Item 1. Business - Registrant (Union Light) - ------- -----------------------------------
General - -------
Union Light, a wholly-owned subsidiary of The Cincinnati Gas & Electric Company (CG&E), was incorporated in Kentucky in 1901, and operates in that portion of Kentucky contiguous to the area served by CG&E. Both companies are managed by substantially the same principal officers and have their principal executive offices at the same address, 139 East Fourth Street, Cincinnati, Ohio. In January 1994, Union Light transferred its former subsidiary, Enertech Associates International, Inc., to CGE Corp., which is a wholly-owned non- regulated subsidiary of CG&E.
Union Light provides electric or gas service, or both, to a population of about 280,000 in an area of about 500 square miles in six counties in northern Kentucky.
In December 1992, CG&E, PSI Resources, Inc. (PSI) and PSI Energy, Inc., PSI's principal subsidiary, an Indiana electric utility (PSI Energy), entered into an agreement which, as subsequently amended (the Merger Agreement) provides for the merger of PSI into a newly formed corporation named CINergy Corp. (CINergy) and the merger of a newly formed subsidiary of CINergy into CG&E. CINergy will become a holding company required to be registered under the Public Utility Holding Company Act of 1935 (PUHCA) with two operating subsidiaries, CG&E and PSI Energy. Union Light will remain a subsidiary of CG&E.
The merger will be accounted for as a "pooling of interests", and it is anticipated that the transaction will be completed in the third quarter of 1994. The merger is subject to approval by the Securities and Exchange Commission (SEC) and the Federal Energy Regulatory Commission (FERC). Shareholders of both companies approved the merger in November 1993.
FERC issued conditional approval of the CINergy merger in August 1993, but several intervenors, including The Public Utilities Commission of Ohio (PUCO) and the Kentucky Public Service Commission (KPSC), filed for rehearing of that order. On January 12, 1994, FERC withdrew its conditional approval of the merger and ordered the setting of FERC-sponsored settlement procedures to be held.
On March 4, 1994, CG&E reached a settlement agreement with the PUCO and the Ohio Office of Consumers' Counsel on merger issues identified by FERC. On March 2, PSI Energy and Indiana's consumer representatives had reached a similar agreement. Both settlement agreements have been filed with FERC. These documents address, among other things, the coordination of state and federal regulation and the commitment that neither CG&E nor PSI electric base rates, nor CG&E's gas base rates, will rise because of the merger, except
to reflect any effects that may result from the divestiture of CG&E's gas operations if ordered by the SEC in accordance with the requirements of PUHCA discussed below.
CG&E also filed with FERC a unilateral offer of settlement addressing all issues raised in the KPSC's application for rehearing with FERC. Although it is the belief of CG&E and PSI that no state utility commissions have jurisdiction over approval of the proposed merger, an application has been filed with the KPSC to comply with the Staff of the KPSC's position that the KPSC's authorization is required for the indirect acquisition of control of Union Light by CINergy. As part of the settlement offer, Union Light will agree not to increase gas base rates as a result of the merger except to reflect any effects that may result from the divestiture of Union Light's gas operations discussed below.
If the settlement agreements filed with FERC are not acceptable, FERC could set issues for hearing. If a hearing is held by FERC, consummation of the merger would likely be extended beyond the third quarter of 1994.
PUHCA imposes restrictions on the operations of registered holding company systems. Among these are requirements that securities issuances, sales and acquisitions of utility assets or of securities of utility companies and acquisitions of interests in any other business be approved by the SEC. PUHCA also limits the ability of registered holding companies to engage in non-utility ventures and regulates holding company system service companies and the rendering of services by holding company affiliates to the system's utilities. The SEC has interpreted the PUHCA to preclude registered holding companies, with some exceptions, from owning both electric and gas utility systems. The SEC may require that CG&E and Union Light divest their gas properties within a reasonable time after the merger in order to approve the merger as it has done in many cases involving the acquisition by a holding company of a combination gas and electric company. In some cases, the SEC has allowed the retention of the gas properties or deferred the question of divestiture for a substantial period of time. In those cases in which divestiture has taken place, the SEC usually has allowed companies sufficient time to accomplish the divestiture in a manner that protects shareholder value. CG&E and Union Light believe good arguments exist to allow retention of the gas assets, and will request that the Companies be allowed to do so.
Electric Operations - -------------------
Union Light does not own or operate any electric generating facilities. Its requirements for electric energy are purchased from CG&E at rates regulated by FERC. The maximum net peak load experienced by Union Light in 1993 of 661,397 Kw exceeded by 10% the previous record net peak load of 598,889 Kw established in 1991. Union Light owns an electric transmission system and an electric distribution system in Covington, Newport and other smaller communities and in adjacent rural territory within all or parts of the Counties of Kenton, Campbell, Boone, Grant, and Pendleton, in Kentucky.
The Energy Policy Act of 1992 (Energy Act) addresses several matters affecting electric utilities including mandated open access to the electric transmission system and greater encouragement of independent power production and cogeneration. Union Light cannot predict the long-term consequences the Energy Act will have on its operations.
Gas Operations and Gas Supply - -----------------------------
In 1992, FERC issued Order 636 which restructures the relationships between interstate gas pipelines companies and their customers, including Union Light, for gas sales and transportation services. Order 636 has changed the way Union Light purchases gas supplies and contracts for transportation and storage services. Union Light has contracts that provide adequate supply and storage capacity, including transportation services, to meet normal demand, as well as unanticipated load swings. Union Light expects to purchase approximately 5% of its annual firm gas requirements on the spot market.
Order 636 also allows pipelines to recover transition costs they incur in complying with the Order from customers, including Union Light. The KPSC has issued an order which allows recovery of these transition costs through Union Light's purchased gas adjustment clause. Order 636 transition costs are not expected to significantly impact Union Light.
