related differences 9.0 13.5 13.1 Preferred dividend requirements of subsidiaries 10.8 12.4 13.3 AFUDC equity (.6) (2.2) (5.0) Phase-in deferred return (.6) (3.1) (7.2) Write-off of a portion of Zimmer - - 69.4 Other - net 2.3 12.4 (3.5) Federal income tax expense $202.0 $132.4 $138.2
CG&E
Statutory Federal income tax provision $121.4 $81.0 $17.9 Increases (Reductions) in taxes resulting from: Amortization of investment tax credits (6.0) (6.1) (5.8) Depreciation and other utility plant- related differences 9.0 8.2 6.9 Preferred dividends 6.2 7.8 8.8 AFUDC equity (.6) (.7) (1.1) Phase-in deferred return (.6) (3.1) (7.2) Write-off of a portion of Zimmer - - 69.4 Other - net (.9) 8.3 (3.9) Federal income tax expense $128.5 $95.4 $85.0
PSI 1995 1994 1993 (in millions)
Statutory Federal income tax provision $77.5 $44.2 $65.3 Increases (Reductions) in taxes resulting from: Amortization of investment tax credits (4.1) (4.3) (4.2) Depreciation and other electric utility plant-related differences - 1.8 4.1 AFUDC equity - (1.5) (3.9) Other - net 2.1 3.8 .5 Federal income tax expense $75.5 $44.0 $61.8
ULH&P 1995 1994 1993 (in thousands)
Statutory Federal income tax provision $6 496 $4 385 $4 798 Increases (Reductions) in taxes resulting from: Amortization of investment tax credits (285) (287) (288) Depreciation and other utility plant- related differences 219 138 108 AFUDC equity (25) (27) (104) Other - net (16) (69) (144) Federal income tax expense $6 389 $4 140 $4 370
13. Commitments and Contingencies
(a) Construction and Other Expenditures
Cinergy, CG&E, PSI, and ULH&P
Cinergy and its subsidiaries will have commitments in connection with their forecasted construction programs. Aggregate expenditures for Cinergy's construction program for the 1996 through 2000 period are currently forecasted to be $2.1 billion. Of these projected expenditures, approximately $1.1 billion relates to CG&E, including $102 million for ULH&P, and $1.0 billion relates to PSI.
Cinergy and PSI
In November 1995, a 25-year contractual agreement between PSI and Destec Energy, Inc. (Destec) for the provision of coal gasification services began upon commercial operation of the Clean Coal Project. The agreement requires PSI to pay Destec a base monthly fee including certain monthly operating expenses. Over the next five years (1996 through 2000), the fixed component of the base monthly fee is expected to total $63 million, and the variable expenses are estimated at $105 million in nominal dollars. PSI's currently pending retail rate increase request includes recovery of the operating costs, including gasification services, associated with the Clean Coal Project. PSI received authorization in the February 1995 Order to defer for future recovery the costs incurred prior to the order in its current retail rate proceeding.
(b) MGP Sites
Cinergy, CG&E, PSI, and ULH&P
(i) General Prior to the 1950s, gas was produced at MGP sites through a process that involved the heating of coal and/or oil. The gas produced from this process was sold for residential, commercial, and industrial uses.
Cinergy and PSI
(ii) PSI Coal tar residues, related hydrocarbons, and various metals associated with MGP sites have been found at former MGP sites in Indiana, including, but not limited to, Shelbyville and Lafayette, two sites previously owned by PSI. PSI has identified at least 21 MGP sites which it previously owned, including 19 it sold in 1945 to IGC, including the Shelbyville and Lafayette sites. IGC has informed PSI of the basis for its claim that PSI, as a PRP under the CERCLA, should contribute to IGC's response costs related to investigating and remediating contamination at MGP sites which PSI sold to IGC.
The Shelbyville site has been the subject of an investigation and cleanup enforcement action by the IDEM against IGC and PSI. Without admitting liability, PSI and IGC have conducted an investigation and remedial activities at the Shelbyville site. PSI and IGC are sharing the costs of the Shelbyville site, and based upon environmental investigations and remediation completed to date, PSI believes that any further required investigation and remediation for this site will not have a material adverse effect on its financial condition or results of operations.
In 1992, the IDEM issued an order to IGC, naming IGC as a PRP as defined in the CERCLA, which requires investigation and remediation of the Lafayette MGP site. IGC entered into an agreed order with the IDEM for the removal of MGP contamination at that site.
During 1995, PSI received notification from NIPSCO alleging PSI is a PRP under the CERCLA with respect to contamination associated with MGP sites previously owned and/or operated by both PSI and NIPSCO (or their predecessors). The notification included seven sites, five of which PSI acquired from NIPSCO and subsequently sold to IGC.
PSI has placed its insurance carriers on notice of IGC's and NIPSCO's claims.
IGC and PSI have entered into discussions regarding IGC's claim; however, with the exception of the Shelbyville site, PSI has not assumed any responsibility to reimburse IGC or NIPSCO for their costs of investigating and remediating MGP sites. It is premature, at this time, to predict the nature, extent, and ultimate costs of, or PSI's responsibility for, environmental investigations and remediations at MGP sites owned or previously owned by PSI. Information available to PSI regarding the current status of investigation and/or remediation at the sites identified in IGC's claim indicates PSI's potential exposure to probable and reasonably estimable liabilities associated with these MGP sites would not be material to its financial condition or results of operations. However, further investigation and remediation activities at these sites and the additional sites identified in NIPSCO's claim may indicate that the potential liability for MGP sites could be material.
In May 1995, the IURC denied IGC's request for recovery of costs incurred in complying with Federal, state, and local environmental regulations related to MGP sites in which IGC has an interest, including sites acquired from PSI. IGC has appealed this decision, which IGC contends is contrary to decisions made by other state utility commissions with respect to this issue. In August 1995, the IURC granted PSI's motion to establish a sub-docket to PSI's pending retail rate proceeding to consider its request for rate recovery of any MGP site-related costs it may incur. PSI is unable to predict the extent to which it will be able to recover through rates any MGP costs ultimately incurred.
Cinergy, CG&E, and ULH&P
(iii) CG&E and its Utility Subsidiaries Lawrenceburg also has an MGP site. In May 1995, Lawrenceburg and the IDEM reached an agreement to include the Lawrenceburg MGP site in the IDEM's voluntary cleanup program. Lawrenceburg is currently implementing a remediation plan, and total cleanup costs are not expected to exceed amounts previously accrued of $400,000.
CG&E and its utility subsidiaries are aware of other potential sites where MGP activities may have occurred at some time in the past. None of these sites is known to present a risk to the environment. Except for the Lawrenceburg site, neither CG&E nor its utility subsidiaries have undertaken responsibility for investigating other potential MGP sites.
Cinergy and CG&E
(c) United Scrap Lead Site The EPA alleges that CG&E is a PRP under the CERCLA liable for cleanup of the United Scrap Lead site in Troy, Ohio. CG&E was one of approximately 200 companies so named. CG&E believes it is not a PRP and should not be responsible for cleanup of the site. Under the CERCLA, CG&E could be jointly and severally liable for costs incurred in cleaning up the site, estimated by the EPA to be $27 million, of which CG&E estimates its portion to be immaterial to its financial condition or results of operations.
Cinergy, CG&E, and PSI
(d) Power International Litigation On October 25, 1995, a suit was filed in the Federal District Court for the Southern District of Ohio by three former employees of Power International, a subsidiary of Investments, naming as defendants Power International, Cinergy, Investments, CG&E, PSI, James E. Rogers, and William J. Grealis. (Mr. Rogers and/or Mr. Grealis are officers and/or directors of the foregoing companies.) The lawsuit, which stems from the termination of employment of the three former employees, alleges that they entered into employment contracts with Power International based on the opportunity to participate in potential profits from future investments in energy projects in central and eastern Europe. The suit alleges causes of action based upon, among other theories, breach of contract related to the events surrounding the termination of their employment and fraud and misrepresentation related to the level of financial support for future projects. The suit alleges compensatory damages of $154 million based upon assumed future success of potential future investments and punitive damages of three times that amount. All defendants intend to defend vigorously against the charges based upon meritorious defenses. Cinergy, CG&E, and PSI are currently unable to predict the outcome of this litigation. Cinergy and PSI
(e) WVPA Litigation In 1984, WVPA discontinued payments to PSI for its 17% share of Marble Hill, a nuclear project jointly owned by PSI and WVPA which was canceled by PSI in 1984, and filed suit against PSI in the United States District Court for the Southern District of Indiana (Indiana District Court), seeking $478 million plus interest and other damages to recover its Marble Hill costs. The suit was amended to include as defendants several officers of PSI along with certain contractors and their officers involved in the Marble Hill project, and to allege claims against all defendants under the Racketeer Influenced and Corrupt Organizations Act (RICO). Claims proven and damages allowed under RICO may be trebled and attorneys' fees assessed against the defendants. The suit was further amended to add claims of common law fraud, constructive fraud and deceit, and negligent misrepresentation against PSI and the other defendants.
