ITEM 1. BUSINESS
Cinergy, CG&E, PSI, and ULH&P
Organization
Cinergy Corp., a Delaware corporation (Cinergy or Company), is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). Cinergy was created in the October 1994 merger of PSI Resources, Inc. (Resources) and The Cincinnati Gas & Electric Company (CG&E). The business combination was accounted for as a pooling of interests. Following the merger, Cinergy became the parent holding company of PSI Energy, Inc. (PSI), previously Resources' utility subsidiary, CG&E, Cinergy Investments, Inc. (Investments) and Cinergy Services, Inc. (Services).
Cinergy's two utility subsidiaries, CG&E and PSI, account for the majority of Cinergy's revenues and total assets.
Cinergy, CG&E, and ULH&P
CG&E
CG&E, an Ohio corporation, is a combination electric and gas public utility company with five wholly-owned utility subsidiaries, The Union Light, Heat and Power Company (ULH&P), Miami Power Corporation (Miami), The West Harrison Gas and Electric Company, an Indiana corporation (West Harrison), KO Transmission Company (KO Transmission), and Lawrenceburg Gas Company, an Indiana corporation (Lawrenceburg). In addition, CG&E has one wholly-owned non- utility subsidiary, Tri-State Improvement Company (Tri-State).
CG&E and its utility subsidiaries are engaged in the production, transmission, distribution, and sale of electric energy and/or the sale and transportation of natural gas in the southwestern portion of Ohio and adjacent areas in Kentucky and Indiana. The area served with electricity, gas, or both covers approximately 3,000 square miles, has an estimated population of 1.8 million people, and includes the cities of Cincinnati and Middletown in Ohio, Covington and Newport in Kentucky, and Lawrenceburg in Indiana.
KO Transmission, a Kentucky corporation, acquired an interest in an interstate natural gas pipeline in June 1996, to which CG&E was entitled as a result of a settlement with the Columbia Gas Transmission Corp. KO Transmission is engaged in the transportation of natural gas in interstate commerce between Kentucky and Ohio.
Tri-State, an Ohio corporation, is devoted to acquiring and holding property in Ohio, Kentucky, and Indiana for substations, electric and gas rights of way, office space, and other uses in CG&E's and its subsidiaries' operations.
ULH&P
ULH&P, a Kentucky corporation, is engaged in the transmission, distribution, and sale of electric energy and the sale and transportation of natural gas in northern Kentucky. The area served with electricity, gas, or both covers approximately 500 square miles, has an estimated population of 299,000 people, and includes the cities of Covington and Newport in Kentucky.
Cinergy and PSI
PSI
PSI, an Indiana corporation, is engaged in the production, transmission, distribution, and sale of electric energy in north central, central, and southern Indiana. It serves an estimated population of two million people located in 69 of the state's 92 counties including the cities of Bloomington, Columbus, Kokomo, Lafayette, New Albany, and Terre Haute.
PSI Energy Argentina, Inc., a wholly-owned subsidiary of PSI and an Indiana corporation (PSI Energy Argentina), was formed to invest in foreign utility companies. PSI Energy Argentina is a member of a multinational consortium which has controlling ownership of Edesur S.A. (Edesur). Edesur is an electricity-distribution network serving the southern half of Buenos Aires, Argentina. Edesur provides distribution services to 2.1 million customers. PSI Energy Argentina owns a small equity interest in this project and provides operating and consulting services.
South Construction Company, Inc., a wholly-owned subsidiary of PSI and an Indiana corporation (South Construction), has been used solely to hold legal title to real estate and interests in real estate which are either not used and useful in the conduct of PSI's business (such as undeveloped real estate of PSI abutting a PSI office building) or which has some defect in title which is unacceptable to PSI. Most of the real estate to which South Construction acquires title relates to PSI's utility business.
Cinergy
Investments
Investments, a Delaware corporation, is a non-utility subholding company that was formed to operate Cinergy's domestic non-utility and international businesses and interests. Investments holds the following non-utility subsidiaries and interests, which are more fully described below: Enertech Associates, Inc. (Enertech), formerly Power International, Inc. (Power International), formerly Enertech Associates International, Inc.; Cinergy Resources, Inc. (Cinergy Resources), formerly CG&E Resource Marketing, Inc.; CGE ECK, Inc.; Cinergy Technology, Inc. (Technology), formerly PSI Environmental Corp.; Cinergy Solutions, Inc. (Solutions); Cinergy Cooling Corp. (CoolCo); Cinergy UK, Inc. (Cinergy UK), formerly ME Holdings, Inc.; and Cinergy Capital & Trading, Inc. (Capital & Trading), formerly Wholesale Power Services, Inc.
Enertech was incorporated in Ohio in 1992 as a vehicle for CG&E to offer utility management consulting services and to pursue investment opportunities in energy-related areas, including demand-side management (DSM) services, consulting, energy and fuel brokering, engineering services, construction and/or operation of generation, cogeneration, and independent power production facilities, and project development. In July 1994, Enertech acquired Beheer- En Belegginsmaatschappij Bruwabel B.V. (Bruwabel) and its subsidiaries for the purpose of pursuing design, engineering, and development work involving energy privatization projects, primarily in the Czech Republic. In June 1996, Investments sold what remained of its investment in Bruwabel and its subsidiaries and their assets, including the Vytopna Kromeriz Heating Plant which was acquired by Power Development s.r.o. in 1995. (See Note 12(d) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
Cinergy Resources, a Delaware corporation, was formed to hold CG&E's interest in U.S. Energy Partners, a gas marketing partnership that was dissolved effective September 1, 1995. Upon dissolution, Cinergy Resources took its portion of the partnership assets to continue in the gas marketing business. Cinergy Resources competes with traditional, regulated local distribution companies by offering "merchant service" (i.e., acquiring natural gas for resale to end-use customers) and brokers gas to industrial and large commercial customers.
Technology, an Indiana corporation, was created to manage certain existing technology-related investments of Cinergy, assess the market potential for technology-related product and service development opportunities, and form key alliances for technology-related product development.
Solutions, a Delaware corporation, was formed to market an array of energy- related products and services and develop, acquire, own, and operate certain energy-related projects. Solutions holds a 50% interest in Trigen-Cinergy Solutions LLC, a Delaware limited liability company, (Trigen-Cinergy). Trigen-Cinergy was formed to build, own, and operate cogeneration and trigeneration facilities for industrial plants, office buildings, shopping centers, hospitals, universities, and other major energy users that can benefit from combined heat and power production economies. Trigen-Cinergy will also provide energy and asset management services, including fuel procurement, ancillary to its activities. (See Note 1(e)(ii) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
CoolCo, incorporated in Ohio in February 1996, was formed to engage in the district cooling business. The City of Cincinnati awarded an exclusive franchise that permits CoolCo to construct, install, maintain, and operate a chilled water system in the downtown business district of Cincinnati, Ohio. Construction of such system began in the third quarter of 1996.
Cinergy UK, a Delaware corporation, was formed to hold Cinergy's 50% interest in Avon Energy Partners Holdings, an unlimited liability company, and its wholly owned subsidiary, Avon Energy Partners PLC, a limited liability company (collectively, Avon Energy). During 1996, Avon Energy acquired all of the outstanding common stock of Midlands Electricity plc (Midlands), a United Kingdom (U.K.) regional electric company. Midlands primarily distributes and supplies electricity to 2.2 million industrial, commercial, and residential customers. In addition, Midlands, together with its subsidiaries, generates power, supplies natural gas to industrial and commercial customers, and performs electrical contracting services. (See Notes 1(e)(i) and 12(g) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
PSI Recycling, Inc. (Recycling) is an Indiana corporation which recycled metal from CG&E and paper, metal, and other materials from PSI, its largest single supplier, and other sources. Investments sold the assets of Recycling in August 1996.
Power Equipment Supply Co. (PESCO) was incorporated in Indiana to sell equipment and parts from a PSI generating plant which was canceled, the Marble Hill Nuclear Project. PESCO also purchased equipment for resale, brokered equipment, and sold equipment on consignment for others. PESCO discontinued operations in early 1996.
Capital & Trading, an Indiana corporation, was formed to engage in the business of marketing power, emission allowances, electricity futures, and related products and services and to provide consulting services in the wholesale power-related markets. Capital & Trading will be devoted to marketing and brokering energy commodities to customers nationwide.
Cinergy, CG&E, PSI, and ULH&P
Services
Services, a Delaware corporation, is the service company for the Cinergy system, providing member companies with a variety of administrative, management, and support services.
Cinergy, CG&E, PSI, and ULH&P
Customer, Sales, and Revenue Data
The number of customers served at year-end and the percent of operating revenues derived from the sale of electricity and the sale and transportation of natural gas for each registrant for 1996 are as follows:
Operating Customers Revenues Registrant Electric Gas Electric Gas
Cinergy and subsidiaries 1,391,938 450,047 84% 14% CG&E and subsidiaries 729,391 450,047 75% 24% PSI 662,549 N/A 98% N/A ULH&P 115,969 75,783 71% 28%
Cinergy's utilities' service territory spans 86 counties in Ohio, Indiana, and Kentucky and includes approximately 840 cities, towns, unincorporated communities, and adjacent rural areas, including municipal utilities and rural electric cooperatives.
The service territory of CG&E and its utility subsidiaries, including ULH&P, is heavily populated and characterized by a stable residential customer base and a diverse mix of industrial customers. CG&E's and its utility subsidiaries' service territory spans 19 counties in Ohio, Indiana, and Kentucky (of which ULH&P serves six counties in Kentucky) and includes approximately 130 (44 for ULH&P) cities, towns, unincorporated communities, and adjacent rural areas, including municipal utilities and rural electric cooperatives. The area served by PSI is a residential, agricultural, and widely diversified industrial territory. PSI's service territory includes approximately 710 cities, towns, unincorporated communities, and adjacent rural areas, including municipal utilities and rural electric cooperatives. No one customer accounts for more than 5% of operating revenues for PSI, 5% of electric or gas operating revenues for CG&E and its utility subsidiaries, or 10% of electric or gas operating revenues for ULH&P. Sales of electricity and gas sales and transportation are affected by seasonal weather patterns, and, therefore, operating revenues and associated operating expenses are not distributed evenly during the year.