Union Light has an approved rate structure for the transportation of gas allowing its gas price to remain competitive with alternate fuels. Union Light transports gas for certain large-volume customers. Without this program, Union Light would have lost many of these customers to alternate fuels. Union Light can either transport gas purchased by its customers for a transportation charge, or buy spot market gas which is then sold to customers at a rate competitive with alternate fuels.
Rate Matters - ------------
In September 1992, Union Light filed a request with the KPSC to increase annual gas revenues by approximately $9 million. In accordance with Kentucky law, on April 26, 1993, Union Light implemented the proposed rate increase, subject to refund. On July 23, 1993, the KPSC issued an Order authorizing Union Light to increase annual gas revenues by $3.9 million effective retroactively to April 26, 1993. The authorized rates were not placed into effect pending resolution of Union Light's request for rehearing of the Order. On August 31, 1993, the KPSC granted an additional annual increase of $247,000. Union Light has placed these rates into effect and has refunded the excess revenue collected with interest to customers.
Rules established by the KPSC pertaining to Union Light's electric fuel adjustment clause provide for public hearings at six-month intervals to review past calculations, reconciliation of over- or under-recovery of fuel costs, and a public hearing every two years to review the application of the adjustment charge and fuel procurement practices. In accordance with a
purchased gas adjustment clause approved by the KPSC, Union Light is permitted to make quarterly adjustments in gas costs and reconciliation of over- or under- recovery of gas costs. In conjunction with these rules, Union Light expenses the costs of gas and electricity purchased as recovered through revenue and defers the portion of these costs recoverable or refundable in future periods.
Construction - ------------
During 1993, construction expenditures amounted to $24.4 million. Of this amount, $14.5 million was for electric facilities and $6.8 million for gas facilities and $3.1 million for facilities used in both electric and gas operations.
Construction expenditures for Union Light are estimated to be $20.3 million for 1994 and $120.2 million for the five years 1994-1998. These estimates are under continuing review and are subject to adjustment.
In October 1993, Union Light filed its second integrated resource plan (IRP) in the state of Kentucky. The primary emphasis of IRP is on procedures for the evaluation of long-term electric forecasts and the integration of demand and supply alternatives for meeting future electric needs. The KPSC is currently reviewing this report. A review conference is scheduled for April 19, 1994.
Environmental Matters - ---------------------
CG&E has advised Union Light that CG&E's inability to comply with potential environmental regulations, and more rigid enforcement policies with respect to existing standards and regulations, could cause substantial capital expenditures in addition to those included in CG&E's construction program, and increase the cost per Kwh of generation to CG&E and, ultimately, the cost of electric energy purchased by Union Light from CG&E by reducing the amount of electricity available for delivery or by necessitating increased fuel and/or operating and capital costs, and may cause serious fuel supply problems for CG&E, or require it to cease operating a portion of its generating facilities.
Union Light is subject to regulation by various Federal, state, and local authorities relative to air and water quality, solid and hazardous waste disposal, and other environmental matters. Pursuant to Federal law, the Secretary of the Natural Resources and Environmental Protection Cabinet (NREPC) administers regulations prescribing air and water quality standards and regulations pertaining to solid and hazardous wastes. NREPC is generally empowered by Kentucky environmental laws to issue construction and operating permits and variances for facilities which may contribute to air pollution and issue similar permits for facilities which discharge pollutants into the waters of the state, as well as permits for the disposal of solid and hazardous waste. The Kentucky implementation plan is fully enforceable by the state and, to the extent approved by the U.S. Environmental Protection Agency, is also enforceable by it.
The Comprehensive Environmental Response Compensation and Liability Act (CERCLA) expanded reporting and liability requirements covering the release of hazardous substances into the environment. Some of these substances, including polychlorinated biphenyls (PCBs), a substance regulated under the Toxic Substances Control Act, are contained in certain equipment currently used by Union Light. Union Light cannot predict the occurrence and effect of a release of such substances.
CERCLA provides, among other things, for a trust fund, drawn from industry and federal appropriations, to finance cleanup and containment efforts of improperly managed hazardous waste sites. Under CERCLA, and other laws, responsible parties may be strictly, and jointly and severally, liable for money expended by the government to take necessary corrective action at such sites.
The Superfund Amendments and Reauthorization Act of 1986 (SARA) significantly amended CERCLA and established programs dealing with emergency preparedness and community right-to-know, leaking underground storage tanks, and other matters. SARA provides for a significant increase in CERCLA funding, adopts strict cleanup standards and schedules, places limitations on the timing and scope of court review of government cleanup decisions, authorizes state and citizen participation in cleanup plans, enforcement actions, and court proceedings, including provisions for citizens' suits against both private and public entities to enforce CERCLA's requirements, expands liability provisions, and increases civil and criminal penalties for violations of CERCLA.
Employee Relations - ------------------
Union Light presently employs about 340 full-time employees, of whom about 280 belong to bargaining units. Approximately 90 employees are represented by the International Brotherhood of Electrical Workers (IBEW), 110 by the United Steelworkers of America (USWA) and 80 by the Independent Utilities Union (IUU).
The collective bargaining agreements with the IBEW and USWA expire on April 1, and May 15, 1994, respectively. The three-year agreement with the IUU, which expires in March 1995, has a wage reopener for the third year of the contract. Negotiations with both the IBEW and IUU are presently under way.
Item 2.
