ITEM 1. BUSINESS
Organization
In October 1994, The Cincinnati Gas & Electric Company (CG&E) became a subsidiary of CINergy Corp. (CINergy) as a result of the merger of CG&E and PSI Resources, Inc. (Resources). CINergy is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA).
The Company
CG&E, an Ohio corporation, is an electric and gas public utility company with four wholly-owned utility subsidiaries including The Union Light, Heat and Power Company (ULH&P), Miami Power Corporation (Miami), The West Harrison Gas and Electric Company (West Harrison), and Lawrenceburg Gas Company (Lawrenceburg). In addition, CG&E has two non-utility subsidiaries, KO Transmission Company (KO Transmission) and Tri-State Improvement Company (Tri- State), both of which are wholly-owned.
CG&E and its utility subsidiaries are primarily engaged in the production, transmission, distribution, and sale of electric energy and 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 was incorporated in Kentucky in 1994 and will be used to acquire an interest in an interstate natural gas pipeline to which CG&E is entitled as a result of a settlement with the Columbia Gas Transmission Corp. It will have an office in Cincinnati and will be engaged in the transportation of natural gas in interstate commerce between Kentucky and Ohio. KO Transmission's portion of the pipeline will extend from central Kentucky to the Ohio River.
Tri-State, an Ohio corporation, is devoted to acquiring and holding property in Ohio, Kentucky, and Indiana for substations, electric and gas rights of way, office space, and other uses in CG&E's and its subsidiaries' utility operations.
As a result of the merger, CGE Corp., a subsidiary of CG&E prior to merger consummation, was merged with and into CINergy Investments, Inc. (Investments), a subsidiary of CINergy. CGE Corp.'s former subsidiaries, Power International, Inc., previously named Enertech Associates International, Inc., and CG&E Resource Marketing, Inc., are now subsidiaries of Investments.
Customer, Sales, and Revenue Data
Approximately 75% and 24% of CG&E's and its subsidiaries' operating revenues are derived from the sale of electricity and the sale and transportation of natural gas, respectively. The service territory of CG&E and its subsidiaries is heavily populated and characterized by a stable residential customer base and a diverse mix of industrial customers. As of December 31, 1994, CG&E and its subsidiaries supplied electric service to over 708,000 customers and provided gas service to more than 429,000 customers. CG&E's and its utility subsidiaries' service territory spans 19 counties in Ohio, Indiana, and Kentucky and includes approximately 130 cities, towns, unincorporated communities, and adjacent rural areas, including municipal utilities and rural electric cooperatives. No one customer accounts for more than 5% of electric or gas operating revenues of CG&E and its subsidiaries. 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.
Financial Information by Business Segment
For financial information by business segment, see Note 16 of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data". For a discussion of the potential divestiture of CG&E's gas operations, see Note 13(d) of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
Regulation
As subsidiaries of CINergy, CG&E and its subsidiaries are subject to regulation by the Securities and Exchange Commission (SEC) under the PUHCA with respect to, among other things, issuances and sales of securities, acquisitions and sales of certain utility properties, acquisitions and retentions of interests in non-utility businesses, intrasystem sales of certain goods and services, the method of keeping accounts, and access to books and records. In addition, the PUHCA generally limits registered holding companies to a single "integrated" public utility system, which the SEC traditionally has interpreted to prohibit a registered holding company, with limited exceptions, from owning both gas and electric properties. (Refer to the information appearing under the caption "Potential Divestiture of Gas Operations" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".)
CG&E, ULH&P, and Miami 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 will be rendered in accordance with terms and conditions and at rates contained in a gas tariff filed with the FERC. Transportation of gas between CG&E and ULH&P is subject to regulation by the FERC under the Natural Gas Act.
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, and West Harrison and Lawrenceburg are regulated by the Indiana Utility Regulatory Commission (IURC).
Rate Matters
Refer to the information appearing under the caption "Regulatory Matters" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".
Power Supply
CG&E and 28 other electric utilities in an eight-state area are participating in the East Central Area Reliability Coordination Agreement for the purpose of coordinating the planning and operation of generating and transmission facilities to provide for maximum reliability of regional bulk power supply.
CG&E's electric system, which is operated by CINergy Services, Inc., the service company which provides a variety of administrative, management, and support services to the CINergy system, is interconnected with the electric systems of PSI Energy, Inc. (Energy), also a subsidiary of CINergy, East Kentucky Power Cooperative, Inc. (East Kentucky), Indiana Michigan Power Company, Louisville Gas and Electric Company, Columbus Southern Power Company, The Dayton Power and Light Company, Ohio Valley Electric Corporation, Ohio Power Company, and Tennessee Valley Authority.
CG&E and East Kentucky have an agreement for the interchange of electric power, subject to availability, during certain times of the year through March 2000. Under the agreement, CG&E, a summer peaking company, has the right to obtain up to 150 megawatts (mw) of electricity through March 31, 1997, and up to 50 mw from April 1, 1997, through March 31, 2000, from East Kentucky during the months of June, July, and August. East Kentucky, a winter peaking company, has the right to receive up to 150 mw through March 31, 1997, and up to 50 mw from April 1, 1997, through March 31, 2000, from CG&E in December, January, and February.
Fuel Supply
A major portion of the coal required by CG&E 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 to reflect suppliers' costs and certain other factors. 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 Ohio, Kentucky, West Virginia, and Pennsylvania.
CG&E monitors alternative sources to assure a continuing availability of economical fuel supplies. CG&E intends to continue purchasing a portion of its coal requirements on the spot market and, at the present time, is investigating the expanded use of low-sulfur coal in connection with its plans to comply with the Clean Air Act Amendments of 1990 (see the information appearing under the caption "Environmental Issues" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations").
CG&E believes it will be able to obtain sufficient coal to meet future generating requirements. However, CG&E is unable to predict the extent to which coal availability and price may ultimately be affected by future environmental requirements. Presently, CG&E expects 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.
Gas Supply
The FERC's Order 636 restructured the operations of gas pipelines and the supply portfolios of gas distribution companies. As gas pipelines unbundled their historic service of supply aggregating, direct term contracting by gas distribution companies with producers and marketers diminished the once prominent spot market (see the information appearing under the caption "Order 636" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations").
CG&E and its subsidiaries now obtain the majority of their natural gas supply (89%) 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 subsidiaries' core requirements, and "swing" load, which is gas available on a daily basis for changes in demand. While a premium is paid for the swing load, the use of industry indices to price firm gas volumes on a monthly basis ensures that the price CG&E and its subsidiaries pay remains economically competitive.
Gas is transported on interstate pipelines either directly to CG&E's and its subsidiaries' distribution systems, or it is injected into pipeline storage facilities for withdrawal and delivery in the future. Most of CG&E's and its subsidiaries' gas supplies are sourced from the Gulf of Mexico coastal area. CG&E and its subsidiaries have also obtained limited supply sourced from the Appalachian region and the mid-continent (Arkansas - Oklahoma) basin, and from methane gas recovered from an Ohio landfill. Over the long-term, natural gas is expected to retain its competitiveness with alternative fuels; however, the costs of discovery and development of new sources of supply will influence prices.
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".
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".
Environmental Matters
CG&E's 1995 construction expenditures for environmental compliance are forecasted to be $6 million. In addition, refer to the information appearing in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".
Employees
The number of employees of CG&E and its subsidiaries at December 31, 1994, was 4,834, of whom CG&E employed 4,479, ULH&P employed 342, and Lawrenceburg employed 13.
CG&E and its utility subsidiaries have collective bargaining agreements with several union organizations. Approximately 1,226 employees were represented by the Independent Utilities Union (IUU). The current contract between CG&E and the IUU will expire in March 1998. The United Steelworkers of America (USWA) and the International Brotherhood of Electrical Workers (IBEW) represented approximately 475 and 1,570 employees, respectively. CG&E and its subsidiaries have a three-year contract with the USWA expiring May 15, 1997. The IBEW contract expires April 1, 1997.
ITEM 2.
ITEM 2. PROPERTIES
Substantially all utility plant is subject to the lien of each applicable company's first mortgage bond indenture.
In addition to the information further discussed herein, refer to the information appearing under the caption "New Generation" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 14 of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
CG&E
CG&E wholly owns and operates seven steam electric generating units at two different stations and 20 rapid-start internal combustion generating units at four different stations. In addition, CG&E operates five commonly owned steam
electric generating units at four different stations, in all of which CG&E has an undivided interest. CG&E also has an undivided interest in six commonly owned steam electric generating units at three separate stations which are not operated by CG&E. All of these properties are located in Ohio, with the exception of one of the jointly owned stations operated by CG&E which is located in Kentucky. CG&E-owned system generating capability as of December 31, 1994, was 5,374 mw.
CG&E's 1994 summer peak load, which occurred on July 20, was 4,326 mw, and its 1994 winter peak load, which occurred on January 18, was 4,077 mw, exclusive of off-system transactions. For the period 1995 through 2004, summer and winter peak load and kilowatt-hour sales are each forecasted to have annual growth rates of 2%. These forecasts reflect CG&E's assessment of demand-side management programs, load growth, alternative fuel choices, population growth, and housing starts. These forecasts exclude non-firm power transactions and any potential off-system, long-term firm power sales.
As of December 31, 1994, CG&E's transmission system consisted of 388 circuit miles of 345,000 volt line, 604 circuit miles of 138,000 volt line, 475 circuit miles of 69,000 volt line, and 117 circuit miles of lesser volt line, all within the states of Ohio and Kentucky. In addition, as of December 31, 1994, CG&E's distribution system consisted of 14,388 circuit miles, all within the state of Ohio. As of the same date, CG&E's transmission substations had a combined capacity of 14,845,106 kilovolt-amperes, and the distribution substations had a combined capacity of 5,860,802 kilovolt-amperes. A portion of CG&E's total transmission system is jointly owned, primarily in connection with the previously mentioned jointly owned electric generating units.
During 1994, 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 subsidiaries.
CG&E owns two underground caverns, one with a seven million gallon capacity and one with an eight million gallon capacity, for the storage of liquid propane and related vaporization and mixing plants. Both of the storage caverns are located in Ohio and used primarily to augment CG&E's supply of natural gas during periods of peak demand and emergencies. CG&E also owns natural gas distribution systems consisting of 5,341 miles of mains and service lines in southwestern Ohio.
ULH&P
As of December 31, 1994, ULH&P owned 104 circuit miles of 69,000 volt electric transmission line, an electric distribution system consisting of 2,468 circuit miles, and a gas distribution system consisting of 1,190 miles of mains and service lines in northern Kentucky. ULH&P also owns a seven million gallon capacity underground cavern for the storage of liquid propane and a related vaporization and mixing plant and feeder lines, located in northern Kentucky and adjacent to one of the gas lines that transports natural gas to CG&E. The cavern and vaporization and mixing plant are used primarily to augment CG&E's and ULH&P's supply of natural gas during periods of peak demand and emergencies.
Other Subsidiaries
As of December 31, 1994, Lawrenceburg owned a gas distribution system consisting of 166 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, 1994, 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 Louisville Gas and Electric Company with those of CG&E.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Merger Litigation
The original merger agreement between CG&E and Resources was amended in response to a June 1993 ruling by the IURC, which dismissed a petition by Energy for approval of the transfer of its license or property to CINergy Corp., an Ohio corporation. The IURC held that such transfer could not be made to a corporation incorporated outside of Indiana. The original structure provided that Resources, Energy, and CG&E would be merged into CINergy. Under this structure, Energy and CG&E would have become operating divisions of CINergy, ceasing to exist as separate corporations, and CINergy would not have been required to register as a public utility holding company under the PUHCA. Energy appealed the IURC's decision, and in October 1994, the Indiana Court of Appeals reversed the IURC's decision. This decision by the Indiana Court of Appeals did not alter the consummation of the merger establishing CINergy as a registered holding company.
Shareholder Litigation
In March 1993, in conjunction with a proposed tender offer for Resources, IPALCO Enterprises, Inc. filed suit in the United States District Court for the Southern District of Indiana, Indianapolis Division (District Court), against Resources, CINergy, James E. Rogers, Energy, and CG&E (IPALCO Action). The IPALCO Action was subsequently dismissed in November 1993. In March 1993 and in the weeks following, six suits with claims similar to the IPALCO Action were filed by purported shareholders of Resources (Shareholder Litigation). Four of the suits were filed in the District Court, and two were filed in state courts, although one of those two was subsequently consolidated with the four in the District Court.