Cinergy, CG&E, and ULH&P
Financial Information by Business Segment
For financial information by business segment, see Note 15 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data." For a discussion of the potential divestiture of CG&E's, including ULH&P's, gas operations, see Note 12(f) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data." Regulation
Cinergy, CG&E, PSI, and ULH&P
Cinergy, its utility subsidiaries, and certain of its non-utility subsidiaries are subject to regulation by the Securities and Exchange Commission (SEC) under the Public Utilities Holding Company Act of 1935 (PUHCA) with respect to, among other things, issuances and sales of securities, acquisitions and sales of certain utility properties, acquisitions and retentions of interests in non-utility businesses, intrasystem sales of certain goods and services, the method of keeping accounts, and access to books and records. In addition, the PUHCA generally limits registered holding companies to a single "integrated" public utility system, which the SEC traditionally has interpreted to prohibit a registered holding company, with limited exceptions, from owning both gas and electric properties. (Refer to the information appearing under the captions "Repeal of the PUHCA" in the "Competitive Pressures" section and "Potential Divestiture of Gas Operations" in the "Regulatory Matters" section in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and to Note 1(f) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
CG&E, ULH&P, Miami, and PSI are each subject to regulation by the Federal Energy Regulatory Commission (FERC) under the Federal Power Act with respect to the classification of accounts, rates for wholesale sales of electricity, interconnection agreements, and acquisitions and sales of certain utility properties. In addition, services by KO Transmission are rendered in accordance with terms and conditions and at rates contained in a gas tariff filed with the FERC. Transportation of gas between CG&E and ULH&P is subject to regulation by the FERC under the Natural Gas Act.
Cinergy, CG&E, and ULH&P
CG&E, as a public utility under the laws of Ohio, is also subject to regulation by the Public Utilities Commission of Ohio (PUCO) as to retail electric and gas rates, services, accounts, depreciation, issuance of securities, acquisitions and sales of certain utility properties, and in other respects as provided by Ohio law. Rates within municipalities in Ohio are subject to original regulation by the municipalities. The Ohio Power Siting Board, a division of the PUCO, has jurisdiction in Ohio over the location, construction, and initial operation of new electric generating facilities and certain electric and gas transmission lines presently utilized by CG&E. As to retail rates and other matters, ULH&P is regulated by the Kentucky Public Service Commission (KPSC), and West Harrison and Lawrenceburg are regulated by the Indiana Utility Regulatory Commission (IURC).
Cinergy and PSI
PSI, as a public utility under the laws of Indiana, is also regulated by the IURC as to its retail rates, services, accounts, depreciation, issuance of securities, acquisitions and sales of certain utility properties, and in other respects as provided by Indiana law. Prior to the construction, purchase, or lease of a facility used for the generation of electricity, a public utility in Indiana must obtain from the IURC a certificate of public convenience and necessity.
Cinergy, CG&E, PSI, and ULH&P
Regulatory Matters
Refer to the information appearing under the caption "Regulatory Matters" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Power Supply
Cinergy, CG&E, PSI, and ULH&P
Cinergy and other utilities in an eight-state region are participating in the East Central Area Reliability Coordination Agreement for the purpose of coordinating the planning and operation of generating and transmission facilities to provide for maximum reliability of regional bulk power supply. (Refer to the information appearing under the caption "Cinergy's Response to the Changing Competitive Environment" in the "Competitive Pressures" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of Cinergy's involvement in a coalition for operation of a regional transmission system.)
In addition to an intercompany tie between CG&E's and PSI's electric systems, Cinergy's electric system, which is operated by Services, is interconnected with the electric systems of Indiana Michigan Power Company, Columbus Southern Power Company, Ohio Power Company (all doing business as American Electric Power Company, Inc. (AEP)), Central Illinois Public Service Company, East Kentucky Power Cooperative, Hoosier Energy Rural Electric Cooperative, Inc., Indianapolis Power and Light Company, Kentucky Utilities Company, Louisville Gas & Electric Company (LG&E), Northern Indiana Public Service Company, Southern Indiana Gas and Electric Company, The Dayton Power and Light Company, and Ohio Valley Electric Corporation.
Cinergy and PSI
PSI has a power supply relationship with Wabash Valley Power Association, Inc. (WVPA) and Indiana Municipal Power Agency (IMPA) through power coordination agreements. WVPA and IMPA are also parties with PSI to a joint transmission and local facilities agreement.
Cinergy, CG&E, and ULH&P
ULH&P does not own or operate any electric generating facilities. Its requirements for electric energy are purchased from CG&E at rates regulated by the FERC.
Fuel Supply
Cinergy
Cinergy purchases approximately 25 million tons of coal annually for use by CG&E and PSI, which historically would rank Cinergy as the sixth largest utility coal purchaser in the United States.
Cinergy, CG&E, and PSI
A major portion of the coal required by CG&E and PSI is obtained through both long- and short-term coal supply agreements, with the remaining requirements purchased on the spot market. The prices to be paid under most of these contracts are subject to adjustment. In addition, some of these agreements include extension options and termination provisions pertaining to coal quality. The coal delivered under these contracts is primarily from mines located in Indiana, Illinois, and Pennsylvania for PSI and Ohio, Kentucky, West Virginia, and Pennsylvania for CG&E.
CG&E and PSI monitor alternative sources to assure a continuing availability of economical fuel supplies. The companies intend to maintain the practice of purchasing a portion of their coal requirements on the spot market and will continue to investigate the least cost coal options in connection with their compliance with the Clean Air Act Amendments of 1990 (CAAA) (see the information appearing under the caption "Environmental Issues" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations").
The companies believe they will be able to obtain sufficient coal to meet future generating requirements. However, both CG&E and PSI are unable to predict the extent to which coal availability and price may ultimately be affected by future environmental requirements. Presently, CG&E and PSI expect the cost of coal to rise in the long run as the supply of more accessible and higher-grade coal diminishes and as mining, transportation, and other related costs continue an upward trend.
Cinergy, CG&E, and ULH&P
Gas Supply
In 1996, CG&E and its utility subsidiaries, including ULH&P, purchased the majority of their natural gas supply (78%) from firm supply agreements, with remaining volumes purchased in the spot market. These firm contracts feature dual levels of gas supply: base load for continuous supply for CG&E's and its utility subsidiaries' core requirements, and "swing" load, which is gas available on a daily basis to accommodate changes in demand. CG&E pays reservation charges for firm base and swing supplies. These charges guarantee delivery from the supplier during extreme weather and protect the supplier from fluctuations in daily prices associated with swing supplies.
However, as the trend of industrial customers purchasing gas directly from producers and utilizing CG&E's facilities for transportation increases, CG&E and its subsidiaries seek to minimize contract commitment costs to firm suppliers, and reduce the amount of reservation charges paid to suppliers for firm supply. Accordingly, CG&E and its subsidiaries anticipate purchasing approximately 50% of their gas supply in the spot market and only 50% from firm supply agreements in 1997.
Gas purchased by CG&E and its subsidiaries is transported on interstate pipelines either directly to CG&E's and its subsidiaries' distribution systems, or it is injected into pipeline storage facilities for withdrawal and delivery in the future. Most of CG&E's and its utility subsidiaries' gas supplies are sourced from the Gulf of Mexico coastal area. CG&E and its subsidiaries have also obtained limited supply sourced from the Appalachian region and the mid-continent (Arkansas - Oklahoma) basin, and from methane gas recovered from an Ohio landfill. Over the long term, natural gas is expected to retain its competitiveness with alternative fuels. However, colder or warmer than normal winter weather conditions can cause significant price fluctuation.
Cinergy, CG&E, PSI, and ULH&P
Competition
Refer to the information appearing under the caption "Competitive Pressures" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Cinergy, CG&E, PSI, and ULH&P
Capital Requirements
Refer to the information appearing under the caption "Capital Requirements" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Cinergy, CG&E, and PSI
Environmental Matters
Environmental compliance construction expenditures for 1997 for Cinergy and its subsidiaries are forecasted to be as follows:
Registrant Expenditures (in thousands)
CG&E and subsidiaries $709 PSI 245 Cinergy and subsidiaries $954
In addition, refer to the information appearing under the caption "Environmental Issues" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Employees
Cinergy
The number of employees of Cinergy and its subsidiaries at December 31, 1996, was 7,973, of whom 4,678 belonged to bargaining units. These bargaining unit employees were represented by labor agreements between CG&E and its subsidiaries, including ULH&P, or PSI and the applicable union organization. Of Cinergy's total employees, 3,019 employees were represented by the International Brotherhood of Electrical Workers (IBEW), 456 were represented by the United Steelworkers of America (USWA), and 1,203 were represented by the Independent Utilities Union (IUU).
Employees assigned to Services at December 31, 1996, totaled 2,798, of whom 905 belonged to bargaining units. These bargaining unit employees were represented by the labor agreements previously discussed. Of Services' total employees, 477 were represented by the IUU, 7 were represented by the USWA, and 421 were represented by the IBEW (142 were represented by the agreement with PSI and 279 were represented by the agreement with CG&E).
Cinergy and CG&E
The number of employees of CG&E and its subsidiaries at December 31, 1996, was 2,964, of whom CG&E employed 2,676, ULH&P employed 276, and Lawrenceburg employed 12.
CG&E and its subsidiaries have collective bargaining agreements with several union organizations. Of CG&E's and its subsidiaries' total employees 726 employees were represented by the IUU, 449 were represented by the USWA, and 1,215 were represented by the IBEW. The current contract between CG&E and the IUU will expire in April 2001. CG&E and its subsidiaries have a contract with the USWA expiring May 15, 2002. The IBEW contract expires April 1, 2001.
Cinergy and PSI
The number of employees of PSI at December 31, 1996, was 2,211, of whom 1,383 were represented by the IBEW.