Item 2. Properties - ------- ----------
Union Light owns an electric transmission system and an electric distribution system in Covington, Newport, and other smaller communities and in adjacent rural territory within all or parts of the Counties of Kenton, Campbell, Boone, Grant, and Pendleton, in Kentucky. Union Light owns a gas distribution system in Covington, Newport, and other smaller communities and in adjacent rural territory within all or parts of the Counties of Kenton, Campbell, Boone, Grant, Gallatin, and Pendleton, in Kentucky. Union Light owns a 7,000,000 gallon capacity underground cavern for the storage of liquid propane and a related vaporization and mixing plant and feeder lines, located in Kenton County, Kentucky near the Kentucky-Ohio line and adjacent to one of the gas lines which transports natural gas to CG&E. The cavern and vaporization and mixing plant are used primarily to augment CG&E's and Union Light's supply of natural gas during periods of peak demand and emergencies.
Under the terms of the mortgage indenture securing first mortgage bonds issued by Union Light, substantially all property is subject to a direct first mortgage lien.
Item 3.
Item 3. Legal Proceedings - ------- -----------------
The registrant has no material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------- ---------------------------------------------------
Omitted pursuant to Instruction J(2)(c).
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------- ----------------------------------------------------------------------
All of Union Light's Capital Shares are owned by CG&E.
Union Light declared a dividend of $5.00 per capital share during the fourth quarter of 1993. No dividends were declared in 1992.
Item 6.
Item 6. Selected Financial Data - ------- -----------------------
Omitted pursuant to Instruction J(2)(a).
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations ---------------------
Earnings per capital share increased in 1993 to $15.95 from $2.23 in 1992. The increase was due to a gas rate increase in 1993, higher gas and electric sales volumes and cost control efforts. For information on the gas rate increase see "Future Outlook" herein. In 1992, earnings per capital share decreased to $2.23 from $12.48 in 1991. The decrease was primarily due to Union Light incurring increased purchased power costs from CG&E which were not reflected in Union Light's electric revenues for the period and to the KPSC ordering a $2.5 million decrease in the retail portion of Union Light's electric rates in May 1992.
Electric operating revenues increased $16.0 million in 1993 due to an increase in electric Kwh sales of 5.8% and to the full effect of a rate increase that became effective in May 1992. In 1992, electric operating revenues increased $6.3 million primarily due to a rate increase that became effective in May 1992 and to a 1.4% increase in sales volumes.
Gas operating revenues increased $13.1 million in 1993 due to the operation of an adjustment clause reflecting increases in the cost of gas purchased, a rate increase (see "Future Outlook" herein), and a 5.8% increase in total volumes sold and transported. In 1992, gas operating revenues increased $3.7 million primarily due to a 7.0% increase in total volumes sold and transported.
Electricity purchased increased $7.1 million in 1993 due to a 6.3% increase in volumes purchased. In 1992, electricity purchased increased $14.8 million due to a 10.9% increase in the average cost per Kwh purchased and to a 2.1% increase in volume purchased.
Gas purchased expense for 1993 increased $8.0 million due to an 11.8% increase in the average cost per Mcf purchased and to a 9.5% increase in volumes purchased. In 1992, gas purchased expense increased $1.9 million due to a 3.5% increase in volumes purchased and a 2.0% increase in the average cost per Mcf purchased.
Other operation expense decreased $1.2 million in 1993 due to a number of factors including reduced electric and gas distribution expenses and cost control efforts.
In 1992, maintenance expense decreased $.8 million primarily due to reduced maintenance costs related to gas and electric distribution facilities.
Depreciation expense increased $1.5 million in 1993 due to an increase in depreciable plant in service and to increases in depreciation accrual rates on gas and common plant in accordance with a KPSC rate order issued in 1993. Depreciation expense increased $.7 million in 1992 due to an increase in depreciable plant in service.
Allowance for funds used during construction (AFC) decreased $.6 million in 1992 due to lower AFC rates.
Increases in interest on long-term debt of $.7 million and $.5 million in 1993 and 1992, respectively, were due to the issuance of additional first mortgage bonds in August 1992.
Other interest expense decreased $.6 million in 1993 due to a decrease in the amount of short-term borrowings and lower interest rates.
Liquidity and Capital Resources - -------------------------------
During 1993, internally generated funds provided 51% of the amount needed for construction expenditures, an increase from 34% in 1992. External funds were obtained in 1993 from the net issuance of $18.5 million of short-term debt. Union Light also retired at maturity $6.5 million of first mortgage bonds in 1993.
The issuance of first mortgage bonds by Union Light is limited by earnings coverage and fundable property provisions of Union Light's First Mortgage Indenture. Certain provisions in the mortgage indenture of CG&E prohibit the sale by Union Light of debt securities except to CG&E if, after giving effect to the sale of such securities, the outstanding debt securities of Union Light are in excess of 75% of the net plant of Union Light. Bonds may be issued upon the basis of property additions and cash deposits only if net earnings, as defined in the Mortgage, are at least 2.00 times the annual interest charges on all outstanding indebtedness having an equal or prior lien. In accordance with the most restrictive of these provisions, Union Light would have been permitted to issue at December 31, 1993, at least $50 million of additional first mortgage bonds at current interest rates. In addition, Union Light presently can issue $9.1 million of first mortgage bonds against previously retired bonds without regard to the Indenture's earnings coverage or fundable property requirements.
The construction expenditures for Union Light are estimated to be $20.3 million for 1994 and $120.2 million over the next five years (1994-1998). These estimates are under continuing review and are subject to adjustment. Construction and financing plans for the future are dependent on, among other things, the amount and timing of rate changes, sales volumes, changes in construction plans, cost control efforts, market conditions, regulatory actions, and the ability to obtain financing. Short-term indebtedness will be used to supplement internal sources of funds for the interim financing of the construction program. Union Light presently has authorized a maximum amount of short-term indebtedness of $35 million through December 31, 1994, and $25.0 million of short-term borrowings were outstanding at December 31, 1993. Union Light has authority to issue to CG&E up to $15 million of Capital Stock through December 31, 1994.
