-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VdThpqmrnCYAWlHPbY6YT5o/BrDvqGAg/ooYi5I0NhF8R+Eb7wBeXSo7lo8zX81R HYvGQ6zNwcp+gGxr+efcoQ== 0000081020-98-000013.txt : 19980817 0000081020-98-000013.hdr.sgml : 19980817 ACCESSION NUMBER: 0000081020-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSI ENERGY INC CENTRAL INDEX KEY: 0000081020 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 350594457 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03543 FILM NUMBER: 98687344 BUSINESS ADDRESS: STREET 1: 1000 E MAIN ST CITY: PLAINFIELD STATE: IN ZIP: 46168 BUSINESS PHONE: 3178399611 FORMER COMPANY: FORMER CONFORMED NAME: PUBLIC SERVICE CO OF INDIANA INC DATE OF NAME CHANGE: 19900509 10-Q 1 1998 2ND QUARTER 10-Q PSI ENERGY UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address, and Telephone Number Identification No. 1-11377 CINERGY CORP. 31-1385023 (A Delaware Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500 1-1232 THE CINCINNATI GAS & ELECTRIC COMPANY 31-0240030 (An Ohio Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500 1-3543 PSI ENERGY, INC. 35-0594457 (An Indiana Corporation) 1000 East Main Street Plainfield, Indiana 46168 (317) 839-9611 2-7793 THE UNION LIGHT, HEAT AND POWER COMPANY 31-0473080 (A Kentucky Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No This combined Form 10-Q is separately filed by Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. The Union Light, Heat and Power Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing its company specific information with the reduced disclosure format. As of July 31, 1998, shares of Common Stock outstanding for each registrant were as listed: Company Shares Cinergy Corp., par value $.01 per share 158,535,278 The Cincinnati Gas & Electric Company, par value $8.50 per share 89,663,086 PSI Energy, Inc., without par value, stated value $.01 per share 53,913,701 The Union Light, Heat and Power Company, par value $15.00 per share 585,333 TABLE OF CONTENTS Item Page Number Number Glossary of Terms . . . . . . . . . . . . . . . . . . . 3 PART I. FINANCIAL INFORMATION 1 Financial Statements Cinergy Corp. Consolidated Balance Sheets . . . . . . . . . . . . . 6 Consolidated Statements of Income (Loss). . . . . . . 8 Consolidated Statements of Changes in Common Stock Equity. . . . . . . . . . . . . . . . . . . . 9 Consolidated Statements of Cash Flows . . . . . . . . 12 Results of Operations . . . . . . . . . . . . . . . . 13 The Cincinnati Gas & Electric Company Consolidated Balance Sheets . . . . . . . . . . . . . 24 Consolidated Statements of Income and Comprehensive Income. . . . . . . . . . . . . . . . . . . . . . . 26 Consolidated Statements of Cash Flows . . . . . . . . 27 Results of Operations . . . . . . . . . . . . . . . . 28 PSI Energy, Inc. Consolidated Balance Sheets . . . . . . . . . . . . . 34 Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) . . . . . . . . . . . . 36 Consolidated Statements of Cash Flows . . . . . . . . 37 Results of Operations . . . . . . . . . . . . . . . . 38 The Union Light, Heat and Power Company Balance Sheets. . . . . . . . . . . . . . . . . . . . 43 Statements of Income (Loss) . . . . . . . . . . . . . 45 Statements of Cash Flows. . . . . . . . . . . . . . . 46 Results of Operations . . . . . . . . . . . . . . . . 47 Notes to Financial Statements . . . . . . . . . . . . . 50 2 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 57 3 Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . 62 PART II. OTHER INFORMATION 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . 63 6 Exhibits and Reports on Form 8-K. . . . . . . . . . . . 63 Signatures. . . . . . . . . . . . . . . . . . . . . . . 65 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below: TERM DEFINITION 1997 Form Combined 1997 Annual Report on Form 10-K filed separately by 10-K Cinergy, CG&E, PSI, and ULH&P Apache Apache Corporation Avon Energy Avon Energy Partners Holdings, an Unlimited Liability Company and its wholly-owned subsidiary Avon Energy Partners PLC, a Limited Liability Company Bcf Billion cubic feet Beckjord CG&E's W. C. Beckjord Station (steam electric generating plant) CC&T Cinergy Capital and Trading, Inc. (a subsidiary of Investments) CERCLA Comprehensive Environmental Response, Compensation and Liability Act CFC National Rural Utilities Cooperative Finance Corporation CG&E The Cincinnati Gas & Electric Company (a subsidiary of Cinergy) Cinergy or Cinergy Corp. Company Cinergy Global Cinergy Global Power, Inc., formerly Cinergy Investments Power MPI, Inc. (a subsidiary of Cinergy Global Resources, Inc.) Cinergy Global Cinergy Global Resources, Inc. (a subsidiary of Cinergy), Resources which holds Cinergy's foreign non-regulated business Committed Lines Unsecured lines of credit Conesville CG&E's Conesville Station (steam electric generating plant) Enertech Enertech Associates, Inc., formerly Power International, Inc. (a subsidiary of Cinergy Investments, Inc.) EPA United States Environmental Protection Agency EPS Earnings per share Exxon Exxon Coal and Minerals Company FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission HB 443 Customer choice bill introduced by the House Chairman of the Tourism, Development and Energy Committee in Kentucky HJR 95 House Joint Resolution, which calls for an executive task force to study electricity restructuring in Kentucky GLOSSARY OF TERMS (Continued) TERM DEFINITION HB 732 and Companion electric restructuring bills introduced into the SB 237 Ohio legislature during 1998 IDEM Indiana Department of Environmental Management IGC Indiana Gas Company, Inc., formerly Indiana Gas and Water Company, Inc. IRS Internal Revenue Service IT Information Technology Investments Cinergy Investments, Inc. (a subsidiary of Cinergy) kwh Kilowatt-hour Mcf Thousand cubic feet MGP Manufactured gas plant Midlands Midlands Electricity plc, a United Kingdom regional electric company (a wholly-owned subsidiary of Avon Energy) MW Megawatts NIPSCO Northern Indiana Public Service Company NOx Nitrogen Oxide Oryx Oryx Energy Company ProEnergy Producers Energy Marketing, LLC (a subsidiary of CC&T) PSI PSI Energy, Inc. (a subsidiary of Cinergy) PUCO Public Utilities Commission of Ohio RUS Rural Utilities Service SIP State Implementation Plan Statement 130 Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income Statement 133 Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities Teplarna Teplarna Svit a.s. (a subsidiary of Cinergy Global Power) ULH&P The Union Light, Heat and Power Company (a wholly-owned subsidiary of CG&E) Uncommitted Short-term borrowings with various banks arranged on an "as Lines offered" basis WVPA Wabash Valley Power Association, Inc. Zimmer CG&E's William H. Zimmer Generating Station (steam electric generating plant) CINERGY CORP. AND SUBSIDIARY COMPANIES CINERGY CORP. CONSOLIDATED BALANCE SHEETS ASSETS June 30 December 31 1998 1997 (unaudited) (dollars in thousands) Utility Plant - Original Cost In service Electric $9,048,447 $8,981,182 Gas 759,774 746,903 Common 186,236 186,078 ---------- ---------- 9,994,457 9,914,163 Accumulated depreciation 3,922,498 3,800,322 ---------- ---------- 6,071,959 6,113,841 Construction work in progress 219,154 183,262 ---------- ---------- Total utility plant 6,291,113 6,297,103 Current Assets Cash and temporary cash investments 86,934 53,310 Restricted deposits 1,507 2,319 Notes receivable 78 110 Accounts receivable less accumulated provision for doubtful accounts of $14,520 at June 30, 1998, and $10,382 at December 31, 1997 528,923 413,516 Materials, supplies, and fuel - at average cost Fuel for use in electric production 72,272 57,916 Gas stored for current use 29,282 29,174 Other materials and supplies 70,475 76,066 Prepayments and other 68,126 38,171 ---------- ---------- 857,597 670,582 Other Assets Regulatory assets Amounts due from customers - income taxes 398,237 374,456 Post-in-service carrying costs and deferred operating expenses 174,557 178,504 Coal contract buyout costs 112,936 122,485 Deferred merger costs 87,684 90,346 Deferred demand-side management costs 91,793 109,596 Phase-in deferred return and depreciation 82,232 89,689 Unamortized costs of reacquiring debt 64,443 66,242 Other 44,241 45,533 Investments in unconsolidated subsidiaries 589,724 537,720 Other 385,746 275,897 ---------- ---------- 2,031,593 1,890,468 $9,180,303 $8,858,153 The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements. CINERGY CORP. CAPITALIZATION AND LIABILITIES June 30 December 31 1998 1997 (unaudited) (dollars in thousands) Common Stock Equity Common stock - $.01 par value; authorized shares - 600,000,000; outstanding shares - 158,535,278 at June 30, 1998, and 157,744,658 at December 31, 1997 $ 1,585 $ 1,577 Paid-in capital 1,599,435 1,573,064 Retained earnings 905,556 967,420 Accumulated other comprehensive income (3,330) (2,861) ---------- ---------- Total common stock equity 2,503,246 2,539,200 Cumulative Preferred Stock of Subsidiaries Not subject to mandatory redemption 92,688 177,989 Long-term Debt 2,192,975 2,150,902 ---------- ---------- Total capitalization 4,788,909 4,868,091 Current Liabilities Long-term debt due within one year 251,569 85,000 Notes payable and other short-term obligations 1,120,559 1,114,028 Accounts payable 655,241 488,716 Accrued taxes 187,197 187,033 Accrued interest 35,420 46,622 Other 88,405 79,193 ---------- ---------- 2,338,391 2,000,592 Other Liabilities Deferred income taxes 1,209,293 1,248,543 Unamortized investment tax credits 161,464 166,262 Accrued pension and other postretirement benefit costs 315,348 297,142 Other 366,898 277,523 ---------- ---------- 2,053,003 1,989,470 $9,180,303 $8,858,153
CINERGY CORP. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (unaudited) Quarter Ended Year to Date Twelve Months Ended June 30 June 30 June 30 1998 1997 1998 1997 1998 1997 (in thousands, except per share amounts) Operating Revenues Electric $1,021,922 $790,576 $2,180,646 $1,608,490 $4,433,854 $3,041,642 Gas 50,081 74,757 223,142 287,023 427,264 495,782 ---------- -------- ---------- ---------- ---------- ---------- 1,072,003 865,333 2,403,788 1,895,513 4,861,118 3,537,424 Operating Expenses Fuel used in electric production 155,547 134,602 336,066 310,348 719,153 668,341 Gas purchased 21,668 35,826 118,279 159,794 224,643 275,730 Purchased and exchanged power 439,920 195,364 911,805 355,956 1,775,207 456,371 Other operation 237,130 158,488 400,158 321,900 716,203 625,574 Maintenance 55,613 51,201 94,679 97,055 174,095 199,157 Depreciation 73,790 72,171 147,095 143,727 292,445 285,698 Amortization of phase-in deferrals 5,540 3,370 11,079 6,741 17,821 13,540 Amortization of post-in-service deferred operating expenses 1,090 1,090 2,181 2,181 4,362 2,379 Income taxes (10,897) 39,937 59,894 103,856 204,975 215,122 Taxes other than income taxes 68,157 67,841 137,806 136,213 266,617 261,482 ---------- -------- ---------- ---------- ---------- ---------- 1,047,558 759,890 2,219,042 1,637,771 4,395,521 3,003,394 Operating Income 24,445 105,443 184,746 257,742 465,597 534,030 Other Income and Expenses - Net Allowance for equity funds used during construction 111 180 132 371 (141) 748 Post-in-service carrying costs - - - - - 386 Phase-in deferred return 1,811 2,002 3,622 4,004 7,626 8,190 Equity in earnings of unconsolidated subsidiaries 9,717 12,180 21,571 38,680 43,283 61,677 Income taxes 12,788 3,653 26,130 4,444 57,623 18,433 Other - net (12,684) (8,080) (31,715) (10,707) (52,510) (37,545) ---------- -------- ---------- ---------- ---------- ---------- 11,743 9,935 19,740 36,792 55,881 51,889 Income Before Interest and Other Charges 36,188 115,378 204,486 294,534 521,478 585,919 Interest and Other Charges Interest on long-term debt 43,835 44,977 87,593 94,252 175,113 187,713 Other interest 18,845 13,430 36,839 27,297 69,489 50,274 Allowance for borrowed funds used during construction (1,925) (1,754) (3,872) (3,096) (6,176) (6,499) Preferred dividend requirements of subsidiaries 1,366 3,236 3,788 6,475 9,882 16,209 ---------- -------- ---------- ---------- ---------- ---------- 62,121 59,889 124,348 124,928 248,308 247,697 Net Income (Loss) Before Extraordinary Item $ (25,933) $ 55,489 $ 80,138 $ 169,606 $ 273,170 $ 338,222 Extraordinary Item - Equity Share of Windfall Profits Tax (Less Applicable Income Taxes of $0) - - - - (109,400) - ---------- -------- ---------- ---------- ---------- ------- Net Income (Loss) $ (25,933) $ 55,489 $ 80,138 $ 169,606 $ 163,770 $ 338,222 Average