PSI's collective bargaining agreement with the IBEW will expire at the end of April 1999.
Cinergy and ULH&P
The number of employees of ULH&P at December 31, 1996, was 276, of whom 229 belonged to bargaining units. These bargaining unit employees were represented by the same labor agreements between CG&E and the applicable union organization. Of ULH&P's total employees, 62 employees were represented by the IBEW, 102 were represented by the USWA, and 65 were represented by the IUU.
The current contract between ULH&P and the IUU will expire in April 2001. ULH&P has agreements with the USWA and IBEW that will expire May 15, 2002, and April 1, 2001, respectively.
ITEM 2.
ITEM 2. PROPERTIES
Cinergy, CG&E, PSI, and ULH&P
Substantially all utility plant is subject to the lien of each applicable company's first mortgage bond indenture.
In addition to the information discussed herein, refer to Note 13 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data."
Cinergy, CG&E, and PSI
At December 31, 1996, the Cinergy utility subsidiaries owned electric generating plants, or portions thereof in the case of jointly owned plants, with net capabilities (winter ratings) as shown in the following table:
Cinergy and CG&E
CG&E
CG&E's 1996 peak load, which occurred on August 6 and was exclusive of off- system transactions, was 4,452 mw. For the period 1997 through 2006, peak load and kilowatt-hour (kwh) sales are each forecasted to have annual growth rates of 2%. These forecasts reflect CG&E's load growth, alternative fuel choices, population growth, and housing starts. These forecasts exclude an assessment of DSM, non-firm power transactions, and any potential off-system, long-term firm power sales.
As of December 31, 1996, CG&E's transmission system consisted of 388 circuit miles of 345,000 volt line, 618 circuit miles of 138,000 volt line, 520 circuit miles of 69,000 volt line, and 116 circuit miles of lesser volt line, all within the states of Ohio and Kentucky. In addition, as of December 31, 1996, CG&E's distribution system consisted of 14,647 circuit miles, all within the state of Ohio. As of the same date, CG&E's transmission substations had a combined capacity of 14,845,000 kilovolt-amperes, and the distribution substations had a combined capacity of 5,968,000 kilovolt-amperes. A portion of CG&E's total transmission system is jointly owned, primarily in connection with its jointly owned electric generating units.
During 1996, almost all of the electricity generated by units owned by CG&E or in which it has an ownership interest was produced by coal-fired generating units. Those units generate most of the electric requirements of CG&E and its utility subsidiaries.
CG&E owns two propane/air peakshaving plants. Associated with these plants are two underground caverns, one with a seven million gallon capacity and one with an eight million gallon capacity. Both plants and storage caverns are located in Ohio and are used primarily to augment CG&E's supply of natural gas during periods of peak demand and emergencies. CG&E also owns natural gas distribution systems consisting of 5,632 miles of mains and service lines in southwestern Ohio.
Cinergy and PSI
PSI
PSI's 1996 peak load, which occurred on August 7 and was exclusive of off- system transactions, was 5,227 mw. For the period 1997 through 2006, peak load and kwh sales are each forecasted to have annual growth rates of 2%. These forecasts reflect PSI's load growth, alternative fuel choices, population growth, and housing starts. These forecasts exclude an assessment of DSM, non-firm power transactions, and any potential off-system, long-term firm power sales.
As of December 31, 1996, PSI's transmission system consisted of 719 circuit miles of 345,000 volt line, 656 circuit miles of 230,000 volt line, 1,595 circuit miles of 138,000 volt line, and 2,428 circuit miles of 69,000 volt line, all within the state of Indiana. In addition, as of December 31, 1996, PSI's distribution system consisted of 19,486 circuit miles, all within the state of Indiana. As of the same date, PSI's transmission substations had a combined capacity of 21,535,000 kilovolt-amperes, and the distribution substations had a combined capacity of 6,299,000 kilovolt-amperes.
During 1996, almost all of PSI's kwh production was obtained from coal-fired and hydroelectric generation.
Cinergy, CG&E, and ULH&P
ULH&P
As of December 31, 1996, ULH&P owned 104 circuit miles of 69,000 volt electric transmission line, an electric distribution system consisting of 2,510 circuit miles, and a gas distribution system consisting of 1,271 miles of mains and service lines in northern Kentucky. ULH&P also owns a propane/air peakshaving plant, a seven million gallon capacity underground cavern for the storage of liquid propane, and related liquid propane feeder lines, located in northern Kentucky and adjacent to one of the gas lines that transports natural gas to CG&E. The propane/air plant and cavern are used primarily to augment CG&E's and ULH&P's supply of natural gas during periods of peak demand and emergencies.
Cinergy and CG&E
Other Utility Subsidiaries
As of December 31, 1996, Lawrenceburg owned a gas distribution system consisting of 170 miles of mains and service lines in Indiana adjacent to the western part of CG&E's service area. Lawrenceburg is connected with and sells gas at wholesale to the city of Aurora, Indiana, and is also connected within Indiana with the lines of Texas Gas Transmission Corporation and Texas Eastern Transmission Corporation.
As of December 31, 1996, West Harrison owned a small electric distribution system consisting of 10 circuit miles in Indiana adjacent to CG&E's service area. As of the same date, Miami owned 40 miles of 138,000 volt transmission line connecting the lines of LG&E with those of CG&E.
As of December 31, 1996, KO Transmission owned a 32.67% interest in a 90-mile interstate natural gas pipeline. KO Transmission transports gas from southeast Kentucky northward to the service territories of CG&E and ULH&P.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Cinergy, CG&E, and PSI
Merger Litigation
Hearings before the United States Court of Appeals for the District of Columbia Circuit in connection with AEP's petition for review of the FERC's order approving the merger of CG&E and Resources to form Cinergy (Merger Order) concluded on March 18, 1997. AEP has objected to the Merger Order alleging that the post-merger operations of Cinergy would require the use of AEP's transmission facilities on a continuous basis without compensation. AEP contends that the FERC, in issuing the Merger Order, did not adequately evaluate the impact on AEP or whether the need to use AEP's transmission facilities would interfere with Cinergy achieving merger benefits. In addition, AEP claims that the FERC failed to evaluate the extent to which the merged facilities' operations would be consistent with the integrated public utility concept of the PUHCA. CG&E and PSI have intervened in this action. While a decision in the appeal is expected by the end of 1997, Cinergy, CG&E, and PSI currently cannot predict the outcome.
Cinergy and PSI
Wabash Valley Power Association, Inc. Settlement Agreement See Note 12(e) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data."
Cinergy, CG&E, and PSI
Enertech Litigation
See Note 12(d) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data."
ULH&P
ULH&P has no material pending legal proceedings.
Cinergy, CG&E, PSI, and ULH&P
In addition to the above litigation, see " Regulatory Matters" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes 12(b), 12(c), and 12(f) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cinergy, CG&E, and PSI
None.
ULH&P
Omitted pursuant to instruction I(2)(c). EXECUTIVE OFFICERS OF THE REGISTRANTS (at February 28, 1997)
Age at Dec. 31, Name 1996 Office & Date Elected or in Job
Cinergy, CG&E, and PSI
Jackson H. Randolph 66 Chairman of Cinergy, CG&E, and PSI - 1995 Chairman and Chief Executive Officer of Cinergy, CG&E, and PSI - 1994 Chairman, President, and Chief Executive Officer of CG&E - 1993 President and Chief Executive Officer of CG&E - 1986
James E. Rogers 49 Vice Chairman, President, and Chief Executive Officer of Cinergy - 1995 Vice Chairman and Chief Executive Officer of CG&E and PSI - 1995 Vice Chairman, President, and Chief Operating Officer of Cinergy - 1994 Vice Chairman and Chief Operating Officer of CG&E and PSI - 1994 Chairman and Chief Executive Officer of Resources - 1993 Chairman, President, and Chief Executive Officer of PSI - 1990
Cheryl M. Foley 49 Vice President, General Counsel, and Secretary of CG&E - 1995 Vice President, General Counsel, and Secretary of Cinergy - 1994 Vice President, General Counsel, and Secretary of PSI and Resources - 1991 Vice President and General Counsel of Resources - 1990
Elizabeth K. Lanier 1/ 45 Vice President and Chief of Staff - 1996 Partner - Frost & Jacobs 2/ - 1984
J. Wayne Leonard 46 President, Energy Commodities Business Unit of Cinergy - 1996 Group Vice President and Chief Financial Officer of CG&E and PSI - 1995 Group Vice President and Chief Financial Officer of Cinergy - 1994 Senior Vice President and Chief Financial Officer of PSI and Resources - 1992 Vice President and Chief Financial Officer of PSI and Resources - 1989
William L. Sheafer 53 Treasurer of Cinergy and PSI - 1994 Treasurer of CG&E - 1987
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at Dec. 31, Name 1996 Office & Date Elected or in Job
Larry E. Thomas 51 President, Energy Delivery Business Unit of Cinergy - 1996 Group Vice President and Chief Transformation Officer of Cinergy, CG&E, and PSI - 1995 Group Vice President, Reengineering and Operations Services of CG&E and PSI - 1995 Group Vice President, Reengineering and Operations Services of Cinergy - 1994 Senior Vice President and Chief Operations Officer of PSI - 1992 Senior Vice President and Chief Operating Officer, Customer Operations of PSI - 1990
Charles J. Winger 51 Comptroller of CG&E - 1995 Comptroller of Cinergy - 1994 Comptroller of Resources - 1988 Comptroller of PSI - 1984
Cinergy and CG&E
William J. Grealis 3/ 51 President, Energy Services Business Unit of Cinergy - 1996 President of CG&E - 1995 Vice President of Cinergy - 1995 President, Gas Business Unit of CG&E - 1995 President of Investments - 1995 Partner - Akin, Gump, Strauss, Hauer & Feld 2/ - 1978
Cinergy and PSI
John M. Mutz 4/ 61 Vice President of Cinergy - 1995 President of PSI - 1994 President of Resources - 1993 President - Lilly Endowment, Inc. 2/ - 1989
Cinergy
J. Joseph Hale, Jr. 47 Vice President of Cinergy - 1996 General Manager, Marketing Operations of CG&E - 1995 President of Cinergy Foundation, Inc. 5/ - 1992 President - The Kaiser Group, Inc. 2/ - 1989
EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)
Age at Dec. 31, Name 1996 Office & Date Elected or in Job
M. Stephen Harkness 48 Vice President of Cinergy - 1996 Executive Vice President and Chief Operating Officer of Trigen-Cinergy Solutions LLC 6/ - 1996 General Manager, Corporate Development and Financial Services of Cinergy - 1994 Treasurer of PSI and Resources - 1986
Jerry W. Liggett 55 Vice President of Cinergy - 1996 Senior Manager, Human Resources Strategy of Cinergy - 1995 General Manager, Employee Relations, Compensation & Benefits of Cinergy - 1995 Executive Director, Human Resources of PSI and Resources - 1990
Michael M. Sample 44 Vice President of Cinergy - 1996 General Manager, International Investments of Cinergy - 1994 Vice President, Government Affairs of PSI and Resources - 1991 ULH&P
Omitted pursuant to instruction I(2)(c).