In January 1994, the parties to the Shareholder Litigation executed a Stipulation and Agreement of Dismissal (Stipulation) settling and dismissing with prejudice all of the parties' claims except for plaintiffs' petitions for fees and expenses and defendants' right to object thereto. An agreement in principle has been reached in the Shareholder Litigation which contemplates that counsel for all plaintiffs will receive from Energy a portion of the fees and expenses claimed. The parties have agreed to provide notice to affected shareholders of a hearing during which the order on the fees and expenses will be considered by the District Court. Pending such order, the agreed upon fees and expenses will be deposited into an interest-bearing escrow account.
In addition to the above litigation, see Notes 2 and 13(b), 13(c), and 13(d) of the "Notes to Consolidated Financial Statements" in "Item 8. Financial Statements and Supplementary Data".
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
EXECUTIVE OFFICERS OF THE REGISTRANT (at February 28, 1995)
Age at Dec. 31, Name 1994 Office & Date Elected or in Job
Jackson H. Randolph 64 Chairman and Chief Executive Officer of CINergy, CG&E, and Energy - 1994 Chairman, President and Chief Executive Officer of CG&E - 1993 President and Chief Executive Officer of CG&E - 1986
James E. Rogers 47 Vice Chairman, President and Chief Operating Officer of CINergy - 1994 Vice Chairman and Chief Operating Officer of CG&E and Energy - 1994 Chairman and Chief Executive Officer of Resources - 1993 Chairman, President and Chief Executive Officer of Energy - 1990 Chairman, President and Chief Executive Officer of Resources - 1988 Chairman and Chief Executive Officer of Energy - 1988
Terry E. Bruck 49 Group Vice President, Wholesale Power and Transmission Operations of CG&E - 1995 Group Vice President, Wholesale Power and Transmission Operations of CINergy - 1994 Vice President, Electric Operations of CG&E - 1988
Cheryl M. Foley 47 Vice President, General Counsel and Corporate Secretary of CG&E - 1995 Vice President, General Counsel and Corporate Secretary of CINergy - 1994 Vice President, General Counsel and Secretary of Resources and Energy - 1991 Vice President and General Counsel of Resources - 1990 Vice President and General Counsel of Energy - 1989
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Age at Dec. 31, Name 1994 Office & Date Elected or in Job
William J. Grealis 1/ 49 Vice President of CINergy - 1995 President, Natural Gas Business Unit of CG&E - 1995 President of Investments - 1995 Partner - Akin, Gump, Strauss, Hauer & Feld - 1978 2/
J. Wayne Leonard 44 Group Vice President and Chief Financial Officer of CG&E - 1995 Group Vice President and Chief Financial Officer of CINergy - 1994 Senior Vice President and Chief Financial Officer of Resources and Energy - 1992 Vice President and Chief Financial Officer of Resources and Energy - 1989
Stephen G. Salay 57 Group Vice President, Power Operations of CG&E - 1995 Group Vice President, Power Operations of CINergy - 1994 Vice President, Electric Production and Fuel Supply of CG&E - 1988
William L. Sheafer 51 Treasurer of CINergy and Energy - 1994 Treasurer of CG&E - 1987
George H. Stinson 49 Vice President of CINergy - 1995 3/ President of CG&E - 1994 Vice President, Gas Operations of CG&E - 1991 Manager, Gas Operations of CG&E - 1990 Manager, CG&E's Miami Fort Station - 1980
Larry E. Thomas 49 Group Vice President, Reengineering and Operations Services of CG&E - 1995 Group Vice President, Reengineering and Operations Services of CINergy - 1994 Senior Vice President and Chief Operations Officer of Energy - 1992 Senior Vice President and Chief Operating Officer, Customer Operations of Energy - Senior Vice President, Customer Operations of Energy - 1986
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Age at Dec. 31, Name 1994 Office & Date Elected or in Job
Charles J. Winger 49 Comptroller of CG&E - 1995 Comptroller of CINergy - 1994 Comptroller of Resources - 1988 Comptroller of Energy - 1984
Under the Amended and Restated Agreement and Plan of Reorganization (the Merger Agreement) by and among CG&E, Resources, Energy, and CINergy, a Delaware corporation, dated as of December 11, 1992, as amended on July 2, 1993, and as of September 10, 1993, Jackson H. Randolph will be entitled to serve as Chairman and Chief Executive Officer (CEO) of CINergy until November 30, 1995, and Chairman of CINergy until November 30, 2000. James E. Rogers will be entitled to serve as Vice Chairman, President and Chief Operating Officer of CINergy until November 30, 1995, at which time he will be entitled to serve as Vice Chairman, President and CEO.
None of the officers are related in any manner. Executive officers of CG&E are elected to the offices set opposite their respective names until the next annual meeting of the Board of Directors and until their successors shall have been duly elected and shall have been qualified.
1/ Prior to becoming president of Investments, Mr. Grealis was a partner in the Washington, D.C. law firm of Akin, Gump, Strauss, Hauer & Feld. In addition, prior to the merger, Mr. Grealis was president of PSI Investments, Inc. on an interim basis beginning in 1992.
2/ Non-affiliate of CINergy.
3/ Mr. Stinson was elected Vice President of CINergy effective March 3, 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All CG&E common stock is held by CINergy; therefore, there is no public trading market for CG&E common stock.
Trading of CG&E common stock (New York, Cincinnati, Chicago, and Pacific Stock Exchanges: CIN) ended at the close of the market October 24, 1994. Trading of CINergy common stock began upon the opening of the market October 25, 1994. The following table shows CG&E's common stock dividends declared per share for the past two years:
Dividends per share Quarter 1994 1993 4th $.3272 (a) $.43 3rd .43 .415 2nd .43 .415 1st .43 .415
(a) The pro rated fourth quarter dividend for CG&E was determined by multiplying that portion of the regular dividend by a fraction equal to the number of days from the last common dividend payment date (August 15, 1994) to and including the closing date of the merger, divided by the number of days in the quarterly period (92). In the fourth quarter of 1994, CG&E paid an additional dividend of $15,276,000 to CINergy.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
See "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MERGER CONSUMMATION
CINergy Corp. (CINergy) was created for the October 1994 merger of The Cincinnati Gas & Electric Company (CG&E or Company) and PSI Resources, Inc. (Resources) and is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). The business combination was accounted for as a pooling of interests. Each outstanding share of common stock of CG&E and Resources was exchanged for one share and 1.023 shares, respectively, of CINergy common stock. Following the merger, CINergy became the parent holding company of CG&E and PSI Energy, Inc. (Energy), previously Resources' utility subsidiary. The outstanding preferred stock and debt securities of CG&E and its utility subsidiaries were not affected by the merger. Following the merger, CG&E and Energy (the Operating Companies) began jointly dispatching their generating units.
FINANCIAL CONDITION
Competitive Pressures
Electric Utility Industry
Introduction The primary factor influencing the future profitability of CINergy and its utility subsidiaries is the changing competitive environment for energy services and the related commoditization of electric power markets. Changes in the industry include more competition in wholesale power markets and the imminent likelihood of "customer choice" by large industrial customers and, ultimately, by all retail customers. For an electric utility to be successful in this competitive environment, it is critical that regulatory reform keep pace with the competitive realities facing electric utilities and their customers. Strict adherence to traditional, cost-based rate of return regulation will significantly disadvantage a utility's ability to successfully compete to supply customer needs. For example, performance-based regulation (e.g., price caps) would likely add substantial flexibility for the franchise utility in the transition to a fully competitive environment.
Although the Operating Companies provide service in separate retail regulatory jurisdictions, as a result of the merger, strategies and opportunities for success in a more competitive environment are most appropriately discussed for CINergy as a whole. Consequently, the discussion that follows addresses issues for CINergy as a whole while recognizing that regulatory response to competitive pressures may vary between regulatory jurisdictions.
Pressures for "Customer Choice" The granting of choice to end-user customers, commonly referred to as retail wheeling, would allow a customer within a particular utility's service territory to buy power directly from another source using the power lines of the local utility for delivery. The regulatory and legislative reform to facilitate this result is primarily driven by large industrial energy users' needs for low-cost power to remain competitive in the global marketplace. These industrial customers are intensifying their efforts to change the regulatory process that currently denies them access to lower-cost power. The current restrictions on access to low-cost power are exacerbated by cost-of-service regulation which has produced average industrial rates to customers that vary substantially across the United States (from approximately 3 cents per kilowatt-hour [kwh] to 10 cents per kwh).
Federal Law, the New Competitors, and the Commoditization of Electric Power Markets The Energy Policy Act of 1992 (Energy Act), the most comprehensive energy legislation enacted since the late 1970s, has essentially provided for open competition at the wholesale level. The Energy Act created a new class of wholesale power providers, exempt wholesale generators (EWGs), that are not subject to the restrictive requirements of the PUHCA nor the ownership restrictions of the Public Utility Regulatory Policies Act of 1978. However, due to excess capacity in the industry, EWGs have not yet significantly affected competition in the wholesale power market. To date, the primary impetus for increased wholesale competition has been the provision of the Energy Act that granted the Federal Energy Regulatory Commission (FERC) the authority to order wholesale transmission access. This provision, combined with the excess capacity in the bulk-power markets, has resulted in the emergence of power marketers and brokers.
Brokers are intermediaries between buyers and sellers (i.e., they do not take title to the power). Power marketers are entities licensed by the FERC to conduct bulk power trades at market-based prices. They manage portfolios of power contracts (which they have title to) and owned generation and package energy products for customers of bulk power, including price risk management contracts such as options on fixed price energy or guaranteed fixed price contracts.
As regulatory issues such as transmission pricing are resolved, power marketers and brokers will become more significant factors in wholesale power markets and, ultimately, the retail markets. With respect to transmission pricing, the FERC recently issued a policy statement indicating its intent to allow flexibility in pricing, permitting parties to submit either traditional, cost-based plans or pricing schemes based on non-traditional designs. The transmission pricing policy enumerates five principles that the FERC will consider in approving future proposals, including cost-based rates, adherence to the FERC's comparability standard, economic efficiency, fairness, and practicality.
States' Role in Customer Choice (Retail Wheeling) As discussed above, the Energy Act allows real competition in the wholesale power market; however, it prohibits the FERC from ordering utilities to provide transmission access to retail customers (retail wheeling) and is silent with respect to the states' role and authority in this issue.
Several states are currently reviewing retail wheeling proposals. In particular, the California Public Utilities Commission proposed a plan in 1994 that would allow all customers to choose their electric supplier by the year 2002. However, it is currently anticipated that implementation of this proposal could be substantially delayed due to the complex issues involved (e.g., exclusive use of a power pool run by an impartial third party vs. bilateral contract arrangements). In addition to California, Michigan regulators have proposed a limited retail wheeling experiment, and Wisconsin regulators are reviewing numerous proposals for restructuring that state's electric supply and related services. Connecticut regulators, on the other hand, recently decided to delay consideration of retail wheeling until new capacity is needed in the state (approximately the year 2007).
A significant issue for states and utilities to resolve with respect to retail wheeling is the regulatory treatment of any stranded investments, or costs without a customer. California's proposal and a recent proposal by the FERC contain mechanisms for recovery by the franchise utility of certain sunk costs or investments "stranded" by the loss of the monopoly franchise; however, there are numerous arguments being advanced against the collection of stranded costs. For example, there are concerns that an efficient competitive market cannot exist if regulators allow recovery in the future of all uncollected past costs. Given that the most severe electric competition is expected to be in the commodity sector, stranded costs are usually considered uneconomical generating property. In addition, stranded costs could include assets created by the actions of regulators (i.e., regulatory assets) under the provisions of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (Statement 71), or operating costs such as fuel supply contracts. The substantial accounting implications from the loss of franchise territory and related regulatory protections are discussed further herein.
CINergy's Response to the Changing Competitive Environment CINergy and its utility subsidiaries support increased competition in the electric utility industry. In fact, the foresight that competition was about to substantially increase and that retail wheeling was inevitable was a catalyst for the merger (which was announced in 1992). CINergy possesses certain competitive advantages (e.g., low-cost generation) that could be substantially eroded by restrictive regulations that lag the development of a competitive market and limit CINergy's ability to preempt the competition in responding to customer needs. As such, CINergy has chosen to initiate the retail wheeling debate and be a leader in establishing the "ground rules" in its franchise area.