Common Shares Outstanding 158,018 157,679 157,892 157,679 157,790 157,679 Earnings Per Common Share Net income (loss) before extraordinary item $(.16) $.35 $.51 $1.07 $1.73 $2.02 Net income (loss) $(.16) $.35 $.51 $1.07 $1.04 $2.02 Earnings Per Common Share - Assuming Dilution (Note 13) Net income (loss) before extraordinary item $(.16) $.35 $.51 $1.06 $1.72 $2.01 Net income (loss) $(.16) $.35 $.51 $1.06 $1.03 $2.01 Dividends Declared Per Common Share $ .45 $.45 $.90 $ .90 $1.80 $1.78 The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (dollars in thousands) (unaudited) Accumulated Other Total Total Common Paid-in Retained Comprehensive Comprehensive Common Stock Stock Capital Earnings Income Income Equity Quarter Ended June 30, 1998 Balance April 1, 1998 $1,578 $1,574,080 $1,002,495 $(3,279) $2,574,874 Comprehensive income Net income (loss) (25,933) $(25,933) (25,933) Other comprehensive income, net of tax Foreign currency translation adjustment (51) (51) -------- Other comprehensive income (loss) total (51) (51) -------- Comprehensive income (loss) total $(25,984) Issuance of 771,258 shares of common stock - net 7 26,504 26,511 Treasury shares purchased (1) (3,502) (3,503) Treasury shares reissued 1 2,329 2,330 Dividends on common stock (see page 8 for per share amounts) (71,006) (71,006) Other 24 24 ------ ---------- ---------- ------- ---------- Balance June 30, 1998 $1,585 $1,599,435 $ 905,556 $(3,330) $2,503,246 Quarter Ended June 30, 1997 Balance at April 1, 1997 $1,577 $1,579,934 $1,036,643 $(2,419) $2,615,735 Comprehensive income Net income 55,489 $ 55,489 55,489 Other comprehensive income, net of tax Foreign currency translation adjustment 446 446 -------- Other comprehensive income total 446 446 -------- Comprehensive income total $ 55,935 ======== Treasury shares purchased (4) (13,778) (13,782) Treasury shares reissued 4 4,325 4,329 Dividends on common stock (see page 8 for per share amounts) (70,910) (70,910) Other 52 (12) 40 ------ ---------- ---------- ------- ---------- Balance June 30, 1997 $1,577 $1,570,533 $1,021,210 $(1,973) $2,591,347 The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (CONTINUED) (dollars in thousands) (unaudited) Accumulated Other Total Total Common Paid-in Retained Comprehensive Comprehensive Common Stock Stock Capital Earnings Income Income Equity Six Months Ended June 30, 1998 Balance January 1, 1998 $1,577 $1,573,064 $ 967,420 $(2,861) $2,539,200 Comprehensive income Net income 80,138 $ 80,138 80,138 Other comprehensive income, net of tax Foreign currency translation adjustment (418) (418) Minimum pension liability adjustment (51) (51) -------- Other comprehensive income (loss) total (469) (469) -------- Comprehensive income total $ 79,669 ======== Issuance of 790,620 shares of common stock - net 8 26,793 26,801 Treasury shares purchased (2) (4,932) (4,934) Treasury shares reissued 2 4,478 4,480 Dividends on common stock (see page 8 for per share amounts) (142,000) (142,000) Other 32 (2) 30 ------ ---------- ---------- ------- ---------- Balance June 30, 1998 $1,585 $1,599,435 $ 905,556 $(3,330) $2,503,246 Six Months Ended June 30, 1997 Balance at January 1, 1997 $1,577 $1,590,735 $ 993,526 $(1,384) $2,584,454 Comprehensive income Net income 169,606 $169,606 169,606 Other comprehensive income, net of tax Foreign currency translation adjustment (589) (589) -------- Other comprehensive income (loss) total (589) (589) -------- Comprehensive income total $169,017 ======== Treasury shares purchased (11) (45,725) (45,736) Treasury shares reissued 11 25,459 25,470 Dividends on common stock (see page 8 for per share amounts) (141,910) (141,910) Other 64 (12) 52 ------ ---------- ---------- ------- ---------- Balance June 30, 1997 $1,577 $1,570,533 $1,021,210 $(1,973) $2,591,347 The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (CONTINUED) (dollars in thousands) (unaudited) Accumulated Other Total Total Common Paid-in Retained Comprehensive Comprehensive Common Stock Stock Capital Earnings Income Income Equity Twelve Months Ended June 30, 1998 Balance July 1, 1997 $1,577 $1,570,533 $1,021,210 $(1,973) $2,591,347 Comprehensive income Net income 163,770 $163,770 163,770 Other comprehensive income, net of tax Foreign currency translation adjustment (224) (224) Minimum pension liability adjustment (1,133) (1,133) -------- Other comprehensive income (loss) total (1,357) (1,357) -------- Comprehensive income total $162,413 Issuance of 856,149 shares of common stock - net 8 28,859 28,867 Treasury shares purchased (2) (5,406) (5,408) Treasury shares reissued 2 5,748 5,750 Dividends on common stock (see page 8 for per share amounts) (283,956) (283,956) Other (299) 4,532 4,233 ------ ---------- ---------- -------- ---------- Balance June 30, 1998 $1,585 $1,599,435 $ 905,556 $(3,330) $2,503,246 Twelve Months Ended June 30, 1997 Balance at July 1, 1996 $1,577 $1,594,920 $ 982,076 $(1,640) $2,576,933 Comprehensive income Net income 338,222 $338,222 338,222 Other comprehensive income, net of tax Foreign currency translation adjustment (153) (153) Minimum pension liability adjustment (180) (180) -------- Other comprehensive income (loss) total (333) (333) -------- Comprehensive income total $337,889 ======== Treasury shares purchased (14) (54,070) (54,084) Treasury shares reissued 14 29,647 29,661 Costs of reacquisition of preferred stock of subsidiary (18,391) (18,391) Dividends on common stock (see page 8 for per share amounts) (280,668) (280,668) Other 36 (29) 7 ------ ---------- ----------- ------- ---------- Balance June 30, 1997 $1,577 $1,570,533 $1,021,210 $(1,973) $2,591,347 The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Year to Date Twelve Months Ended June 30 June 30 1998 1997 1998 1997 (in thousands) Operating Activities Net income $ 80,138 $ 169,606 $ 163,770 $ 338,222 Items providing (using) cash currently: Depreciation 147,095 143,727 292,445 285,698 Reserves related to electric trading business 67,000 - 71,000 - WVPA settlement 80,000 - 80,000 - Deferred income taxes and investment tax credits - net (61,871) 8,146 (2,379) 23,275 Equity in earnings of unconsolidated subsidiaries (21,571) (38,680) (18,130) (61,677) Extraordinary item - equity share of windfall profits tax - - 109,400 - Allowance for equity funds used during construction (132) (371) 141 (748) Regulatory assets - net 36,171 38,881 68,600 57,144 Changes in current assets and current liabilities Restricted deposits 812 (224) 438 (270) Accounts and notes receivable, net of reserves on receivables sold (1,456) 25,529 (244,142) (37,429) Materials, supplies, and fuel (4,667) 20,980 (3,830) 52,803 Accounts payable 40,353 7,025 216,624 54,493 Litigation settlement - - - (80,000) Accrued taxes and interest (11,038) 9,548 (42,000) 20,008 Other items - net 23,850 (56,281) 108,306 (2,345) --------- --------- --------- --------- Net cash provided by operating activities 374,684 327,886 800,243 653,864 Financing Activities Issuance of common stock 290 - 2,356 - Issuance of long-term debt 321,921 - 421,983 150,217 Retirement of preferred stock of subsidiaries (85,269) (114) (101,424) (197,487) Redemption of long-term debt (220,409) (206,312) (350,409) (282,375) Change in short-term debt 972 182,642 10,141 347,359 Dividends on common stock (141,599) (141,910) (283,555) (280,668) --------- --------- --------- --------- Net cash used in financing activities (124,094) (165,694) (300,908) (262,954) Investing Activities Construction expenditures (less allowance for equity funds used during construction) (144,524) (144,372) (328,207) (341,600) Acquisition of businesses (net of cash acquired) (46,141) - (46,141) - Deferred demand-side management costs (4,703) (10,783) (13,787) (37,921) Investments in unconsolidated subsidiaries (21,598) - (50,630) (46,351) --------- --------- --------- --------- Net cash used in investing activities (216,966) (155,155) (438,765) (425,872) Net increase (decrease) in cash and temporary cash investments 33,624 7,037 60,570 (34,962) Cash and temporary cash investments at beginning of period 53,310 19,327 26,364 61,326 --------- --------- --------- --------- Cash and temporary cash investments at end of period $ 86,934 $ 26,364 $ 86,934 $ 26,364 The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
CINERGY CORP. Below is information concerning the consolidated results of operations for Cinergy for the quarter, six months, and twelve months ended June 30, 1998. For information concerning the results of operations for each of the other registrants for the quarter and six months ended June 30, 1998, see the discussion under the heading "Results of Operations" following the financial statements of each company. RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 Kwh Sales Kwh sales increased 25.5% for the quarter ended June 30, 1998, from the comparable period of last year, primarily reflecting increased activity in Cinergy's power marketing and trading operations which led to higher non-firm power sales for resale. Also contributing to the higher kwh sales level was an increase in residential and commercial sales due to the return to more normal weather conditions for the quarter ended June 30, 1998, as compared to the same period last year, and an increase in industrial sales primarily reflecting growth in the chemicals, transportation equipment, and miscellaneous manufacturers sectors. Mcf Sales and Transportation Mcf gas sales and transportation volumes for the quarter ended June 30, 1998, decreased when compared to the same period in 1997. The decline in Mcf sales was partially offset by an increase in gas transportation volumes as customers continued the trend of purchasing gas directly from suppliers, using transportation services provided by Cinergy. Operating Revenues Electric Operating Revenues Electric operating revenues for the quarter ended June 30, 1998, increased $231 million (29%), as compared to the same period last year, primarily as a result of the increased kwh sales discussed above. Also contributing to the increase was a higher average price received on non-firm power transactions. An analysis of electric operating revenues is shown below: Quarter Ended June 30 (in millions) Electric operating revenues - June 30, 1997 $ 791 Increase (Decrease) due to change in: Price per kwh Retail (3) Sales for resale Firm power obligations 2 Non-firm power transactions 89 Total change in price per kwh 88 Kwh sales Retail 50 Sales for resale Firm power obligations 10 Non-firm power transactions 80 Total change in kwh sales 140 Other 3 Electric operating revenues - June 30, 1998 $1,022 Gas Operating Revenues The increasing trend of industrial customers purchasing gas directly from producers and utilizing CG&E facilities to transport the gas continues to put downward pressure on gas operating revenues. Since providing transportation services does not necessitate recovery of the cost of gas purchased, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues. Gas operating revenues decreased $25 million (33%) in the second quarter of 1998, when compared to the same period last year, primarily due to the decline in volume sales discussed above and the aforementioned trend toward increased transportation services. Operating Expenses Fuel Used in Electric Production Electric fuel costs increased $21 million (16%) for the quarter ended June 30, 1998, as compared to the same period last year. An analysis of these fuel costs is shown below: Quarter Ended June 30 (in millions) Fuel expense - June 30, 1997 $135 Increase (Decrease) due to change in: Price of fuel (2) Deferred fuel cost 7 Kwh generation 16 ---- Fuel expense - June 30, 1998 $156 Gas Purchased Gas purchased for the quarter ended June 30, 1998, decreased $14 million (40%), when compared to the same period last year, primarily due to a decrease in the volumes of gas purchased, due to lower demand. Purchased and Exchanged Power Purchased and exchanged power increased $245 million for the quarter ended June 30, 1998, when compared to the same period last year, primarily reflecting increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations and the provision of $61 million of reserves for the electric trading business recorded during the second quarter of 1998 (see Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information"). Other Operation Other operation expenses for the quarter ended June 30, 1998, increased $79 million (50%), as compared to the same period of 1997. This increase is primarily due to