In 1985, PSI and WVPA entered into an agreement under which PSI agreed to place in escrow 17% of all salvage proceeds received from the sales of Marble Hill equipment, materials, and nuclear fuel after May 23, 1985, as a result of WVPA's filing for protection under Chapter 11 of the Federal Bankruptcy Code.
In 1989, PSI and its officers reached a settlement with WVPA which, if approved by judicial and regulatory authorities, will settle the suit filed by WVPA. The settlement is also contingent on the resolution of the WVPA bankruptcy proceeding.
The principal terms of the settlement are:
PSI, on behalf of itself and its officers, will pay $80 million on behalf of WVPA to RUS and the CFC. The $80 million obligation, net of insurance proceeds, other credits, and applicable income tax effects, was charged to income in 1988 and 1989.
WVPA will transfer its 17% ownership interest in the site to PSI, and PSI will assume responsibility for all future costs associated with the site, excluding WVPA's 17% share of future salvage program expenses. Additionally, RUS and the CFC will receive the balance in the salvage escrow account and 17% of future salvage proceeds, net of related salvage program expenses.
PSI will enter into a 35-year, take-or-pay power supply agreement for the sale of 70 megawatts of firm power to WVPA. This power will be supplied from Gibson Unit 1 and will be priced at PSI's firm power rates for service to WVPA. The difference between the revenues received from WVPA and the costs of operating Gibson Unit 1 (the Margin) will be remitted annually by PSI, on behalf of itself and its officers, to RUS and the CFC to discharge a $90 million obligation, plus accrued interest. If, at the end of the term of the power supply agreement, the $90 million obligation plus accrued interest has not been fully discharged, PSI must do so within 60 days. The settlement provides that in the event PSI is party to a merger or acquisition, PSI and WVPA will use their best efforts to obtain regulatory approval to price the power sale exclusive of the effects of the merger or acquisition.
Certain aspects of the settlement are subject to approval by the FERC and potentially by the IURC and the Michigan Public Service Commission. At such time as the necessary approvals from these regulatory authorities are received, PSI will record a $90 million regulatory asset. Concurrently, a $90 million obligation to RUS and the CFC will be recorded as a long-term commitment. Recognition of the asset is based, in part, on projections which indicate that the Margin will be sufficient to discharge the $90 million obligation to RUS and the CFC, plus accrued interest, within the 35-year term of the power supply agreement. If, in some future period, projections indicate the Margin would not be sufficient to discharge the obligation plus accrued interest within the 35-year term, the deficiency would be recognized as a loss.
RUS has proposed a plan of reorganization which, similar to WVPA's plan, incorporates the settlement agreement. However, RUS's plan provides for full recovery of principal and interest on WVPA's debt to RUS, which is substantially in excess of the amount to be recovered under WVPA's proposed plan. In 1991, the United States Bankruptcy Court for the Southern District of Indiana (Bankruptcy Court) confirmed WVPA's plan of reorganization and denied confirmation of RUS's opposing plan. The Bankruptcy Court's approval of WVPA's reorganization plan is contingent upon WVPA's receipt of regulatory approval to change its rates. RUS appealed the Bankruptcy Court's decision to the Indiana District Court. In June 1994, the Indiana District Court ruled in favor of WVPA's plan. RUS subsequently appealed this decision, and on December 28, 1995, the Seventh Circuit Court of Appeals affirmed the decision of the Indiana District Court. PSI cannot predict whether RUS will appeal this decision to the U.S. Supreme Court, and if appealed, the outcome of such appeal, nor is it known whether WVPA can obtain regulatory approval to change its rates. If reasonable progress is not made in satisfying conditions to the settlement by February 1, 1997, either party may terminate the settlement agreement. (See Note 17 for an event subsequent to the date of the auditor's report.)
Cinergy, CG&E, and ULH&P
(f) Potential Divestiture of Gas Operations Under the PUHCA, the divestiture of CG&E's, including ULH&P's, gas operations may be required. In its order approving the merger, the SEC reserved judgment over Cinergy's ownership of the gas operations for a period of three years. However, in June 1995, the SEC endorsed recommendations for reform/repeal of the PUHCA, including allowing registered holding companies to own combination electric and gas utility companies, provided the affected states agree. In addition, legislation providing for the repeal of the PUHCA is currently pending before Congress.
Regardless of the outcome of the proposals to reform/repeal the PUHCA, Cinergy believes it has a justifiable basis for retention of its gas operations and will continue its pursuit of SEC approval. If divestiture is ultimately required, the SEC has historically allowed companies sufficient time to accomplish divestitures in a manner that protects shareholder value. See Note 16 for financial information by business segment.
Cinergy, CG&E, PSI, and ULH&P
(g) 1996 Voluntary Workforce Reduction Program In January 1996, Cinergy announced a voluntary workforce reduction program which provides enhanced retirement and/or severance benefits to eligible employees. There are 840 employees who meet certain age and service requirements and are potentially eligible for enhanced retirement benefits under this program. Eligible employees who do not meet age and service requirements would receive severance benefits upon resignation from their employment. Program costs will not be known until after the participation election period ends on May 15, 1996. Cinergy intends to classify these costs as costs to achieve merger savings which, consistent with the merger savings sharing mechanisms previously approved by regulators, will result in the portion of these costs allocable to Ohio electric jurisdictional customers (approximately 38%) being charged to earnings in the second quarter of 1996, and the remaining costs allocable to other jurisdictions being deferred for future recovery through rates as an offset against merger savings. (See Note 1(i).) A significant portion of these benefits will be eligible for funding from qualified retirement plan assets.
Cinergy, CG&E, and PSI
14. Jointly Owned Plant
PSI is a joint owner of Gibson Unit 5 with WVPA and IMPA. Additionally, PSI is a co-owner with WVPA and IMPA of certain transmission property and local facilities. These facilities constitute part of the integrated transmission and distribution systems which are operated and maintained by PSI. CG&E, Columbus Southern Power Company, and The Dayton Power and Light Company have constructed electric generating units and related transmission facilities on varying common ownership bases. The Consolidated Statements of Income reflect PSI's and CG&E's portions of all operating costs associated with the commonly owned facilities.
PSI's and CG&E's investments in jointly owned plant are as follows:
15. Quarterly Financial Data (unaudited)
Cinergy
Net Earnings Operating Operating Income (Loss) Quarter Ended Revenues Income (Loss) Per Share (in millions, except per share amounts)
March 31 $ 809 $161 $102 $ .65 June 30 668 120 60 .39 September 30 768 168 109 .69 December 31 786 133 76 .49 Total $3 031 $582 $347 $2.22
March 31 $ 851 $155 $ 99 $ .68 June 30 662 106 49 .33 September 30 692 118(a) 58 (a) .40 (a) December 31 693 61(a) (15)(a) (.11)(a) Total $2 898 $440 $191 $1.30
(a) In 1994, Cinergy recognized charges to earnings of approximately $79 million ($56 million, net of taxes) or 38 cents per share primarily for certain merger-related and other expenditures which cannot be recovered from customers under the merger savings sharing mechanisms authorized by regulators. Of these charges, approximately $46 million, net of taxes (31 cents per share), was recognized in the fourth quarter, and approximately $8 million, net of taxes (5 cents per share), was recognized in the third quarter. The charges include the PUCO electric jurisdictional portion of Merger Costs incurred through December 31, 1994, previously capitalized information systems development costs, and severance benefits to former officers of CG&E and PSI. Of the total $79 million charge, $62 million is reflected in "Operating Expenses - Other operation" and $17 million is reflected in "Other Income and Expenses - Net".
CG&E
Net Operating Operating Income Quarter Ended Revenues Income (Loss) (in millions)
March 31 $ 525 $109 $ 77 June 30 393 71 40 September 30 435 98 69 December 31 495 82 50 Total $1 848 $360 $236
March 31 $ 563 $106 $ 76 June 30 391 70 39 September 30 409 81 (a) 48 (a) December 31 425 34 (a) (5)(a) Total $1 788 $291 $158
(a) In 1994, CG&E recognized charges to earnings of approximately $64 million ($46 million, net of taxes) primarily for certain merger-related and other expenditures which cannot be recovered from customers under the merger savings sharing mechanism authorized by the PUCO. Of these charges, approximately $39 million, net of taxes, was recognized in the fourth quarter and approximately $7 million, net of taxes, was recognized in the third quarter. The charges include the PUCO electric jurisdictional portion of Merger Costs incurred through December 31, 1994, previously capitalized information systems development costs, and severance benefits to former officers of CG&E. Of the total $64 million charge, $52 million is reflected in "Operating Expenses - Other operation" and $12 million is reflected in "Other Income and Expenses - Net".