Ratings on Union Light's first mortgage bonds by Standard & Poor's and Moody's Investors Service are BBB+ and Baa1, respectively.
Future Outlook - --------------
Union Light's future earnings will be affected by its ability to secure adequate and timely rate relief.
In September 1992, Union Light filed a request with the KPSC to increase annual gas revenues by approximately $9 million. In accordance with Kentucky law, on April 26, 1993, Union Light implemented the proposed rate increase, subject to refund. On July 23, 1993, the KPSC issued an Order authorizing Union Light to increase annual gas revenues by $3.9 million effective retroactively to April 26, 1993. The authorized rates were not placed into effect pending resolution of Union Light's request for rehearing of the Order. On August 31, 1993, the KPSC granted an additional annual increase of $247,000. Union Light has placed these rates into effect and has refunded the excess revenue collected with interest to customers.
In April 1992, FERC issued Order 636 which restructures the relationships between interstate gas pipelines and their customers for gas sales and transportation services. Order 636 will result in changes in the way Union Light purchases gas supplies and contracts for transportation and storage services, and will result in increased risks in managing the ability to meet demand.
Order 636 also allows pipelines to recover transition costs they incur in complying with the Order from customers, including Union Light. The KPSC has issued an Order which allows recovery of these transition costs through Union Light's purchased gas adjustment clause. Order 636 transition costs are not expected to significantly impact Union Light.
The Energy Act addresses several matters affecting electric utilities including mandated open access to the electric transmission system and greater encouragement of independent power production and cogeneration. Union Light cannot predict the long-term consequences the Energy Act will have on its operations.
In recent years several new accounting standards have been issued by the Financial Accounting Standards Board. While the impact on earnings and cash flow associated with the new standards has been relatively minor, these accounting changes do affect the recognition and presentation of amounts reported in Union Light's financial statements. For information in addition to that provided below on recently adopted accounting standards, see Note 1 to the Financial Statements.
In 1993, CG&E and its subsidiaries adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106). Union Light is a participating company under CG&E's health care and life insurance benefit plans. SFAS No. 106 requires the accrual of the expected cost of providing postretirement benefits other than pensions to an employee and the employee's covered dependents during the employee's active working career. SFAS No. 106 also requires the recognition of the actuarially determined total postretirement benefit obligation earned by existing retirees. Currently, SFAS No. 106
health care costs are being expensed. The adoption of SFAS No. 106 did not have a material effect on results on operations.
Also in 1993, Union Light adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109 requires deferred tax recognition for all temporary differences in accordance with the liability method, requires that deferred tax liabilities and assets be adjusted for enacted changes in tax laws or rates and prohibits net-of-tax accounting and reporting. Union Light believes it is probable that any net future increase or decrease in income taxes payable will be reflected in future rates. In accordance with SFAS No. 109, Union Light has recorded a net regulatory liability at December 31, 1993. Adoption of SFAS No. 109 had no impact on results of operations.
In 1993, CG&E and its subsidiaries adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112). SFAS No. 112 requires the accrual of the cost of certain postemployment benefits provided to former or inactive employees. The adoption of SFAS No. 112 did not have a material effect on results of operations.
Over the past several years, the rate of inflation has been relatively low. Union Light believes that the recent inflation rates do not materially affect its results of operations or financial condition. However, under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------- -------------------------------------------
THE UNION LIGHT, HEAT AND POWER COMPANY --------------------------------------- NOTES TO FINANCIAL STATEMENTS -----------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Union Light follows the Uniform Systems of Accounts prescribed by the Federal Energy Regulatory Commission (FERC), and is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation". The more significant accounting policies are summarized below:
UTILITY PLANT. Property, plant and equipment is stated at the original cost of construction, which includes payroll and related costs such as taxes, pensions and other fringe benefits, general and administrative costs, and an allowance for funds used during construction.
REVENUES AND PURCHASED GAS AND ELECTRICITY COSTS. Union Light recognizes revenues for gas and electric service rendered during the month, which includes revenue for sales unbilled at the end of each month. Union Light expenses the costs of gas and electricity purchased as recovered through revenues and defers the portion of these costs recoverable or refundable in future periods.
DEPRECIATION AND MAINTENANCE. Union Light determines its provision for depreciation using the straight-line method and by the application of rates to various classes of property, plant and equipment. The rates are based on periodic studies of the estimated service lives and net cost of removal of the properties. The percentages of the annual provisions for depreciation to the weighted average of depreciable property during the three years ended December 31, 1993, were equivalent to:
1993 1992 1991 ---- ---- ---- Electric 3.3 3.3 3.3 Gas 2.9 2.7 2.7 Common 5.0 1.7 1.8
In a July 1993 rate order, the Kentucky Public Service Commission (KPSC) authorized changes in depreciation accrual rates on Union Light's gas and common plant. These changes resulted in an increase in depreciation expense for 1993 of approximately $500,000.
Expenditures for maintenance and repairs of units of property, including renewals of minor items, are charged to the appropriate maintenance expense accounts. A betterment or replacement of a unit of property is accounted for as an addition and retirement of property, plant and equipment. At the time of such a retirement, the accumulated provision for depreciation is charged with the original cost of the property retired and also for the net cost of removal.
INCOME TAXES. For income tax purposes, Union Light uses liberalized depreciation methods and deducts removal costs as incurred. Consistent with regulatory treatment, Union Light provides for income tax deferrals resulting from the use of liberalized depreciation and from interest deductions associated with borrowed funds used during construction.
Union Light adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), in 1993. SFAS No. 109 requires deferred tax recognition for all temporary differences in accordance with the liability method, requires that deferred tax liabilities and assets be adjusted for enacted changes in tax laws or rates and prohibits net-of-tax accounting and reporting. Union Light believes it is probable that any net future increase or decrease in income taxes payable will be reflected in future rates. In accordance with SFAS No. 109, Union Light has recorded a net regulatory liability at December 31, 1993. Adoption of SFAS No. 109 had no impact on results of operations.