the one-time charge of $80 million recorded during the second quarter of 1998, reflecting the implementation of a 1989 settlement of a dispute with the WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"). This increase also reflects a provision of $4 million recorded in the second quarter of 1998 for potential bad debts related to certain power marketing and trading accounts. Maintenance For the quarter ended June 30, 1998, maintenance expenses increased $4 million (9%), when compared to the quarter ended June 30, 1997. This increase is primarily due to forced outages at Conesville and Beckjord and an increase in overhead line maintenance costs resulting from storm damage during the second quarter of 1998. Amortization of Phase-in Deferrals Amortization of phase-in deferrals reflects the PUCO ordered phase-in plan for Zimmer. Other Income and Expenses - Net Equity in Earnings of Unconsolidated Subsidiaries The $2 million (20%) decrease in equity in earnings of unconsolidated subsidiaries for the quarter ended June 30, 1998, as compared to the same period of 1997, is primarily attributable to the decrease in earnings of Midlands. Other - net The change in other - net of $5 million for the quarter ended June 30, 1998, from the same period of 1997, is primarily due to an increase in expenses related to Cinergy Global Power, which was formed in September 1997, a higher level of expenses associated with PSI's sales of accounts receivable during the second quarter of 1998, and expenses related to the acquisitions and start-up costs of other non-regulated entities. Interest and Other Charges Other Interest Other interest increased $5 million (40%) for the second quarter of 1998, as compared to the same period last year, partially due to increased interest on the currency swap, interest expense recognized on a settlement agreement between PSI and WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"), and increased short-term borrowings. Preferred Dividend Requirements of Subsidiaries The decrease in preferred dividend requirements of subsidiaries of $2 million (58%) for the quarter ended June 30, 1998, from the same period of 1997, is primarily attributable to PSI's redemption of all outstanding shares of its 7.15% Series Cumulative Preferred Stock and 7.44% Series Cumulative Preferred Stock on September 1, 1997, and March 1, 1998, respectively. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 Kwh Sales Kwh sales increased 47.3% for the six months ended June 30, 1998, from the comparable period of last year, primarily reflecting increased activity in Cinergy's power marketing and trading operations which led to higher non-firm power sales for resale. Also contributing to the higher kwh sales levels was an increase in industrial sales primarily reflecting growth in the transportation equipment and miscellaneous manufacturers sectors, and increases in the average number of residential and commercial customers. Mcf Sales and Transportation Mcf gas sales and transportation volumes for the six months ended June 30, 1998, decreased when compared to the same period in 1997. Decreased Mcf sales reflect, in part, milder weather during the first quarter of 1998, as compared to the same period of 1997, and were partially offset by an increase in the average number of residential and commercial customers. Industrial sales declined and gas transportation volumes increased as customers continued the trend of purchasing gas directly from suppliers, using transportation services provided by CG&E. Operating Revenues Electric Operating Revenues Electric operating revenues for the six months ended June 30, 1998, increased $572 million (36%), as compared to the same period last year, primarily as a result of the increased kwh sales previously discussed. Also contributing to the increase was a higher average price received on non-firm power transactions. An analysis of electric operating revenues is shown below: Six Months Ended June 30 (in millions) Electric operating revenues - June 30, 1997 $1,609 Increase due to change in: Price per kwh Retail 13 Sales for resale Non-firm power transactions 105 Total change in price per kwh 118 Kwh sales Retail 58 Sales for resale Firm power obligations 10 Non-firm power transactions 380 Total change in kwh sales 448 Other revenues 6 Electric operating revenues - June 30, 1998 $2,181 Gas Operating Revenues For a discussion of the continued trend of downward pressure on gas operating revenues from increased transportation services, refer to the discussion under the heading "Gas Operating Revenues" for Cinergy in "Results of Operations for the Quarter Ended June 30, 1998." Gas operating revenues decreased $64 million (22%) for the six months ended June 30, 1998, when compared to the same period last year. This decrease is primarily due to the previously discussed changes in Mcf sales and transportation volumes. Operating Expenses Fuel Used in Electric Production Electric fuel costs increased $26 million (8%) for the first six months of 1998, as compared to the same period last year. An analysis of these fuel costs is shown below: Six Months Ended June 30 (in millions) Fuel expense - June 30, 1997 $310 Increase (Decrease) due to change in: Price of fuel (8) Deferred fuel cost 17 Kwh generation 17 ---- Fuel expense - June 30, 1998 $336 Gas Purchased Gas purchased for the six months ended June 30, 1998, decreased $42 million (26%) when compared to the same period last year, reflecting a decrease in the volume of gas purchased, due to lower demand, and a lower average cost per Mcf purchased. Purchased and Exchanged Power Purchased and exchanged power increased $556 million for the six months ended June 30, 1998, when compared to the same period last year, primarily reflecting increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations and the provision of $63 million of reserves for the electric trading business recorded during 1998 (see Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information"). Other Operation Other operation expenses for the first six months of 1998 increased by $78 million (24%), as compared to the same period of 1997. This increase is primarily due to the one-time charge of $80 million recorded during the second quarter of 1998, reflecting the implementation of a 1989 settlement of a dispute with the WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"). This increase also reflects a provision of $4 million for potential bad debts related to certain power marketing and trading accounts recorded during the six months ended June 30, 1998. Amortization of Phase-in Deferrals Amortization of phase-in deferrals reflects the PUCO ordered phase-in plan for Zimmer. Other Income and Expenses - Net Equity in Earnings of Unconsolidated Subsidiaries The $17 million (44%) decrease in equity in earnings of unconsolidated subsidiaries for the six months ended June 30, 1998, as compared to the same period of 1997, is primarily attributable to the decrease in earnings of Midlands, which is due to milder weather conditions during the first quarter of 1998, and a penalty imposed on each electric distribution company due to the delay in opening the electricity supply business to competition. Other - net The change in other - net of $21 million for the six months ended June 30, 1998, from the same period of 1997, is primarily due to a litigation settlement (see Note 10 of the "Notes to Financial Statements" in "Part I. Financial Information"), an increase in expenses related to Cinergy Global Power, which was formed in September 1997, and expenses related to the acquisitions and start-up costs of other non-regulated entities. Interest and Other Charges Interest on Long-term Debt Interest on long-term debt decreased $7 million (7%) for the six months ended June 30, 1998, as compared to the same period last year, primarily due to the net redemption of approximately $190 million of long-term debt by CG&E and ULH&P during the period from March 1997 through June 1998. Other Interest Other interest increased $10 million (35%) for the first half of 1998, as compared to the same period last year, primarily due to increased interest expense on the currency swap, which was initiated in mid-February 1997, interest expense recognized on a settlement agreement between PSI and WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"), and increased short-term borrowings. Preferred Dividend Requirements of Subsidiaries The decrease in preferred dividend requirements of subsidiaries of $3 million (41%) for the six months ended June 30, 1998, from the same period of 1997, is primarily attributable to PSI's redemption of all outstanding shares of its 7.15% Series Cumulative Preferred Stock and 7.44% Series Cumulative Preferred Stock on September 1, 1997, and March 1, 1998, respectively. RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1998 Kwh Sales Kwh sales increased 71.5% for the twelve months ended June 30, 1998, from the comparable period of last year, primarily reflecting increased activity in Cinergy's power marketing and trading operations which led to higher non-firm power sales for resale. Also contributing to the higher kwh sales levels was an increase in residential and commercial sales due to an increase in the average number of residential and commercial customers, and an increase in industrial sales primarily reflecting growth in the miscellaneous manufacturers and primary metals sectors. Mcf Sales and Transportation Mcf gas sales and transportation volumes for the twelve months ended June 30, 1998, decreased when compared to the same period in 1997. Decreased Mcf sales reflect, in part, milder weather during the period, as compared to the same period a year ago and were partially offset by an increase in the average number of residential and commercial customers. Industrial sales declined and gas transportation volumes increased as customers continued the trend of purchasing gas directly from suppliers, using transportation services provided by CG&E. Operating Revenues Electric Operating Revenues Compared to the same period last year, electric operating revenues for the twelve months ended June 30, 1998, increased $1.4 billion (46%), reflecting the increased kwh sales discussed above. An analysis of electric operating revenues is shown below: Twelve Months Ended June 30 (in millions) Electric operating revenues - June 30, 1997 $3,042 Increase (Decrease) due to change in: Price per kwh Retail 14 Sales for resale Firm power obligations (2) Non-firm power transactions 231 Total change in price per kwh 243 Kwh sales Retail 91 Sales for resale Firm power obligations 22 Non-firm power transactions 1,026 Total change in kwh sales 1,139 Other 10 Electric operating revenues - June 30, 1998 $4,434 Gas Operating Revenues For a discussion of the continued trend of downward pressure on gas operating revenues from increased transportation services, refer to the discussion under the caption "Gas Operating Revenues" for Cinergy in "Results of Operations for the Quarter Ended June 30, 1998." Gas operating revenues decreased $69 million (14%) for the twelve months ended June 30, 1998, when compared to the same period last year. This decrease was largely the result of the previously discussed changes in Mcf sales and transportation volumes. Operating Expenses Fuel Used in Electric Production Electric fuel costs increased $51 million (8%) for the twelve months ended June 30, 1998, as compared to the same period last year. An analysis of these fuel costs is shown below: Twelve Months Ended June 30 (in millions) Fuel expense - June 30, 1997 $668 Increase due to change in: Price of fuel 4 Kwh generation 47 Fuel expense - June 30, 1998 $719 Gas Purchased Gas purchased for the twelve months ended June 30, 1998, decreased $51 million (19%) when compared to the same period last year, reflecting a lower volume of gas purchased, due to lower demand, and a decrease in the average cost per Mcf purchased. Purchased and Exchanged Power Purchased and exchanged power increased $1.3 billion for the twelve months ended June 30, 1998, when compared to the same period of last year, primarily reflecting increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations and the provision of $67 million of reserves for the electric trading business recorded during the period (see Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information"). Other Operation Other operation expenses increased $91 million (14%) for the twelve months ended June 30, 1998, as compared to the same period last year, primarily due to the one-time charge of $80 million recorded during the second quarter of 1998, reflecting the implementation of a 1989 settlement of a dispute with the WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"). This increase also reflects a provision of $4 million recorded in the second quarter of 1998 for potential bad debts related to certain power marketing and trading accounts. Maintenance Maintenance expenses decreased $25 million (13%) for the twelve months ended June 30, 1998, as compared to the twelve months ended June 30, 1997, primarily due to decreased outage-related expenses at PSI's and CG&E's production facilities. Amortization of Phase-in Deferrals Amortization of phase-in deferrals reflects the PUCO ordered phase-in plan for Zimmer. Amortization of Post-in-service Deferred Operating Expenses Amortization of post-in-service deferred operating expenses reflects the amortization and related recovery in rates of various deferrals of depreciation, operation and maintenance expenses (exclusive of fuel costs), and property taxes on certain generating units and other utility plant from the in-service date until the related plant was reflected in retail rates. Other Income and Expenses - Net Equity in Earnings of Unconsolidated Subsidiaries The $18 million (30%) decrease in equity in earnings of unconsolidated subsidiaries for the twelve months ended June 30, 1998, as compared to the same period of 1997, is partially attributable to the decrease in earnings of Midlands, which is due to milder weather conditions and a penalty imposed on each electric distribution company due to the delay in opening the electricity supply business to competition. The decrease also reflects losses recognized on several non-utility subsidiaries. Other - net The change in other - net of $15 million for the twelve months ended June 30, 1998, from the same period of 1997, is primarily due to a litigation settlement (see Note 10 of the "Notes to Financial Statements" in "Part I. Financial Information"). Additionally, the change also reflects a gain in 1996 related to the sale of certain CG&E assets. Interest and Other Charges Interest on Long-term Debt Interest on long-term debt decreased $13 million (7%) for the twelve months ended June 30, 1998, as compared to the same period last year, primarily due to the net redemption of approximately $190 million of long-term debt by CG&E and ULH&P during the period from March 1997 through June 1998. Other Interest Other interest increased $19 million (38%) for the twelve months ended June 30, 1998, as compared to the same period last year, partially due to increased interest expense on the currency swap, which was initiated in mid-February 1997, interest expense recognized on a settlement agreement between PSI and WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"), and increased short-term borrowings. Preferred Dividend Requirements of Subsidiaries The decrease in preferred dividend requirements of subsidiaries of $6 million (39%) for the twelve months ended June 30, 1998, from the same period of 1997, is primarily attributable to the September 1996 reacquisition and retirement of approximately 90 percent of the outstanding preferred stock of CG&E. Additionally, PSI redeemed all outstanding shares of its 7.15% Series Cumulative Preferred Stock and 7.44% Series Cumulative Preferred Stock on September 1, 1997, and March 1, 1998, respectively. THE CINCINNATI GAS & ELECTRIC COMPANY AND SUBSIDIARY COMPANIES THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS ASSETS June 30 December 31 1998 1997 (unaudited) (dollars in thousands) Utility Plant - Original Cost In service Electric $4,729,327 $4,700,631 Gas 759,774 746,903 Common 186,236 186,078 ---------- ---------- 5,675,337 5,633,612 Accumulated depreciation 2,082,014 2,008,005 ---------- ---------- 3,593,323 3,625,607 Construction work in progress 143,734 118,133 ---------- ---------- Total utility plant 3,737,057 3,743,740 Current Assets Cash and temporary cash investments 12,673 2,349 Restricted deposits 1,173 1,173 Notes receivable from affiliated companies 73,442 27,193 Accounts receivable less accumulated provision for doubtful accounts of $11,799 at June 30, 1998, and $9,199 at December 31, 1997 173,035 193,549 Accounts receivable from affiliated companies 32,216 35,507 Materials, supplies, and fuel - at average cost Fuel for use in electric production 26,867 29,682 Gas stored for current use 25,734 29,174 Other materials and supplies 40,193 49,111 Prepayments and other 52,130 31,827 ---------- ---------- 437,463 399,565 Other Assets Regulatory assets Amounts due from customers - income taxes 372,567 350,515 Post-in-service carrying costs and deferred operating expenses 131,261 134,672 Deferred merger costs 16,090 16,557 Deferred demand-side management costs 37,573 38,318 Phase-in deferred return and depreciation 82,233 89,689 Unamortized costs of reacquiring debt 36,051 36,575 Other 4,575 1,439 Other 90,118 103,368 ---------- ---------- 770,468 771,133 $4,944,988 $4,914,438 The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements. THE CINCINNATI GAS & ELECTRIC COMPANY CAPITALIZATION AND LIABILITIES June 30 December 31 1998 1997 (unaudited) (dollars in thousands) Common Stock Equity Common stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at June 30, 1998, and December 31, 1997 $ 762,136 $ 762,136 Paid-in capital 534,668 534,649 Retained earnings 312,799 314,553 Accumulated other comprehensive income (904) (750) ---------- ---------- Total common stock equity 1,608,699 1,610,588 Cumulative Preferred Stock Not subject to mandatory redemption 20,735 20,793 Long-term Debt 1,219,487 1,324,432 ---------- ---------- Total capitalization 2,848,921 2,955,813 Current Liabilities Long-term debt due within one year 110,000 - Notes payable and other short-term obligations 214,000 289,000 Notes payable to affiliated companies 11,362 12,253 Accounts payable 267,277 249,538 Accounts payable to affiliated companies 13,339 10,821 Accrued taxes 167,240 149,129 Accrued interest 18,094 25,430 Other 28,009 29,950 ---------- ---------- 829,321 766,121 Other Liabilities Deferred income taxes 815,233 794,396 Unamortized investment tax credits 113,898 116,966 Accrued pension and other postretirement benefit costs 156,796 180,566 Other 180,819 100,576 ---------- ---------- 1,266,746 1,192,504 $4,944,988 $4,914,438
THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) Quarter Ended Year to Date June 30 June 30 1998 1997 1998 1997 (in thousands) Operating Revenues Electric Non-affiliated companies $521,198 $404,117 $1,096,039 $ 799,742 Affiliated companies 18,444 7,785 36,908 13,860 Gas Non-affiliated companies 50,082 74,757 223,142 287,023 Affiliated companies 388 1 790 2 -------- -------- ---------- ---------- 590,112 486,660 1,356,879 1,100,627 Operating Expenses Fuel used in electric production 77,642 60,358 165,705 130,597 Gas purchased 21,657 35,826 118,245 159,794 Purchased and exchanged power Non-affiliated companies 230,665 93,909 460,159 164,771 Affiliated companies 10,133 3,065 17,747 4,637 Other operation 77,266 79,897 158,913 159,172 Maintenance 27,901 23,957 47,659 51,293 Depreciation 41,588 40,878 82,886 81,282 Amortization of phase-in deferrals 5,540 3,370 11,079 6,741 Amortization of post-in-service deferred operating expenses 822 822 1,645 1,645 Income taxes 8,806 27,037 53,419 70,837 Taxes other than income taxes 53,712 52,507 108,395 106,021 -------- -------- ---------- ---------- 555,732 421,626 1,225,852 936,790 Operating Income 34,380 65,034 131,027 163,837 Other Income and Expenses - Net Allowance for equity funds used during construction 97 87 107 206 Phase-in deferred return 1,811 2,002 3,622 4,004 Income taxes 3,844 3,730 7,672 6,736 Other - net (2,273) (4,261) (6,588) (9,036) -------- -------- ---------- ---------- 3,479 1,558 4,813 1,910 Income Before Interest 37,859 66,592 135,840 165,747 Interest Interest on long-term debt 24,415 27,831 50,467 57,876 Other interest 2,269 2,562 4,370 4,258 Allowance for borrowed funds used during construction (1,511) (1,231) (2,875) (2,140) -------- -------- ---------- ---------- 25,173 29,162 51,962 59,994 Net Income $ 12,686 $ 37,430 $ 83,878 $ 105,753 Preferred Dividend Requirement 215 217 430 436 -------- -------- ---------- ---------- Net Income Applicable to Common Stock $ 12,471 $ 37,213 $ 83,448 $ 105,317 Other Comprehensive Income, Net of Tax - - (155) - -------- -------- ---------- ------- Comprehensive Income $ 12,471 $ 37,213 $ 83,293 $ 105,317 The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements.
THE CINCINNATI GAS & ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Year to Date June 30 1998 1997 (in thousands) Operating Activities Net income $ 83,878 $ 105,753 Items providing (using) cash currently: Depreciation 82,886 81,282 Reserves related to electric trading business 59,000 - Deferred income taxes and investment tax credits - net (14,433) 15,055 Allowance for equity funds used during construction (107) (206) Regulatory assets - net 15,541 15,011 Changes in current assets and current liabilities Restricted deposits - (2) Accounts and notes receivable, net of reserves on receivables sold (22,325) 45,703 Materials, supplies, and fuel 15,173 10,429 Accounts payable 20,257 (4,353) Accrued taxes and interest 10,775 (2,802) Other items - net (4,146) (29,645) --------- --------- Net cash provided by operating activities 246,499 236,225 Financing Activities Retirement of preferred stock (39) (113) Issuance of long-term debt 223,020 - Redemption of long-term debt (220,409) (160,612) Change in short-term debt (75,891) 87,398 Dividends on preferred stock (430) (438) Dividends on common stock (85,200) (85,200) --------- --------- Net cash used in financing activities (158,949) (158,965) Investing Activities Construction expenditures (less allowance for equity funds used during construction) (75,571) (67,963) Deferred demand-side management costs (1,655) (4,708) Net cash used in investing activities (77,226) (72,671) Net increase in cash and temporary cash investments 10,324 4,589 Cash and temporary cash investments at beginning of period 2,349 5,120 --------- --------- Cash and temporary cash investments at end of period $ 12,673 $ 9,709 The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial statements. THE CINCINNATI GAS & ELECTRIC COMPANY RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 Kwh Sales Kwh sales for the quarter ended June 30, 1998, increased 25.2%, as compared to the second quarter of 1997, primarily due to higher non-firm power sales for resale resulting from increased activity in Cinergy's power marketing and trading operations, increased residential and commercial sales due to a return to more normal weather in the second quarter of 1998, as compared to the relatively mild weather during the second quarter of 1997, and an increase in the average number of residential and commercial customers, and an increase in industrial sales primarily reflecting growth in the chemicals and the miscellaneous manufacturers sectors. Nonsystem kwh sales (and related revenues and expenses) resulting from Cinergy's power marketing and trading operations are allocated 50%/50% between CG&E and PSI pursuant to the operating agreements filed with the companies' regulators. Mcf Sales and Transportation Mcf gas sales and transportation volumes for the quarter ended June 30, 1998, decreased when compared to the same period in 1997. The decline in Mcf sales was partially offset by an increase in gas transportation volumes as customers continued the trend of purchasing gas directly from suppliers, using transportation services provided by CG&E. Operating Revenues Electric Operating Revenues Electric operating revenues increased $128 million (31%) for the quarter ended June 30, 1998, from the comparable period of 1997. This increase is primarily a result of the increased kwh sales previously discussed, higher average price received on non-firm power transactions, and the operation of fuel adjustment clauses reflecting a higher average cost per kwh. An analysis of electric operating revenues is shown below: Quarter Ended June 30 (in millions) Electric operating revenues - June 30, 1997 $412 Increase due to change in: Price per kwh Retail 11 Sales for resale Non-firm power transactions 49 Total change in price per kwh 60 Kwh sales Retail 