PSI
Net Operating Operating Income Quarter Ended Revenues Income (Loss) (in millions)
March 31 $ 299 $ 53 $ 33 June 30 290 49 29 September 30 343 70 50 December 31 316 55 34 Total $1 248 $227 $146
March 31 $ 288 $ 48 $ 35 June 30 272 37 19 September 30 284 38 20 December 31 270 29 (a) 8 (a) Total $1 114 $152 $ 82
(a) In the fourth quarter of 1994, PSI recognized a charge to earnings of approximately $10 million ($6 million, net of taxes) for severance benefits to former officers of PSI which cannot be recovered from customers under the merger savings sharing mechanism authorized by the IURC. The total $10 million charge is reflected in "Operating Expenses - Other operation".
16. Financial Information by Business Segment
Cinergy Operating Operating Operating Income Provision for Construction Year Ended Revenues Income Taxes Depreciation Expenditures (in millions) Electric $2 620 $543 $207 $258 $286 Gas 411 39 12 22 36 Total $3 031 $582 $219 $280 $322
Electric $2 456 $412 $144 $274 $432 Gas 442 28 8 20 42 Total $2 898 $440 $152 $294 $474
Electric $2 374 $450 $166 $261 $517 Gas 469 33 7 18 45 Total $2 843 $483 $173 $279 $562
December 31 1995 1994 1993_ (in millions) Property, Plant, and Equipment - net Electric $5 719 $5 680 $5 519 Gas 532 519 504 6 251 6 199 6 023 Other Corporate Assets 1 969 1 951 1 781 Total Assets $8 220 $8 150 $7 804
For a discussion of the potential divestiture of CG&E's, including ULH&P's, gas operations, see Note 13(f).
CG&E Operating Operating Operating Income Provision for Construction Year Ended Revenues Income Taxes Depreciation Expenditures (in millions) Electric $1 437 $321 $124 $137 $101 Gas 411 39 12 22 36 Total $1 848 $360 $136 $159 $137
Electric $1 346 $263 $ 96 $137 $138 Gas 442 28 8 20 42 Total $1 788 $291 $104 $157 $180
Electric $1 283 $287 $102 $134 $157 Gas 469 33 7 18 45 Total $1 752 $320 $109 $152 $202 CG&E Continued
December 31 1995 1994 1993_ (in millions) Property, Plant, and Equipment - net Electric $3 244 $3 277 $3 282 Gas 532 519 504 3 776 3 796 3 786 Other Corporate Assets 1 401 1 386 1 358 Total Assets $5 177 $5 182 $5 144
For a discussion of the potential divestiture of CG&E's, including ULH&P's, gas operations, see Note 13(f).
ULH&P
Operating Operating Operating Income Provision for Construction Year Ended Revenues Income Taxes Depreciation Expenditures (in thousands) Electric $187 180 $11 425 $4 500 $ 6 679 $10 909 Gas 70 288 8 405 3 387 4 759 8 063 Total $257 468 $19 830 $7 887 $11 438 $18 972
Electric $177 564 $ 9 736 $3 007 $ 6 213 $12 127 Gas 71 971 6 654 2 335 4 431 8 277 Total $249 535 $16 390 $5 342 $10 644 $20 404
Electric $175 712 $ 9 821 $3 078 $ 5 798 $16 291 Gas 75 744 8 115 2 673 4 015 8 133 Total $251 456 $17 936 $5 751 $ 9 813 $24 424
December 31 1995 1994 1993 (in thousands)
Property, Plant, and Equipment - net Electric $138 482 $134 508 $130 054 Gas 104 749 102 340 98 445 243 231 236 848 228 499 Other Corporate Assets 56 566 50 280 57 546 Total Assets $299 797 $287 128 $286 045
For a discussion of the potential divestiture of ULH&P's gas operations, see Note 13(f).
17. Subsequent Events (unaudited)
(a) PSI's Current Retail Rate Proceeding In connection with the filing of its proposed retail rate order with the IURC in March 1996, PSI reduced its requested retail rate increase to 10.3% ($102.9 million annually) from 11.2% ($111.2 million annually). (See Note 2(a).)
(b) WVPA Litigation RUS has requested a rehearing by the Seventh Circuit Court of Appeals. PSI cannot predict the disposition of the rehearing request or whether RUS will appeal an unfavorable decision to the U.S. Supreme Court, and in the event of such an appeal, the outcome of such appeal. (See Note 13(e).)
ITEM 9.
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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
Board of Directors
Cinergy
Reference is made to Cinergy's 1996 Proxy Statement with respect to identification of directors and their current principal occupations.
CG&E
The directors of CG&E at February 29, 1996, included:
Jackson H. Randolph Mr. Randolph, age 65, is Chairman of CG&E. He has served as a director of CG&E since 1983, and his current term as director expires April 25, 1996.
James E. Rogers Mr. Rogers, age 48, is Vice Chairman and Chief Executive Officer of CG&E. He has served as a director of CG&E since October 24, 1994, and his current term as director expires April 25, 1996.
William J. Grealis Mr. Grealis, age 50, is President of CG&E. He has served as a director of CG&E since September 1, 1995, and his current term expires April 25, 1996.
PSI
Reference is made to PSI's 1996 Information Statement with respect to identification of directors and their current principal occupations.
ULH&P
Omitted pursuant to Instruction J(2)(c).
Executive Officers
Cinergy, CG&E, and PSI
The information included in Part I of this report on pages 21 through 23 under the caption "Executive Officers of the Registrant" is referenced in reliance upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
ULH&P
Omitted pursuant to Instruction J(2)(c).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Cinergy
Reference is made to Cinergy's 1996 Proxy Statement with respect to executive compensation.
CG&E
Board Compensation Committee Report on Executive Compensation
The executive compensation program of Cinergy and its subsidiaries is administered by the Compensation Committee of Cinergy's Board of Directors (the "Committee"). The Committee establishes the compensation philosophy and the compensation of the chief executive officer and all other executive officers of Cinergy and its subsidiaries. The Committee also recommends and administers compensation plans for all executive officers and key employees. The Committee is composed of Messrs. Van P. Smith (Chairman), Michael G. Browning, George C. Juilfs, and John J. Schiff, Jr., each of whom is an independent, non-employee director (of Cinergy), and an "outside director" (of Cinergy) within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
Compensation Philosophy
The Committee reported in Cinergy's 1995 proxy statement that although its executive compensation philosophy was developing, it expressed an intent to emphasize incentive compensation, both short-term and long-term, in order to tie the interests of the executive officers and Cinergy's shareholders. At that time, the Committee anticipated that base salary, annual cash incentives, and long-term incentives would play an integral part in Cinergy's executive compensation program.
With assistance from an independent compensation and benefits consulting firm which conducted a study of existing executive compensation program structures, the Committee has formulated an integrated executive compensation philosophy which includes base salary, and annual and long-term incentives. The consulting firm has also advised as to the retention, modification or replacement of certain existing compensation and benefits plans and as to plan design generally.
Cinergy and its subsidiaries seek to provide a total compensation program that will attract, retain, and motivate the high quality employees needed to provide superior service to its customers and to maximize returns to its shareholders. Base salaries for the executive group will be targeted at the median of comparably sized utility companies based on kilowatt hours sold. Because of the low-cost position of Cinergy and its subsidiaries, kilowatt hours sold is considered to be a better size measure than revenues for constructing a comparator group. Base salary levels will be reviewed annually. Salary increases will be based on such factors as corporate financial results, each individual's performance, and the executive's role and skills. The executive compensation program seeks to link executive and shareholder interests through cash-based and equity-based incentive plans, in order to reward corporate and individual performance and balance short-term and long-term considerations. Thus, annual and long-term incentive plans will be structured to provide opportunities that are competitive with general industry companies.
This philosophy will result in a compensation mix for the chief executive officer and senior officers, including executive officers, consisting of annual incentive and long-term incentives that will account for at least 50% of the employee's total compensation.
During 1995, the Committee adopted a charter which supports Cinergy's executive compensation philosophy and the Committee's role in designing and implementing that philosophy. Pursuant to the charter, the Committee:
- - reviews and determines the annual base salaries, annual incentives, and long-term incentives of the executive officers of Cinergy and its subsidiaries, and develops an appropriate balance between short-term and long- term incentives while focusing on long-term shareholder interests; and
- - reviews the operation of the executive compensation programs; establishes and periodically reviews policies for the administration of these programs; and takes steps, if appropriate, to modify such programs and to design and implement new executive compensation programs.