Cinergy, CG&E, and PSI
None of the officers is related in any manner. Executive officers of Cinergy are elected to the offices set opposite their respective names until the next annual meeting of the Board of Directors and until their successors shall have been duly elected and shall have been qualified.
1/ Prior to becoming Vice President effective June 1, 1996, Ms. Lanier was a partner in the law firm of Frost & Jacobs located in Cincinnati, Ohio.
2/ Non-affiliate of Cinergy.
3/ Prior to becoming President of Investments, Mr. Grealis was a partner in the Washington, D.C. law firm of Akin, Gump, Strauss, Hauer & Feld. In addition, prior to the merger, Mr. Grealis was President of PSI Investments, Inc. on an interim basis beginning in 1992.
4/ Prior to becoming President of Resources, Mr. Mutz was President of Lilly Endowment, Inc., a private philanthropic foundation located in Indianapolis, Indiana.
5/ An affiliated public benefit corporation organized and operating exclusively for charitable purposes.
6/ Joint venture company formed by Cinergy and Trigen Energy Corporation.
PART II
	ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON 	EQUITY AND RELATED STOCKHOLDER MATTERS
Cinergy, CG&E, PSI, and ULH&P
Cinergy's common stock is listed on the New York Stock Exchange and has unlisted trading privileges on the Boston, Chicago, Cincinnati, Pacific, and Philadelphia exchanges. As of February 7, 1997, Cinergy's most recent dividend record date, there were 77,405 common shareholders of record. The following table shows the high and low sales prices per share, if applicable, and the dividends on common stock declared by Cinergy, CG&E, PSI, and ULH&P for the past two years:
Market Price (a) Dividends Declared_____ High Low (per share) (in thousands)
Cinergy 4th Quarter 31 1/8 27 3/4 .43 3rd Quarter 27 7/8 25 1/4 .43 2nd Quarter 27 24 5/8 .43 1st Quarter 25 1/4 23 3/8 .43
CG&E 4th Quarter 56 600 (b) 3rd Quarter 55 400 (b) 2nd Quarter 55 900 (b) 1st Quarter 51 650 (b)
ULH&P 4th Quarter 6.00 (b)
Cinergy 4th Quarter 34 1/4 30 7/8 .45 3rd Quarter 32 29 1/8 .43 2nd Quarter 32 27 1/2 .43 1st Quarter 32 1/8 28 1/4 .43
CG&E 4th Quarter 50 949 (b) 3rd Quarter 239 909 (b) 2nd Quarter 45 116 (b) 1st Quarter 41 995 (b)
PSI 4th Quarter 29 713 (b) 3rd Quarter 28 311 (b) 2nd Quarter 28 165 (b) 1st Quarter 25 887 (b)
ULH&P 4th Quarter 8.50 (b)
(a) Market price for CG&E, PSI, and ULH&P is not applicable.
(b) All of CG&E's and PSI's dividends were paid to Cinergy and all of ULH&P's dividends were paid to CG&E.
See Note 2(b) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data" for a brief description of common dividend restrictions.
All CG&E and PSI common stock is held by Cinergy and all ULH&P common stock is held by CG&E; therefore, there is no public trading market for their common stock.
	ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Cinergy 1996 1995 1994 1993 1992 	 (in millions, except per share amounts)
Operating revenues (1) $3 243 $3 023 $2 888 $2 833 $2 613 Net income (1) 335 347 191 63 271 Common stock Earnings per share (1) (5) 2.00 2.22 1.30 .43 1.91 Dividends declared per share 1.74 1.72 1.50 1.46 1.39
Total assets (2) 8 849 8 220 8 150 7 804 7 133 Cumulative preferred stock of subsidiaries subject to mandatory redemption (3) - 160 210 210 210 Long-term debt (4) 2 535 2 531 2 715 2 645 2 547 Long-term debt due within one year 140 202 60 - 46
CG&E 1996 1995 1994 1993 1992 (in millions)
Operating revenues (1) $1 976 $1 848 $1 788 $1 752 $1 553 Net income (loss)(1) 227 236 158 (9) 202
Total assets (2) 4 967 5 197 5 182 5 144 4 802 Cumulative preferred stock subject to mandatory redemption (3) - 160 210 210 210 Long-term debt (4) 1 565 1 703 1 838 1 829 1 810 Long-term debt due within one year 130 152 - - 7
PSI 1996 1995 1994 1993 1992 (in millions)
Operating revenues (1) $1 332 $1 248 $1 114 $1 092 $1 066 Net income (1) 126 146 82 125 107
Total assets (2) 3 295 3 076 2 945 2 645 2 300 Long-term debt (4) 970 828 878 816 737 Long-term debt due within one year 10 50 60 - 40
Cinergy, CG&E, and PSI
(1) See Notes 1 and 15 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data."
(2) See Notes 1(f) and 6 of the "Notes to Financial Statements" in (3) "Item 8. Financial Statements and Supplementary Data."
(3) See Note 3 of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data."
(4) See Note 4 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data."
(5) Includes costs incurred in 1996 by Cinergy of $.12 per share related to the reacquisition of 90% of CG&E's preferred stock through a tender offer.
In addition, see "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cinergy, CG&E, PSI, and ULH&P
CAUTIONARY STATEMENTS REGARDING FORWARD - LOOKING INFORMATION Matters discussed in this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" reflect and elucidate the Companies' corporate vision of the future and, as a part of that, outline goals and aspirations, as well as specific projections. These goals and projections are considered forward-looking statements and are based on management's beliefs, as well as certain assumptions made by management. In addition to any assumptions and other factors that are referred to specifically in connection with these statements, other factors that could cause actual results to differ materially from those indicated in any forward-looking statements include, among others:
Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages; unusual maintenance or repairs; unanticipated changes to fossil fuel costs, gas supply costs, or availability constraints due to higher demand, shortages, transportation problems or other developments; environmental incidents; or electric transmission or gas pipeline system constraints.
Increased competition in the electric and gas utility industries including effects of: industry restructuring; transmission system operation and/or administration; customer choice; and cogeneration.
Regulatory factors such as unanticipated changes in rate-setting policies or procedures; recovery of investments made under traditional regulation, and the frequency and timing of rate increases.
Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), state public utility commissions, state entities which regulate natural gas transmission, gathering and processing and similar entities with regulatory oversight.
Economic conditions including inflation rates and monetary fluctuations.
Changing market conditions and a variety of other factors associated with physical energy and financial trading activities including, but not limited to, price, basis, credit, liquidity, volatility, capacity, transmission, currency exchange, interest rate, and warranty risks.
Availability or cost of capital, resulting from changes in: Cinergy and its subsidiaries, interest rates, and securities ratings or market perceptions of the utility industry and energy-related industries.
Employee workforce factors including changes in key executives, collective bargaining agreements with union employees, or work stoppages.
Legal and regulatory delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures.
Costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters, including but not limited to those described in Note 12 of the "Notes to Financial Statements" in "Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company:
We have audited the financial statements of Cinergy Corp. (a Delaware Corporation), The Cincinnati Gas & Electric Company (an Ohio Corporation), PSI Energy, Inc. (an Indiana Corporation), and The Union Light, Heat and Power Company (a Kentucky Corporation), as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, as listed in the index on page 48. These financial statements and the schedules referred to below are the responsibility of management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental financial statement schedules listed in the index on page 49 pursuant to Item 14, are presented for purposes of complying with the Securities and Exchange Commission's Rules and Regulations under the Securities Exchange Act of 1934 and are not a required part of the basic financial statements. The supplemental financial statement schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP Cincinnati, Ohio, January 29, 1997
RESULTS OF OPERATIONS - CINERGY
Kilowatt-Hour (kwh) Sales
Cinergy's total kwh sales in 1996, as compared to 1995, increased 11.0% reflecting an increase in sales to all customer classes. Increased activity in Cinergy's power marketing and trading operations led to higher non-firm power sales for resale. The increase in retail sales which reflects a higher average number of residential and commercial customers was partially offset by the return to more normal weather in 1996. The increase in industrial sales was due to growth in the primary metals sector.
As compared to 1994, total kwh sales in 1995 increased 4.1% reflecting higher sales to all retail customer classes. Contributing significantly to this increase were higher residential and commercial sales due to warmer weather during the 1995 summer cooling season and colder weather during the fourth quarter of 1995. Additionally, increased sales to industrial customers, reflecting growth in the primary metals and chemicals sectors, contributed to the increased kwh sales level. These increases were offset, in part, by a decline in non-firm power sales for resale.
Total kwh sales increased 2.8% in 1994, as compared to 1993, due, in large part, to non-firm power sales for resale, reflecting third-party, short-term power sales to other utilities through PSI's system and direct power sales by PSI to other utilities. This increase was partially offset by CG&E's reduced power sales to other utilities in 1994. Also significantly contributing to the total kwh sales levels were increased sales to industrial customers. This increase reflected growth in the primary metals and transportation equipment sectors. Commercial sales increased due, in part, to new customers. A decrease in residential sales resulted from the milder weather experienced during the third and fourth quarters of 1994.