Energy recently announced its plans to offer its larger industrial customers some form of retail wheeling in Indiana. Energy plans to submit a proposal that would permit certain customers to choose their electric supplier. In return, Energy would require some form of reciprocal arrangement (i.e., the opportunity to similarly compete for customers of the selected supplier). Under this proposal, Energy would be free to negotiate specific contracts with customers who choose to give up the protection of the franchise obligation to serve. Energy intends for these contractual relationships to satisfy customer needs, while at the same time provide an appropriate risk-return relationship for investors. In addition to the above proposal, Energy, along with other Indiana utilities, proposed legislation in 1995 that would allow the Indiana Utility Regulatory Commission (IURC) to adopt alternative regulatory schemes such as performance-based regulation and the use of more flexible pricing mechanisms. Energy is also participating in a series of informal conferences sponsored by the IURC to discuss the consequences of competition and appropriate responses thereto.
With respect to Ohio, a retail wheeling bill was introduced in early 1994 that would have given customers the ability to purchase power from their provider of choice and would have required utilities to provide access to their transmission lines for delivery of the electric service. No action was taken on the bill in 1994; however, similar legislation may be introduced in 1995. CG&E is also participating in roundtable discussions being held by the Public Utilities Commission of Ohio (PUCO) to more fully consider the emerging competitive environment.
CINergy will continue to aggressively pursue any legislative or regulatory reforms necessary to provide the opportunity for its success in a competitive environment.
CINergy's Competitive Position As stand-alone companies, CG&E and Energy were well positioned to succeed in a more competitive environment -- as a combined organization, CINergy believes it is even better positioned to compete in such an environment. The merger (1) combines two low-cost providers, resulting in savings in nominal dollars of approximately $1.5 billion over the first 10 years; (2) enhances the companies' transmission capabilities; (3) diversifies the customer base; and (4) creates a financially stronger company -- all of which improve an already competitively strong position. CINergy's strategy will be to aggressively build on its cost advantage by continually focusing on flexible strategies that are directed toward reducing the cost structure and shifting the cost mix from fixed to variable. CG&E and Energy have industrial rates that are below the national average (based on 1993 data) and own generating plants that are consistently ranked among the most efficient in the country.
CINergy believes its low-cost position and strategic initiatives will allow it to maintain, and perhaps expand, its wholesale market share and its current base of industrial customers. Recent successes in these markets include Energy's 10-year agreement to serve the power needs of Blue Ridge Power Agency, a group of municipal utilities organized in Virginia, and CG&E's 14- year agreement to provide power to a municipal utility serving a portion of Cleveland, Ohio. Also, CG&E's and Energy's low industrial rates have produced regional leadership over the last five years (1989 through 1993) with respect to growth in industrial kwh sales.
In addition, CINergy intends to aggressively pursue the substantial opportunities that exist in the electricity markets for power marketing and brokering. These opportunities are being created by the increasing commoditization of electricity. CINergy believes that the ability to identify and manage various business risks and innovative packaging of power supply services and products based upon superior acquisition and analysis of information will be key factors that will ensure successful participation in these markets. CINergy's strategy for success in this business is to leverage its understanding of customer needs and the intricacies of operating in power markets with new skills and expertise of operating in commodity markets that are being developed and selectively acquired from outside the industry.
Outsiders' View of CINergy's Competitive Position Major credit rating agencies have issued reports recognizing the increased risk in the electric utility industry due to competition. Specifically, in conjunction with fundamentally changing the way it evaluates the credit quality of electric utilities, Standard & Poor's has categorized each electric utility's business position in one of seven categories ranging from "Above Average" to "Below Average". As a result, Standard & Poor's placed Energy in the second highest category, "Somewhat Above Average", and CG&E in the third highest category, "High Average". In addition, Moody's recently issued a credit report stating its belief that Energy is well positioned to compete in a more competitive environment. At the same time, certain sell-side equity analysts have placed CINergy near the top of their lists of those best equipped to handle increasing competitive pressures. CINergy believes these actions support its position that its competitive strategy will be successful.
With respect to accessing financial markets for capital needs, U.S. utilities must compete for capital in world markets where some forecasts indicate that as much as $250 billion will be needed by the year 2000 for state-owned electricity privatization. These forecasts enforce CINergy's belief that regulatory reform establishing a market structure for utilities similar to that already existing in other countries is critical in order to successfully compete for not only customers, but also capital.
Despite the numerous published reports discussing the increased business risk that investors face from deregulation of the electric utility industry, the 1994 decline in electric utility stocks, taken as a whole, can be substantially attributed to historical relationships of common stock prices to changes in interest rates. Therefore, electric utility stocks could see additional pressures to reflect the increased fundamental business risk as markets become more workably competitive, particularly, without regulatory recognition through higher allowed returns and increased flexibility (e.g., price caps) in order to compete. On the other hand, there is an increasingly large disparity between the fundamental valuation measures (e.g., yield, market-to-book ratio) of low-cost producers, like CINergy, and high-cost producers. For example, it should be noted that the merger of Resources and CG&E combined two utilities whose common stocks have outperformed the industry average for the five-year period 1990 through 1994.
Gas Utility Industry
Customer Choice Energy's retail wheeling proposal discussed above is consistent with a recent step taken by CG&E to extend a program to its natural gas customers that is the equivalent of electric retail wheeling. For several years, large-volume commercial and industrial customers in Ohio and Kentucky have been able to purchase natural gas directly from suppliers and have it transported by CG&E or The Union Light, Heat and Power Company (ULH&P). In September 1994, CG&E implemented a new firm transportation service which allows all non-residential customers of CG&E to purchase gas directly from suppliers, up to approximately 5% of CG&E's peak load. The suppliers assume the risk and obligation associated with supplying the contractual volumes, while CG&E retains responsibility for delivering the gas through its distribution system. This new service affords commercial and industrial customers greater choice in competitively contracting for their energy requirements.
Order 636 In April 1992, the FERC issued Order 636, which restructured operations between interstate gas pipelines and their customers for gas sales and transportation services. Order 636 mandated changes to the way CG&E and ULH&P purchase gas supplies and contract for transportation and storage services, resulting in increased risks in meeting the gas demands of their customers.
CG&E and ULH&P are responding to the supply risks and opportunities of Order 636 by introducing innovations to their supply strategy including contracting with major southwest producers for firm gas supply agreements with flexible, extremely market sensitive pricing, marketing short-term unused pipeline capacity and storage gas to other companies throughout the country through use of electronic bulletin boards, and restructuring their allotment of interstate pipeline capacity among delivering pipelines.
Order 636 also allowed pipelines to recover transition costs they incurred in complying with the order from customers, including CG&E and ULH&P. In July 1994, the PUCO issued an order approving a stipulation between CG&E and its domestic and industrial customer groups providing for recovery of these pipeline transition costs. CG&E is presently recovering its Order 636 transition costs pursuant to a PUCO approved tariff. ULH&P recovers such costs through its gas cost recovery mechanism.
Substantial Accounting Implications
A potential outcome of the changing competitive environment could be the inability of regulated utilities to continue application of Statement 71, the linchpin of regulated industry accounting, which allows the deferral of costs (i.e., regulatory assets) to future periods based on assurances of a regulator as to the recoverability of the costs in rates charged to customers. In connection with assessing the financial exposure related to stranded costs, regulatory assets would have to be evaluated to determine the portion for which deferral could be continued based on the existence of the necessary regulatory assurances.
Although CINergy's current regulatory orders and regulatory environment fully support the recognition of its regulatory assets, the ultimate outcome of the changing competitive environment could result in CINergy discontinuing application of Statement 71 for all or part of its business. Such an event would require the write-off of the portion of any regulatory asset for which no regulatory assurance of recovery continues to exist. No evidence currently exists that would support a write-off of any portion of CINergy's regulatory assets. CINergy intends to pursue competitive strategies that would mitigate the impact of this issue on the financial condition of CINergy and its utility subsidiaries (see Note 1(c) of the "Notes to Consolidated Financial Statements" in "Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of The Cincinnati Gas & Electric Company:
We have audited the consolidated balance sheets and schedules of cumulative preferred stock and long-term debt of THE CINCINNATI GAS & ELECTRIC COMPANY (an Ohio Corporation and a wholly owned subsidiary of CINergy Corp.) and its subsidiary companies as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in common stock equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 Cincinnati Gas & Electric Company and its subsidiary companies as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As explained in Notes 8 and 12 to the consolidated financial statements, the Company changed its methods of accounting for postretirement health care benefits and income taxes 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 LLP Cincinnati, Ohio, January 23, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
(a) Merger On October 24, 1994, a subsidiary of CINergy Corp. (CINergy) was merged with and into The Cincinnati Gas & Electric Company (CG&E), and PSI Resources, Inc. (Resources) was merged with and into CINergy. Each outstanding share of common stock of CG&E and Resources was exchanged for one share and 1.023 shares, respectively, of CINergy common stock, resulting in the issuance of approximately 148 million shares of CINergy common stock, par value $.01 per share. The outstanding preferred stock and debt securities of CG&E and its utility subsidiaries were not affected by the merger. Following the merger, CINergy became the parent holding company of CG&E and PSI Energy, Inc., previously Resources' utility subsidiary. The merger was accounted for as a pooling of interests, and the Consolidated Financial Statements, along with the related notes, are presented as if the merger was consummated as of the beginning of the earliest period presented. Due to immateriality, no adjustments were made to conform the accounting policies of the two companies.
(b) Consolidation Policy The accompanying Consolidated Financial Statements include the accounts of CG&E and its subsidiaries after elimination of significant intercompany transactions and balances.
(c) Regulation CG&E and its subsidiaries are subject to regulation by the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA). CG&E and its utility subsidiaries are also subject to regulation by the Federal Energy Regulatory Commission (FERC) and the state utility commissions of Indiana, Ohio, and Kentucky. The accounting policies of CG&E and its subsidiaries conform to the accounting requirements and ratemaking practices of these regulatory authorities and to generally accepted accounting principles, including the provisions of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (Statement 71).
Regulatory assets represent probable future revenue to CG&E and its utility subsidiaries associated with deferred costs to be recovered from customers through the ratemaking process. The following regulatory assets of CG&E and its utility subsidiaries are reflected in the Consolidated Balance Sheets as of December 31: 1994 1993 (in millions)
Post-in-service carrying costs and deferred operating expenses. . . . . . . . . . . . . . $155 $162 Phase-in deferred return and depreciation . . . 101 83 Deferred demand-side management (DSM) costs . . 10 4 Amounts due from customers - income taxes . . . 382 388 Deferred merger costs . . . . . . . . . . . . . 12 13 Costs of reacquiring debt . . . . . . . . . . . 33 27 Postretirement benefit costs. . . . . . . . . . 4 5 1992 workforce reduction costs. . . . . . . . . 17 27 Other . . . . . . . . . . . . . . . . . . . . . 35 17
Total . . . . . . . . . . . . . . . . . . . . $749 $726
CG&E and its utility subsidiaries currently have regulatory orders in effect which provide for the recovery of $704 million of their regulatory assets as of December 31, 1994, and will request recovery of the remaining amounts in their next rate proceedings in each applicable jurisdiction.
See Note 1(g), (h), (i), (j), and (l) for additional information regarding phase-in deferred return and depreciation, post-in-service carrying costs and deferred operating expenses, deferred DSM costs, amounts due from customers - income taxes, and costs of reacquiring debt, respectively. For additional information regarding deferred merger costs, postretirement benefit costs, and 1992 workforce reduction costs, see Notes 2, 8, and 9.
Although current regulatory orders and the regulatory environment fully support the recognition of these regulatory assets, the ultimate outcome of the changing competitive environment discussed in the "Competitive Pressures" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" could result in CG&E discontinuing application of Statement 71 for all or part of the business. Such an event would require the write-off of the portion of any regulatory asset for which no regulatory assurance of recovery continues to exist. No evidence currently exists that would support a write-off of any portion of the regulatory assets. CG&E and its utility subsidiaries intend to pursue competitive strategies that would mitigate the impact of this issue on their financial condition.
(d) Utility Plant Utility plant is stated at the original cost of construction, which includes an allowance for funds used during construction (AFUDC) and a proportionate share of overhead costs. Construction overhead costs include salaries, payroll taxes, fringe benefits, and other expenses. Substantially all utility plant is subject to the lien of each applicable company's first mortgage bond indenture.
(e) AFUDC CG&E and its utility subsidiaries capitalize AFUDC, a non-cash income item, which is defined in the regulatory system of accounts prescribed by the FERC as including "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used". AFUDC accrual rates averaged 9.1%, 8.3%, and 10.2% in 1994, 1993, and 1992, respectively, and are compounded semi-annually.