Consistent with its charter and its executive compensation philosophy, the Committee has reviewed Cinergy's existing short-term and long-term incentive plans and has concluded that it would be in the best interests of Cinergy and its shareholders to modify the Annual Incentive Plan and to adopt a new long- term incentive compensation plan.
Under the proposed amendment to the Annual Incentive Plan, the maximum award opportunity for "covered employees", as that term is defined in Code Section 162(m), would be one million dollars. Currently, the maximum award is 75% of annual base salary. Expressing the maximum possible award for covered employees in this manner is consistent with regulations issued by the Internal Revenue Service (the "IRS") in December, 1995.
The proposed 1996 Long-Term Incentive Compensation Plan would allow Cinergy flexibility to design long-term incentive compensation programs which will help achieve its goals. The adoption of this plan is subject to approval by Cinergy's shareholders. The 1996 Long-Term Incentive Compensation Plan is intended, in part, to replace Cinergy's Performance Shares Plan.
Annual Incentive Plan
For 1995, executive officers were eligible for incentives under Cinergy's Annual Incentive Plan. Approximately 400 key employees participated in the plan in 1995 and were granted cash awards to the extent that certain pre- determined corporate and individual goals were attained during that year. Graduated standards for achievement were developed to encourage each employee's contribution. The potential awards ranged from 2.5% to 55% of the annual salary of the participant (including deferred compensation), depending upon the achievement levels and the participant's position. The Committee reviewed and approved both the plan goals at the beginning of the year and the achievements at the end of the year.
For 1995, the Annual Incentive Plan used a combination of corporate and individual goals. Achievement of corporate goals and achievement of individual goals each accounted for 50% of the total possible award. The portion of the payout in March, 1996, attributable to the corporate goals was based on 1995 achievement in two areas: (1) earnings per share; and (2) non- fuel operation and maintenance merger savings. The earnings per share goal accounted for 37.5% and the merger savings goal constituted 12.5% of the total possible award. The achievement level for each of the corporate goals was at the maximum award level for 1995.
In 1995, incentive awards for each executive officer reflected individual achievement as well as Cinergy's attainment of its corporate goals. Individual performance goals for each executive varied from executive to executive; however, all related to the achievement of Cinergy's overall strategic vision of becoming a premier general energy services company.
For each executive officer, the Committee assessed the extent to which each person contributed toward the accomplishment of Cinergy's vision in 1995. Although its determinations were subjective, the Committee believed that its assessment accurately measured the performance of each executive officer. Based upon the extraordinary efforts of the executive officers in 1995, the Committee determined that a maximum award was payable to each.
For 1996, Cinergy's Annual Incentive Plan will again use a combination of corporate and individual goals. The corporate goal will account for 50% of the total possible award and achievement of individual goals will account for the remaining 50%. The corporate goal for 1996 will be based on earnings per share. For 1996, approximately 400 key employees will participate in the plan. The potential awards will range from 2.5% to 90% of the participant's annual salary, depending upon the achievement levels and the participant's position.
Other Compensation Decisions
The Committee, at its discretion, can award other forms of compensation in recognition of outstanding service to Cinergy or any of its subsidiaries. Consistent with that philosophy, the Committee approved in 1995 special performance awards for Messrs. Leonard and Thomas and Ms. Foley for exemplary performance associated with consummation of the corporate reorganization resulting in the formation of Cinergy (as set forth in footnotes to the Summary Compensation Table).
Long-Term Incentive Plan and Stock Option Plan
Cinergy's Performance Shares Plan (the "Performance Shares Plan") is a long- term incentive plan developed to reward officers and other key employees for contributing to long-term success by achieving corporate and individual goals approved by the Committee. The executive officers named in the compensation tables participate in this plan, and the same corporate and individual goals used in Cinergy's Annual Incentive Plan are applicable to this plan. The potential award opportunities are established in the same manner as the Annual Incentive Plan, with the minimum award opportunities ranging from 13.33% to 36.66% of annual salary for the full performance cycle. Performance cycles consist of overlapping four year periods. Because the former Resources' performance shares plan was merged into the Performance Shares Plan effective as of October 24, 1994, the then existing Resources performance cycles of 1992-1995 and 1994-1997 became performance cycles under the Performance Shares Plan. Awards earned under the 1992-1995 performance cycle by executive officers are paid in two installments: one-half of the award was paid in February, 1996, and the remaining portion will be paid in February, 1997. The dollar value of the awards to Messrs. Rogers, Leonard, and Thomas and Ms. Foley, paid in February 1995 and earned under the 1990-1993 performance cycle, are set forth in the Summary Compensation Table. The next overlapping four year performance cycle under the Performance Shares Plan began January 1, 1996 and will end December 31, 1999. As mentioned previously, the 1996 Long-Term Incentive Compensation Plan is intended, in part, to replace the Performance Shares Plan; the details of the transition have yet to be determined.
Cinergy's executive officers and other key employees are also eligible for grants under Cinergy's Stock Option Plan in amounts determined to be appropriate by the Committee. The plan is designed to align executive compensation with shareholder interests. Both non-qualified and incentive stock options have been granted under the plan. Options vest at the rate of 20% per year over a five-year period from the date of grant and may be exercised over a 10-year term.
Chief Executive Officer
Mr. Randolph's 1995 base salary was determined pursuant to an employment agreement with Cinergy dated December 11, 1992, as amended and restated effective October 24, 1994 (see Employment Agreements and Severance Arrangements discussed further herein). For 1995, Mr. Randolph also earned incentive compensation under the Annual Incentive Plan in the amount of $321,750, of which 50% was based on achievement of corporate goals and 50% was based upon the Committee's determination of his achievement of individual goals.
Mr. Rogers' 1995 base salary was determined pursuant to an employment agreement with Cinergy dated December 11, 1992, as amended and restated effective July 2, 1993 (see Employment Agreements and Severance Arrangements discussed further herein). For 1995, Mr. Rogers also earned incentive compensation under the Annual Incentive Plan in the amount of $321,750, of which 50% was based on achievement of corporate goals and 50% was based upon the Committee's determination of his achievement of individual goals.
Giving consideration to the accomplishments of 1995 leading to a total return to Cinergy shareholders of 39.1% and an increase in earnings per share of 17%, the latter adjusted for the effects of weather and non-recurring items, sufficient goals were met to obtain the maximum award available. Other goals pertaining to budgeting, reengineering, development of a comprehensive human resource strategy, enhancement of top management team effectiveness, and elevation of Cinergy's impact in community involvement were also met. The relative importance in meeting these goals was equal in the determination of awards.
Summary
The Committee has established its executive compensation philosophy which emphasizes incentive compensation, both short-term and long-term, in order to tie the interests of the executive officers and shareholders. Base salary, annual cash incentives, and long-term incentives are an integral part of executive compensation. The Committee has determined that the Annual Incentive Plan should be modified to increase the maximum amount which can be awarded under that plan to "covered employees" under Code Section 162(m), and that the proposed 1996 Long-Term Incentive Compensation Plan is needed to provide flexibility in designing competitive long-term incentive programs in order to attract and retain qualified and highly motivated executive employees in the future.
The 1993 Omnibus Budget Reconciliation Act ("OBRA") became law in August, 1993, for compensation earned in 1994 and later. Under the law, income tax deductions of publicly traded companies may be limited to the extent total compensation for certain executive officers exceeds one million dollars in any one year. Under OBRA, the deduction limit does not apply to payments which qualify as "performance based" or compensation which is payable under a written contract that was in effect before February 17, 1993. The Committee has reviewed the final regulations issued by the IRS and will continue to review the application of these rules to future compensation; however, the Committee intends to compensate executives on performance achieved, both corporate and individual. Summary Compensation Table
The following table sets forth the compensation of Messrs. Rogers and Randolph, each of whom served as chief executive officer at different periods during 1995, and each of the additional four most highly compensated executive officers (these six executive officers sometimes hereinafter collectively referred to as the "named executive officers") for services to Cinergy and its subsidiaries, including CG&E, during the calendar years ended December 31, 1995, 1994, and 1993. (The data presented includes, for Mr. Randolph compensation from CG&E, and for the remaining named executive officers compensation from PSI, for the periods prior to October 24, 1994.)
Option/SAR Grants Table
The following table sets forth information concerning options to purchase Cinergy common stock granted to Mr. Grealis, the only named executive officer granted such options during 1995.