Year-to-year changes in kwh sales for each major class of customers are shown below:
Increase (Decrease) from Prior Year
1996 1995 1994_ Retail Residential 2.4% 5.8% (1.7)% Commercial 1.3 4.3 1.9 Industrial 3.3 4.6 4.6
Total retail 2.4 4.9 1.6
Sales for resale Firm power obligations 10.5 1.7 2.5 Non-firm power transactions 82.0 (1.3) 14.4
Total sales for resale 59.6 (.4) 10.5
Total sales 11.0 4.1 2.8
Cinergy currently forecasts a 2% annual compound growth rate in kwh sales over the 1997 through 2001 period. This forecast does not reflect the effects of DSM programs and excludes non-firm power sales for resale and any potential new off-system, long-term firm power sales.
Thousand Cubic Feet (Mcf) Sales and Transportation
Mcf gas sales and transportation volumes increased 8.4%, as compared to 1995. Colder weather in the first quarter of 1996 and cooler than normal weather early in the second quarter of 1996 led to increased gas sales to residential and commercial customers. Also contributing to the increase in total sales was an increase in the number of residential and commercial customers. Industrial sales decreased and gas transported increased as customers continued to purchase gas directly from suppliers using transportation services provided by CG&E. The increase in transportation volumes mainly reflects demand for gas transportation services in the primary metals sector.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared to 1994. Increased sales to residential customers, resulting from colder weather during the fourth quarter of 1995 and an increase in the number of customers, contributed to the higher sales levels. Additionally, increases in commercial and industrial transportation volumes, which resulted from customers electing to purchase gas directly from suppliers, more than offset declines in industrial and commercial sales. The increased transportation volumes mainly reflect industrial demand for gas transportation services in the primary metals, food products, and paper products sectors.
The milder weather experienced in 1994 contributed to a decrease in residential and commercial gas sales volumes and led to the decrease in total Mcf sales and transportation of 1.2%, as compared to 1993. An increase in gas transportation volumes to industrial customers, mainly in the primary metals sector, partially offset this decrease.
Year-to-year changes in Mcf sales for each major class of customers and Mcf transportation volumes are shown below:
Increase (Decrease) from Prior Year
1996 1995 1994 _
Retail Residential 3.6% 10.5% (10.2)% Commercial 7.8 (2.0) (1.5) Industrial (13.3) (26.6) (9.9)
Total sales 2.1 1.5 (6.7)
Gas transported 19.8 24.4 13.9
Total gas sold and transported 8.4 8.6 (1.2)
Operating Revenues
ELECTRIC OPERATING REVENUES
The $156 million (6.0%) increase in 1996 electric operating revenues, as compared to 1995, is due, in large part, to the increase in kwh sales as previously discussed. Also contributing to the increase was the effect of PSI's 7.6% retail rate increase approved in the September 1996 Order, as well as a full year's effect of PSI's 4.3% retail rate increase approved in the February 1995 Order and PSI's 1.9% increase for carrying costs on construction work in progress property which was approved by the IURC in March 1995. These rate increases were offset by the return of approximately $10 million to PSI's customers in accordance with the February 1995 Order, which requires all retail operating income above a certain level to be refunded to customers, the operation of CG&E's fuel adjustment clauses reflecting a lower average cost of fuel used in electric production, and a decrease in ULH&P's electric rates reflecting a reduction in the cost of electricity purchased from CG&E.
Higher retail kwh sales, PSI's electric rate increases which became effective in February 1995 and March 1995, and a full year's effect of CG&E's electric rate increase which became effective in May 1994, significantly contributed to the $167 million (6.8%) increase in electric operating revenues for 1995, when compared to 1994.
Electric operating revenues increased $82 million (3.5%) in 1994, as compared to 1993, as a result of CG&E's electric rate increases which became effective in May 1993, August 1993, and May 1994, PSI's increased kwh sales, and the effects of PSI's $31 million refund to retail customers accrued in June 1993 as a result of the settlement of an April 1990 IURC order.
An analysis of electric operating revenues for the past three years is shown below:
1996 1995 1994_ (dollars in millions)
Previous year's electric operating revenues $2 613 $2 446 $2 364 Increase (Decrease) due to change in: Price per kwh Retail (1) 54 32 Sales for resale Firm power obligations (4) (1) 1 Non-firm power transactions - 4 - Total change in price per kwh (5) 57 33
Kwh sales Retail 56 109 34 Sales for resale Firm power obligations 9 1 2 Non-firm power transactions 94 (1) 14 Total change in kwh sales 159 109 50
Other 2 1 (1)
Current year's electric operating revenues $2 769 $2 613 $2 446
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from producers and utilizing CG&E facilities to transport the gas (see the "Mcf Sales and Transportation" section) continues to put downward pressure on gas operating revenues. When Cinergy sells gas, the sales price reflects the cost of gas purchased by Cinergy to support the sale plus the costs to deliver the gas. When gas is transported, Cinergy does not incur any purchased gas costs but delivers gas the customer has purchased from other sources. Since providing transportation services does not necessitate recovery of gas purchased costs, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues.
Gas operating revenues increased $63 million (15.4%), as compared to 1995. This increase is attributable to the increase in gas sales and transportation volumes. Also contributing to the increase was the operation of fuel adjustment clauses reflecting a higher cost of gas purchased.
In 1995, gas operating revenues declined $32 million (7.1%), as compared to 1994, as a result of the aforementioned trend toward increased transportation services and the operation of fuel adjustment clauses reflecting a lower average cost of gas purchased.
Gas operating revenues decreased $27 million (5.7%) in 1994, as compared to 1993, due to the operation of fuel adjustment clauses which reflected a lower average cost of gas purchased during the latter part of 1994 and a reduction in total volumes sold and transported.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs, Cinergy's largest operating expense, remained relatively constant in 1996, showing less than a 1% decrease when compared to 1995.
An analysis of fuel costs for the past three years is shown below:
1996 1995 1994 (dollars in millions)
Previous year's fuel expense $717 $713 $733 Increase (Decrease) due to change in: Price of fuel (6) (25) (39) Kwh generation 2 29 19
Current year's fuel expense $713 $717 $713
Gas Purchased Gas purchased increased $43 million (20.8%), as compared to 1995 due to an increase in volumes purchased and a higher average cost per Mcf of gas purchased, as previously discussed.
In 1995, gas purchased expense decreased $42 million (16.9%), as compared to 1994, primarily reflecting a decline in the average cost per Mcf of gas purchased.
A reduction in the average cost per Mcf of gas purchased and lower volumes purchased contributed to the decline in gas purchased expense of $33 million (11.6%) in 1994, as compared to 1993.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $111 million, as compared to 1995. The increase primarily reflects increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations.
The increase in purchased and exchanged power of $13 million (35.6%) in 1994, as compared to 1993, reflected an increase in third-party, short-term power sales to other utilities through PSI's system and increased purchases of other non-firm power by PSI primarily to serve its own load.
OTHER OPERATION
Other operation increased $78 million (15.0%) in 1996, as compared to 1995. This increase is due to a number of factors, including increased administrative and general expenses reflecting, in part, charges of $35 million for voluntary early retirement and severance programs and charges totaling $6 million related to the December 1996 Order. In addition, an increase of $7 million in production expenses associated with the operations of the Clean Coal Project contributed to the increase.
In 1995, other operation expenses decreased $29 million (5.2%), as compared to 1994. Charges of $62 million in 1994 for Merger Costs and other expenditures which cannot be recovered from customers under the merger savings sharing mechanisms authorized by regulators significantly contributed to the decrease. In addition, emphasis on achieving merger savings and other cost reductions led to lower operating costs for 1995. These decreases were partially offset by the recognition of postretirement benefit costs on an accrual basis, an increase in the ongoing level of DSM expenses, and the amortization of deferred postretirement benefit costs, deferred Merger Costs, and deferred DSM costs, all of which are being recovered in revenues pursuant to the February 1995 Order.
Other operation expenses increased $105 million (23.7%) in 1994, as compared to 1993, due to a number of factors including the previously discussed charges of $62 million, fuel litigation expenses of $8 million incurred by PSI, and increased electric production and distribution expenses.
MAINTENANCE
An increase of $12 million (6.4%) in maintenance costs, as compared to 1995, is primarily attributable to increased maintenance associated with the Clean Coal Project which began commercial operation in November 1995. Increased transmission and distribution expenses also contributed to the higher level of maintenance expense.
Maintenance costs decreased $19 million (9.3%) in 1995, as compared to 1994, primarily due to improved scheduling of routine maintenance on electric generating units. Lower maintenance costs on gas and electric distribution facilities also contributed to this decrease.
Increased maintenance on a number of PSI's generating stations and the initial costs of PSI's new distribution line clearing program resulted in increased maintenance expenses of $8 million (4.2%) in 1994, as compared to 1993.
DEPRECIATION
In 1995, depreciation expense decreased $15 million (5.0%), when compared to 1994, due in large part to the adoption of lower depreciation rates for PSI effective in March 1995. This decrease was partially offset by the effect of additions to utility plant.
Depreciation expense increased $16 million (5.6%) in 1994, as compared to 1993, primarily as a result of additions to electric utility plant.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect various deferrals of depreciation, operation and maintenance expenses (exclusive of fuel costs), and property taxes on certain generating units and other utility plant from the in-service date until the related plant is reflected in retail rates, net of amortization of these deferrals as they are recovered through retail rates. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
PHASE-IN DEFERRED DEPRECIATION AND RETURN AND AMORTIZATION OF PHASE-IN DEFERRALS
Phase-in deferred depreciation, phase-in deferred return, and amortization of phase-in deferrals reflect the PUCO-ordered phase-in plan for Zimmer. (See Note 1(k) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $12 million (4.8%) in 1995 and $15 million (6.5%) in 1994, primarily due to increased property taxes resulting from a greater investment in taxable property and higher property tax rates.