The following are the tax effects of temporary differences resulting in deferred tax assets and liabilities:
The following table reconciles the change in the net deferred tax liability to the deferred income tax expense included in the accompanying Statement of Income for the year ended December 31, 1993:
In August 1993, President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993. Among the Act's provisions is an increase in the corporate Federal income tax rate from 34% to 35%, retroactive to January 1, 1993. Under SFAS No. 109, the increase in the tax rate has resulted in an increase in the net deferred tax liability and a decrease in income tax related regulatory liabilities. In the above table, this decrease in regulatory liabilities has been included in "Change in income taxes refundable through rates". The increase in the Federal income tax rate has not had a material impact on Union Light's results of operations.
RETIREMENT INCOME PLANS. Union Light is a participating company under CG&E's trusteed non-contributory retirement income plans covering substantially all regular employees. The benefits are based on the employee's compensation, years of service, and age at retirement. Union Light's funding policy is to contribute annually to the plans an amount which is not less than the minimum amount required by the Employee Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes.
The plans' funded status and amounts recognized by CG&E and its subsidiary companies for the years 1993 and 1992 are presented below:
During 1992, CG&E and its subsidiaries recorded $28.4 million ($2.8 million applicable to Union Light) of accrued pension cost in accordance with Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits". This amount represented the costs associated with additional benefits extended in connection with an early retirement program and workforce reduction discussed below.
The following assumptions were used in accounting for pensions:
Net pension cost for CG&E and its subsidiary companies for the years 1993, 1992 and 1991 included the following components:
EARLY RETIREMENT PROGRAM AND WORKFORCE REDUCTIONS. As a result of unfavorable rate orders received in 1992, CG&E and its subsidiaries eliminated approximately 900 regular, temporary and contract positions. The workforce reduction was accomplished through a voluntary early retirement program and involuntary separations. At December 31, 1992, the accrued liability for CG&E and its subsidiaries associated with the workforce reduction was $30.4 million ($3.0 million applicable to Union Light), including $28.4 million ($2.8 million for Union Light) of additional pension benefits discussed above. In accordance with a July 1993 Order of the KPSC, Union Light is recovering the majority of these costs associated with gas operations through gas rates over a period of ten years. Costs associated with electric operations shall be addressed by the KPSC in Union Light's next electric rate case. The balance of unrecovered costs at December 31, 1993, totalled $2.9 million and is reflected in "Other Assets" on the Balance Sheet.
POSTRETIREMENT BENEFITS. Effective January 1, 1993, CG&E and its subsidiaries adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS
No. 106). Union Light is a participating company under CG&E's health care and life insurance benefit plans. SFAS No. 106 requires the accrual of the expected cost of providing postretirement benefits other than pensions to an employee and the employee's covered dependents during the employee's active working career. SFAS No. 106 also requires the recognition of the actuarially determined total postretirement benefit obligation earned by existing retirees. CG&E offers health care and life insurance benefits which are subject to SFAS No. 106.
Life insurance benefits are fully paid by the Companies for qualified employees. Eligibility to receive postretirement coverage is limited to those employees who had participated in the plans and earned the right to postretirement benefits prior to January 1, 1991.
In 1988, CG&E and its subsidiaries recognized the actuarially determined accumulated benefit obligation for postretirement life insurance benefits earned by retirees. The accumulated benefit obligation for active employees is being amortized over 15 years, the employees' estimated remaining service lives. The accounting for postretirement life insurance benefits is not impacted by the adoption of SFAS No. 106.
Postretirement health care benefits are subject to deductibles, copayment provisions and other limitations. Retirees can participate in health care plans by paying 100% of the group coverage premium. Prior to the adoption of SFAS No. 106, the cost of postretirement health care benefits was expensed by the Companies as paid. Beginning in 1993, the Companies began recognizing the accumulated postretirement benefit obligation over 20 years in accordance with SFAS No. 106. Currently, SFAS No. 106 health care costs are being expensed. The adoption of SFAS No. 106 did not have a material effect on results on operations.
The net periodic postretirement cost for the Companies' postretirement benefit plans for 1993 are presented below.
The Companies' accumulated postretirement benefit obligation and accrued postretirement benefit cost under the plans at December 31, 1993 are as follows:
The following assumptions were used to determine the accumulated postretirement benefits obligation:
Increasing the assumed medical care cost trend rates by one percentage point in each year would increase the estimated accumulated postretirement benefit obligation as of December 31, 1993 by $10.5 million and the net periodic postretirement cost by $1.2 million. No funding has been established by the Companies for postretirement benefits.
POSTEMPLOYMENT BENEFITS. In 1993, CG&E and its subsidiaries adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112). SFAS No. 112 requires the accrual of the cost of certain postemployment benefits provided to former or inactive employees. The adoption of SFAS No. 112 did not have a material effect on results of operations.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. The applicable regulatory uniform systems of accounts define "allowance for funds used during construction" (AFC) as including "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used." This amount of AFC constitutes an actual cost of construction and, under established regulatory rate practices, a return on and
recovery of such costs heretofore has been permitted in determining the rates charged for utility services.
AFC was accrued at average pre-tax rates of 8.79%, 3.96% and 8.38% compounded semi-annually for 1993, 1992 and 1991, respectively. AFC represents non-cash earnings and, as a result, does not affect current cash flow.
STATEMENT OF CASH FLOWS. For purposes of the Statement of Cash Flows, Union Light considers short-term investments having maturities of three months or less at time of purchase to be cash equivalents.