Aggregated Option/SAR Exercises and Year-End Option/SAR Value Table
The following table sets forth information concerning stock options exercised by the named executive officers during 1995, including the values realized for such options exercised, which represent the positive spread between the respective exercise prices and market prices on dates of exercises, and the numbers of shares for which options were held as of December 31, 1995, including the values for "in-the-money" options, which represent the positive spread between the respective exercise prices of outstanding stock options and the market price of the shares of Cinergy common stock as of December 31, 1995, which was $30.625 per share.
Long-Term Incentive Plan Awards Table
The following table sets forth the potential payouts of an award contingently granted under the Performance Shares Plan to Mr. Grealis, the only named executive officer granted such award during 1995.
Pension Benefits
The primary pension benefits payable at retirement to each of the named executive officers are provided pursuant to the terms of either CG&E's non- contributory management pension plan (the "CG&E Pension Plan") or PSI's non- contributory pension plan (the "PSI Pension Plan"). Mr. Randolph is covered under the terms of the CG&E Pension Plan. Messrs. Rogers, Grealis, Leonard, and Thomas and Ms. Foley are covered under the terms of the PSI Pension Plan.
Under the terms of the CG&E Pension Plan, the retirement income payable to a pensioner is 1.3% of final average pay plus 0.35% of final average pay in excess of covered compensation, times the number of years of credited service through 30 years, plus 0.1% of final average pay times the number of years of credited service over 30 years. Final average pay is the average annual salary, based on July 1 pay rates, during the employee's five consecutive calendar years producing the highest such average within the last ten calendar years immediately preceding retirement. The IRS annually establishes a dollar limit, indexed to inflation, of the amount of pay permitted for consideration under the terms of the plan, which for 1995 was $150,000. Covered compensation is the average social security taxable wage base over a 35-year period. The accrued annual benefit payable to Mr. Randolph upon his retirement under the terms of the plan is $106,211 based upon IRS limits and credited service of 37 years.
Cinergy and Mr. Randolph have entered into an Amended and Restated Supplemental Executive Retirement Income Agreement which in effect freezes as of December 31, 1994, the accrual of benefits payable to Mr. Randolph under CG&E's Supplemental Executive Retirement Plan upon his retirement, death, or disability. Under the amended agreement, the annual supplemental retirement benefit of $511,654 shall be paid to Mr. Randolph or his beneficiary in monthly installments of $42,638 for 180 months beginning December 1, 2000.
The PSI Pension Plan covers all of its employees who meet certain minimum age and service requirements. Compensation utilized to determine benefits under the PSI Pension Plan includes substantially all salaries and annual incentive compensation, including deferred compensation for Mr. Rogers. PSI Pension Plan benefits are determined under a final average pay formula with consideration of years of service to a maximum of 30, age at retirement and the applicable average social security wage base. PSI also maintains an Excess Benefit Plan which is designed to restore pension benefits to those individuals whose benefits under the PSI Pension Plan would otherwise exceed the limits imposed by the Code. Each of the named executive officers, with the exception of Mr. Randolph, participates in the Excess Benefit Plan.
The following pension plan table illustrates the estimated annual benefits payable as a straight-life annuity under both 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 $ 300,000 $23,190 $ 46,380 $ 69,575 $ 92,765 $115,955 $139,145 400,000 31,190 62,380 93,575 124,765 155,955 187,145 500,000 39,190 78,380 117,575 156,765 195,955 235,145 600,000 47,190 94,380 141,575 188,765 235,955 283,145 700,000 55,190 110,380 165,575 220,765 275,955 331,145 800,000 63,190 126,380 189,575 252,765 315,955 379,145 900,000 71,190 142,380 213,575 284,765 355,955 427,145 1,000,000 79,190 158,380 237,575 316,765 395,955 475,145 1,100,000 87,190 174,380 261,575 348,765 435,955 523,145
The estimated credited years of service at age 62 for each of the named executive officers covered under the terms of the PSI Pension Plan are as follows: Mr. Rogers, 20.22 years; Mr. Grealis, 11.69 years; Mr. Leonard, 30 years; Mr. Thomas, 30 years; and Ms. Foley, 19.22 years.
Messrs. Rogers and Grealis and Ms. Foley also participate in the PSI Supplemental Retirement Plan, which is designed to provide coverage to employees, previously designated by the board of directors of PSI, who will not otherwise qualify for full retirement benefits under the PSI Pension Plan. The benefit provided by the PSI Supplemental Retirement Plan will be an amount equal to that which a covered employee with maximum permitted years of participation (30 years) would have received under the PSI Pension Plan, reduced by the actual benefit provided by the PSI Pension Plan and the Excess Benefit Plan, and further reduced by benefits the covered employee will be eligible to receive from retirement plans from previous self-employment and from previous employers. The estimated annual benefit payable at age 62 under the PSI Supplemental Retirement Plan is $192,158 for Mr. Rogers, $3,230 for Mr. Grealis, and $54,624 for Ms. Foley.
Cinergy has an Executive Supplemental Life Insurance Program, which provides key management personnel, including the named executive officers, with additional life insurance coverage during employment, and post-retirement deferred compensation. At the later of age 55 or retirement, the participant's life insurance coverage under the program will be canceled. At that time, the participant will receive the total amount of coverage in the form of deferred compensation payable in ten equal annual installments. The annual benefit payable, at the later of age 55 or retirement, to each of the named executive officers is $15,000 per year over ten years.
Employment Agreements and Severance Arrangements
Cinergy entered into individual employment agreements with Mr. Randolph and Mr. Rogers (each sometimes hereinafter individually referred to as the "Executive") effective as of October 24, 1994.
Pursuant to his employment 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. Mr. Rogers served as Vice Chairman, President and Chief Operating Officer of Cinergy until November 30, 1995, and thereafter has served as Vice Chairman, President and Chief Executive Officer of Cinergy. Mr. Rogers' agreement is for a term of three years; however, as amended in December 1995, on each annual anniversary date it will be automatically extended for an additional year, unless either Cinergy or Mr. Rogers gives timely notice otherwise.
During the terms of their agreements, Messrs. Randolph and Rogers will receive minimum annual base salaries of $465,000 and $422,722, respectively. Each will also be paid an annual incentive award of up to a maximum of no less than 55% of his annual salary pursuant to Cinergy's Annual Incentive Plan, and will be eligible to participate in all other incentive, stock option, performance award, savings, retirement and welfare plans applicable generally to Cinergy employees and executives.
If the Executive's employment terminates 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. 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 Performance Shares Plan and Executive Supplemental Life Insurance Program, (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. Randolph has a severance agreement with Cinergy which provides that if, within three years after October 24, 1994, he terminates his employment for good cause or his employment is terminated by Cinergy other than for disability or cause, Cinergy will pay him a cash amount equal to 300% of his annualized compensation for the most recent five years ending before October 24, 1994, less $1,000, plus a cash "gross-up" payment equal to the federal excise tax due on such amount, if any.
Cinergy and Mr. Grealis entered into an employment agreement which commenced on January 16, 1995, and shall continue until June 30, 2000; provided, however, commencing on January 1, 1999, and each January 1, 1999, and each January 1 thereafter, the term of the employment agreement may be extended for one additional year upon mutual agreement. Pursuant to the terms of his agreement, Mr. Grealis initially served as President of Investments and President of CG&E's Gas Operations. However, Mr. Grealis may be further assigned such other responsible executive capacity or capacities as the boards of directors of Cinergy or Services or Cinergy's chief executive officer may from time to time determine. Effective September 1, 1995, Mr. Grealis was named to the position of President of CG&E in addition to retaining the position of President of Investments. During the term of his agreement, Mr. Grealis will receive a minimum annualized base salary of $288,000, will be eligible to participate in all other incentive, stock option, performance award, savings, retirement and welfare benefit plans applicable generally to Cinergy employees and executives, and will receive other fringe benefits. In connection with his retirement, the employment agreement provides that Mr. Grealis will receive an annual benefit of no less than $283,000 payable as a straight-life annuity at age 62.
Cinergy entered into individual employment agreements with Messrs. Leonard and Thomas and Ms. Foley, which shall continue until December 31, 1997; provided, however, effective January 1, 1996, and each January 1 thereafter, the term of each such employment agreement may be extended for one additional year upon mutual agreement. Pursuant to the terms of their respective agreements, Mr. Leonard has served as Group Vice President and Chief Financial Officer of Cinergy and its subsidiaries, Mr. Thomas initially served as Group Vice President, Reengineering and Operation Services of Cinergy and its subsidiaries, and Ms. Foley has served as Vice President, General Counsel and Secretary of Cinergy and its subsidiaries. However, each such officer may be further assigned such other responsible executive capacity or capacities as the boards of directors of Cinergy or Services or Cinergy's chief executive officer may from time to time determine. Effective September 1, 1995, Mr. Thomas was named to the position of Group Vice President and Chief Transformation Officer. During the term of their agreements, Messrs. Leonard and Thomas and Ms. Foley will receive minimum annual base salaries of $250,000, $240,000, and $230,000, respectively, and each will be eligible to participate in all other incentive, stock option, performance award, savings, retirement and welfare benefit plans applicable generally to Cinergy employees and executives, and will receive other fringe benefits.