(f) Depreciation and Maintenance Provisions for depreciation are determined by using the straight-line method applied to the cost of depreciable plant in service. The rates are based on periodic studies of the estimated service lives and net cost of removal of the properties. The depreciation rates for utility plant during each of the following three years were:
1994 1993 1992
Electric. . . . . . . . . . . . 2.9% 2.9% 2.9% Gas . . . . . . . . . . . . . . 2.8 2.7 2.6 Common. . . . . . . . . . . . . 3.4 3.3 3.1
In May 1992, the Public Utilities Commission of Ohio (PUCO) issued an order (May 1992 Order) which authorized changes in depreciation accrual rates on CG&E's electric and common plant. The changes resulted in an annual decrease in depreciation expense of about $9 million.
Maintenance and repairs of property units and replacements of minor items of property are charged to maintenance expense. The costs of replacements of property units are capitalized. The original cost of the property retired and the related costs of removal, less salvage recovered, are charged to accumulated depreciation.
(g) Phase-in Deferred Return and Depreciation In the May 1992 Order, the PUCO authorized CG&E to begin recovering the cost of the Wm. H. Zimmer Generating Station (Zimmer) through an increase in electric revenues of $116.4 million to be phased in over a three-year period under a plan that met the requirements of Statement of Financial Accounting Standards No. 92, Regulated Enterprises - Accounting for Phase-in Plans. The phase-in plan was designed so that the three rate increases would provide revenues sufficient to recover all operating expenses and provide a fair rate of return on plant investment. In the first three years of the phase-in plan, rates charged to customers did not fully recover depreciation expense and return on shareholders' investment. This deficiency has been deferred on the Consolidated Balance Sheets and will be recovered over a seven-year period beginning in May 1995, at which point the revenue levels authorized pursuant to the phase-in plan are designed to be sufficient to recover annual operating expenses, a fair return on the unrecovered investment, and annual amortization of the deferred depreciation and deferred return recorded during the first three years of the plan.
(h) Post-in-service Carrying Costs and Deferred Operating Expenses In accordance with a March 1991 order by the PUCO, CG&E capitalized carrying costs for Zimmer from the time it was placed in service in March 1991 until the effective date of new rates authorized by the May 1992 Order which reflected Zimmer. CG&E began recovering these carrying costs over the useful life of Zimmer in accordance with a stipulation approved by the PUCO in August 1993 (August 1993 Order) (see Note 2).
Effective in January 1992, the PUCO authorized CG&E to defer Zimmer depreciation, operation and maintenance expenses (exclusive of fuel costs), and property taxes which were not being recovered in rates charged to customers. The PUCO also authorized CG&E to accrue carrying costs on the deferred expenses. In the May 1992 Order, the PUCO authorized CG&E to begin recovering these deferred expenses and associated carrying costs over a 10-year period.
In May 1992, the first three units at CG&E's Woodsdale Generating Station (Woodsdale) began commercial operation, and, in July 1992, two additional units were declared operational. In accordance with an October 1992 order issued by the PUCO, CG&E deferred carrying costs on the first five units at Woodsdale and deferred depreciation, operation and maintenance expenses (exclusive of fuel costs), and property taxes from the time these units were placed in service until the effective date of new rates approved in the August 1993 Order which reflected the Woodsdale units. CG&E began recovering the carrying costs over the useful life of Woodsdale and the deferred expenses over a 10-year period in accordance with the August 1993 Order (see Note 2).
(i) DSM Costs In the August 1993 Order, CG&E was authorized to recover approximately $5 million of costs associated with DSM programs for domestic customers. The PUCO has also permitted CG&E to defer future expenditures of approved DSM programs with carrying costs for future recovery. In addition, CG&E has applications pending for approval by the PUCO for deferral of the costs of additional DSM programs.
(j) Federal and State Income Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities. Investment tax credits utilized to reduce Federal income taxes payable have been deferred for financial reporting purposes and are being amortized over the useful lives of the property which gave rise to such credits.
Income tax provisions reflected in customer rates are regulated by the various regulatory commissions overseeing the regulated business operations of CG&E and its utility subsidiaries. To the extent deferred income taxes are not reflected in rates charged to customers, income taxes payable in future years are recoverable from customers as paid. These amounts are reflected in the accompanying Consolidated Financial Statements as a regulatory asset on the basis of their probable recovery in future periods.
(k) Operating Revenues and Fuel Costs CG&E and its utility subsidiaries recognize revenues for electric and gas service rendered during the month, which includes revenues for sales unbilled at the end of each month. CG&E and its Kentucky subsidiary, The Union Light, Heat and Power Company (ULH&P) expense the costs of electricity and gas purchased and the cost of fuel used in electric production as recovered through revenues and defer the portion of these costs recoverable or refundable in future periods.
(l) Debt Discount, Premium, and Issuance Expense and Costs of Reacquiring Debt Debt discount, premium, and issuance expense on outstanding long-term debt are amortized over the lives of the respective issues.
In accordance with established ratemaking practices, CG&E and its utility subsidiaries are deferring costs (principally call premiums) from the reacquisition of long-term debt and are amortizing such amounts over periods ranging from one year to 15 years.
(m) Order 636 In April 1992, the FERC issued Order 636, which restructured operations between interstate gas pipelines and their customers for gas sales and transportation services. Order 636 also allowed pipelines to recover transition costs they incurred in complying with the order from customers, including CG&E and ULH&P. In July 1994, the PUCO issued an order approving a stipulation between CG&E and its domestic and industrial customer groups providing for recovery of these pipeline transition costs. CG&E is presently recovering its Order 636 transition costs pursuant to a PUCO approved tariff. ULH&P recovers such costs through its gas cost recovery mechanism. These costs are deferred as incurred by CG&E and ULH&P and amortized as recovered from customers.
(n) Consolidated Statements of Cash Flows All temporary cash investments with maturities of three months or less, when acquired, are reported as cash equivalents. CG&E and its subsidiaries had no material non-cash investing or financing transactions during the years 1992 through 1994.
(o) Reclassification Certain amounts in the 1992 and 1993 Consolidated Financial Statements have been reclassified to conform to the 1994 presentation.
2. Rates
In its May 1992 Order authorizing the phase-in of Zimmer costs into customer rates, the PUCO disallowed from rates approximately $230 million, representing costs related to Zimmer for nuclear fuel, nuclear wind-down activities during the conversion to a coal-fired facility, and a portion of the AFUDC accrued on Zimmer.
Pursuant to an appeal by CG&E of the May 1992 Order, the Supreme Court of Ohio (Court) ruled in November 1993 (November 1993 Ruling) that the PUCO does not have the authority to order a phase-in of amounts granted in a rate proceeding and remanded the case to the PUCO to set rates that provide the gross annual revenues determined in accordance with Ohio statutes. However, the Court upheld the PUCO's disallowance of Zimmer costs, and, as a result, CG&E wrote off Zimmer costs of approximately $223 million, net of taxes, in the fourth quarter of 1993.
In April 1994, the PUCO issued an order approving a settlement agreement between CG&E, the PUCO Staff, the Ohio Office of Consumers' Counsel, and other intervenors which addressed the issues raised in the November 1993 Ruling. As part of the settlement agreement, CG&E did not seek early implementation of the third phase of the authorized rate increase and will not seek accelerated recovery of deferrals related to the phase-in plan. These deferrals will be recovered over the remaining seven-year period as contemplated in the May 1992 Order. In addition, CG&E agreed to a moratorium on increases in base electric rates until January 1, 1999 (except under certain circumstances), and, in return, is allowed to retain all PUCO electric jurisdictional non-fuel operation and maintenance expense merger savings until 1999.
In the August 1993 Order, the PUCO authorized annual increases of approximately $41 million (5%) in electric revenues and $19 million (6%) in gas revenues that were effective immediately. The August 1993 Order precludes CG&E from increasing gas base rates prior to June 1, 1995, except for rate filings made under certain circumstances.
In 1994, CG&E expensed $32 million of merger transaction costs and costs to achieve merger savings applicable to its PUCO electric jurisdiction. The remaining merger-related costs allocable to PUCO electric jurisdictional customers will be expensed as incurred. CG&E intends to continue deferring the non-PUCO electric jurisdictional portion of merger transaction costs and costs to achieve merger savings (current estimate of $14 million) for future recovery in customer rates.
In mid-1993, the Kentucky Public Service Commission (KPSC) issued orders authorizing ULH&P to increase annual gas revenues by $4.2 million.
In exchange for the KPSC's support of the merger, in May 1994, ULH&P accepted the KPSC's request for an electric rate moratorium commencing after ULH&P's next retail rate case and extending to January 1, 2000. The KPSC also required CG&E and ULH&P to agree that, for 12 months from consummation of the merger, no filings will be made to adjust CG&E's base purchase power rate charged to ULH&P or ULH&P's base electric rates.
3. Common Stock
All of CG&E's common stock is held by CINergy. No common dividends can be paid by CG&E if dividends are in arrears on its preferred stock.
The following table reflects the shares of CG&E common stock issued in 1994 (prior to the merger), 1993, and 1992 for its stock-based plans. After merger consummation, the common stock used by CG&E's 401(k) Savings Plans became CINergy common stock rather than CG&E common stock, and CG&E's Dividend Reinvestment and Stock Purchase Plan was merged into and replaced by CINergy's Dividend Reinvestment and Stock Purchase Plan.
Shares Issued 1994 1993 1992
401(k) Savings Plans. . . . . . . 830 140 843 352 902 692
Dividend Reinvestment and Stock Purchase Plan . . . . . . 770 863 829 706 797 516
4. Preferred Stock
Changes in preferred stock outstanding during 1994 and 1992 were as follows:
Shares Issued Par (Retired) Value (dollars in thousands)
Cumulative preferred stock Not subject to mandatory redemption Par value $100 per share 9.28 % Series. . . . . . . . . . . (400 000) $(40 000)
Cumulative preferred stock Not subject to mandatory redemption Par value $100 per share 9.52 % Series. . . . . . . . . . . (450 000) (45 000) 9.30 % Series. . . . . . . . . . . (350 000) (35 000)
Subject to mandatory redemption Par value $100 per share 7 3/8% Series. . . . . . . . . . . 800 000 80 000 10.20% Series. . . . . . . . . . . (365 000) (36 500)
CG&E had no changes in preferred stock outstanding during 1993.
5. Preferred Stock with Mandatory Redemption
CG&E's preferred stock redemption requirements for the next five years are $2.5 million in each of 1996 and 1997 and $6.5 million in each of 1998 and 1999.
CG&E's Cumulative Preferred Stock, 9.15% Series is subject to mandatory redemption each July 1, beginning in 1996, in an amount sufficient to retire 25,000 shares, and CG&E's 7 3/8% Series is subject to mandatory redemption each August 1, beginning in 1998, in an amount sufficient to retire 40,000 shares, each at $100 per share, plus accrued dividends. For both series, CG&E has the noncumulative option to redeem up to a like amount of additional shares in each year. CG&E has the option to satisfy the mandatory redemption requirements in whole or in part by crediting shares acquired by CG&E. To the extent CG&E does not satisfy its mandatory sinking fund obligation in any year, such obligation must be satisfied in the succeeding year or years. If CG&E is in arrears in the redemption pursuant to the mandatory sinking fund requirement, CG&E shall not purchase or otherwise acquire for value, or pay dividends on, common stock.
6. Long-term Debt
CG&E's and its subsidiaries' long-term debt maturities, excluding sinking fund requirements, for the next five years are $130 million in 1997 and $180 million in 1999.
The first mortgage bond indentures of both CG&E and ULH&P provide that so long as any series of bonds issued prior to 1976 and 1978, respectively, are outstanding, CG&E and ULH&P will pay to the trustee as a Maintenance and Replacement Fund (M&R Fund), on or before April 30 of each year, in cash, unfunded property additions, or principal amount of first mortgage bonds of any series issued under the mortgages, a formularized amount related to the net revenues of CG&E and ULH&P. For 1994, the M&R Fund requirements (payable on or before April 30, 1995) for CG&E and ULH&P are approximately $114 million and $5 million, respectively.
Most of CG&E's and ULH&P's first mortgage bonds are redeemable at par value, plus accrued interest, through cash deposited to satisfy the annual M&R Fund requirement. On March 24, 1995, CG&E announced its intention to redeem, beginning May 1, 1995, $114 million principal amount of its 10.125% and 9.70% first mortgage bonds at par with cash deposited in the M&R Fund. ULH&P also announced its intention to redeem $5 million principal amount of its 10.25% first mortgage bonds (due June 1, 2020) at par with cash deposited in the M&R Fund, and to redeem the remaining amount of such bonds at the redemption price of 107.34% on June 1, 1995.