Other Income and Expenses - Net
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on certain generating units and other utility plant from the in-service date until the related plant is reflected in retail rates. (See Note 1(h) of the Notes to Consolidated Financial Statements).
OTHER - NET
The change in other - net of $37 million, as compared to 1995, is due to a number of factors including $4 million of interest received in 1995 on an income tax refund related to prior years, charges totaling $14 million associated with the December 1996 Order, expenses associated with CG&E's and ULH&P's sales of accounts receivables in 1996, and the effect of a $10 million gain in 1995 on the sale of Cinergy's investment in an Argentine utility.
The $31 million change in other - net in 1995, as compared to 1994, is due in part to interest on the income tax refund and the $10 million gain discussed above and charges of $17 million in 1994 for merger-related and other expenditures which cannot be recovered from customers.
In 1994, other - net increased $9 million, as compared to 1993, primarily as a result of the write-off during 1993 of $22 million related to the defense against the IPALCO Enterprises, Inc. hostile takeover attempt. The increase was offset, in part, by the charges in 1994 of $17 million previously discussed.
Interest and Other Charges
INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased $23 million (10.9%), as compared to 1995, due to the refinancing and redemptions of long-term debt by CG&E, PSI, and ULH&P during 1995 and 1996.
OTHER INTEREST
Other interest increased $10 million (49.7%), as compared to 1995, primarily reflecting increased interest expense on short-term borrowings used to fund Cinergy's investment in Avon Energy.
PREFERRED DIVIDEND REQUIREMENTS OF SUBSIDIARIES
Preferred dividend requirements of subsidiaries decreased $8 million (24.9%), as compared to 1995. The decrease was primarily attributable to the reacquisition of approximately 90% of the outstanding preferred stock of CG&E, pursuant to Cinergy's tender offer (see Note 3(b) of the Notes to Financial Statements).
The Cincinnati Gas & Electric Company and subsidiaries
RESULTS OF OPERATIONS - CG&E
Kwh Sales
CG&E's total kwh sales increased 10.6% in 1996, as compared to 1995, reflecting an increase in sales to all customer classes. The increase to retail sales which reflects a higher average number of residential and commercial customers was partially offset by the return to more normal weather in 1996. The increase in industrial sales was due to growth in the primary metals sector. Increased activity in Cinergy's power marketing and trading operations led to higher non-firm power sales for resale.
Kwh sales for 1995 increased 15.3% over 1994, reflecting increased sales to all customer classes. Significantly contributing to this increase were higher non-firm power sales for resale primarily due to increased sales to PSI, as a result of the coordination of CG&E's and PSI's electric dispatch systems. Higher residential and commercial sales resulted primarily from warmer weather during the 1995 summer cooling season and colder weather during the fourth quarter of 1995. Additionally, increased sales to industrial customers were mainly attributable to growth in the primary metals and chemicals sectors.
CG&E's total kwh sales in 1994, as compared to 1993, decreased 1.2%, due in large part to reduced power sales to other utilities in 1994 and decreased residential sales resulting from milder weather experienced during the third and fourth quarters of 1994. This decrease was partially offset by increased kwh sales to industrial customers reflecting growth in the primary metals and machinery sectors.
Year-to-year changes in kwh sales for each major class of customers are shown below:
Increase (Decrease) from Prior Year
1996 1995 1994 Retail Residential 4.7% 3.8% (2.0)% Commercial 2.3 3.4 2.3 Industrial 3.4 3.9 4.3
Total retail 3.3 3.8 1.1
Sales for resale Firm power obligations 3.7 6.3 1.7 Non-firm power transactions 51.7 211.8 (29.3)
Total sales for resale 48.1 172.6 (24.9)
Total sales 10.6 15.3 (1.2)
CG&E currently forecasts a 2% annual compound growth rate in kwh sales over the 1997 through 2001 period. This forecast does not reflect the effects of DSM programs and excludes non-firm power sales for resale and any potential new off-system, long-term firm power sales.
Mcf Sales and Transportation
Mcf gas sales and transportation volumes increased 8.4%, as compared to 1995. Colder weather in the first quarter of 1996 and cooler than normal weather early in the second quarter of 1996 led to increased gas sales to residential and commercial customers. Also contributing to the increase in total sales was an increase in the number of residential and commercial customers. Industrial sales decreased and gas transported increased as customers continued to purchase gas directly from suppliers using transportation services provided by CG&E. The increase in transportation volumes mainly reflects demand for gas transportation services in the primary metals sector.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared to 1994. Increased sales to residential customers, resulting from colder weather during the fourth quarter of 1995 and an increase in the number of customers, contributed to the higher sales levels. Additionally, increases in commercial and industrial transportation volumes, which resulted from customers electing to purchase gas directly from suppliers, more than offset declines in industrial and commercial sales. The increased transportation volumes mainly reflect industrial demand for gas transportation services in the primary metals, food products, and paper products sectors.
The milder weather experienced in 1994 contributed to a decrease in residential and commercial gas sales volumes and led to the decrease in total Mcf sales and transportation of 1.2%, as compared to 1993. An increase in gas transportation volumes to industrial customers, mainly in the primary metals sector, partially offset this decrease.
Year-to-year changes in Mcf sales for each major class of customers and Mcf transportation volumes are shown below:
Increase (Decrease) from Prior Year
1996 1995 1994
Retail Residential 3.6 % 10.5 % (10.2)% Commercial 7.8 (2.0) (1.5) Industrial (13.3) (26.6) (9.9)
Total sales 2.1 1.5 (6.7)
Gas transported 19.8 24.4 13.9
Total gas sold and transported 8.4 8.6 (1.2)
Operating Revenues
ELECTRIC OPERATING REVENUES
The $65 million (4.5%) increase in 1996 electric operating revenues, as compared to 1995, is due, in large part, to the increase in kwh sales as previously discussed. This increase was partially offset by the operation of fuel adjustment clauses reflecting a lower average cost of fuel used in electric production.
Electric operating revenues increased $91 million (6.8%) in 1995, as compared to 1994. This increase reflects the higher kwh sales, as previously discussed and a full year's effect of CG&E's electric rate increase which became effective in May 1994. This increase was partially offset by the operation of fuel adjustment clauses reflecting a lower average cost of fuel used in electric production.
CG&E's electric rate increases which became effective in May 1993, August 1993, and May 1994 substantially contributed to the increase in electric operating revenues of $63 million (4.9%) in 1994, as compared to 1993. An analysis of electric operating revenues for the past three years is shown below:
1996 1995 1994_ (in millions) Previous year's electric operating revenues $1 437 $1 346 $1 282 Increase (Decrease) due to change in: Price per kwh Retail (13) (10) 55 Sales for resale Firm power obligations - 1 - Non-firm power transactions (10) (9) 3 Total change in price per kwh (23) (18) 58
Kwh sales Retail 44 49 14 Sales for resale Firm power obligations 1 1 - Non-firm power transactions 41 60 (9) Total change in kwh sales 86 110 5
Other 2 (1) 1 Current year's electric operating revenues $1 502 $1 437 $1 346
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from producers and utilizing CG&E facilities to transport the gas (see the "Mcf Sales and Transportation" section) continues to put downward pressure on gas operating revenues. When CG&E sells gas, the sales price reflects the cost of gas purchased by CG&E to support the sale plus the costs to deliver the gas. When gas is transported, CG&E does not incur any purchased gas costs but delivers gas the customer has purchased from other sources. Since providing transportation services does not necessitate recovery of gas purchased costs, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues.
Gas operating revenues increased $63 million (15.4%)as compared to 1995. This increase is attributable to the increase in gas sales and transportation volumes. Also contributing to the increase was the operation of fuel adjustment clauses reflecting a higher cost of gas purchased.
In 1995, gas operating revenues declined $32 million (7.1%), as compared to 1994, as a result of the aforementioned trend toward increased transportation services and the operation of fuel adjustment clauses reflecting a lower average cost of gas purchased.
Gas operating revenues decreased $27 million (5.7%)in 1994, as compared to 1993, due to the operation of fuel adjustment clauses which reflected a lower average cost of gas purchased during the latter part of 1994 and a reduction in total volumes sold and transported.
Operating Expenses
FUEL
Fuel Used in Electric Production Electric fuel costs increased $22 million (6.7%) in 1996, when compared to 1995.
An analysis of fuel costs for the past three years is shown below:
1996 1995 1994 (in millions)
Previous year's fuel expense $327 $325 $333 Increase (Decrease) due to change in: Price of fuel (4) (20) (9) Kwh generation 26 22 1
Current year's fuel expense $349 $327 $325
Gas Purchased Gas purchased increased $43 million (20.8%), as compared to 1995, due to an increase in volumes purchased and a higher average cost per Mcf of gas purchased, as previously discussed.
In 1995, gas purchased expense decreased $42 million (16.9%), as compared to 1994, primarily reflecting a decline in the average cost per Mcf of gas purchased.
A reduction in the average cost per Mcf of gas purchased and lower volumes purchased contributed to the decline in gas purchased expense of $33 million (11.6%) in 1994, as compared to 1993.
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $12 million (20.9%), as compared to 1995. The increase primarily reflects increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations.
Purchased and exchanged power costs increased $36 million in 1995, as compared to 1994, reflecting increased purchases from PSI resulting from the coordination of PSI's and CG&E's electric dispatch systems. These increases were partially offset by a decline in third-party, short-term power sales to other utilities.
OTHER OPERATION
Other operation increased $38 million (13.1%) in 1996, as compared to 1995. This increase is attributable to higher administrative and general expenses reflecting, in part, charges of $30 million for voluntary early retirement and severance programs and charges totaling $6 million related to the December 1996 Order. The increase is partially offset by a decrease in electric distribution expenses.
In 1995, other operation expenses decreased $44 million (13.1%), as compared to 1994. Charges of $52 million in 1994 for Merger Costs and other expenditures which cannot be recovered from customers under the merger savings sharing mechanism authorized by the PUCO significantly contributed to the decrease. In addition, emphasis on achieving merger savings and other cost reductions led to lower operating costs for 1995. The decrease was partially offset by the write-off of obsolete inventory in December 1995.