If the employment of Messrs. Grealis, Leonard, or Thomas or Ms. Foley (each sometimes hereinafter 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 Cinergy's Performance Shares 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 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 Cinergy's Performance Shares 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.
If the employment of any such officer (as defined above) 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 (two times in the case of Mr. Grealis) the sum of the officer's annual base salary immediately prior to the date of the officer's 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 the officer's 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 (twenty-four months in the case of Mr. Grealis), reduced to the extent comparable benefits are received, without cost, by the officer.
Deferred Compensation Agreements
Mr. Randolph and CG&E, and Mr. Rogers and Resources, entered into deferred compensation agreements effective as of January 1, 1992 (the "Deferred Compensation Agreements"), pursuant to which each such officer is credited with a $50,000 base salary increase in the form of deferred compensation. Such amount is deferred annually, in the case of both Mr. Randolph and Mr. Rogers, for a five-year period beginning January 1, 1992, and ending December 31, 1996, and in the case of Mr. Rogers, for an additional five-year period beginning January 1, 1997 and ending December 31, 2001. The Deferred Compensation Agreements were assumed by Cinergy effective as of October 24, 1994.
In general, Mr. Randolph's Deferred Compensation Agreement provides that if his employment terminates for any reason, other than death or disability, prior to January 1, 1997, he will receive the total amount of his deferred income plus interest. If Mr. Randolph's employment terminates on or after January 1, 1997, he will receive an annual cash benefit of $179,000 payable for a 15-year period beginning January 2001. Proportional benefits are payable to Mr. Randolph in the event his employment is terminated for death or disability prior to January 1, 1997.
In general, Mr. Rogers' Deferred Compensation Agreement provides that if his employment terminates for any reason, other than death, prior to January 1, 1997, he will receive a lump sum cash payment equal to the total amount deferred for the first five-year period described above plus interest. If Mr. Rogers' employment terminates for any reason, other than death, on or after January 1, 1997, he will receive an annual cash benefit over a 15-year period beginning the first January following termination of his employment, but in no event earlier than January 2003 nor later than January 2010. The annual cash benefit amount payable for such 15-year period ranges from $179,000 per year if payment begins in January 2003, to $554,400 per year if payment commences in January 2010. Comparable amounts are payable to Mr. Rogers in the event his employment is terminated for disability prior to January 1, 1997, or if Mr. Rogers dies (i) prior to January 1, 1997, while employed or disabled, or (ii) on or after January 1, 1997, but before commencement of payment of the 15-year payments described above; provided, however, if Mr. Rogers becomes disabled prior to the completion of the first award period, the amounts paid will be proportionately reduced based on the ratio of the amount deferred to the date of disability to the total amount that would have been deferred to the end of the first award period. In addition, if Mr. Rogers' employment terminates for any reason, other than death or disability, on or after January 1, 1997, but before January 1, 2002, he will receive a lump sum cash payment equal to the total amount deferred during the second five-year period described above plus interest. Additionally, if Mr. Rogers' employment terminates for any reason, other than death or disability, on or after January 1, 2002, he will receive an additional annual benefit for a 15-year period beginning the first January following termination of his employment, but in no event earlier than January 2008 nor later than January 2010. The annual cash benefit amount payable for such period ranges from $179,000 per year if payment begins in January 2008, to $247,000 per year if payment begins in January 2010. Provided that Mr. Rogers is employed on January 1, 1997, comparable amounts are payable to Mr. Rogers in the event his employment is terminated for disability prior to January 1, 2002, or if Mr. Rogers dies (i) prior to January 1, 2002, while employed or disabled, or (ii) on or after January 1, 2002, but before commencement of payment of benefits; provided, however, if Mr. Rogers becomes disabled prior to the completion of the second award period, his payments will be proportionately reduced in the same manner as described above for disability during the first award period.
Compensation Committee Interlocks and Insider Participation
Mr. Schiff, Chairman of the Board of Cincinnati Financial Corporation, serves on the Compensation Committee of the board of directors of Cinergy, and Mr. Randolph, Chairman of the Board of Cinergy and 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 the common stock of CG&E with the cumulative total returns during the same time period of the S&P Electric Utilities Index and the S&P 500 Stock Index. The graph tracks performance from January 1, 1991, through October 24, 1994, the final trading date of CG&E's common stock. The graph assumes a $100 investment on January 1, 1991, and reinvestment of all dividends.
[OMITTED IS A LINE GRAPH ILLUSTRATING THE FOLLOWING DATA]
1/1/91 1/1/92 1/1/93 1/1/94 10/24/94
CG&E Common Stock $100 $145 $144 $169 $149
S&P Electric Utilities Index $100 $130 $138 $155 $128
S&P 500 Stock Index $100 $130 $140 $155 $156 Directors' Compensation
Directors who are not employees (the "non-employee directors") receive an annual retainer fee of $8,000 plus a fee of $1,000 for each CG&E board of directors' meeting attended; however, any non-employee director of CG&E who also serves as a non-employee director of Cinergy or any of its affiliates shall neither receive such annual retainer fee, nor any compensation for attendance at any CG&E board meeting that is held concurrently or consecutively with a meeting of the board of directors of Cinergy. Directors who are also employees of Cinergy or any of its subsidiaries (Messrs. Randolph, Rogers, and Grealis) will receive no remuneration for their services as directors.
Under Cinergy's Directors' Deferred Compensation Plan, each non-employee director of Cinergy or any of its subsidiaries may defer fees and have them accrued either in cash or in units representing shares of Cinergy common stock. If deferred in such units, the stock will be distributed to the director at the time of retirement from the appropriate board. Amounts deferred in cash will be paid at the same time.
Under Cinergy's Retirement Plan for Directors, non-employee directors with five or more years of service will receive annual retirement compensation in an amount equal to the annual CG&E board retainer fee in effect at the time of termination of service as a director, plus the product of the fee paid for attendance at a CG&E board meeting multiplied by five. Retirement compensation is paid for as many years as the director served on the CG&E board. This plan covers non-employee directors serving on the boards of directors of Cinergy, Services, CG&E, or PSI. Prior service by non-employee directors of CG&E, PSI, or Resources is credited under this plan.
PSI
Reference is made to PSI's 1996 Information Statement with respect to executive compensation.
ULH&P
Omitted pursuant to Instruction J(2)(c).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Cinergy
Reference is made to Cinergy's 1996 Proxy Statement with respect to security ownership of certain beneficial owners and security ownership of management.
CG&E
Cinergy owns all the outstanding shares of common stock of CG&E. The only two holders of record known by management of CG&E to be the beneficial owners of more than 5% of the class of CG&E's cumulative preferred stock as of December 31, 1995 are set forth in the following table.
Name and Address Amount and Nature Percent of Beneficial Owner of Beneficial Ownership of Class
U. S. Leasing International, Inc. 282,500 shares 14.13% 733 Front Street San Francisco, CA 94111
Household Finance Corporation 105,000 shares 5.25% 2700 Sanders Road Prospect Heights, IL 60070
CG&E's directors and executive officers did not beneficially own any shares of any series of the class of CG&E's cumulative preferred stock as of December 31, 1995. The beneficial ownership of Cinergy's common stock held by each director and named executive officer as of December 31, 1995 is set forth in the following table.
Amount and Nature Name of Beneficial Owner(1) of Beneficial Ownership (2)
Cheryl M. Foley 71,592 shares William J. Grealis 300 shares J. Wayne Leonard 74,060 shares Jackson H. Randolph 75,658 shares James E. Rogers 252,582 shares Larry E. Thomas 75,640 shares
All directors and executive 666,772 shares (2) officers as a group (representing 0.42% of the class)
(1) No individual listed beneficially owned more than 0.16% 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 - 57,397; Mr. Leonard - 57,611; Mr. Randolph - 50,000; Mr. Rogers - - 189,403; Mr. Thomas - 51,107; and all directors and executive officers as a group - 491,093. PSI
Reference is made to PSI's 1996 Information Statement with respect to security ownership of certain beneficial owners and security ownership of management.
ULH&P
Omitted pursuant to Instruction J(2)(c).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Cinergy, CG&E, and PSI
None.