7. Pension Plan
The defined benefit pension plans of CG&E and its subsidiaries cover substantially all employees meeting certain minimum age and service requirements. Plan benefits are determined under a final average pay formula with consideration of years of participation, age at retirement, and the applicable average Social Security wage base or benefit amount.
The funding policy of CG&E and its subsidiaries 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. No contributions were made for the 1994 and 1992 plan years, and a contribution of $3.1 million was made for the 1993 plan year. The plans' assets consist of investments in equity and fixed income securities.
Pension cost for 1994, 1993, and 1992 included the following components:
1994 1993 1992 (in millions)
Benefits earned during the period . . . . . . . $ 10.7 $ 9.2 $ 8.8 Interest accrued on projected benefit obligations . . . . . . . . . . . . . 35.1 34.5 30.4 Actual (return) loss on plans' assets . . . . . 5.6 (31.4) (27.0) Net amortization and deferral . . . . . . . . . (43.2) (4.7) (7.5)
Net periodic pension cost . . . . . . . . . . . $ 8.2 $ 7.6 $ 4.7
Additionally, during 1992 and 1994, CG&E and its subsidiaries recognized $28.4 million and $15.6 million, respectively, 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. These amounts represented the costs associated with additional benefits extended in connection with voluntary early retirement programs and workforce reductions in those years (see Note 9).
1994 1993 1992 Actuarial Assumptions: For determination of projected benefit obligations Discount rate . . . . . . . . . . . . . . . 8.50% 7.50% 8.25% Rate of increase in future compensation . . 5.50 5.00 5.75
For determination of pension cost Rate of return on plans' assets . . . . . . . 9.50 9.50 9.50
The following table reconciles the plans' funded status with amounts recorded in the Consolidated Financial Statements. Under the provisions of Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions (Statement 87), certain assets and obligations of the plans are deferred and recognized in the Consolidated Financial Statements in subsequent periods.
1994 1993 Plan's Plan's Plans' Assets Exceed Accumulated Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets Benefits (in millions) Actuarial present value of benefits Vested benefits . . . . . . . . $(123.2) $(206.5) $(328.1) Non-vested benefits . . . . . . (17.5) (11.0) (32.3)
Accumulated benefit obligations . . . . . . . . (140.7) (217.5) (360.4)
Effect of future compensation increases . . . . . . . . . . (53.0) (52.2) (110.3)
Projected benefit obligations . . . . . . . . (193.7) (269.7) (470.7)
Plans' assets at fair value . . . 182.1 198.7 423.1
Projected benefit obligations in excess of plans' assets . . . . (11.6) (71.0) (47.6)
Remaining balance of plans' net assets existing at date of initial application of Statement 87 to be recognized as a reduction of pension cost in future periods. . . . . (2.9) (3.8) (7.4)
Unrecognized net gain resulting from experience different from that assumed and effects of changes in assumptions . . . . . . . . . . (13.6) (1.9) (16.0)
Prior service cost not yet recognized in net periodic pension cost. . . . . . . . . . 20.9 18.2 29.2
Accrued pension cost at December 31 . . . . . . . . . . $ (7.2) $ (58.5) $ (41.8)
8. Other Postretirement Benefits
CG&E and its subsidiaries provide certain health care and life insurance benefits to retired employees and their eligible dependents. The health care benefits include medical coverage and prescription drugs. Prior to 1993, the cost of retiree health care was charged to expense as claims were paid. The accounting for life insurance benefits provided by CG&E and its subsidiaries is further discussed herein. CG&E and its subsidiaries do not currently pre- fund their obligations for these postretirement benefits.
Effective with the first quarter of 1993, CG&E and its subsidiaries implemented the provisions of Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (Statement 106). Under the provisions of Statement 106, the costs of health care and life insurance benefits provided to retirees are recognized for accounting purposes during periods of employee service (accrual basis). The unrecognized and unfunded Accumulated Postretirement Benefit Obligation (APBO) existing at the date of initial application of Statement 106 (i.e., the transition obligation) of $51.7 million is being amortized over a 20-year period.
Life insurance benefits are fully paid by CG&E for qualified employees. Eligibility to receive postretirement coverage is limited to those employees who 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 APBO for postretirement life insurance benefits earned by retirees. The portion of the APBO applicable to active employees is being amortized over 15 years, the employees' estimated remaining service lives. The accounting for CG&E's postretirement life insurance benefits was not affected by the adoption of Statement 106.
Postretirement benefit cost for 1994 and 1993 included the following components:
Health Life Care Insurance Total (in millions) Benefits earned during the period. . . . . . $ .9 $ .1 $ 1.0 Interest accrued on APBO . . . . . . . . . . 3.9 2.0 5.9 Amortization of transition obligation. . . . 2.6 .4 3.0
Net periodic postretirement benefit cost . . $7.4 $2.5 $ 9.9
Benefits earned during the period. . . . . . $1.0 $ .1 $ 1.1 Interest accrued on APBO . . . . . . . . . . 4.2 2.0 6.2 Amortization of transition obligation. . . . 2.6 .4 3.0
Net periodic postretirement benefit cost . . $7.8 $2.5 $10.3
The following table reconciles the APBO of the health care and life insurance plans with amounts recorded in the Consolidated Financial Statements. Under the provisions of Statement 106, certain obligations of the plans are deferred and recognized in the Consolidated Financial Statements in subsequent periods.
Health Life Care Insurance Total (in millions) Actuarial present value of benefits Fully eligible active plan participants. . $ (2.2) $ (.8) $ (3.0) Other active plan participants . . . . . . (26.3) (1.8) (28.1) Retirees and beneficiaries . . . . . . . . (25.2) (21.7) (46.9) Projected APBO . . . . . . . . . . . . . (53.7) (24.3) (78.0) Unamortized transition obligation. . . . . . 46.1 3.3 49.4 Unrecognized net gain resulting from experience different from that assumed and effects of changes in assumptions. . . (5.2) (2.7) (7.9) Accrued postretirement benefit obligation at December 31, 1994 . . . . . . . . . . . $(12.8) $(23.7) $(36.5)
Actuarial present value of benefits Fully eligible active plan participants. . $ (2.4) $ (1.5) $ (3.9) Other active plan participants . . . . . . (27.5) (2.9) (30.4) Retirees and beneficiaries . . . . . . . . (22.7) (22.3) (45.0) Projected APBO . . . . . . . . . . . . . (52.6) (26.7) (79.3) Unamortized transition obligation. . . . . . 49.1 3.7 52.8 Unrecognized net (gain) loss resulting from experience different from that assumed and effects of changes in assumptions. . . (3.8) .3 (3.5) Accrued postretirement benefit obligation at December 31, 1993 . . . . . . . . . . . $ (7.3) $(22.7) $(30.0)
The following assumptions were used to determine the APBO:
1994 1993 1992
Discount rate. . . . . . . . . . 8.50% 7.50% 8.25%
Health care cost trend rate, gradually declining to 5%. . . 9.00-12.00% 10.00-13.00% 12.00-15.00%
Year ultimate trend rates achieved . . . . . . . . . . . 2002 2002 2003
Increasing the health care cost trend rate by one percentage point in each year would increase the APBO by approximately $10.0 million and $10.5 million for 1994 and 1993, respectively, and the aggregate of the service and interest cost components of the postretirement benefit cost for each of 1994 and 1993 by approximately $1.2 million.
CG&E and its subsidiaries began amortizing the transition obligation for health care costs over 20 years in accordance with Statement 106. The majority of CG&E's and its subsidiaries' postretirement benefit costs are subject to PUCO jurisdiction. The PUCO authorized CG&E to begin recovering these costs in September 1993. The adoption of Statement 106 did not have a material effect on the results of operations of CG&E and its subsidiaries.
9. Workforce Reductions
In 1992, CG&E and its subsidiaries eliminated 464 positions. The workforce reduction was accomplished through a voluntary early retirement program and involuntary separations. At December 31, 1992, the accrued liability associated with the workforce reduction was $30.4 million (including $28.4 million of additional pension costs previously discussed in Note 7). In accordance with the August 1993 Order, CG&E is recovering the majority of these costs through rates over a period of three years.
Additionally, in an effort to begin to realize merger savings, CG&E and its subsidiaries completed a voluntary workforce reduction program in 1994. Under the program, 115 employees elected to terminate their employment with the companies, resulting in a combined pre-tax cost of approximately $17.4 million (including $15.6 million of additional pension costs previously discussed in Note 7). In the third quarter of 1994, CG&E expensed $11 million representing the PUCO electric jurisdictional portion of these costs. The remaining $6.4 million of costs have been deferred as costs to achieve merger savings for future recovery through rates.
10. Notes Payable
CG&E and its subsidiaries had authority to borrow up to $235 million as of December 31, 1994. In connection with this authority, CG&E and its subsidiaries have established unsecured lines of credit (Committed Lines) which currently permit borrowings of up to $112 million, of which $98 million remained unused. CG&E also issues commercial paper from time to time. All outstanding commercial paper is supported by the Committed Lines. Additionally, this authority allows CG&E to arrange for additional short-term borrowings with various banks on an "as offered" basis (Uncommitted Lines). All Uncommitted Lines provide for maturities of up to 365 days with various interest rate options.
Amounts outstanding under the Committed Lines would become immediately due upon an event of default which includes non-payment, default under other agreements governing company indebtedness, bankruptcy, or insolvency. Certain of the Uncommitted Lines have similar default provisions. The lines are maintained by compensating balances or commitment fees. Commitment fees for the Committed Lines were immaterial during the 1992 through 1994 period.
For the years 1994, 1993, and 1992, CG&E's and its subsidiaries' short-term borrowings outstanding at various times were as follows: Weighted Weighted Maximum Average Average Average Amount Amount Interest Balance Interest Outstanding Outstanding Rate at Rate at at Any During the During Dec. 31 Dec. 31 Month-end Year the Year (dollars in millions) Bank loans. . . . . . $14.5 6.14% $26.0 $ 6.7 4.12%
Bank loans. . . . . . 31.0 3.48 47.6 22.5 3.35 Commercial paper. . . - - 20.0 7.7 3.44
Bank loans. . . . . . 33.5 3.74 67.0 27.0 4.06 Commercial paper. . . 13.0 4.22 13.0 3.1 3.82
11. Fair Values of Financial Instruments
The estimated fair values of financial instruments were as follows (this information does not purport to be a valuation of CG&E and its subsidiaries):
December 31 December 31 1994 1993 Carrying Fair Carrying Fair Financial Instrument Amount Value Amount Value (in millions)
Long-term debt First mortgage bonds. . . . . . $1 726 $1 692 $1 654 $1 847 Other long-term debt. . . . . . 112 114 175 193 Cumulative preferred stock - subject to mandatory redemption. . . . . . . . . . . 210 221 210 230
The following methods and assumptions were used to estimate the fair values of each major class of financial instrument:
Cash and temporary cash investments, restricted deposits, and notes payable Due to the short period to maturity, the carrying amounts reflected on the Consolidated Balance Sheets approximate fair values.
Long-term debt The fair values of long-term debt issues were estimated based on the present value of future cash flows. The discount rates used approximate the incremental borrowing costs for similar instruments.
Cumulative preferred stock - subject to mandatory redemption The aggregate fair value of preferred stock subject to mandatory redemption was based on the latest closing prices quoted on the New York Stock Exchange for each series.
12. Income Taxes
Effective with the first quarter of 1993, CG&E and its subsidiaries implemented the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement 109). Statement 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities. Net-of-tax accounting and reporting is prohibited. CG&E and its subsidiaries adopted this new accounting standard as the cumulative effect of a change in accounting principle with no restatement of prior periods. The adoption of Statement 109 had no material effect on CG&E's consolidated earnings.
In August 1993, Congress enacted the Omnibus Budget Reconciliation Act of 1993, which included a provision to increase the Federal corporate income tax rate from 34% to 35%, retroactive to January 1, 1993. In accordance with the provisions of Statement 109, the income tax rate increase resulted in an increase in the net deferred income tax liability and recognition of a regulatory asset to reflect expected future recovery of the increased liability through rates charged to customers.