Other operation expenses increased $79 million (30.5%) in 1994, as compared to 1993, due to a number of factors including the previously discussed charges of $52 million and increased electric production and distribution expenses.
MAINTENANCE
The decrease in maintenance expense of $12 million (11.3%) in 1995, as compared to 1994, was primarily attributable to improved scheduling of routine maintenance on electric generating units. Lower maintenance costs on gas and electric distribution facilities also contributed to the decline.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect various deferrals of depreciation, operation and maintenance expenses (exclusive of fuel costs), and property taxes on certain generating units and other utility plant from the in-service date until the related plant is reflected in retail rates, net of amortization of these deferrals as they are recovered through retail rates. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
PHASE-IN DEFERRED DEPRECIATION AND RETURN AND AMORTIZATION OF PHASE-IN DEFERRALS
Phase-in deferred depreciation, phase-in deferred return, and amortization of phase-in deferrals reflect the PUCO-ordered phase-in plan for Zimmer. (See Note 1(k) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $6 million (3.2%) in 1995, and $14 million (7.6%) in 1994, primarily due to increased property taxes resulting from a greater investment in taxable property and higher property tax rates.
Other Income and Expenses - Net
OTHER - NET
The change in other - net of $26 million in 1996, as compared to 1995, is due to a number of factors including $4 million of interest received in 1995 on an income tax refund related to prior years, charges totaling $14 million associated with the December 1996 Order, and expenses associated with CG&E's and ULH&P's sales of accounts receivables in 1996.
The increase in other - net of $11 million in 1995, as compared to 1994, is due in part to interest on the income tax refund discussed above and charges of $12 million in 1994 for merger-related and other expenditures which cannot be recovered from customers.
Interest and Other Charges
Interest on Long-term Debt
Interest on long-term debt decreased $20 million (13.8%), as compared to 1995, due to the refinancing and redemptions of long-term debt in 1996 and 1995.
PREFERRED DIVIDEND REQUIREMENT Preferred dividend requirements decreased $7 million (39.8%), as compared to 1995. The decrease was primarily attributable to the reacquisition of approximately 90% of the outstanding preferred stock of CG&E, pursuant to Cinergy's tender offer (see Note 3(b) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data").
CG&E's preferred dividend requirement decreased $5 million (21.0%) for 1995, as compared to 1994. The decrease was attributable to the early redemption of 400,000 shares of $100 par value, 9.28% Series Cumulative Preferred Stock in April 1994, along with the early redemption of 400,000 and 500,000 shares of $100 par value Cumulative Preferred Stock, 7.44% Series and 9.15% Series, respectively, on July 1, 1995.
PSI Energy, Inc. and Subsidiaries
RESULTS OF OPERATIONS - PSI
Kwh Sales
PSI's total kwh sales increased 11.0% in 1996, as compared to 1995. Increased activity in Cinergy's power marketing and trading operations led to higher non-firm power sales for resale. The increase in retail sales which reflects a higher average number of residential and industrial customers was partially offset by the return to more normal weather in 1996. The increase in industrial sales was due to growth in the primary metals and transportation equipment sectors.
As compared to 1994, total kwh sales in 1995 increased 6.3%, reflecting increased sales to all customer classes. Contributing significantly to this increase were higher residential and commercial sales due to warmer weather during the 1995 summer cooling season, colder weather during the fourth quarter of 1995, and an increase in the number of residential and commercial customers. Increased sales to industrial customers, reflecting growth in the primary metals, chemicals, and food products sectors, also contributed to the increased kwh sales level. This increase also reflects higher non-firm power sales for resale resulting from an increase in sales to CG&E reflecting the coordination of PSI's and CG&E's electric dispatch systems.
Total kwh sales increased 6.3% in 1994, as compared to 1993, due, in large part, to non-firm power sales for resale, reflecting third party, short-term power sales to other utilities through PSI's system and direct power sales by PSI to other utilities. Also contributing to the total kwh sales levels were increased sales to industrial customers. This increase reflected growth in the primary metals and transportation equipment sectors. A decrease in residential sales resulted from the milder weather experienced during the third and fourth quarters of 1994.
Year-to-year changes in kwh sales for each major class of customers are shown below:
Increase (Decrease) from Prior Year
1996 1995 1994 Retail Residential - % 7.9% (1.4)% Commercial 0.4 5.2 1.4 Industrial 3.3 5.1 4.9
Total retail 1.5 6.0 2.0
Sales for resale Firm power obligations 11.4 1.1 2.6 Non-firm power transactions 51.6 10.2 33.5
Total sales for resale 40.2 7.4 22.4
Total sales 11.0 6.3 6.3
PSI currently forecasts a 2% annual compound growth rate in kwh sales over the 1997 through 2001 period. This forecast does not reflect the effects of DSM programs and excludes non-firm power sales for resale and any potential new off-system, long-term firm power sales. Operating Revenues
Operating revenues increased $84 million (6.7%) in 1996, as compared to 1995, due, in large part, to the increase in kwh sales as previously discussed. Also contributing to the increase was the effect of a 7.6% retail rate increase approved in the September 1996 Order, as well as a full year's effect of a 4.3% retail rate increase approved in the February 1995 Order and a 1.9% increase for carrying costs on construction work in progress (CWIP) property which was approved by the IURC in March 1995. Partially offsetting these increases was the return of approximately $10 million to customers in accordance with the February 1995 Order, which requires all retail operating income above a certain level to be refunded to customers.
Higher kwh sales and electric rate increases which became effective in February 1995 and March 1995 significantly contributed to the $135 million (12.1%) increase in operating revenues for 1995, when compared to 1994.
Operating revenues increased $21 million (1.9%) in 1994, as compared to 1993, as a result of increased kwh sales, the effects of a $31 million refund to retail customers accrued in June 1993 as a result of the settlement of an April 1990 IURC order, and increased fuel costs. Partially offsetting these increases were the 1.5% retail rate reduction resulting from a December 1993 IURC order and the return of approximately $9 million to customers in connection with certain provisions of Indiana law which limit the level of retail operating income as determined in quarterly fuel adjustment clause proceedings.
An analysis of operating revenues for the past three years is shown below:
1996 1995 1994 (in millions)
Previous year's operating revenues $1 248 $1 114 $1 092 Increase (Decrease) due to change in: Price per kwh Retail 8 68 (23) Sales for resale Firm power obligations (3) (1) 2 Non-firm power transactions - 1 -_ _ Total change in price per kwh 5 68 (21)
Kwh sales Retail 16 55 18 Sales for resale Firm power obligations 8 1 2 Non-firm power transactions 55 9 23 Total change in kwh sales 79 65 43
Other - 1 - __
Current year's operating revenues $1 332 $1 248 $1 114
Operating Expenses
FUEL
Fuel costs, PSI's largest operating expense, decreased approximately $25 million (6.5%) in 1996, when compared to 1995.
An analysis of fuel costs for the past three years is shown below:
1996 1995 1994 (in millions)
Previous year's fuel expense $389 $387 $400 Increase (Decrease) due to change in: Price of fuel (2) (5) (30) Kwh generation (23) 7 17
Current year's fuel expense $364 $389 $387
PURCHASED AND EXCHANGED POWER
Purchased and exchanged power increased $92 million in 1996, as compared to 1995. This increase primarily reflects increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations and increased purchases from CG&E as a result of the coordination of PSI's and CG&E's electric dispatch systems.
Purchased and exchanged power increased $22 million (54.3%) in 1995, as compared to 1994, reflecting increased purchases from CG&E as a result of the coordination of PSI's and CG&E's electric dispatch systems. These increases were partially offset by a decline in third party, short-term power sales to other utilities.
Purchased and exchanged power increased $17 million (70.6%) in 1994, as compared to 1993, reflecting an increase in third party, short-term power sales to other utilities through PSI's system and increased purchases of other non-firm power by PSI primarily to serve its own load.
OTHER OPERATION
Other operation expenses increased approximately $40 million (17.5%) in 1996, as compared to 1995. This increase was due to a number of factors, including an increase related to the ongoing level and amortization of DSM expenses and an increase in production expenses associated with the operations of the Clean Coal Project, all of which are being recovered in revenues pursuant to the February 1995 and September 1996 Orders. Charges related to voluntary early retirement and severance programs and increased transmission costs also contributed to the higher level of other operation expenses.
In 1995, other operation expenses increased $15 million (7.2%), as compared to 1994. This increase was due to a number of factors, including the recognition of postretirement benefit costs on an accrual basis, an increase in the ongoing level of DSM expenses, and the amortization of deferred postretirement benefit costs, deferred Merger Costs, and deferred DSM costs, all of which are being recovered in revenues pursuant to the February 1995 Order. These increases were partially offset by charges of $10 million in 1994 for severance benefits to former officers of PSI which cannot be recovered from customers under the merger savings sharing mechanisms authorized by the IURC. In addition, emphasis on achieving merger savings and other cost reductions also partially offset the increase in other operation expenses.
Other operation expenses increased $26 million (14.2%) in 1994, as compared to 1993, due to a number of factors including the previously discussed charges of $10 million and fuel litigation expenses of $8 million. MAINTENANCE
An increase of $10 million (11.7%) in maintenance costs as compared to 1995 is primarily attributable to increased maintenance associated with the Clean Coal Project which began commercial operation in November 1995. Increased transmission and distribution costs also contributed to the higher level of maintenance expenses.
Maintenance costs decreased $7 million (7.1%) in 1995, as compared to 1994, primarily due to improved scheduling of routine maintenance on generating units and lower maintenance costs on transmission and distribution facilities.
Increased maintenance on a number of PSI's generating stations and the initial costs of a new distribution line clearing program resulted in increased maintenance expenses of $10 million (12.1%) in 1994 when compared to 1993.
DEPRECIATION
In 1995, depreciation expense decreased $17 million (12.3%), when compared to 1994, due in large part to the adoption of lower depreciation rates effective in March 1995. This decrease was partially offset by the effect of additions to utility plant.