The cash amounts of interest (net of allowance for borrowed funds used during construction) and income taxes paid by Union Light in 1993, 1992 and 1991 are as follows:
1993 1992 1991 ---------- ---------- ---------- Interest...................... $8,404,058 $7,597,202 $7,523,242 Income Taxes.................. $4,001,150 $ (440,612) $2,395,392
RECLASSIFICATIONS. Certain reclassifications of previously reported amounts have been made to conform with current classifications. These reclassifications had no effect on earnings on common shares.
(2) INCOME TAXES:
The provision for income taxes included in the accompanying Statement of Income consists of the following components:
Federal income taxes (included in the total provision for income tax expense set forth above) are different from the amount which would be computed by applying the statutory Federal income tax rate to income before provision for Federal income taxes; the principal reasons for this difference are as follows:
(3) CAPITAL STOCK:
Union Light sold $15 million of Capital Stock to CG&E in December 1992 and has authority from the KPSC to issue up to an additional $15 million of Capital Stock through December 31, 1994. Also in 1992, CG&E purchased, from the remaining minority shareholders, 36-63/94 shares of the capital stock of Union Light. As a result, all of Union Light's Capital Shares are owned by CG&E.
(4) LONG-TERM DEBT:
Under the terms of the mortgage indenture securing first mortgage bonds issued by Union Light, substantially all property is subject to a direct first mortgage lien.
Improvement and sinking fund provisions contained in the indenture applicable to the First Mortgage Bonds of Union Light issued prior to 1981 require deposits with the Trustee, on or before April 30 of each year, of amounts in cash and/or principal amount of bonds equal to 1% ($200,000) of the principal amount of bonds of the applicable series originally outstanding less certain designated retirements. In lieu of such cash deposits or delivery of bonds and as permitted under the terms of the indenture, historically Union Light has followed the practice of pledging unfunded property additions to the extent of 166-2/3% of the annual sinking fund requirements.
(5) RATES:
Reference is made to "Rate Matters" on page 3 herein with respect to electric and gas rate matters.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS No. 107), requires disclosure of the estimated fair value of certain financial instruments of Union Light. This information does not purport to be a valuation of Union Light as a whole.
The following methods and assumptions were used to estimate the fair value of each major class of financial instrument of Union Light as required by SFAS No. 107:
CASH, NOTES PAYABLE, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The carrying amount as reflected on the Balance Sheet approximates the fair value of these instruments due to the short period to maturity.
LONG-TERM DEBT. At December 31, 1993 and 1992, Union Light's first mortgage bonds had an estimated fair value of approximately $107,078,000 and $103,782,000, respectively. The aggregate fair value for the first mortgage bonds is based on the present value of future cash flows. The discount rate used approximates the incremental borrowing cost for similar instruments.
(7) COMMITMENTS AND CONTINGENCIES:
In December 1992, CG&E, PSI Resources, Inc. (PSI) and PSI Energy, Inc., PSI's principal subsidiary, an Indiana electric utility (PSI Energy), entered into an agreement which, as subsequently amended (the Merger Agreement) provides for the merger of PSI into a newly formed corporation named CINergy Corp. (CINergy) and the merger of a newly formed subsidiary of CINergy into CG&E. CINergy will become a holding company required to be registered under the Public Utility Holding Company Act of 1935 (PUHCA) with two operating subsidiaries, CG&E and PSI Energy. Union Light will remain a subsidiary of CG&E.
The merger will be accounted for as a "pooling of interests", and it is anticipated that the transaction will be completed in the third quarter of 1994. The merger is subject to approval by the Securities and Exchange Commission (SEC) and FERC. Shareholders of both companies approved the merger in November 1993.
FERC issued conditional approval of the CINergy merger in August 1993, but several intervenors, including The Public Utilities Commission of Ohio (PUCO) and the KPSC, filed for rehearing of that order. On January 12, 1994, FERC withdrew its conditional approval of the merger and ordered the setting of FERC-sponsored settlement procedures to be held.
On March 4, 1994, CG&E reached a settlement agreement with the PUCO and the Ohio Office of Consumers' Counsel on merger issues identified by FERC. On March 2, PSI Energy and Indiana's consumer representatives had reached a similar agreement. Both settlement agreements have been filed with FERC. These documents address, among other things, the coordination of state and federal regulation and the commitment that neither CG&E nor PSI electric
base rates, nor CG&E's gas base rates, will rise because of the merger, except to reflect any effects that may result from the divestiture of CG&E's gas operations if ordered by the SEC in accordance with the requirements of PUHCA discussed below.
CG&E also filed with FERC a unilateral offer of settlement addressing all issues raised in the KPSC's application for rehearing with FERC. Although it is the belief of CG&E and PSI that no state utility commissions have jurisdiction over approval of the proposed merger, an application has been filed with the KPSC to comply with the Staff of the KPSC's position that the KPSC's authorization is required for the indirect acquisition of control of Union Light by CINergy. As part of the settlement offer, Union Light will agree not to increase gas base rates as a result of the merger except to reflect any effects that may result from the divestiture of Union Light's gas operations discussed below.
If the settlement agreements filed with FERC are not acceptable, FERC could set issues for hearing. If a hearing is held by FERC, consummation of the merger would likely be extended beyond the third quarter of 1994.
PUHCA imposes restrictions on the operations of registered holding company systems. Among these are requirements that securities issuances, sales and acquisitions of utility assets or of securities of utility companies and acquisitions of interests in any other business be approved by the SEC. PUHCA also limits the ability of registered holding companies to engage in non-utility ventures and regulates holding company system service companies and the rendering of services by holding company affiliates to the system's utilities. The SEC has interpreted the PUHCA to preclude registered holding companies, with some exceptions, from owning both electric and gas utility systems. The SEC may require that CG&E and Union Light divest their gas properties within a reasonable time after the merger in order to approve the merger as it has done in many cases involving the acquisition by a holding company of a combination gas and electric company. In some cases, the SEC has allowed the retention of the gas properties or deferred the question of divestiture for a substantial period of time. In those cases in which divestiture has taken place, the SEC usually has allowed companies sufficient time to accomplish the divestiture in a manner that protects shareholder value. CG&E and Union Light believe good arguments exist to allow retention of the gas assets, and will request that the Companies be allowed to do so.