25 Sales for resale Firm power 1 Non-firm power transactions 41 Total change in kwh sales 67 Other 1 Electric operating revenues - June 30, 1998 $540 Gas Operating Revenues The increasing trend of industrial customers purchasing gas directly from producers and utilizing CG&E facilities to transport the gas continues to put downward pressure on gas operating revenues. Since providing transportation services does not necessitate recovery of the cost of gas purchased, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues. Gas operating revenues decreased $24 million (32%) in the second quarter of 1998, when compared to the same period last year, primarily due to the decline in volume sales discussed above and the aforementioned trend toward increased transportation services. Operating Expenses Fuel Used in Electric Production Electric fuel costs increased $17 million (29%) for the quarter ended June 30, 1998, as compared to the same period last year. An analysis of these fuel costs is shown below: Quarter Ended June 30 (in millions) Fuel expense - June 30, 1997 $60 Increase due to change in: Deferred fuel cost 14 Kwh generation 3 Fuel expense - June 30, 1998 $77 Gas Purchased Gas purchased for the quarter ended June 30, 1998, decreased $14 million (40%), when compared to the same period last year, primarily due to a decrease in the volumes of gas purchased, due to lower demand. Purchased and Exchanged Power Purchased and exchanged power for the quarter ended June 30, 1998, increased $144 million over the comparable period of 1997, primarily reflecting increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations and the provision of additional reserves of $56 million for the electric trading business recorded during the second quarter of 1998 (see Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information"). Maintenance The $4 million (16%) increase in maintenance expenses for the quarter ended June 30, 1998, as compared to the same period of 1997, is primarily due to forced outages at Conesville and Beckjord and an increase in overhead line maintenance costs resulting from storm damage during the second quarter of 1998. Amortization of Phase-in Deferrals Amortization of phase-in deferrals reflects the PUCO-ordered phase-in plan for Zimmer. Interest Interest on Long-term Debt Interest on long-term debt decreased $3 million (12%) for the quarter ended June 30, 1998, as compared to the same period of 1997, primarily due to the net redemption of approximately $174 million of long-term debt during the period from April 1997 through June 1998. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 Kwh Sales Kwh sales for the six months ended June 30, 1998, increased 50.4%, as compared to the six months ended June 30, 1997, primarily due to higher non-firm power sales for resale resulting from increased activity in Cinergy's power marketing and trading operations, increased residential and commercial sales due to an increase in the average number of residential and commercial customers, and increased industrial sales primarily reflecting growth in the chemicals, miscellaneous manufacturers and primary metals sectors. Nonsystem kwh sales (and related revenues and expenses) resulting from Cinergy's power marketing and trading operations are allocated 50%/50% between CG&E and PSI pursuant to the operating agreements filed with the companies' regulators. Mcf Sales and Transportation Mcf gas sales and transportation volumes for the six months ended June 30, 1998, decreased when compared to the same period in 1997. Decreased Mcf sales reflect, in part, milder weather during the first quarter of 1998, as compared to the same period of 1997, and were partially offset by an increase in the average number of residential and commercial customers. Industrial sales declined and gas transportation volumes increased as customers continued the trend of purchasing gas directly from suppliers, using transportation services provided by CG&E. Operating Revenues Electric Operating Revenues Electric operating revenues increased $319 million (39%) for the six months ended June 30, 1998, from the comparable period of 1997. This increase is primarily a result of the increased kwh sales previously discussed, a higher average price received on non-firm power transactions, and the operation of fuel adjustment clauses reflecting a higher average cost per kwh. An analysis of electric operating revenues is shown below: Six Months Ended June 30 (in millions) Electric operating revenues - June 30, 1997 $ 814 Increase (Decrease) due to change in: Price per kwh Retail 32 Sales for resale Firm power (1) Non-firm power transactions 71 Total change in price per kwh 102 Kwh sales Retail 23 Sales for resale Non-firm power transactions 192 Total change in kwh sales 215 Other 2 Electric operating revenues - June 30, 1998 $1,133 Gas Operating Revenues For a discussion of the continued trend of downward pressure on gas operating revenues from increased transportation services, refer to the discussion under the caption "Gas Operating Revenues" for CG&E in "Results of Operations for the Quarter Ended June 30, 1998." Gas operating revenues decreased $63 million (22%) for the six months ended June 30, 1998, when compared to the same period last year. This decrease is primarily due to the previously discussed changes in Mcf sales and transportation volumes. Operating Expenses Fuel Used in Electric Production Electric fuel costs increased $35 million (27%) for the six months ended June 30, 1998, as compared to the same period last year. An analysis of these fuel costs is shown below: Six Months Ended June 30 (in millions) Fuel expense - June 30, 1997 $131 Increase (Decrease) due to change in: Price of fuel (1) Deferred fuel cost 35 Kwh generation 1 --- Fuel expense - June 30, 1998 $166 Gas Purchased Gas purchased for the six months ended June 30, 1998, decreased $42 million (26%) when compared to the same period last year, reflecting a decrease in the volumes of gas purchased, due to lower demand, and a lower average cost per Mcf purchased. Purchased and Exchanged Power Purchased and exchanged power for the six months ended June 30, 1998, increased $308 million over the comparable period of 1997, primarily reflecting increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations and the provision of reserves of $57 million for the electric trading business recorded in 1998 (see Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information"). Maintenance The $4 million (7%) decrease in maintenance expenses for the six months ended June 30, 1998, as compared to the same period of 1997, is primarily due to decreased outage-related expenses. These decreases were offset in part by overhead line maintenance costs resulting from storm damage during the second quarter of 1998. Amortization of Phase-in Deferrals Amortization of phase-in deferrals reflects the PUCO-ordered phase-in plan for Zimmer. Other Income and Expenses - Net Other - net The change in other - net of $2 million for the six months ended June 30, 1998, as compared to the same period of 1997, is due, in part, to a higher level of expenses in the prior year associated with CG&E's and ULH&P's sales of accounts receivable, an increase in interest revenue related to an increase in the balance of short-term loans to affiliated companies through Cinergy's money pool arrangement, and an adjustment recorded in the prior year related to the sale of certain assets. Interest Interest on Long-term Debt Interest on long-term debt decreased $7 million (13%) for the six months ended June 30, 1998, as compared to the same period of 1997, primarily due to the net redemption of $190 million of long-term debt during the period from March 1997 through June 1998. PSI ENERGY, INC. AND SUBSIDIARY COMPANY PSI ENERGY, INC. CONSOLIDATED BALANCE SHEETS ASSETS June 30 December 31 1998 1997 (unaudited) (dollars in thousands) Electric Utility Plant - Original Cost In service $4,319,120 $4,280,551 Accumulated depreciation 1,840,484 1,792,317 ---------- ---------- 2,478,636 2,488,234 Construction work in progress 75,420 65,129 ---------- ---------- Total electric utility plant 2,554,056 2,553,363 Current Assets Cash and temporary cash investments 36,744 18,169 Restricted deposits 334 1,146 Notes receivable 84 110 Notes receivable from affiliated companies 11,367 21,998 Accounts receivable less accumulated provision for doubtful accounts of $2,676 at June 30, 1998, and $1,183 at December 31, 1997 227,227 197,898 Accounts receivable from affiliated companies 621 4,516 Materials, supplies, and fuel - at average cost Fuel 45,405 28,234 Other materials and supplies 29,161 26,955 Prepayments and other 11,619 4,405 ---------- ---------- 362,562 303,431 Other Assets Regulatory assets Amounts due from customers - income taxes 25,670 23,941 Post-in-service carrying costs and deferred operating expenses 43,296 43,832 Coal contract buyout costs 112,936 122,485 Deferred merger costs 71,594 73,789 Deferred demand-side management costs 54,220 71,278 Unamortized costs of reacquiring debt 28,391 29,667 Other 39,666 44,094 Other 114,753 127,945 ---------- ---------- 490,526 537,031 $3,407,144 $3,393,825 The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.
PSI ENERGY, INC. CAPITALIZATION AND LIABILITIES June 30 December 31 1998 1997 (unaudited) (dollars in thousands) Common Stock Equity Common stock - without par value; $0.01 stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701 at June 30, 1998, and December 31, 1997 $ 539 $ 539 Paid-in capital 400,904 390,188 Retained earnings 577,438 636,519 Accumulated other comprehensive income (642) (1,586) ---------- ---------- Total common stock equity 978,239 1,025,660 Cumulative Preferred Stock Not subject to mandatory redemption 71,953 157,196 Long-term Debt 950,425 826,470 ---------- ---------- Total capitalization 2,000,617 2,009,326 Current Liabilities Long-term debt due within one year 141,569 85,000 Notes payable and other short-term obligations 106,500 190,600 Notes payable to affiliated companies 88,919 16,435 Accounts payable 265,035 212,833 Accounts payable to affiliated companies 40,254 40,714 Accrued taxes 48,350 69,310 Accrued interest 18,026 21,369 Other 2,473 2,560 ---------- ---------- 711,126 638,821 Other Liabilities Deferred income taxes 381,598 403,535 Unamortized investment tax credits 47,566 49,296 Accrued pension and other postretirement benefit costs 108,196 116,576 Other 158,041 176,271 ---------- ---------- 695,401 745,678 $3,407,144 $3,393,825
PSI ENERGY, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (unaudited) Quarter Ended Year to Date June 30 June 30 1998 1997 1998 1997 (in thousands) Operating Revenues Non-affiliated companies $500,723 $386,459 $1,084,607 $808,748 Affiliated companies 10,807 3,079 19,048 4,645 -------- -------- ---------- -------- 511,530 389,538 1,103,655 813,393 Operating Expenses Fuel 77,905 74,244 170,361 179,751 Purchased and exchanged power Non-affiliated companies 209,255 101,455 451,645 191,185 Affiliated companies 17,932 7,799 35,832 13,868 Other operation 160,983 78,078 243,360 161,787 Maintenance 27,712 27,244 47,020 45,762 Depreciation 32,202 31,293 64,209 62,445 Amortization of post-in-service deferred operating expenses 268 268 536 536 Income taxes (19,543) 13,067 6,718 33,292 Taxes other than income taxes 14,507 15,323 29,474 30,180 -------- -------- ---------- -------- 521,221 348,771 1,049,155 718,806 Operating Income (Loss) (9,691) 40,767 54,500 94,587 Other Income and Expenses - Net Allowance for equity funds used during construction 14 93 25 165 Income taxes 1,358 117 1,675 (328) Other - net 199 (133) 1,906 2,713 -------- -------- ---------- -------- 1,571 77 3,606 2,550 Income (Loss) Before Interest (8,120) 40,844 58,106 97,137 Interest Interest on long-term debt 19,420 17,146 37,126 36,376 Other interest 3,892 2,075 9,667 6,532 Allowance for borrowed funds used during construction (414) (523) (997) (956) -------- -------- ---------- -------- 22,898 18,698 45,796 41,952 Net Income (Loss) $(31,018) $ 22,146 $ 12,310 $ 55,185 Preferred Dividend Requirement 1,150 3,019 3,358 6,039 -------- -------- ---------- -------- Net Income (Loss) Applicable to Common Stock $(32,168) $ 19,127 $ 8,952 $ 49,146 Other comprehensive income, net of tax - - 944 - -------- -------- ---------- ----- Comprehensive Income (Loss) $(32,168) $ 19,127 $ 9,896 $ 49,146 The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements.