ULH&P
Omitted pursuant to Instruction J(2)(c).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
Cinergy, CG&E, PSI, and ULH&P
Refer to the page captioned "Index to Financial Statements and Financial Statement Schedules", pages 46 and 47 of this report, for an index of the financial statements and financial statement schedules included in this report.
(b) Reports on Form 8-K.
Cinergy, CG&E, PSI, and ULH&P
None
(c) Exhibits.
Copies of the documents listed below which are identified with an asterisk (*) have heretofore been filed with the SEC and are incorporated herein by reference and made a part hereof. Exhibits not so identified are filed herewith.
Exhibit Designation Nature of Exhibit
Cinergy
3-a *Certificate of Incorporation of Cinergy. (Exhibit to Cinergy's 1993 Form 10-K in File No. 1-11377.)
3-b *By-laws of Cinergy as amended January 25, 1996. (Exhibit to Cinergy's Form U-1 Declaration filed February 23, 1996, in File No. 70- 8807.)
CG&E
3-c *Amended Articles of Incorporation of CG&E effective January 24, 1994. (Exhibit to CG&E's 1993 Form 10-K in File No. 1-1232.)
3-d *Regulations of CG&E as amended, adopted June 16, 1995. (Exhibit to CG&E's Form 8-A dated July 24, 1995.)
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 By-laws of PSI, as amended January 25, 1996.
ULH&P
3-g *Restated Articles of Incorporation made effective May 7, 1976. (Exhibit to ULH&P's Form 8-K, May 1976.)
3-h *By-laws of ULH&P as amended, adopted by shareholders June 16, 1995. (Exhibit to ULH&P's June 30, 1995, Form 10-Q in File No. 2- 7793.)
Cinergy and PSI
4-a *Original Indenture (First Mortgage Bonds) dated September 1, 1939, between PSI and The First National Bank of Chicago, as Trustee (Exhibit A- Part 3 in File No. 70-258), and LaSalle National Bank as Successor Trustee (Supplemental Indenture dated March 30, 1984).
4-b *Nineteenth Supplemental Indenture between PSI and The First National Bank of Chicago dated January 1, 1972. (Exhibit to File No. 2- 42545.)
4-c *Twenty-third Supplemental Indenture between PSI and The First National Bank of Chicago dated January 1, 1977. (Exhibit to File No. 2- 57828.)
4-d *Twenty-fifth Supplemental Indenture between PSI and The First National Bank of Chicago dated September 1, 1978. (Exhibit to File No. 2- 62543.)
4-e *Twenty-seventh Supplemental Indenture between PSI and The First National Bank of Chicago dated March 1, 1979. (Exhibit to File No. 2- 63753.)
4-f *Thirty-fifth Supplemental Indenture between PSI and The First National Bank of Chicago dated March 30, 1984. (Exhibit to PSI's 1984 Form 10-K in File No. 1-3543.)
4-g *Thirty-ninth Supplemental Indenture between PSI and The First National Bank of Chicago dated March 15, 1987. (Exhibit to PSI's 1987 Form 10-K in File No. 1-3543.)
4-h *Forty-first Supplemental Indenture between PSI and The First National Bank of Chicago dated June 15, 1988. (Exhibit to PSI's 1988 Form 10-K in File No. 1-3543.)
4-i *Forty-second Supplemental Indenture between PSI and The First National Bank of Chicago dated August 1, 1988. (Exhibit to PSI's 1988 Form 10-K in File No. 1-3543.)
4-j *Forty-fourth Supplemental Indenture between PSI and The First National Bank of Chicago dated March 15, 1990. (Exhibit to PSI's 1990 Form 10-K in File No. 1-3543.)
4-k *Forty-fifth Supplemental Indenture between PSI and The First National Bank of Chicago dated March 15, 1990. (Exhibit to PSI's 1990 Form 10-K in File No. 1-3543.)
4-l *Forty-sixth Supplemental Indenture between PSI and The First National Bank of Chicago dated June 1, 1990. (Exhibit to PSI's 1991 Form 10-K in File No. 1-3543.)
4-m *Forty-seventh Supplemental Indenture between PSI and The First National Bank of Chicago dated July 15, 1991. (Exhibit to PSI's 1991 Form 10-K in File No. 1-3543.)
4-n *Forty-eighth Supplemental Indenture between PSI and The First National Bank of Chicago dated July 15, 1992. (Exhibit to PSI's 1992 Form 10-K in File No. 1-3543.)
4-o *Forty-ninth Supplemental Indenture between PSI and The First National Bank of Chicago dated February 15, 1993. (Exhibit to PSI's 1992 Form 10-K in File No. 1-3543.)
4-p *Fiftieth Supplemental Indenture between PSI and The First National Bank of Chicago dated February 15, 1993. (Exhibit to PSI's 1992 Form 10-K in File No. 1-3543.)
4-q *Fifty-first Supplemental Indenture between PSI and The First National Bank of Chicago dated February 1, 1994. (Exhibit to PSI's 1993 Form 10-K in File No. 1-3543.)
4-r *Indenture (Secured Medium-term Notes, Series A), dated July 15, 1991, between PSI and The First National Bank of Chicago, as Trustee. (Exhibit to PSI's Form 10-K/A, Amendment No. 2, dated July 15, 1993, in File No. 1-3543.)
4-s *Indenture (Secured Medium-term Notes, Series B), dated July 15, 1992, between PSI and The First National Bank of Chicago, as Trustee. (Exhibit to PSI's Form 10-K/A, Amendment No. 2, dated July 15, 1993, in File No. 1-3543.)
Cinergy and CG&E
4-t *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-u *Tenth Supplemental Indenture between CG&E and The Bank of New York dated as of July 1, 1967. (Exhibit to CG&E's Registration Statement No. 2- 26549.)
4-v *Eleventh Supplemental Indenture between CG&E and The Bank of New York dated as of May 1, 1969. (Exhibit to CG&E's Registration Statement No. 2-32063.)
4-w *Thirteenth Supplemental Indenture between CG&E and The Bank of New York dated as of November 1, 1971. (Exhibit to CG&E's Registration Statement No. 2-41974.)
4-x *Fourteenth Supplemental Indenture between CG&E and The Bank of New York dated as of November 2, 1972. (Exhibit to CG&E's Registration Statement No. 2-60961.)
4-y *Fifteenth Supplemental Indenture between CG&E and The Bank of New York dated as of August 1, 1973. (Exhibit to CG&E's Registration Statement No. 2-60961.)
4-z *Thirty-second Supplemental Indenture between CG&E and The Bank of New York dated as of December 15, 1991. (Exhibit to CG&E's Registration Statement No. 33-45115.)
4-aa *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-bb *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-cc *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-dd *Thirty-sixth Supplemental Indenture between CG&E and The Bank of New York dated as of February 15, 1994. (Exhibit to CG&E's Registration Statement No. 33-52335.)
4-ee *Loan Agreement between CG&E and County of Boone, Kentucky dated as of February 1, 1985. (Exhibit to CG&E's 1984 Form 10-K in File No. 1- 1232.)
4-ff *Loan Agreement between CG&E and State of Ohio Air Quality Development Authority dated as of December 1, 1985. (Exhibit to CG&E's 1985 Form 10-K in File No. 1-1232.)
4-gg *Loan Agreement between CG&E and State of Ohio Air Quality Development Authority dated as of December 1, 1985. (Exhibit to CG&E's 1985 Form 10-K in File No. 1-1232.)
4-hh *Repayment Agreement between CG&E and The Dayton Power and Light Company dated as of December 23, 1992. (Exhibit to CG&E's 1992 Form 10-K in File No. 1-1232.)
4-ii *Loan Agreement between CG&E and 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-jj *Loan Agreement between CG&E and State of Ohio Air Quality Development Authority dated as of January 1, 1994. (Exhibit to CG&E's 1993 Form 10-K in File No. 1-1232.)
4-kk *Loan Agreement between CG&E and County of Boone, Kentucky dated as of January 1, 1994. (Exhibit to CG&E's 1993 Form 10-K in File No. 1-1232.)
4-ll *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-mm *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-nn *Second Supplemental Indenture between CG&E and The Fifth Third Bank dated as of June 30, 1995. (Exhibit to CG&E's Form 8-A dated July 24, 1995, in File No. 1-1232.)
4-oo *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-pp *Loan Agreement between CG&E and the State of Ohio Air Quality Development Authority dated as of September 13, 1995. (Exhibit to CG&E's September 30, 1995, Form 10-Q in File No. 1-1232.)
Cinergy, CG&E, and ULH&P
4-qq *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-rr *Fifth Supplemental Indenture between ULH&P and The Bank of New York dated as of January 1, 1967. (Exhibit to CG&E's Registration Statement No. 2-60961.)