Additions to electric utility plant led to increases in depreciation expense of $11 million (8.6%) in 1994 as compared to 1993.
POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET
Post-in-service deferred operating expenses - net reflect the deferral of depreciation on certain major projects, primarily environmental in nature, from the in-service date until the related projects are reflected in retail rates, net of amortization of these deferrals as they are recovered. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes increased $6 million (11.9%) in 1995, as compared to 1994, primarily due to increased property taxes resulting from a greater investment in taxable property.
Other Income and Expenses - Net
ALLOWANCE FOR EQUITY FUNDS USED DURING CONSTRUCTION
In 1995, allowance for equity funds used during construction decreased $4 million (95.9%), as compared to 1994, primarily due to a decrease in the average balance of CWIP.
A decrease of $7 million (62.1%) in allowance for equity funds used during construction in 1994, as compared to 1993, was due to an increase in borrowings of short-term debt which resulted in a decrease in the equity rate.
POST-IN-SERVICE CARRYING COSTS
Post-in-service carrying costs reflect the deferral of carrying costs on certain major projects, primarily environmental in nature, from the in-service date until the related projects are reflected in retail rates. (See Note 1(h) of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")
Interest
INTEREST ON LONG-TERM DEBT
Interest on long-term debt decreased $4 million (5.1%) in 1996, as compared to 1995, due to the redemption of $135 million of long-term debt during the period from August 1995 through December 1996.
ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION
Allowance for borrowed funds used during construction decreased $2 million (44.8%) in 1996, as compared to 1995. This decrease is primarily attributable to a decrease in the average balance of CWIP resulting from the Clean Coal Project being completed at the end of 1995.
Allowance for borrowed funds used during construction decreased $5 million (55.0%) in 1995, as compared to 1994, primarily as a result of a decrease in the average balance of CWIP which was partially offset by an increase in the debt component of the AFUDC rate.
The Union Light, Heat and Power Company
RESULTS OF OPERATIONS - ULH&P
Kwh Sales
In 1996, ULH&P's total kwh sales increased 5.8% as compared to 1995, reflecting increased sales to all customer classes. The increase in retail sales, which reflects a higher average number of residential and commercial customers, was partially offset by the return to more normal weather in 1996. The increased industrial sales primarily reflect growth in the food products sector.
ULH&P's total kwh sales in 1995, as compared to 1994, increased 7.2% reflecting increased sales to all customer classes. The increase in residential and commercial kwh sales was due to warmer weather during the 1995 summer cooling season and colder weather during the fourth quarter of 1995 and an increase in the average number of customers. The increased industrial sales primarily reflect growth in the primary metals sector.
Total kwh sales increased 2.8% in 1994, as compared to 1993, primarily due to increased retail sales to commercial and industrial customers. Industrial sales reflected a higher level of economic activity, including growth in the primary metals, industrial machinery, food products, and rubber and plastic products sectors. The increase in commercial sales was due, in part, to new customers. A decrease in residential sales resulted from the milder weather experienced during the third and fourth quarters of 1994.
ULH&P currently forecasts a 3% annual compound growth rate in kwh sales over the 1997 through 2001 period. This forecast does not reflect the effects of DSM programs and excludes any potential new off-system, long-term firm power sales.
Mcf Sales and Transportation
Mcf gas sales and transportation volumes increased 6.6%, as compared to 1995. Colder weather in the first quarter of 1996, cooler than normal weather early in the second quarter of 1996, and increases in the average number of customers led to increased sales to residential and commercial customers. This increase was partially offset by a decrease in industrial sales as customers continued to purchase gas directly from suppliers using transportation services provided by ULH&P. The increase in transportation volumes mainly reflects demand for gas transportation services in the chemicals and primary metals sectors.
Total gas sales and transportation volumes increased 8.6% in 1995, as compared to 1994. The colder weather during the fourth quarter of 1995 primarily attributed to the increase in residential and commercial sales. These increases were partially offset by a decline in industrial sales resulting from customers electing to purchase directly from suppliers, creating additional demand for transportation services. The increased transportation volumes mainly reflect industrial demand for gas transportation services in the paper products sector.
The milder weather experienced in 1994 contributed to a decrease in residential gas sales volumes and led to the decrease in total Mcf sales and transportation of 4.3%, as compared to 1993. The increase in gas transportation more than offset the decrease in industrial sales volumes and was attributable to additional demand for gas transportation services by industrial customers mainly in the primary metals, paper products, and food products sectors.
Operating Revenues
ELECTRIC OPERATING REVENUES
Electric operating revenues increased $3.7 million (2.0%) in 1996, $9.6 million (5.4%) in 1995, and $1.9 million (1.1%) in 1994. These increases reflect higher kwh sales, as previously discussed. Partially offsetting the 1996 increase was a lower average cost of electricity purchased due, in part, to an order issued by the Kentucky Public Service Commission (KPSC) on July 3, 1996 (July 1996 Order). The July 1996 Order authorized a decrease in electric rates, retroactive to July 3, 1995, reflecting a reduction in the cost of electricity purchased from CG&E.
GAS OPERATING REVENUES
The increasing trend of industrial customers purchasing gas directly from producers and utilizing ULH&P facilities to transport the gas (see the "Mcf Sales and Transportation" section) continues to put downward pressure on gas operating revenues. When ULH&P sells gas, the sales price reflects the cost of gas purchased by ULH&P to support the sale plus the costs to deliver the gas. When gas is transported, ULH&P does not incur any purchased gas costs but delivers gas the customer has purchased from other sources. Since providing transportation services does not necessitate recovery of gas purchased costs, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues.
Gas operating revenues increased $6.6 million (9.4%) in 1996, as compared to 1995. The increase was primarily attributable to the operation of the fuel adjustment clause reflecting an increase in the cost of gas purchased and an increase in total volumes sold and transported.
In 1995, gas operating revenues declined $1.7 million (2.3%), as compared to 1994 as a result of the aforementioned trend toward increased transportation services and the operation of fuel adjustment clauses reflecting a lower average cost of gas purchased.
Gas operating revenues decreased $3.8 million (5.0%) in 1994, as compared to 1993, primarily as a result of a decline in total volumes sold and transported of 4.3%. This decrease was partially offset by the effect of a gas rate increase which became effective in mid-1993.
Operating Expenses
ELECTRICITY PURCHASED FROM PARENT COMPANY FOR RESALE
Electricity purchased increased $7.4 million (5.5%) in 1995, as compared to 1994, due to an increase in volumes purchased.
GAS PURCHASED
Gas purchased increased $4.4 million (12.1%) in 1996, as compared to 1995, due to an increase in volumes purchased and a higher average cost per Mcf of gas purchased, as previously discussed.
In 1995, gas purchased expense decreased $3.8 million (9.3%) from 1994 primarily due to a 13.7% decrease in the average cost per Mcf of gas purchased.
Gas purchased expense in 1994 decreased $2.9 million (6.6%) due to a 5.2% decrease in volumes purchased.
OTHER OPERATION
In 1995, other operation expense decreased $1.6 million (4.9%), as compared to 1994, due, in part, to decreased gas and electric distribution expenses and decreased gas production expenses.
Other operation expense in 1994 increased $1.9 million (6.2%), as compared to 1993, due primarily to increased gas and electric distribution expenses and increased wages and benefits.
MAINTENANCE
Maintenance expenses increased $.4 million (9.1%) as compared to 1995, primarily as a result of increased transmission and distribution costs.
Maintenance expense decreased $.9 million (16.3%) and $.8 million (12.7%) in 1995 and 1994, respectively, primarily as a result of reduced maintenance costs on gas and electric distribution facilities.
DEPRECIATION
Depreciation expense increased $.8 million (7.5%) in 1995, as compared to 1994, primarily due to additions to electric and gas plant in service.
The increase in 1994 of $.8 million (8.5%) was due to increases in depreciable plant in service and a full year's effect of the adoption of higher depreciation rates on gas and common plant in accordance with a KPSC rate order issued in 1993.
OTHER INCOME AND EXPENSES - NET
Other - Net
The decrease in other - net of $1.4 million in 1996, as compared to 1995, is primarily attributable to expenses associated with the sales of accounts receivables in 1996.
INTEREST AND OTHER CHARGES
Interest on Long-term Debt
Interest on long-term debt decreased $3.1 million (43.9%) as compared to 1995 due to the redemption of $25 million and $35 million of long-term debt in 1996 and 1995, respectively.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company have each duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CINERGY CORP. THE CINCINNATI GAS & ELECTRIC COMPANY PSI ENERGY, INC. THE UNION LIGHT, HEAT AND POWER COMPANY Registrants
Dated: March 27, 1997
By James E. Rogers Vice Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrants and in the capacities and on the dates indicated.
Signature Title Date Cinergy, CG&E, PSI, and ULH&P Jackson H. Randolph Chairman
Cinergy Neil A. Armstrong Director Phillip R. Cox Director Kenneth M. Duberstein Director George C. Juilfs Director Melvin Perelman Director Thomas E. Petry Director John J. Schiff, Jr. Director Philip R. Sharp Director Dudley S. Taft Director Oliver W. Waddell Director
Cinergy and PSI James K. Baker Director Michael G. Browning Director John A. Hillenbrand II Director Van P. Smith Director
CG&E and ULH&P William J. Grealis President and Director
PSI John M. Mutz President and Director
ULH&P Cheryl M. Foley Vice President, General Counsel, Secretary, and Director Larry E. Thomas Group Vice President and Director
Cinergy, CG&E, PSI, and ULH&P
James E. Rogers Vice Chairman, Chief March 27, 1997 Attorney-in-fact for all Executive Officer, and Director the foregoing persons President of Cinergy (Principal Executive Officer)
J. Wayne Leonard Group Vice President and March 27, 1997 Chief Financial Officer Director of ULH&P (Principal Financial Officer)
Charles J. Winger Comptroller March 27, 1997 (Principal Accounting Officer)