PSI ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Year to Date June 30 1998 1997 (in thousands) Operating Activities Net income $ 12,310 $ 55,185 Items providing (using) cash currently: Depreciation 64,209 62,445 Reserves related to electric trading business 8,000 - WVPA settlement 80,000 - Deferred income taxes and investment tax credits - net (32,596) (6,916) Allowance for equity funds used during construction (25) (165) Regulatory assets - net 20,630 23,870 Changes in current assets and current liabilities Restricted deposits 812 (222) Accounts and notes receivable, net of reserves on receivables sold (19,676) (52,661) Materials, supplies, and fuel (19,377) 10,552 Accounts payable 51,742 32,054 Accrued taxes and interest (24,303) (11,516) Other items - net (1,142) (5,203) -------- -------- Net cash provided by operating activities 140,584 107,423 Financing Activities Issuance of long-term debt 98,901 - Retirement of preferred stock (85,230) (1) Redemption of long-term debt - (45,700) Change in short-term debt (11,616) 73,844 Dividends on preferred stock (3,887) (6,039) Dividends on common stock (56,800) (56,800) -------- -------- Net cash used in financing activities (58,632) (34,696) Investing Activities Construction expenditures (less allowance for equity funds used during construction) (60,329) (60,320) Deferred demand-side management costs (3,048) (6,075) Net cash used in investing activities (63,377) (66,395) Net increase in cash and temporary cash investments 18,575 6,332 Cash and temporary cash investments at beginning of period 18,169 2,911 -------- -------- Cash and temporary cash investments at end of period $ 36,744 $ 9,243 The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these consolidated financial statements. PSI ENERGY, INC. RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 Kwh Sales Kwh sales for the second quarter of 1998 increased 29.5%, as compared to the same period last year, primarily due to higher non-firm power sales for resale resulting from increased activity in Cinergy's power marketing and trading operations. An increase in retail sales reflects higher industrial sales and a higher average number of customers in all retail customer classes. The increased industrial sales primarily reflect growth in the primary metals and transportation equipment sectors. Also contributing to the higher kwh sales levels was a return to more normal weather conditions when compared to the same period last year. Nonsystem kwh sales (and related revenues and expenses) resulting from Cinergy's power marketing and trading operations are allocated 50%/50% between CG&E and PSI pursuant to the operating agreements filed with the companies' regulators. Operating Revenues Operating revenues increased $122 million (31%) for the quarter ended June 30, 1998, when compared to the same period last year, primarily as a result of the increased kwh sales previously discussed and a higher average price on non-firm power transactions. An analysis of operating revenues is shown below: Quarter Ended June 30 (in millions) Operating revenues - June 30, 1997 $390 Increase (Decrease) due to change in: Price per kwh Retail (13) Sales for resale Firm power obligations 2 Non-firm power transactions 46 Total change in price per kwh 35 Kwh sales Retail 25 Sales for resale Firm power obligations 9 Non-firm power transactions 50 Total change in kwh sales 84 Other 3 Operating revenues - June 30, 1998 $512 Operating Expenses Fuel Fuel costs increased $4 million (5%) for the second quarter of 1998, as compared to the same period last year. An analysis of fuel costs is shown below: Quarter Ended June 30 (in millions) Fuel expense - June 30, 1997 $74 Increase (Decrease) due to change in: Price of fuel (2) Deferred fuel cost (7) Kwh generation 13 --- Fuel expense - June 30, 1998 $78 Purchased and Exchanged Power For the quarter ended June 30, 1998, purchased and exchanged power increased $118 million, as compared to the same period last year, due primarily to increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations. In addition, a provision of $5 million of reserves for the electric trading business was recorded during the second quarter of 1998 (see Note 9 of "Notes to Financial Statements" in "Part I. Financial Information"). Other Operation Other operation expenses increased $83 million for the quarter ended June 30, 1998, as compared to the same period last year. This increase is primarily due to the one-time charge of $80 million recorded during the second quarter of 1998, reflecting the implementation of a 1989 settlement of a dispute with the WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"). This increase also reflects a provision of $2 million recorded during the second quarter of 1998 for potential bad debts related to certain power marketing and trading accounts. Interest Interest on Long-term Debt Interest on long-term debt increased $2 million (13%) for the quarter ended June 30, 1998, as compared to the same period of 1997, primarily due to the net issuance of $65 million of long-term debt during the period from March 1997 through March 1998. Other Interest Other interest increased $2 million (88%) for the quarter ended June 30, 1998, as compared to the same period last year, primarily due to interest expense recognized on a settlement agreement between PSI and WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"). Preferred Dividend Requirement The preferred dividend requirement decreased $2 million (62%) for the second quarter of 1998, as compared to the same period of 1997. This decrease is attributable to the redemption of all of the 7.15% Series Cumulative Preferred Stock and 7.44% Series Cumulative Preferred Stock on September 1, 1997, and March 1, 1998, respectively. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 Kwh Sales For the six months ended June 30, 1998, kwh sales increased 47.7% when compared to the same period last year, primarily due to increased activity in Cinergy's power marketing and trading operations, which led to higher non-firm power sales for resale. An increase in retail sales reflects higher industrial sales and a higher average number of customers in all retail customer classes. The increased industrial sales primarily reflect growth in the primary metals sector. Nonsystem kwh sales (and related revenues and expenses) resulting from Cinergy's power marketing and trading operations are allocated 50%/50% between CG&E and PSI pursuant to the operating agreements filed with the companies' regulators. Operating Revenues Total operating revenues increased $291 million (36%) for the six months ended June 30, 1998, when compared to the same period last year. This increase primarily reflects the increase in kwh sales previously discussed and a higher average price on non-firm power transactions, partially offset by the operation of fuel adjustment clauses reflecting a lower average cost of fuel used in electric production. An analysis of operating revenues is shown below: Six Months Ended June 30 (in millions) Operating revenues - June 30, 1997 $ 813 Increase (Decrease) due to change in: Price per kwh Retail (18) Sales for resale Firm power obligations 1 Non-firm power transactions 49 Total change in price per kwh 32 Kwh sales Retail 33 Sales for resale Firm power obligations 10 Non-firm power transactions 209 Total change in kwh sales 252 Other 7 Operating revenues - June 30, 1998 $1,104 Operating Expenses Fuel Fuel costs for the six months ended June 30, 1998, decreased $10 million (5%) when compared to the same period last year. An analysis of fuel costs is shown below: Six Months Ended June 30 (in millions) Fuel expense - June 30, 1997 $180 Increase (Decrease) due to change in: Price of fuel (8) Deferred fuel cost (19) Kwh generation 17 ---- Fuel expense - June 30, 1998 $170 Purchased and Exchanged Power For the six months ended June 30, 1998, purchased and exchanged power increased $282 million, as compared to the same period last year, primarily reflecting increased purchases of non-firm power for resale to others as a result of increased activity in Cinergy's power marketing and trading operations and a provision of $6 million of reserves for the electric trading business recorded during 1998 (see Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information"). Other Operation Other operation expenses increased $82 million (50%) for the six months ended June 30, 1998, as compared to the same period last year. This increase is primarily due to the one-time charge of $80 million recorded during the second quarter of 1998, reflecting the implementation of a 1989 settlement of a dispute with the WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"). This increase also reflects a provision of $2 million for potential bad debts related to certain power marketing and trading accounts recorded during the second quarter of 1998. Interest Other Interest Other interest increased $3 million (48%) for the six months ended June 30, 1998, as compared to the same period last year, primarily due to interest expense recognized on a settlement agreement between PSI and WVPA (see Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information"). Additionally, the increase is due to interest resulting from an IRS audit of the 1989 and 1990 tax years. Preferred Dividend Requirement The preferred dividend requirement decreased $3 million (44%) for the first half of 1998, as compared to the same period of 1997. This decrease is attributable to the redemption of all of the 7.15% Series Cumulative Preferred Stock and 7.44% Series Cumulative Preferred Stock on September 1, 1997, and March 1, 1998, respectively. THE UNION LIGHT, HEAT AND POWER COMPANY THE UNION LIGHT, HEAT AND POWER COMPANY BALANCE SHEETS ASSETS June 30 December 31 1998 1997 (unaudited) (dollars in thousands) Utility Plant - Original Cost In service Electric $207,160 $204,111 Gas 159,155 155,167 Common 19,057 19,073 -------- -------- 385,372 378,351 Accumulated depreciation 138,999 133,213 -------- -------- 246,373 245,138 Construction work in progress 21,387 14,346 -------- -------- Total utility plant 267,760 259,484 Current Assets Cash and temporary cash investments 885 546 Accounts receivable less accumulated provision for doubtful accounts of $1,038 at June 30, 1998, and $996 at December 31, 1997 4,694 7,308 Accounts receivable from affiliated companies 11 446 Materials, supplies, and fuel - at average cost Gas stored for current use 5,552 5,401 Other materials and supplies 944 693 Prepayments and other 100 385 -------- -------- 12,186 14,779 Other Assets Regulatory assets Deferred merger costs 5,214 5,213 Unamortized costs of reacquiring debt 3,608 3,590 Other 2,275 2,262 Other 4,069 6,262 -------- -------- 15,166 17,327 $295,112 $291,590 The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements. THE UNION LIGHT, HEAT AND POWER COMPANY CAPITALIZATION AND LIABILITIES June 30 December 31 1998 1997 (unaudited) (dollars in thousands) Common Stock Equity Common stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333 at June 30, 1998, and December 31, 1997 $ 8,780 $ 8,780 Paid-in capital 18,683 18,683 Retained earnings 94,595 95,450 -------- -------- Total common stock equity 122,058 122,913 Long-term Debt 54,516 44,671 -------- -------- Total capitalization 176,574 167,584 Current Liabilities Notes payable to affiliated companies 27,323 23,487 Accounts payable 7,504 11,097 Accounts payable to affiliated companies 18,158 19,712 Accrued taxes 216 6,332 Accrued interest 1,361 1,286 Other 4,077 4,364 -------- -------- 58,639 66,278 Other Liabilities Deferred income taxes 27,474 26,211 Unamortized investment tax credits 4,400 4,516 Accrued pension and other postretirement benefit costs 12,458 14,044 Amounts due to customers - income taxes 7,362 6,566 Other 8,205 6,391 -------- -------- 59,899 57,728 $295,112 $291,590
THE UNION LIGHT, HEAT AND POWER COMPANY STATEMENTS OF INCOME (LOSS) (unaudited) Quarter Ended Year to Date June 30 June 30 1998 1997 1998 1997 (in thousands) Operating Revenues Electric $41,536 $47,314 $ 88,535 $ 95,894 Gas Non-affiliated companies 8,564 10,825 36,939 44,788 Affiliated companies 62 69 167 190 ------- ------- -------- -------- 50,162 58,208 125,641 140,872 Operating Expenses Electricity purchased from parent company for resale 34,421 34,626 68,511 69,755 Gas purchased 4,167 6,555 20,520 27,004 Other operation 7,527 8,203 15,662 16,737 Maintenance 1,375 1,496 2,670 3,059 Depreciation 3,209 3,111 6,441 6,181 Income taxes (1,013) 903 3,204 5,645 Taxes other than income taxes 1,029 1,115 2,034 2,214 ------- ------- -------- -------- 50,715 56,009 119,042 130,595 Operating Income (Loss) (553) 2,199 6,599 10,277 Other Income and Expenses - Net Allowance for equity funds used during construction 24 27 10 23 Income taxes 254 206 482 298 Other - net (404) (514) (886) (961) ------- ------- -------- -------- (126) (281) (394) (640) Income (Loss) Before Interest (679) 1,918 6,205 9,637 Interest Interest on long-term debt 951 881 1,834 1,762 Other interest 197 333 548 634 Allowance for borrowed funds used during construction (179) (7) (298) (37) ------- ------- -------- -------- 969 1,207 2,084 2,359 Net Income (Loss) $(1,648) $ 711 $ 4,121 $ 7,278 The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements.