4-ss *Seventh Supplemental Indenture between ULH&P and The Bank of New York dated as of October 1, 1973. (Exhibit to CG&E's Registration Statement No. 2-60961.)
4-tt *Eighth Supplemental Indenture between ULH&P and The Bank of New York dated as of December 1, 1978. (Exhibit to CG&E's Registration Statement No. 2-63591.)
4-uu *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-vv *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-ww *First Supplemental Indenture between ULH&P and The Fifth Third Bank dated as of July 15, (Exhibit to ULH&P's June 30, 1995, Form 10-Q in File No. 2-7793.)
Cinergy, CG&E, and PSI
10-a *+Amended and Restated Employment Agreement dated October 24, 1994, among CG&E, Cinergy Corp. (an Ohio corporation), Cinergy (a Delaware corporation), PSI Resources, Inc., PSI, and Jackson H. Randolph. (Exhibit to Cinergy's 1994 Form 10-K in File No. 1-11377.)
10-b *+Amended and Restated Employment Agreement dated July 2, 1993, among PSI Resources, Inc., PSI, CG&E, Cinergy, Cinergy Sub, Inc., and James E. Rogers, Jr. (Exhibit to Cinergy's Amendment No. 3 to Form S-4, filed October 8, 1993.)
10-c +First Amendment to Amended and Restated Employment Agreement dated December 12, 1995, retroactively effective to October 24, 1994, amended and restated July 2, 1993, among Cinergy, Services, CG&E, PSI, and James E. Rogers.
10-d *+Employment Agreement dated January 1, 1995, among Cinergy, CG&E, Services, Inc., Investments, PSI, and William J. Grealis. (Exhibit to Cinergy's 1994 Form 10-K in File No. 1-11377.)
10-e Employment Agreement dated October 24, 1994, among Cinergy, Services, CG&E, PSI, and Larry E. Thomas.
10-f First Amendment to Employment Agreement dated October 24, 1994, among Cinergy, Services, CG&E, PSI, and Larry E. Thomas.
10-g Employment Agreement dated October 24, 1994, among Cinergy, Services, CG&E, PSI, and J. Wayne Leonard.
10-h First Amendment to Employment Agreement dated October 24, 1994, among Cinergy, Services, CG&E, PSI, and J. Wayne Leonard.
10-i Employment Agreement dated October 24, 1994, among Cinergy, Services, CG&E, PSI, and Cheryl M. Foley.
10-j First Amendment to Employment Agreement dated October 24, 1994, among Cinergy, Services, CG&E, PSI, and Cheryl M. Foley.
Cinergy and PSI
10-k First Amendment to the PSI Union Employees' 401(k) Savings Plan, dated December 31, 1995.
10-l First Amendment to the PSI Employees' 401(k) Savings Plan, dated December 31, 1995.
10-m *+Employment Agreement dated October 4, 1993, among Cinergy, PSI, and John M. Mutz. (Exhibit to PSI Resources, Inc.'s September 30, 1993, Form 10-Q, File No. 1-9941.)
10-n *+Deferred Compensation Agreement, effective as of January 1, 1992, between Cinergy and James E. Rogers, Jr. (Exhibit to PSI's Form 10-K/A in File No. 1-3543, Amendment No. 1, dated April 29, 1993.)
10-o *+Split Dollar Life Insurance Agreement, effective as of January 1, 1992, between Cinergy and James E. Rogers, Jr. (Exhibit to PSI's Form 10- K/A in File No. 1-3543, Amendment No. 1, dated April 29, 1993.)
10-p *+First Amendment to Split Dollar Life Insurance Agreement between Cinergy and James E. Rogers, Jr. dated December 11, 1992. (Exhibit to PSI's Form 10-K/A in File No. 1-3543, Amendment No. 1, dated April 29, 1993.)
10-q *+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-r *+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-s *CG&E Deferred Compensation and Investment Plan, as amended, effective January 1, 1989. (Exhibit to Cinergy's Form S-8, filed August 30, 1994.)
10-t *CG&E Savings Incentive Plan, as amended, effective January 1, 1989. (Exhibit to Cinergy's Form S-8, filed August 30, 1994.)
10-u *+Deferred Compensation Agreement between Jackson H. Randolph and Cinergy dated January 1, 1992. (Exhibit to CG&E's 1992 Form 10-K in File No. 1-1232.)
10-v *+Supplemental Executive Retirement Income Plan between CG&E and certain executive officers. (Exhibit to CG&E's 1988 Form 10-K in File No. 1-1232.)
10-w *+Amendment to Supplemental Executive Retirement Income Plan between CG&E and certain executive officers. (Exhibit to CG&E's 1992 Form 10-K in File No 1-1232.)
10-x +Amended and Restated Supplemental Retirement Income Plan between CG&E and Jackson H. Randolph.
10-y *+Amendment to Executive Severance Agreement between CG&E and certain executive officers. (Exhibit to CG&E's 1992 Form 10-K in File No. 1-1232.)
10-z *+Executive Severance Agreement between CG&E and certain executive officers. (Exhibit to CG&E's 1989 Form 10-K in File No. 1-1232.)
Cinergy
10-aa *+Cinergy Stock Option Plan, adopted October 18, 1994, effective October 24, 1994. (Exhibit to Cinergy's Form S-8, filed October 19, 1994.)
10-bb *+Cinergy Performance Shares Plan, adopted October 18, 1994, effective October 24, 1994. (Exhibit to Cinergy's Form S-8, filed October 19, 1994.)
10-cc *+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-dd *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-ee *Amendment to Cinergy Employee Stock Purchase and Savings Plan, adopted January 25, 1995, retroactively effective January 1, 1995. (Exhibit to Cinergy's 1994 Form 10-K in File No. 1-11377.)
10-ff *+Cinergy Directors' Deferred Compensation Plan, adopted October 18, 1994, effective October 24, 1994. (Exhibit to Cinergy's Form S-8, filed October 19, 1994.)
10-gg *+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-hh *+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-ii *+Split Dollar Insurance Agreement, effective as of May 1, 1993, between Cinergy and Jackson H. Randolph. (Exhibit to Cinergy's 1994 Form 10-K in File No. 1-11377.)
Cinergy and PSI
10-jj *PSI Union Employees' 401(k) Savings Plan, amended and restated October 24, 1994, effective January 1, 1992. (Exhibit to Cinergy's Form S-8, filed October 18, 1994.)
10-kk *PSI Employees' 401(k) Savings Plan, amended and restated October 24, 1994, effective January 1, 1992. (Exhibit to Cinergy's Form S-8, filed October 18, 1994.)
Cinergy
21 Subsidiaries of Cinergy
Cinergy, CG&E, PSI, and ULH&P
23 Consent of Independent Public Accountants.
24 Power of Attorney.
27 Financial Data Schedules (included in electronic submission only).
Cinergy
99-a 1995 Form 11-K Annual Report of Cinergy Directors' Deferred Compensation Plan.
99-b 1995 Form 11-K Annual Report of Cinergy Employee Stock Purchase and Savings Plan. (To be filed by amendment.)
____________ + Management contract, compensation plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company have each duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CINERGY CORP. THE CINCINNATI GAS & ELECTRIC COMPANY PSI ENERGY, INC. THE UNION LIGHT, HEAT AND POWER COMPANY Registrants
Dated: March 27, 1996
By James E. Rogers Vice Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date Cinergy, CG&E, PSI, and ULH&P Jackson H. Randolph Chairman
Cinergy Neil A. Armstrong Director Clement L. Buenger Director Phillip R. Cox Director Kenneth M. Duberstein Director George C. Juilfs Director Melvin Perelman, Ph.D. Director Thomas E. Petry Director John J. Schiff, Jr. Director Phillip R. Sharp Director Dudley S. Taft Director Oliver W. Waddell Director
Cinergy and PSI James K. Baker Director Michael G. Browning Director John A. Hillenbrand II Director Van P. Smith Director
CG&E and ULH&P William J. Grealis President and Director
PSI John M. Mutz President and Director
ULH&P Terry E. Bruck Group Vice President and Director Cheryl M. Foley Vice President, General Counsel, Secretary, and Director Stephen G. Salay Director
Cinergy, CG&E, PSI, and ULH&P
James E. Rogers Vice Chairman, Chief March 27, 1996 Attorney-in-fact for all Executive Officer, and Director the foregoing persons President of Cinergy (Principal Executive Officer)
J. Wayne Leonard Group Vice President and March 27, 1996 Chief Financial Officer Director of ULH&P (Principal Financial Officer)
Charles J. Winger Comptroller March 27, 1996 (Principal Accounting Officer)