CG&E and Union Light are subject to regulation by various Federal, state and local authorities relative to air and water quality, solid and hazardous waste disposal, and other environmental matters. Compliance programs necessary to meet existing and future environmental laws and regulations will increase the cost of utility service.
Reference is made to "Gas Operations and Gas Supply" herein for information relating to FERC Order 636 and commitments for the purchase of gas and to "Construction" with respect to estimated construction expenditures.
(8) COMPENSATING BANK BALANCES AND NOTES PAYABLE:
At December 31, 1993, Union Light had lines of credit totaling $30 million, which were maintained by compensating balances. Unused lines of credit at December 31, 1993 totaled $9.0 million (generally subject to withdrawal by the banks). Substantially all of the cash balances of Union Light are maintained to compensate the respective banks for banking services and to obtain lines of credit; however, Union Light has the right of withdrawal of such funds. The maximum amount of outstanding short-term notes payable authorized by Union Light's Board of Directors and approved by FERC to be incurred at any time through December 31, 1994 is $35 million.
(9) SUPPLEMENTARY INCOME INFORMATION:
Taxes other than income taxes as set forth in the Statement of Income are as follows:
(10) FINANCIAL INFORMATION BY BUSINESS SEGMENTS:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Union Light, Heat and Power Company:
We have audited the accompanying balance sheet of THE UNION LIGHT, HEAT AND POWER COMPANY (a Kentucky corporation and a subsidiary of The Cincinnati Gas & Electric Company) as of December 31, 1993 and 1992, and the related statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of the Company's 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 The Union Light, Heat and Power Company as of December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, the Company changed its methods of accounting for income taxes, postretirement health care benefits and postemployment benefits effective January 1, 1993.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules listed in 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 schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Cincinnati, Ohio, January 24, 1994.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------ --------------------------------------------------------------- Financial Disclosure --------------------
Not Applicable.
PART III
Items 10., 11., 12. and 13. - ---------------------------
Omitted pursuant to Instruction J(2)(c).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------- -----------------------------------------------------------------
(a) Listed below are all financial statements, schedules, and exhibits attached hereto, incorporated herein, and filed as a part of this Annual Report.
(1) Financial Statements:
Statement of Income for the Three Years Ended December 31,
Statement of Cash Flows for the Three Years Ended December 31, 1993
Balance Sheet, December 31, 1993 and 1992
Statement of Changes in Shareholders' Equity for the Three Years Ended December 31, 1993
Notes to Financial Statements
Report of Independent Public Accountants
(2) Financial Statement Schedules:
#Schedule V -- Property, Plant and Equipment (1993, 1992, and 1991)
#Schedule VI -- Accumulated Provisions for Depreciation (1993, 1992, and 1991)
#Schedule VIII -- Other Accumulated Provisions (1993, 1992, and 1991)
#Schedule IX -- Short-Term Borrowings (1993, 1992, and 1991)
(3) Exhibits:
Exhibit No. -------
*3-A --Copy of Restated Articles of Incorporation made effective May 7, 1976 (filed as Exhibit 1 to Form 8-K, May 1976) *3-B --Copy of By-Laws of Union Light as amended, adopted by shareholders May 3, 1989 (filed as Exhibit 3-B under cover of Form SE dated August 8, 1989)
*4-A-1 --Copy of First Mortgage dated as of February 1, 1949, between Union Light and The Bank of New York (filed as Exhibit 7 to Registration Statement No. 2-7793) *4-A-2 --Copy of Fifth Supplemental Indenture dated as of January 1, 1967, between Union Light and The Bank of New York (filed as Exhibit 2-C-6 to Registration Statement No. 2-60961 of CG&E) *4-A-3 --Copy of Seventh Supplemental Indenture dated as of October 1, 1973, between Union Light and The Bank of New York (filed as Exhibit 2-C-7 to Registration Statement No. 2-60961 of CG&E) *4-A-4 --Copy of Eighth Supplemental Indenture dated as of December 1, 1978, between Union Light and The Bank of New York (filed as Exhibit 2-C-8 to Registration Statement No. 2-63591 of CG&E) *4-A-5 --Copy of Tenth Supplemental Indenture dated as of July 1, 1989 between Union Light and The Bank of New York (filed as Exhibit 4-B to Form 10-Q for the quarter ended June 30, 1989 of CG&E) *4-A-6 --Copy of Eleventh Supplemental Indenture dated as of June 1, 1990 between Union Light and The Bank of New York (filed as Exhibit 4-B to Form 10-Q for the quarter ended June 30, 1990 of CG&E) *4-A-7 --Copy of Twelfth Supplemental Indenture dated as of November 15, 1990, between Union Light and The Bank of New York (filed as Exhibit 4-B-8 to 1990 Form 10-K of CG&E) *4-A-8 --Copy of Thirteenth Supplemental Indenture dated as of August 1, 1992, between Union Light and The Bank of New York (filed as Exhibit 4-B-9 to 1992 Form 10-K of CG&E) 23 --Consent of Independent Public Accountants dated as of March 15, 1994
(b) No reports on Form 8-K were filed during the three months ended December 31, 1993.
----------------
#All schedules other than Schedules V, VI, VIII and IX, are omitted, as the information is not required or is otherwise furnished, per Title 17, Section 210.5-04, CFR.