The significant components of CG&E's and subsidiaries' net deferred income tax liability at December 31, 1994, and 1993, are as follows:
1994 1993 (in millions) Deferred Income Tax Liabilities Utility plant . . . . . . . . . . . . . . . . $639.8 $631.6 Unamortized costs of reacquiring debt . . . . 10.3 9.8 Deferred operating expenses, phase-in deferred return, and accrued carrying costs. . . . . . . . . 76.4 70.6 Amounts due from customers - income taxes . . 108.5 106.1 Deferred demand-side management costs . . . . 2.6 .9 Other . . . . . . . . . . . . . . . . . . . . 37.1 27.7 Total deferred income tax liabilities . . . 874.7 846.7
Deferred Income Tax Assets Unamortized investment tax credits. . . . . . 47.9 49.9 Deferred fuel costs . . . . . . . . . . . . . 10.0 14.8 Accrued pension and other benefit costs . . . 27.6 15.9 Other . . . . . . . . . . . . . . . . . . . . 42.1 32.9 Total deferred income tax assets. . . . . . 127.6 113.5
Net Deferred Income Tax Liability . . . . . . . $747.1 $733.2
A summary of Federal and state income taxes charged (credited) to income and the allocation of such amounts is as follows:
1994 1993 1992 (in millions)
Current Income Taxes Federal . . . . . . . . . . . . . . . . . . . $ 82.3 $ 61.8 $ 22.0 State . . . . . . . . . . . . . . . . . . . . 1.5 2.0 .2 Total current income taxes. . . . . . . . 83.8 63.8 22.2
Deferred Income Taxes Federal Depreciation and other utility plant- related items . . . . . . . . . . . . . . 39.6 47.0 44.7 Property taxes. . . . . . . . . . . . . . . (11.3) (11.3) 6.4 Unrecovered gas cost - net. . . . . . . . . (6.8) .7 2.2 Pension and other benefit costs . . . . . . (8.4) (5.5) (2.2) Write-off of a portion of Zimmer (Note 2). . . . . . . . . . . . . . . . . - (11.0) - Unbilled revenues fuel - net. . . . . . . . 5.3 (4.2) (.9) Deferred expenses and phase-in deferred return . . . . . . . . . . . . . 1.7 6.1 4.0 Costs of reacquiring debt - net . . . . . . 2.0 2.5 4.8 Alternative minimum tax credit carryforward. . . . . . . . . . . . . . . - 3.8 (3.8) Systems costs capitalized . . . . . . . . . (5.2) - (.2) Demand-side management costs. . . . . . . . 1.9 1.2 - Other items - net . . . . . . . . . . . . . .4 - (3.9) Total deferred Federal income taxes . . . 19.2 29.3 51.1
State Depreciation and other utility plant- related items . . . . . . . . . . . . . . 1.1 1.0 1.0 Other items - net . . . . . . . . . . . . . (.5) (.5) .1 Total deferred state income taxes . . . . .6 .5 1.1
Total deferred income taxes . . . . . . . 19.8 29.8 52.2
Investment Tax Credits - Net. . . . . . . . . . (6.1) (6.1) (5.8)
Total Income Taxes. . . . . . . . . . . . $ 97.5 $ 87.5 $ 68.6
Allocated to: Operating income. . . . . . . . . . . . . . . $104.1 $109.0 $ 96.0 Other income and expenses - net . . . . . . . (6.6) (21.5) (27.4) $ 97.5 $ 87.5 $ 68.6
CG&E will participate in the filing of a consolidated Federal income tax return with its parent, CINergy, and other affiliated companies for the year ended December 31, 1994. The current tax liability is allocated among the members of the group pursuant to a tax sharing agreement consistent with Rule 45(c) of the PUHCA.
Federal income taxes, computed by applying the statutory Federal income tax rate to book income before Federal income tax, are reconciled to Federal income tax expense reported in the Consolidated Statements of Income as follows:
1994 1993 1992 (in millions)
Statutory Federal income tax provision. . . . . $81.0 $17.9 $ 82.3 Increases (Reductions) in taxes resulting from: Amortization of investment tax credits. . . . (6.1) (5.8) (5.5) Depreciation and other utility plant- related differences . . . . . . . . . . . . 8.2 6.9 5.5 Preferred dividends . . . . . . . . . . . . . 7.8 8.8 9.4 AFUDC equity. . . . . . . . . . . . . . . . . (.7) (1.1) (14.2) Deferred operating expenses, phase-in deferred return, and accrued carrying costs. . . . . . . . . . . . . . . (3.1) (7.2) (10.7) Write-off of a portion of Zimmer. . . . . . . - 69.4 - Reorganization costs. . . . . . . . . . . . . 4.6 - - Other - net . . . . . . . . . . . . . . . . . 3.7 (3.9) .5 Federal income tax expense. . . . . . . . . . . $95.4 $85.0 $ 67.3
13. Commitments and Contingencies
(a) Construction CG&E and its subsidiaries will have substantial commitments in connection with their construction program. Aggregate expenditures for CG&E's and its subsidiaries' construction program for the 1995 through 1999 period are currently estimated to be approximately $1.1 billion.
(b) Manufactured Gas Plants Coal tar residues and other substances associated with manufactured gas plant (MGP) sites have been found at former MGP sites. Lawrenceburg Gas Company (Lawrenceburg), a wholly-owned subsidiary of CG&E, has an MGP site which is under investigation to determine a remediation strategy. Total cleanup cost is currently estimated to be approximately $750,000. Lawrenceburg has applied to have the site included in the Indiana Department of Environmental Management's voluntary cleanup program. CG&E and its utility subsidiaries are aware of other potential sites where MGP activities may have occurred at some time in the past. None of these sites are known to present a risk to the environment. Except for the Lawrenceburg site, neither CG&E nor its utility subsidiaries have undertaken responsibility for investigating other potential MGP sites.
(c) United Scrap Lead Site The United States Environmental Protection Agency (EPA) alleges that CG&E is a Potentially Responsible Party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) liable for cleanup of the United Scrap Lead site in Troy, Ohio. CG&E was one of approximately 200 companies so named. CG&E believes it is not a PRP and should not be responsible for cleanup of the site. Under the CERCLA, CG&E could be jointly and severally liable for costs incurred in cleaning up the site, estimated by the EPA to be $27 million, of which CG&E estimates its portion to be immaterial to its financial condition or results of operations.
(d) Potential Divestiture of Gas Operations Under the PUHCA, the divestiture of CG&E's gas operations may be required. In its order approving the merger, the SEC reserved judgement over CINergy's ownership of the gas operations for a period of three years. In November 1994, the SEC requested comments on the modernization of the PUHCA given the industry's movement toward a more competitive environment, including whether or not a utility registered under the PUHCA may own a combination system (i.e., electric and gas). CINergy believes it has a justifiable basis for retention of CG&E's gas operations and will continue its pursuit of SEC approval to retain the gas portion of the business. If divestiture is ultimately required, the SEC has historically allowed companies sufficient time to accomplish divestitures in a manner that protects shareholder value. See Note 16 for financial information by business segments.
14. Jointly Owned Plant
CG&E, Columbus Southern Power Company, and The Dayton Power and Light Company have constructed electric generating units and related transmission facilities on varying common ownership bases. The Consolidated Statements of Income reflect CG&E's portion of all operating costs associated with the commonly owned facilities.
CG&E's investments in jointly owned plant are as follows:
15. Quarterly Financial Data (unaudited)
16. Financial Information by Business Segments
For a discussion of the potential divestiture of CG&E's gas operations, see Note 13(d).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
The directors of CG&E at February 28, 1995, included:
Jackson H. Randolph Mr. Randolph, age 64, is Chairman, President and Chief Executive Officer of CG&E. He has served as a director of CG&E since 1983, and his current term as director expires April 20, 1995.
James E. Rogers Mr. Rogers, age 47, is Vice Chairman and Chief Operating Officer of CG&E. He has served as a director of CG&E since October 24, 1994, and his current term as director expires April 20, 1995.
George H. Stinson Mr. Stinson, age 49, is President of CG&E. He has served as a director of CG&E since October 24, 1994, and his current term expires April 20, 1995.
Executive Officers
The information included in Part I of this report on pages 11 through 13 under the caption "Executive Officers of the Registrant" is referenced in reliance upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Board Compensation Committee Report on Executive Compensation
In 1994, the executive compensation program of CG&E was administered by the Management Compensation Committee (CG&E Committee) of the Board of Directors of CG&E (CG&E Board). The CG&E Committee established CG&E's compensation philosophy and the compensation of the Chief Executive Officer and all other executive officers prior to October 24, 1994 (the Effective Date). On the Effective Date, CINergy acquired all the common stock of both CG&E and Resources, and the former common stock holders of CG&E and Resources became holders of common stock of CINergy.
After the Effective Date, it is the responsibility of the Compensation Committee of the Board of Directors of CINergy (CINergy Committee) to establish the compensation for the Chief Executive Officer and all other executive officers. The CINergy Committee also administers compensation plans for all executive officers and key employees. The CG&E Committee was composed of Messrs. Oliver W. Birckhead (Chairman), George C. Juilfs, John J. Schiff, Jr., Dudley S. Taft, and Oliver W. Waddell, each of whom was an independent, non-employee director of CG&E. The CINergy Committee is composed of Messrs. Van P. Smith (Chairman), Michael G. Browning, George C. Juilfs, and John J. Schiff, Jr., each of whom is an independent, non-employee director of CINergy.
Compensation Philosophy CG&E's executive compensation philosophy sought to provide a total compensation program that would attract, retain, and motivate the high quality employees needed to provide superior service to its customers and to maximize returns to its shareholders. CG&E's policy, in considering base salary and performance based annual incentives, was designed to provide competitive levels of compensation that would integrate pay with CG&E's annual performance goals, reward above average corporate performance, and recognize individual achievement.
It was CG&E's practice to review compensation data provided by the Edison Electric Institute for utility companies of comparable size based on revenue. The compensation level for each executive officer was reviewed based on an evaluation of compensation levels at such companies for executives with similar job responsibilities, with the objective of providing total compensation equivalent to approximately the 75th percentile. The performance of each executive was evaluated based upon that individual's performance for the year in relation to the established goals and objectives for the year.
CG&E's executive compensation program consisted of two components: base salary and annual incentives.
Pursuant to the merger, certain executive compensation and benefit plans of Resources and Energy were adopted and implemented by CINergy as of the Effective Date. On October 18, 1994, CINergy adopted, effective as of the Effective Date, the Stock Option Plan, Performance Shares Plan, Annual Incentive Plan, and Executive Supplemental Life Insurance Program (Board approved plans). Each of these plans is substantially similar to its predecessor Resources or Energy plan. Each Resources or Energy predecessor plan was merged into and became a part of the CINergy plan which bears the same name.
CINergy has retained an independent compensation and benefits consulting firm to conduct a study of existing executive compensation program structures and to assist the CINergy Committee as it formulates an integrated corporate compensation philosophy, including the elements of compensation and the mix of base salary, annual, and long-term incentives. The consulting firm will also advise as to the retention, modification, or replacement of the Board approved plans and as to plan design and administration generally.
Annual Cash Incentive Plan For 1994, CG&E had a Key Employee Annual Incentive Plan which was intended to provide additional incentive for superior performance. Approximately 210 key employees of CG&E participated in the plan during 1994 and were granted cash awards to the extent that certain pre- determined corporate and individual goals were attained. Under the Key Employee Annual Incentive Plan, the Chief Executive Officer was eligible for additional compensation of up to 55% of base pay and other CG&E executive officers were eligible for additional compensation of up to 37.5% of base pay. The CG&E Committee determined that the maximum available awards were payable based upon the extraordinary efforts of the executive officers during 1994 leading to the consummation of the merger. The Key Employee Annual Incentive Plan was replaced by CINergy's Annual Incentive Plan as of the Effective Date.
The granting of compensation under the Key Employee Annual Incentive Plan was first subject to a Shareholder Protection Trigger. This trigger provided that no incentive payments were made for the current fiscal year unless dividends per share for that fiscal year equalled or exceeded the amount per share paid in the previous fiscal year, and total pre-tax earnings were sufficient to cover all dividends payable for the current fiscal year, plus the amount necessary to cover total awards payable under the plan. The amounts of any awards varied depending on the meeting of various other goals established and approved by the CG&E Committee. Such goals included consummation of the merger, overall customer satisfaction and relationships, corporate culture initiatives, and cost control. Any award was then subject to modification based on the relative level of rates charged customers, a Customer Protection Modifier, which was based on the relative ranking of electric and gas rates for the city of Cincinnati as compared to 30 other cities. If CG&E maintained its relative position, this modifier had no effect. If CG&E's relative position improved or declined, the awards payable were subject to upward or downward adjustment, accordingly. The data on electric rates was as published by the Edison Electric Institute, and by the American Gas Association for gas rates. Because the CG&E Board recognized that the interests of shareholders and customers are paramount, the Shareholder Protection Trigger and Customer Protection Modifier, as indicated above, were integral to the plan.