THE UNION LIGHT, HEAT AND POWER COMPANY STATEMENTS OF CASH FLOWS (unaudited) Year to Date June 30 1998 1997 (in thousands) Operating Activities Net income $ 4,121 $ 7,278 Items providing (using) cash currently: Depreciation 6,441 6,181 Deferred income taxes and investment tax credits - net 1,192 438 Allowance for equity funds used during construction (10) (23) Regulatory assets (13) (68) Changes in current assets and current liabilities Accounts and notes receivable, net of reserves on receivables sold 4,671 6,513 Materials, supplies, and fuel (402) 1,604 Accounts payable (5,147) (1,877) Accrued taxes and interest (6,041) 3,421 Other items - net 1,481 3,334 -------- -------- Net cash provided by operating activities 6,293 26,801 Financing Activities Issuance of long-term debt 20,127 - Redemption of long-term debt (10,118) - Change in short-term debt 3,836 (9,721) Dividends on common stock (4,975) (4,975) -------- -------- Net cash provided by (used in) financing activities 8,870 (14,696) Investing Activities Construction expenditures (less allowance for equity funds used during construction) (14,824) (8,758) Net cash used in investing activities (14,824) (8,758) Net increase in cash and temporary cash investments 339 3,347 Cash and temporary cash investments at beginning of period 546 1,197 -------- -------- Cash and temporary cash investments at end of period $ 885 $ 4,544 The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these financial statements. THE UNION LIGHT, HEAT AND POWER COMPANY RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 Mcf Sales and Transportation Mcf gas sales and transportation volumes for the quarter ended June 30, 1998, decreased when compared to the same period in 1997. The decrease in Mcf gas sales was due, in part, to the continued trend of customers purchasing gas directly from suppliers, using transportation services provided by ULH&P. Operating Revenues Electric Operating Revenues Electric operating revenues decreased $6 million (12%) for the quarter ended June 30, 1998, from the comparable period of 1997. This decrease primarily reflects a revision of ULH&P's estimate of unbilled revenue in the third quarter of 1997. This adjustment, which was recorded in the second quarter of 1998, resulted in a decrease in electric operating revenues of $3.6 million and a corresponding decrease to operating income and net income of $1.7 million. Gas Operating Revenues The increasing trend of industrial customers purchasing gas directly from producers and utilizing ULH&P facilities to transport the gas continues to put downward pressure on gas operating revenues. Since providing transportation services does not necessitate recovery of the cost of gas purchased, the revenue per Mcf transported is less than the revenue per Mcf sold. As a result, a higher relative volume of gas transported to gas sold translates into lower gas operating revenues. Gas operating revenues decreased $2 million (21%) in the second quarter of 1998, when compared to the same period last year, primarily due to the decline in volume sales discussed above. Operating Expenses Gas Purchased Gas purchased for the quarter ended June 30, 1998, decreased $2 million (36%) from the second quarter of last year, reflecting a decrease in the average cost per Mcf purchased and a decrease in the volumes of gas purchased. Other Operation The $.7 million (8%) decrease in other operation expenses for the second quarter of 1998, as compared to the same period of 1997, is primarily due to lower distribution expenses. Maintenance The $.1 million (8%) decrease in maintenance expenses for the second quarter of 1998, as compared to 1997, is primarily due to a decrease in overhead line maintenance. Taxes Other Than Income Taxes The $.1 million (8%) decrease in taxes other than income taxes for the second quarter of 1998, as compared to the same period of 1997, is primarily due to a decrease in property taxes. Other Income and Expenses - Net Other - net The change in other - net of $.1 million (21%) for the quarter ended June 30, 1998, as compared to the same period of 1997, is partially attributable to a higher level of expenses associated with the sales of accounts receivable in the prior year. Interest Allowance for Borrowed Funds Used During Construction The increase in allowance for borrowed funds used during construction of $.2 million is primarily due to an increase in construction expenditures subject to allowance during the quarter ended June 30, 1998, as compared to the same period of 1997. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 Mcf Sales and Transportation For the six months ended June 30, 1998, Mcf gas sales and transportation volumes decreased, as compared to the same period in 1997. Decreased Mcf sales reflecting the milder weather during the first quarter of 1998 were slightly offset by an increase in the number of residential and commercial customers. Industrial sales declined and gas transportation volumes increased as customers continued the trend of purchasing gas directly from suppliers, using transportation services provided by ULH&P. Operating Revenues Electric Operating Revenues Electric operating revenues decreased $7 million (8%) for the six months ended June 30, 1998, from the comparable period of 1997. This decrease primarily reflects a revision of ULH&P's estimate of unbilled revenue in the third quarter of 1997. This adjustment, which was recorded in the second quarter of 1998, resulted in a decrease in electric operating revenues of $3.6 million and a corresponding decrease to operating income and net income of $1.7 million. Gas Operating Revenues For a discussion of the continued trend of downward pressure on gas operating revenues from increased transportation services, refer to the discussion under the heading "Gas Operating Revenues" for ULH&P in "Results of Operations for the Quarter Ended June 30, 1998." Gas operating revenues decreased $8 million (18%) for the six months ended June 30, 1998, when compared to the same period of last year, primarily due to the decline in volume sales discussed above and the aforementioned trend toward increased transportation services. Operating Expenses Electricity Purchased from Parent Company for Resale Electricity purchased decreased $1 million (2%) for the six months ended June 30, 1998, as compared to the same period last year. This decrease reflects lower volumes purchased from CG&E. Gas Purchased Gas purchased for the six months ended June 30, 1998, decreased $6 million (24%), as compared to the same period in 1997. This decrease reflects a decrease in the average cost per Mcf purchased and a decrease in the volumes of gas purchased. Other Operation The $1.1 million (6%) decrease in other operation expenses for the six months ended June 30, 1998, as compared to the same period of 1997, is primarily due to lower distribution and administrative and general expenses. Maintenance The $.4 million (13%) decrease in maintenance expense for the six months ended June 30, 1998, as compared to the same period of 1997, is primarily due to a decrease in overhead line maintenance. Taxes Other Than Income Taxes The $.2 million (8%) decrease in taxes other than income taxes for the six months ended June 30, 1998, as compared to the same period of 1997, is primarily due to a decrease in property taxes. Interest Other Interest Other interest charges decreased $.1 million (14%) for the six months ended June 30, 1998, as compared to the same period of 1997, primarily due to increased short-term borrowings in the prior year. This decrease was partially offset by payments to the Kentucky State Treasurer resulting from a sales tax audit and underpayment of tax year 1996 income taxes. Allowance for Borrowed Funds Used During Construction The increase in allowance for borrowed funds used during construction of $.3 million is primarily due to an increase in construction expenditures subject to allowance during the six months ended June 30, 1998, as compared to the same period of 1997. NOTES TO FINANCIAL STATEMENTS Cinergy, CG&E, PSI, and ULH&P 1. These Financial Statements reflect all adjustments (which include normal, recurring adjustments and those adjustments discussed in Notes 9 and 14) necessary in the opinion of the registrants for a fair presentation of the interim results. These statements should be read in conjunction with the Financial Statements and the notes thereto included in the combined 1997 Form 10-K of the registrants. Certain amounts in the 1997 Financial Statements have been reclassified to conform to the 1998 presentation. Cinergy and CG&E 2. On April 7, 1998, CG&E issued and sold $100 million principal amount of its 6.40% Debentures due April 1, 2008. Proceeds from the sale were used to repay short-term indebtedness incurred in connection with CG&E's March 1998 redemptions of $100 million principal amount of its 8 1/2% Series First Mortgage Bonds due 2022 and $60 million principal amount of its 7 3/8% Series First Mortgage Bonds due 2001. 3. On May 1, 1998, CG&E redeemed the entire $50 million principal amount of its 7 3/8% Series First Mortgage Bonds due 1999, at the regular redemption price of 100.00%. This redemption effectively eliminates the maintenance and replacement fund provisions of CG&E's First Mortgage Bond indenture, which provisions required CG&E to make cash payments, deposit bonds, or pledge unfunded property additions to the trustee each year based on an amount related to net revenues. 4. On June 15, 1998, CG&E issued and sold $100 million principal amount of unsecured Reset Put Securities. These debentures will bear interest at a rate of 6.35% for the first five years, and the interest rate may be reset every five years thereafter to final maturity in 2038 if the callholder exercises its option on any reset date to purchase the bonds and reset the interest rate. If the callholder does not exercise the option on any reset date, the bonds will be redeemed by CG&E at par. Proceeds from the sale were used to repay short-term indebtedness incurred in connection with the redemption of CG&E's 7 3/8% First Mortgage Bonds referred to above and for general corporate purposes. Cinergy and PSI 5. On July 23, 1998, PSI redeemed the entire $24 million principal amount of its 7 5/8% First Mortgage Bonds, Series Y due January 1, 2007, at the redemption price of 102.11% and the entire $26 million principal amount of its 7% First Mortgage Bonds, Series S due January 1, 2002, at the redemption price of 100.73%. 6. On August 5, 1998, PSI issued and sold $50 million principal amount of unsecured Synthetic Putable Yield Securities. These debentures will bear interest at a rate of 6.50% for the first seven years, and the interest rate may be reset every seven years thereafter to final maturity in 2026 if the callholder exercises its option on any reset date to purchase the bonds and reset the interest rate. If the callholder does not exercise the option on any reset date, the bonds will be redeemed by PSI at par. Proceeds from the sale were used to repay short-term indebtedness incurred in connection with PSI's July 1998 redemptions of the above-mentioned Series Y and Series S First Mortgage Bonds. 7. On August 12, 1998, the Indiana Development Finance Authority loaned the proceeds from the sale of its $23 million principal amount of Environmental Refunding Revenue Bonds, Series 1998, to PSI. The bonds will bear interest initially at a daily rate, will mature on August 1, 2028, and are backed by an irrevocable direct-pay letter of credit through August 1, 2002. Proceeds from the sale will be used to redeem on September 15, 1998, the $23 million 8 1/4% First Mortgage Bonds Series QQ, due June 15, 2013 (Pollution Control), at a redemption price of 102% plus accrued interest. Cinergy, CG&E, and ULH&P 8. On April 30, 1998, ULH&P issued and sold $20 million principal amount of its 6.50% Debentures due April 30, 2008. Proceeds from the sale were used by ULH&P to repay short-term indebtedness incurred in connection with the redemption, on April 24, 1998, of $10 million principal amount of its 8% Series First Mortgage Bonds, due 2003, and in connection with its construction program. The redemption of said First Mortgage Bonds effectively eliminates the maintenance and replacement fund provisions of ULH&P's First Mortgage Bond indenture, which provisions required ULH&P to make cash payments, deposit bonds, or pledge unfunded property additions to the trustee each year based on an amount related to net revenues. Cinergy, CG&E, and PSI 9. Cinergy's power marketing and trading function actively markets and trades over-the-counter forward and option contracts for the purchase and sale of electricity. The majority of these contracts are settled via physical delivery of electricity or netted out in accordance with industry trading standards. The Company also trades exchange-traded futures contracts. Option premiums are deferred and included in the Consolidated Balance Sheets and amortized to "Operating Revenues - Electric" or "Purchased and exchanged power" in the Consolidated Statements of Income over the term of the option contract. Cinergy values its portfolio of contracts using the aggregate lower of cost or market method. To the extent there are net aggregate losses in the portfolio, Cinergy reserves for such losses. Net gains are recognized when realized. Due to the lack of liquidity and the volatility currently experienced in the power markets, significant assumptions must be made by the Company when estimating current market values for purposes of the aggregate lower of cost or market comparison. It is possible that the actual gains and losses from the Company's power marketing and trading activities could differ substantially from the gains and losses estimated currently. Cinergy and its subsidiaries use derivative financial instruments to hedge exposures to foreign currency exchange rates, lower funding costs, and manage exposures to fluctuations in interest rates. Instruments used as hedges must be designated as a hedge at the inception of the contract and must be effective at reducing the risk associated with the exposure being hedged. Accordingly, changes in market values of designated hedge instruments must be highly correlated with changes in market values of the underlying hedged items at inception of the hedge and over the life of the hedge contract. Cinergy utilizes foreign exchange forward contracts and currency swaps to hedge certain of its net investments in foreign operations. Accordingly, any translation gains or losses related to the foreign exchange forward contracts or the principal exchange on the currency swap are recorded in accumulated other comprehensive income, which is a separate component of common stock equity. Aggregate translation losses related to these instruments are reflected in "Current Liabilities Other" in the Consolidated Balance Sheets. Interest rate swaps are accounted for under the accrual method. Accordingly, gains and losses based on any interest differential between fixed-rate and floating-rate interest amounts, calculated on agreed upon notional principal amounts, are recognized in the Consolidated Statements of Income as a component of interest expense as realized over the life of the agreement. Cinergy, CG&E, and PSI 10. As discussed in the 1997 Form 10-K, in October 1995, a suit was filed in the Federal District Court for the Southern District of Ohio by three former employees of Enertech naming as defendants Enertech, Cinergy, Investments, CG&E, PSI, James E. Rogers, and William J. Grealis. (Mr. Rogers and/or Mr. Grealis are officers and/or directors of the foregoing companies.) The lawsuit, which stemmed from the termination of employment of the three former employees, alleged that they entered into employment contracts with Enertech based on the opportunity to participate in potential profits from future investments in energy projects in central