*The exhibits with an asterisk have been filed with the Securities and Exchange Commission and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 15th day of March, 1994.
THE UNION LIGHT, HEAT AND POWER COMPANY
By Jackson H. Randolph ______________________________________ (Jackson H. Randolph, Chairman of the Board, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
(i) Principal Executive Officer:
Chairman of the Board, President and Chief Jackson H. Randolph Executive Officer March 15, 1994 _____________________________________ (Jackson H. Randolph)
(ii) Principal Financial Officer:
Senior Vice-President Finance C. R. Everman and Director March 15, 1994 ____________________________________ (C. Robert Everman)
(iii) Principal Accounting Officer:
Daniel R. Herche Controller March 15, 1994 _____________________________________ (Daniel R. Herche)
(iv) A Majority of the Board of Directors:
Terry E. Bruck Director March 15, 1994 _____________________________________ (Terry E. Bruck)
James J. Mayer Director March 15, 1994 _____________________________________ (James J. Mayer)
George H. Stinson Director March 15, 1994 _____________________________________ (George H. Stinson)
W. D. Waymire Director March 15, 1994 _____________________________________ (W. Denis Waymire)
R. P. Wiwi Director March 15, 1994 _____________________________________ (R. P. Wiwi)
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------- -----------------------------------------------------------------
(a) Listed below are all financial statements, schedules, and exhibits attached hereto, incorporated herein, and filed as a part of this Annual Report.
(1) Financial Statements:
Statement of Income for the Three Years Ended December 31,
Statement of Cash Flows for the Three Years Ended December 31, 1993
Balance Sheet, December 31, 1993 and 1992
Statement of Changes in Shareholders' Equity for the Three Years Ended December 31, 1993
Notes to Financial Statements
Report of Independent Public Accountants
(2) Financial Statement Schedules:
#Schedule V -- Property, Plant and Equipment (1993, 1992, and 1991)
#Schedule VI -- Accumulated Provisions for Depreciation (1993, 1992, and 1991)
#Schedule VIII -- Other Accumulated Provisions (1993, 1992, and 1991)
#Schedule IX -- Short-Term Borrowings (1993, 1992, and 1991)
(3) Exhibits:
Exhibit No. -------
*3-A --Copy of Restated Articles of Incorporation made effective May 7, 1976 (filed as Exhibit 1 to Form 8-K, May 1976) *3-B --Copy of By-Laws of Union Light as amended, adopted by shareholders May 3, 1989 (filed as Exhibit 3-B under cover of Form SE dated August 8, 1989)
*4-A-1 --Copy of First Mortgage dated as of February 1, 1949, between Union Light and The Bank of New York (filed as Exhibit 7 to Registration Statement No. 2-7793) *4-A-2 --Copy of Fifth Supplemental Indenture dated as of January 1, 1967, between Union Light and The Bank of New York (filed as Exhibit 2-C-6 to Registration Statement No. 2-60961 of CG&E) *4-A-3 --Copy of Seventh Supplemental Indenture dated as of October 1, 1973, between Union Light and The Bank of New York (filed as Exhibit 2-C-7 to Registration Statement No. 2-60961 of CG&E) *4-A-4 --Copy of Eighth Supplemental Indenture dated as of December 1, 1978, between Union Light and The Bank of New York (filed as Exhibit 2-C-8 to Registration Statement No. 2-63591 of CG&E) *4-A-5 --Copy of Tenth Supplemental Indenture dated as of July 1, 1989 between Union Light and The Bank of New York (filed as Exhibit 4-B to Form 10-Q for the quarter ended June 30, 1989 of CG&E) *4-A-6 --Copy of Eleventh Supplemental Indenture dated as of June 1, 1990 between Union Light and The Bank of New York (filed as Exhibit 4-B to Form 10-Q for the quarter ended June 30, 1990 of CG&E) *4-A-7 --Copy of Twelfth Supplemental Indenture dated as of November 15, 1990, between Union Light and The Bank of New York (filed as Exhibit 4-B-8 to 1990 Form 10-K of CG&E) *4-A-8 --Copy of Thirteenth Supplemental Indenture dated as of August 1, 1992, between Union Light and The Bank of New York (filed as Exhibit 4-B-9 to 1992 Form 10-K of CG&E) 23 --Consent of Independent Public Accountants dated as of March 15, 1994
(b) No reports on Form 8-K were filed during the three months ended December 31, 1993.
----------------
#All schedules other than Schedules V, VI, VIII and IX, are omitted, as the information is not required or is otherwise furnished, per Title 17, Section 210.5-04, CFR.
*The exhibits with an asterisk have been filed with the Securities and Exchange Commission and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 15th day of March, 1994.
THE UNION LIGHT, HEAT AND POWER COMPANY
By Jackson H. Randolph ______________________________________ (Jackson H. Randolph, Chairman of the Board, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
(i) Principal Executive Officer:
Chairman of the Board, President and Chief Jackson H. Randolph Executive Officer March 15, 1994 _____________________________________ (Jackson H. Randolph)
(ii) Principal Financial Officer:
Senior Vice-President Finance C. R. Everman and Director March 15, 1994 ____________________________________ (C. Robert Everman)
(iii) Principal Accounting Officer:
Daniel R. Herche Controller March 15, 1994 _____________________________________ (Daniel R. Herche)
(iv) A Majority of the Board of Directors:
Terry E. Bruck Director March 15, 1994 _____________________________________ (Terry E. Bruck)
James J. Mayer Director March 15, 1994 _____________________________________ (James J. Mayer)
George H. Stinson Director March 15, 1994 _____________________________________ (George H. Stinson)
W. D. Waymire Director March 15, 1994 _____________________________________ (W. Denis Waymire)
R. P. Wiwi Director March 15, 1994 _____________________________________ (R. P. Wiwi)