For 1995, the CINergy Annual Incentive Plan will use a combination of corporate and individual goals. Corporate goals will account for 50% of the total possible award, and achievement of individual goals will make up the balance. The corporate goals for 1995 will be based in two areas: (1) earnings per share; and (2) non-fuel operation and maintenance merger savings.
The earnings per share goal will account for 37.5% and the merger savings goal will constitute 12.5% of the total possible award. For 1995, approximately 400 key employees will participate in the plan. The potential awards will range up to a maximum of 55% of the participant's annual salary, depending upon the achievement levels and the participant's position.
Long-term Incentive Plan and Stock Option Plan The CINergy Performance Shares Plan is a long-term incentive plan developed to reward officers and other key employees for contributing to long-term success by achieving corporate and individual goals approved by the CINergy Committee. The executive officers named in the compensation tables (except Messrs. C. Robert Everman and Robert P. Wiwi) participate in this plan, and the same corporate and individual goals used in CINergy's Annual Incentive Plan are applicable to this plan. The potential award opportunities are established in the same manner as the Annual Incentive Plan, with the minimum award opportunities ranging from 13.33% to 36.66% of annual salary for the full performance cycle. Performance cycles consist of overlapping four-year periods. Because the former Energy Performance Shares Plan was merged into the CINergy Performance Shares Plan on the Effective Date, the then existing Energy performance cycles of 1992 through 1995 and 1994 through 1997 are the current performance cycles under the CINergy plan.
The executive officers and other key employees of CINergy are also eligible for grants under the CINergy Stock Option Plan. This Plan is designed to align executive compensation with shareholder interests. Both non-qualified and incentive stock options have been granted under the plan. Options vest at the rate of 20% per year over a five-year period from the date of grant and may be exercised over a 10-year term.
Chief Executive Officer Mr. Randolph's 1994 base salary was determined pursuant to an employment agreement with CINergy dated December 11, 1992, as amended and restated as of the Effective Date (see "Employment Agreement and Severance Arrangements" discussed further herein). For 1994, Mr. Randolph also received incentive compensation under the CG&E Key Employee Annual Incentive Plan in the amount of $255,750, of which 57% was based on achievement of CG&E goals and 43% was based upon the CG&E Committee's determination of his achievement of individual goals. Mr. Randolph also was granted an option to purchase 250,000 shares of CINergy common stock on the Effective Date at a price of $22.875.
Giving consideration to the accomplishments of 1994 which resulted in the consummation of the merger, sufficient goals were met to obtain the maximum award available. Other goals pertaining to customer satisfaction and relationships, corporate culture initiatives, and cost control were also met. The relative importance in meeting these goals was equal in the determination of awards. The Customer Protection Modifier was neutral, resulting in no upward or downward adjustment.
Summary The CINergy Committee is reviewing the compensation philosophies of Resources and CG&E in order to determine the CINergy Committee's philosophy. Although its philosophy has not been finalized, it is the intent of the CINergy Committee to emphasize incentive compensation, both short-term and long-term, in order to tie the interests of the executive officers and the shareholders of CINergy. It is anticipated that base salary, annual cash incentives, and long-term incentives will play an integral part in executive compensation in the future. Although CINergy currently has adopted executive compensation plans identical to those previously available at Resources and Energy, the CINergy Committee is reviewing those plans in order to determine the types of plans which will complement its executive compensation philosophy.
The 1993 Omnibus Budget Reconciliation Act (OBRA) became law in August 1993 for compensation earned in 1994 and later. Under the law, income tax deductions of publicly traded companies may be limited to the extent total compensation (including base salary, annual bonus, restricted stock awards, stock option exercises, and non-qualified benefits) for certain executive officers exceeds $1 million in any one year. Under the OBRA, the deduction limit does not apply to payments which qualify as "performance based" or compensation which is payable under a written contract that was in effect before February 17, 1993. The CINergy Committee will review the application of the OBRA to future compensation; however, it intends to compensate executives on performance achieved, both corporate and individual.
Summary Compensation Table
The following table sets forth the total compensation paid to CG&E's Chief Executive Officer and to each of its additional four most highly compensated executive officers (named executive officers) for services to CG&E and its subsidiaries during the calendar years ended December 31, 1994, 1993, and 1992. The data presented includes compensation paid by CG&E and its subsidiaries for the periods prior to the merger.
Option/SAR Grants Table
The following table sets forth information concerning individual grants of options to purchase CINergy common stock made to the named executive officers during 1994.
Option/SAR Exercises and Year-end Value Table
The following table sets forth information concerning stock options held by the named executive officers during 1994. During 1994, none of the named executive officers exercised any stock options. The table shows the numbers of shares for which options were held as of December 31, 1994, and the values for "in-the-money" options, which represent the positive spread between the exercise prices of outstanding stock options and the market price of the shares as of December 31, 1994, which was $23.50 per share.
Long-term Incentive Plan Awards Table
The following table sets forth the potential payouts of awards granted under the CINergy Performance Shares Plan to the named executive officers during 1994.
Pension Benefits
The primary pension benefits payable at retirement to each of the named executive officers are provided pursuant to the terms of CG&E's non- contributory management pension plan (CG&E Pension Plan).
Under the terms of the CG&E Pension Plan, the retirement income payable to a pensioner is 1.3% of final average pay plus 0.35% of final average pay in excess of covered compensation, times the number of years of credited service through 30 years, plus 0.1% of final average pay times the number of years of credited service over 30 years. Final average pay is the average annual salary, based on July 1 pay rates, during the employee's five consecutive calendar years producing the highest such average within the last 10 calendar years immediately preceding retirement. Covered compensation is the average Social Security taxable wage base over a 35-year period.
Each of the named executive officers is also a vested participant in CG&E's Supplemental Executive Retirement Plan which provides retirement, disability, and death benefits. Upon retirement or death after age 55, the participant or designated beneficiary will receive for a period of 15 years an annual amount equal to 75% of the individual's highest annual compensation, reduced by social security benefits and by amounts received from the CG&E Pension Plan. Further reductions will be made for fewer than 30 years of service and retirement prior to age 60. In the case of a participant's death prior to age 60, the designated beneficiary will receive 50% of the participant's final annual compensation until the later of the date the participant would have reached age 65, or 10 years. If disabled, a participant will receive the supplemental retirement benefits until the later of the participant's age 65, or 15 years.
The following pension plan table illustrates the estimated annual benefits payable at normal retirement age 65 for the years of service indicated under the terms of the CG&E Pension Plan and the supplemental plan. Compensation utilized to determine benefits under the plans includes salary and bonus as set forth within the respective columns of the summary compensation table. The estimated credited years of service at normal retirement age 65 are as follows: J. H. Randolph, 37 years; T. E. Bruck, 42 years; and S. G. Salay, 26 years. Effective December 31, 1994, R. P. Wiwi resigned with 31 credited years of service, and C. R. Everman retired with 36 credited years of service.
CINergy has an Executive Supplemental Life Insurance Program, which provides key management personnel, including Messrs. Randolph, Bruck, and Salay, with either postretirement life insurance coverage or deferred compensation. A participant in the program may elect either to continue life insurance coverage after retirement or to receive the total amount of coverage in the form of deferred compensation payable in 10 equal annual installments beginning at age 62 or retirement, whichever is later. An employee who elects to receive deferred compensation will receive, at the later of age 62 or retirement, only deferred compensation payments, and his or her life insurance coverage will be cancelled at that time. Coverage is $50,000 for participants with annual base salaries of less than $100,000; $100,000 for participants with annual base salaries between $100,000 and $200,000; and $150,000 for participants with annual base salaries over $200,000. The estimated annual benefit payable, at the later of age 62 or retirement, to Mr. Randolph is $15,000 per year over 10 years, and to each of Messrs. Bruck and Salay is $10,000 per year over 10 years.
Employment Agreement and Severance Arrangements
CINergy entered into an employment agreement with Mr. Randolph as of the Effective Date. Pursuant to this agreement, Mr. Randolph will serve as Chairman and Chief Executive Officer of CINergy until November 30, 1995, and then will retire from the position of Chief Executive Officer but will continue to serve as Chairman of the Board of CINergy until November 30, 2000.
During the terms of his agreement, Mr. Randolph will receive a minimum annual base salary of $465,000. He will also be paid an annual incentive cash award of up to 55% of his annual salary pursuant to the CINergy Annual Incentive Plan, and will be eligible to participate in all other incentive, stock option, performance award, savings, retirement, and welfare plans applicable generally to employees and executives of CINergy.
If Mr. Randolph's employment terminates as a result of death, his beneficiary will receive a lump sum cash amount equal to the sum of (a) his annual base salary through the termination date to the extent not previously paid, (b) a pro rata portion of the benefit under the CINergy Annual Incentive Plan calculated based upon the termination date, and (c) any compensation previously deferred but not yet paid to Mr. Randolph (with accrued interest or earnings thereon) and any unpaid accrued vacation pay. In addition to these accrued amounts, if CINergy terminates Mr. Randolph's employment without "cause" or he terminates his employment for "good reason" (as each is defined in the employment agreement), CINergy will pay to Mr. Randolph (a) a lump sum cash amount equal to the present value of his annual base salary and benefit under the CINergy Annual Incentive Plan payable through the end of the term of employment, at the rate and applying the same goals and factors in effect at the time of notice of such termination, (b) the value of all benefits to which Mr. Randolph would have been entitled had he remained in employment until the end of the term of employment under the CINergy Performance Shares Plan and Executive Supplemental Life Insurance Program, (c) the value of all deferred compensation and all executive life insurance benefits whether or not then vested or payable, and (d) medical and welfare benefits for Mr. Randolph and his family through the end of the term of employment. If Mr. Randolph's employment is terminated by CINergy for cause or by Mr. Randolph without good reason, Mr. Randolph will receive unpaid annual base salary accrued through the termination date and any accrued deferred compensation.
Each of Messrs. Bruck, Randolph, and Salay (each, an Officer) has a severance agreement with CINergy which provides that if, within three years after the Effective Date, the Officer terminates his employment for good cause or his employment is terminated by CINergy other than for disability or cause, CINergy will pay the Officer a cash amount equal to 300% of his annualized compensation for the most recent five years ending before the Effective Date, less $1,000, plus a cash "gross-up" payment equal to the Federal excise tax due on such amount, if any.
Deferred Compensation Agreement
Mr. Randolph and CG&E entered into a deferred compensation agreement effective as of January 1, 1992 (Deferred Compensation Agreement) pursuant to which, in lieu of granting to him a cash increase in base salary, Mr. Randolph was credited with a $50,000 base salary increase in the form of deferred compensation. Such amount will be deferred annually for a five-year period beginning January 1, 1992, and ending December 31, 1996. The Deferred Compensation Agreement was assumed by CINergy as of the Effective Date.
In general, Mr. Randolph's Deferred Compensation Agreement provides that if his employment terminates for any reason, other than death or disability, prior to January 1, 1997, he will receive the total amount of his deferred income plus interest. If Mr. Randolph's employment terminates on or after January 1, 1997, he will receive an annual cash benefit of $179,000 payable for a 15-year period beginning January 2001. Proportional benefits are payable to Mr. Randolph in the event his employment is terminated for death or disability prior to January 1, 1997.
Compensation Committee Interlocks and Insider Participation
Mr. Schiff, Chairman of the Board of Cincinnati Financial Corporation, serves on the Compensation Committee of the Board of Directors of CINergy, and Mr. Randolph, Chairman of the Board and Chief Executive Officer of CINergy and its subsidiaries, including CG&E, serves on the Board of Directors of Cincinnati Financial Corporation.
CG&E and its subsidiaries carry various bond coverages and also carry insurance coverage for their directors, officers, and employees against certain civil liabilities. During 1994, insurance premiums, amounting to approximately $123,300, at competitive rates, were paid to the John J. & Thomas R. Schiff & Co., Inc., of which Mr. Schiff is also Chairman of the Board.
Performance Graph
The following line graph compares the cumulative total shareholder return of the common stock of CG&E with the cumulative total returns during the same time period of the Standard & Poor's (S&P) Electric Utilities Index and the S&P 500 Stock Index. The graph tracks performance from January 1, 1990, through October 24, 1994, the final trading date of CG&E's common stock. The graph assumes a $100 investment on January 1, 1990, and the reinvestment of all dividends.
Directors' Compensation
Effective March 3, 1995, the CG&E Board approved a recommended decrease in directors' retainer and meeting attendance fees.
Under the revised arrangement, directors who are not employees (non-employee directors) will receive an annual retainer fee of $8,000 plus a fee of $1,000 for each CG&E Board meeting attended; however, any director of CG&E who also serves as a director of CINergy or any of its affiliates shall neither receive such annual retainer fee, nor any compensation for attendance at any CG&E Board meeting that is held concurrently or consecutively with a meeting of the board of directors of CINergy. Directors who are also employees of CINergy or any of its subsidiaries (Messrs. Randolph, Rogers, and Stinson) will receive no remuneration for their services as directors.
Under the CINergy Directors' Deferred Compensation Plan, each non-employee director of CINergy or any of its subsidiaries may defer fees and have them accrued either in cash or in units representing shares of common stock of CINergy. If deferred in such units, the stock will be distributed to the director at the time of retirement from the appropriate board. Amounts deferred in cash will be paid at the same time.
Under the CINergy Retirement Plan for Directors, non-employee directors with five or more years of service will receive annual compensation in an amount equal to the annual CG&E Board fees in effect at the time of termination of service as a director, paid for as many years as the director served on the CG&E Board. This plan covers non-employee directors serving on the boards of directors of CINergy, CINergy Services, Inc., CG&E, or Energy. Prior service by non-employee directors of CG&E, Resources, or Energy as of the Effective Date will be credited under this plan.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As a result of the merger, CINergy became the owner of all of the 89,663,086 outstanding shares of CG&E's common stock. There remain outstanding 2,900,000 shares of CG&E's cumulative preferred stock as of December 31, 1994. The class of cumulative preferred stock has been issued in six series.
No person or group is known by management of CG&E to be the beneficial owner of more than 5% of CG&E's cumulative preferred class of stock, or of any such series.
The beneficial ownership of the outstanding shares of common stock of CINergy held by each director and named executive officer as of December 31, 1994, is set forth in the following table: Amount and Nature Name of Beneficial Owner (1) of Beneficial Ownership (2)
Terry E. Bruck 2,944 shares C. Robert Everman 6,401 shares Jackson H. Randolph 23,549 shares James E. Rogers 212,147 shares Stephen G. Salay 6,114 shares George H. Stinson 3,564 shares Robert P. Wiwi 5,854 shares
All directors and executive 485,627 shares officers as a group (representing 0.31% of the class) __________
(1) No individual listed beneficially owned more than 0.14% of the outstanding shares of common stock.
(2) Includes for Mr. Rogers 179,025 shares which he has the right to acquire within 60 days pursuant to the exercise of stock options. All remaining shares listed are held directly and/or indirectly by named beneficial owner.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
Refer to the page captioned "Index to Financial Statements and Financial Statement Schedules", page 35 of this report, for an index of the financial statements and financial statement schedules included in this report.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
Copies of the documents listed below which are identified with an asterisk (*) have heretofore been filed with the Securities and Exchange Commission and are incorporated herein by reference and made a part hereof. Exhibits not so identified are filed herewith.
Exhibit Designation Nature of Exhibit
3-a *Amended Articles of Incorporation of The Cincinnati Gas & Electric Company (CG&E) effective January 24, 1994. (Exhibit to CG&E's 1993 Form 10-K in File No. 1-1232.)
3-b Regulations of CG&E as amended, adopted March 3, 1995.
4-a *Original Indenture (First Mortgage Bonds) between CG&E and The Bank of New York (as Trustee) dated as of August 1, 1936. (Exhibit to CG&E's Registration Statement No. 2-2374.)
4-b *Tenth Supplemental Indenture between CG&E and The Bank of New York dated as of July 1, 1967. (Exhibit to CG&E's Registration Statement No. 2-26549.)
4-c *Eleventh Supplemental Indenture between CG&E and The Bank of New York dated as of May 1, 1969. (Exhibit to CG&E's Registration Statement No. 2-32063.)
Exhibit Designation Nature of Exhibit
4-d *Thirteenth Supplemental Indenture between CG&E and The Bank of New York dated as of November 1, 1971. (Exhibit to CG&E's Registration Statement No. 2-41974.)
4-e *Fourteenth Supplemental Indenture between CG&E and The Bank of New York dated as of November 2, 1972. (Exhibit to CG&E's Registration Statement No. 2-60961.)
4-f *Fifteenth Supplemental Indenture between CG&E and The Bank of New York dated as of August 1, 1973. (Exhibit to CG&E's Registration Statement No. 2-60961.)
4-g *Twenty-fifth Supplemental Indenture between CG&E and The Bank of New York dated as of December 1, 1985. (Exhibit to CG&E's 1985 Form 10-K in File No. 1-1232.)
4-h *Twenty-ninth Supplemental Indenture between CG&E and The Bank of New York dated as of June 15, 1989. (Exhibit to CG&E's June 30, 1989, Form 10-Q in File No. 1-1232.)
4-i *Thirtieth Supplemental Indenture between CG&E and The Bank of New York dated as of May 1, 1990. (Exhibit to CG&E's June 30, 1990, Form 10-Q in File No. 1-1232.)
4-j *Thirty-first Supplemental Indenture between CG&E and The Bank of New York dated as of December 1, 1990. (Exhibit to CG&E's 1990 Form 10-K in File No. 1-1232.)
4-k *Thirty-second Supplemental Indenture between CG&E and The Bank of New York dated as of December 15, 1991. (Exhibit to CG&E's Registration Statement No. 33-45115.)
4-l *Thirty-third Supplemental Indenture between CG&E and The Bank of New York dated as of September 1, 1992. (Exhibit to CG&E's Registration Statement No. 33-53578.)
4-m *Thirty-fourth Supplemental Indenture between CG&E and The Bank of New York dated as of October 1, 1993. (Exhibit to CG&E's September 30, 1993, Form 10-Q in File No. 1- 1232.)
Exhibit Designation Nature of Exhibit
4-n *Thirty-fifth Supplemental Indenture between CG&E and The Bank of New York dated as of January 1, 1994. (Exhibit to CG&E's Registration Statement No. 33-52335.)
4-o *Thirty-sixth Supplemental Indenture between CG&E and The Bank of New York dated as of February 15, 1994. (Exhibit to CG&E's Registration Statement No. 33-52335.)
4-p *Loan Agreement between CG&E and County of Boone, Kentucky dated as of February 1, 1985. (Exhibit to CG&E's 1984 Form 10-K in File No. 1-1232.)
4-q *Loan Agreement between CG&E and State of Ohio Air Quality Development Authority dated as of December 1, 1985. (Exhibit to CG&E's 1985 Form 10-K in File No. 1-1232.)
4-r *Loan Agreement between CG&E and State of Ohio Air Quality Development Authority dated as of December 1, 1985. (Exhibit to CG&E's 1985 Form 10-K in File No. 1-1232.)
4-s *Loan Agreement between CG&E and State of Ohio Air Quality Development Authority dated as of December 1, 1985. (Exhibit to CG&E's 1985 Form 10-K in File No. 1-1232.)
4-t *Repayment Agreement between CG&E and The Dayton Power and Light Company dated as of December 23, 1992. (Exhibit to CG&E's 1992 Form 10-K in File No. 1-1232.)
4-u *Loan Agreement between CG&E and State of Ohio Water Development Authority dated as of January 1, 1994. (Exhibit to CG&E's 1993 Form 10-K in File No. 1-1232.)
4-v *Loan Agreement between CG&E and State of Ohio Air Quality Development Authority dated as of January 1, 1994. (Exhibit to CG&E's 1993 Form 10-K in File No. 1-1232.)
4-w *Loan Agreement between CG&E and County of Boone, Kentucky dated as of January 1, 1994. (Exhibit to CG&E's 1993 Form 10-K in File No. 1-1232.)
Exhibit Designation Nature of Exhibit
4-x *Original Indenture (First Mortgage Bonds) between The Union Light, Heat and Power Company (ULH&P) and The Bank of New York dated as of February 1, 1949. (Exhibit to ULH&P's Registration Statement No. 2-7793.)
4-y *Fifth Supplemental Indenture between ULH&P and The Bank of New York dated as of January 1, 1967. (Exhibit to CG&E's Registration Statement No. 2-60961.)
4-z *Seventh Supplemental Indenture between ULH&P and The Bank of New York dated as of October 1, 1973. (Exhibit to CG&E's Registration Statement No. 2-60961.)
4-aa *Eighth Supplemental Indenture between ULH&P and The Bank of New York dated as of December 1, 1978. (Exhibit to CG&E's Registration Statement No. 2-63591.)
4-bb *Tenth Supplemental Indenture between ULH&P and The Bank of New York dated as of July 1, 1989. (Exhibit to CG&E's June 30, 1989, Form 10-Q in File No. 1-1232.)
4-cc *Eleventh Supplemental Indenture between ULH&P and The Bank of New York dated as of June 1, 1990. (Exhibit to CG&E's June 30, 1990, Form 10-Q in File No. 1-1232.)
4-dd *Twelfth Supplemental Indenture between ULH&P and The Bank of New York dated as of November 15, 1990. (Exhibit to ULH&P's 1990 Form 10-K in File No. 2-7793.)
4-ee *Thirteenth Supplemental Indenture between ULH&P and The Bank of New York dated as of August 1, 1992. (Exhibit to ULH&P's 1992 Form 10-K in File No. 2-7793.)
10-a *+Supplemental Executive Retirement Income Plan between CG&E and certain executive officers. (Exhibit to CG&E's 1988 Form 10-K in File No. 1-1232.)
10-b *+Amendment to Supplemental Executive Retirement Income Plan between CG&E and certain executive officers. (Exhibit to CG&E's 1992 Form 10-K in File No 1-1232.)
Exhibit Designation Nature of Exhibit
10-c *+Executive Severance Agreement between CG&E and certain executive officers. (Exhibit to CG&E's 1989 Form 10-K in File No. 1-1232.)
10-d *+Amendment to Executive Severance Agreement between CG&E and certain executive officers. (Exhibit to CG&E's 1992 Form 10-K in File No. 1-1232.)
10-e *+Amended and Restated Employment Agreement dated October 24, 1994, among CG&E, CINergy Corp. (an Ohio corporation), CINergy Corp. (CINergy) (a Delaware corporation), PSI Resources, Inc., PSI Energy, Inc., and Jackson H. Randolph. (Exhibit to CINergy's 1994 Form 10-K in File No. 1-11377.)
10-f *+Amended and Restated Employment Agreement dated July 2, 1993 among PSI Resources, Inc., PSI Energy, Inc., CG&E, CINergy, CINergy Sub, Inc., and James E. Rogers, Jr. (Exhibit to CINergy's Amendment No. 3 to CINergy's Form S-4, filed October 8, 1993.)
10-g *+Employment Agreement dated January 1, 1995, among CINergy, CG&E, CINergy Services, Inc., CINergy Investments, Inc., PSI Energy, Inc., and William J. Grealis. (Exhibit to CINergy's 1994 Form 10-K in File No. 1- 11377.)
10-h *Text of Settlement Agreement dated October 27, 1993, by and among PSI Resources, Inc., PSI Energy, Inc., CG&E, CINergy, IPALCO Enterprises, Inc., Indianapolis Power & Light Company, James E. Rogers, John R. Hodowal, and Ramon L. Humke (together with the exhibits and schedules thereto). (Exhibit to PSI Resources, Inc.'s Form 8-K, dated October 27, 1993.)
21 Not Applicable.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule (included in electronic submission only). __________________
+ Management contract, compensation plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
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.
THE CINCINNATI GAS & ELECTRIC COMPANY Dated: March 28, 1995 Registrant
By Jackson H. Randolph Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
James E. Rogers Vice Chairman, Chief Operating March 28, 1995 Officer and Director
George H. Stinson President and Director March 28, 1995
J. Wayne Leonard Group Vice President and March 28, 1995 Chief Financial Officer (Principal Financial Officer)
Jackson H. Randolph Chairman, Chief Executive Officer March 28, 1995 and Director (Principal Executive Officer)
Charles J. Winger Comptroller March 28, 1995 (Principal Accounting Officer)