and eastern Europe. The suit alleged causes of action based upon, among other theories, breach of contract related to the events surrounding the termination of their employment and fraud and misrepresentation related to the level of financial support for future projects. The suit alleged compensatory damages of $154 million based upon assumed future success of potential future investments and punitive damages of three times that amount. In April 1998, the parties reached a comprehensive settlement and all claims were dismissed by the Court. The obligations of the Company arising out of the settlement are not material to its financial condition or its results of operations. Cinergy and PSI 11. As discussed in the 1997 Form 10-K, PSI and IGC submitted a proposed agreed order to the IDEM in 1997 related to the Shelbyville MGP site. On April 15, 1998, the IDEM signed the proposed agreed order, which will result in a determination by the IDEM of whether the activities previously undertaken at the site are sufficient to adequately protect human health and the environment. Based upon environmental investigations and remediation completed to date, PSI believes that any further investigation and remediation required for the Shelbyville site will not have a material adverse effect on its financial condition or results of operations. In August 1997, NIPSCO filed suit against PSI in the United States District Court for the Northern District of Indiana, South Bend Division, claiming, pursuant to the CERCLA, recovery from PSI of NIPSCO's past and future costs of investigating and remediating MGP related contamination at the Goshen MGP site. Recently, NIPSCO increased its estimate of the cost of remediating the Goshen site from $2.7 million to about $3.0 million. As also discussed in the 1997 Form 10-K, PSI previously placed its insurance carriers on notice of IGC's, NIPSCO's and the IDEM's claims related to MGP sites. In April 1998, PSI filed suit in Hendricks County Circuit Court against its general liability insurance carriers, seeking, among other matters, a declaratory judgment that its insurance carriers are obligated to defend MGP claims against PSI or pay PSI's costs of defense and to indemnify PSI for its costs of investigating, preventing, mitigating and remediating damage to property and paying claims associated with MGP sites. PSI cannot predict the outcome of this litigation. Cinergy, CG&E, PSI, and ULH&P 12. Effective with the first quarter of 1998, Cinergy and its subsidiaries adopted Statement 130. Statement 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. During the second quarter of 1998, the FASB issued Statement 133. The new standard requires companies to record derivative instruments, as defined in Statement 133, as assets or liabilities, measured at fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The standard is effective for fiscal years beginning after June 15, 1999, and Cinergy expects to adopt Statement 133 effective for the year beginning January 1, 2000. The Company has not yet quantified the impacts of adopting Statement 133 on its consolidated financial statements. However, the Statement could increase volatility in earnings and other comprehensive income. Cinergy 13. Presented below is a reconciliation of earnings per common share (basic EPS) and earnings per common share assuming dilution (diluted EPS). Income Shares Earnings (Numerator) (Denominator) Per Share (In thousands, except per share amounts) Quarter ended June 30, 1998 Earnings per common share: Net loss $(25,933) 158,018 $(.16) Effect of dilutive securities: Common stock options 689 Contingently issuable common stock 113 EPS--assuming dilution: Net loss plus assumed conversions $(25,933) 158,820 $(.16) Quarter ended June 30, 1997 Earnings per common share: Net income $ 55,489 157,679 $ .35 Effect of dilutive securities: Common stock options 925 Contingently issuable common stock 204 EPS--assuming dilution: Net income plus assumed conversions $ 55,489 158,808 $ .35 Income Shares Earnings (Numerator) (Denominator) Per Share (In thousands, except per share amounts) Six months ended June 30, 1998 Earnings per common share: Net income $ 80,138 157,892 $ .51 Effect of dilutive securities: Common stock options 738 Contingently issuable common stock 118 EPS--assuming dilution: Net income plus assumed conversions $ 80,138 158,748 $ .51 Six months ended June 30, 1997 Earnings per common share: Net income $169,606 157,679 $1.07 Effect of dilutive securities: Common stock options 954 Contingently issuable common stock 204 EPS--assuming dilution: Net income plus assumed conversions $169,606 158,837 $1.06 Income Shares Earnings (Numerator) (Denominator) Per Share (In thousands, except per share amounts) Twelve months ended June 30, 1998 Earnings per common share: Net income before extraordinary item $273,170 157,790 $1.73 Effect of dilutive securities: Common stock options 827 Contingently issuable common stock 162 EPS--assuming dilution: Net income before extraordinary item plus assumed conversions $273,170 158,779 $1.72 Twelve months ended June 30, 1997 Net income $338,222 Less: costs of reacquisition of preferred stock of subsidiary 18,391 Earnings per common share: Net income applicable to common stock 319,831 157,679 $2.02 Effect of dilutive securities: Common stock options 938 Contingently issuable common st 260 EPS--assuming dilution: Net income applicable to common stock plus assumed conversions $319,831 158,877 $2.01 The after-tax impact of the extraordinary item - equity share of windfall profits tax in the twelve months ended June 30, 1998, was $.69 for both basic and diluted earnings per share. Options to purchase shares of common stock that were excluded from the calculation of EPS--assuming dilution because the exercise prices of these options were greater than the average market price of the common shares during the period are summarized below: Quarter Average Ended Exercise June 30 Shares Price 1998 930,600 $37.54 1997 10,400 34.50 Six Months Average Ended Exercise June 30 Shares Price 1998 694,700 $37.83 1997 8,800 34.50 Twelve Months Average Ended Exercise June 30 Shares Price 1998 345,000 $37.82 1997 188,900 33.52 Cinergy and PSI 14. In February 1989, PSI and WVPA entered into a settlement agreement to resolve all claims related to Marble Hill, a nuclear project canceled in 1984. Implementation of the settlement was contingent upon a number of events, including the conclusion of WVPA's bankruptcy proceeding, negotiation of certain terms and conditions with WVPA, the RUS, and the CFC, and certain regulatory approvals. In December 1996, following the resolution of issues associated with WVPA's bankruptcy proceeding, PSI, on behalf of itself and its officers, paid $80 million on behalf of WVPA to the RUS and the CFC. The $80 million obligation, net of insurance proceeds, other credits, and applicable income tax effects, was charged to income in 1988. In January 1997, an order dismissing the WVPA litigation against PSI and its officers with prejudice was entered by the United States District Court for the Southern District of Indiana and final negotiations to implement the settlement agreement were begun with WVPA, the RUS and the CFC. An agreement on substantially all matters has been reached with the parties. As a result, PSI recorded a liability to the RUS and the CFC and will repay the obligation with interest over a 35-year term. PSI will use the net proceeds from a 35-year power sales agreement with WVPA to fund the principal and interest on the obligation. Assumption of the liability (recorded as long-term debt in the consolidated balance sheet) resulted in a charge against second quarter earnings of $80 million ($50 million after tax or $.32 per share basic and diluted). Cinergy 15. The Company's Midlands subsidiary (of which the Company owns 50%) has a 40% ownership interest in a 586 MW power project in Pakistan (Uch project or Uch) which was originally scheduled to begin commercial operation in late 1998. The Pakistani government-owned utility has recently issued a notice of intent to terminate certain key project agreements relative to the Uch project. The notice asserts that various forms of corruption were involved in the original granting of the agreements to the Uch investors by a predecessor government. The Company believes that this notice is similar to notices received by other independent power projects in Pakistan. The Uch investors, including a subsidiary of Midlands, strongly deny the allegations and intend to pursue all available legal options to enforce their contractual rights under the project agreements. At present, the Uch investors continue to explore remedies to the situation with officials of the Pakistani government. Through its ownership of Midlands, the Company's current investment in the Uch project is approximately $30 million. In addition, project lenders could require investors to make additional capital contributions to the project under certain conditions. The Company's share of these additional contributions is approximately $14 million. At the present time, the Company cannot predict the ultimate outcome of this matter. Cinergy and PSI 16. As discussed in the 1997 Form 10-K, PSI filed a petition with the FERC for recovery, through the fuel adjustment clause, of the wholesale jurisdictional portion of the costs resulting from the Exxon contract buyout. During July 1998, the FERC accepted PSI's request to recover these buyout costs from its wholesale customers for the period August 1996 through December 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cinergy, CG&E, PSI, and ULH&P CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Matters discussed in this Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in "Part I. Financial Information" reflect and elucidate Cinergy's corporate vision of the future and, as a part of that, outline goals and aspirations, as well as specific projections. These goals and projections are considered forward-looking statements and are based on management's beliefs, as well as certain assumptions made by management. In addition to any assumptions and other factors that are referred to specifically in connection with these statements, other factors that could cause actual results to differ materially from those indicated in any forward-looking statements include, among others: factors generally affecting utility operations--such as unusual weather conditions, unusual maintenance or repairs, or unanticipated changes in fuel costs; increased competition in the electric and gas utility environment; regulatory factors, including the failure to obtain anticipated regulatory approvals; changes in accounting principles or policies; adverse economic conditions; changing market conditions; availability or cost of capital; employee workforce factors; costs and effects of legal and administrative proceedings; changes in legislative requirements; and other risks. The Securities and Exchange Commission's rules do not require forward-looking statements to be revised or updated, and Cinergy does not intend to do so. FINANCIAL CONDITION Recent Developments Cinergy, CG&E, and PSI Ambient Air Standards As discussed in the 1997 Form 10-K, during 1997, the EPA revised the National Ambient Air Quality Standards for ozone and fine particulate matter. EPA has also proposed, but not finalized, new rules for both ozone transport and regional haze. Relative to ozone transport, during May 1998, the EPA supplemented its proposed rule to reduce utility NOx emissions by approximately 85% by 2003 by proposing a model NOx trading program for 22 states in the eastern half of the United States. On June 25, 1998, 13 midwestern and southern states and numerous industry groups within those states, including Cinergy, filed comments in opposition to the EPA proposed NOx rules. These 13 states and utility commentors proposed alternative reduction strategies that would generally phase in NOx reduction by 65 percent by 2002-2004, would determine by 2002 if additional reductions are needed, and then implement necessary controls between 2005-2007. Commentors also generally opposed EPA's 22 state trading program in favor of smaller and more flexible multi-state programs. The EPA is expected to finalize its ozone transport rulemaking in the fall of 1998 and states would then have 12 to 18 months to incorporate utility NOx reductions into their SIPs. The EPA is scheduled to finalize new regional haze rules in the summer of 1998. Congress, as part of the funding bill for the Surface Transportation Act, combined the schedules for fine particulates and regional haze implementation. The impact of the particulate standards and regional haze rules cannot be determined at this time. Since EPA guidance and technical studies concerning these new regulations have not been provided, Cinergy cannot predict the outcome or effect of the new rulemakings. Air Toxics As discussed in the 1997 Form 10-K, the EPA was to announce, by April 15, 1998, its conclusions regarding the need for additional air toxics regulations. In April 1998, the EPA announced that it would make its regulatory determination on the need for additional air toxics regulation by November 15, 1998. If more air toxics regulations are issued, the compliance cost could be significant. Cinergy cannot predict the outcome or effects of the EPA's determination. Cinergy, CG&E, and ULH&P Competitive Pressures - State Developments As discussed in the 1997 Form 10-K, competition legislation was to be introduced in the Ohio legislature during 1998. This legislation, SB 237 and HB 732, "companion" electric restructuring bills that propose to afford choice to all retail electric customers in Ohio beginning January 1, 2000, was introduced in 1998. Legislative hearings on these bills occurred in the spring. In addition, legislation to provide for securitization of transition costs through issuance of rate reduction bonds has been pending in Ohio since 1997. It is uncertain whether these pieces of legislation will be passed in Ohio in 1998. As also discussed in the 1997 Form 10-K, HB 443 was introduced into the Kentucky General Assembly in January 1998. HB 443 was not brought to a vote during the 1998 legislative session. Rather, HJR 95, which calls for the formation of an executive task force comprised of members from the governor's office and the General Assembly to further study electricity restructuring, was passed by the General Assembly. HJR 95 was signed by the governor during April 1998. Kentucky's General Assembly does not reconvene until the year 2000. Cinergy Acquisitions In June 1998, Cinergy, through its subsidiaries, acquired ProEnergy and Teplarna. Through CC&T, Cinergy acquired ProEnergy from Apache and Oryx. ProEnergy has had and will continue to have exclusive marketing rights to North American gas production owned or controlled by Apache and Oryx, which represents approximately 1.1 Bcf per day of dedicated natural gas supply. These supplies, combined with the active marketing of third party gas, are geographically diverse and are spread through the Southwest, Rocky Mountains, Gulf Coast, Gulf of Mexico, and Michigan. The acquisition was funded with cash and the issuance of 771,258 new shares of Cinergy common stock. A subsidiary of Cinergy Global Power acquired Teplarna, a 410 MW district heating plant in the Czech Republic. In addition to hot water and steam, the plant produces 36 MW of electric capacity. The purchase prices for ProEnergy and Teplarna were not material to Cinergy's financial condition or results of operations. Regulatory Matters Cinergy and PSI Coal Contract Buyout Costs See Note 16 of the "Notes to Financial Statements" in "Part I. Financial Information." Market Risk Sensitive Instruments and Positions Cinergy, CG&E, PSI, and ULH&P The following discussions about Cinergy's market risk sensitive instruments and positions and risk management activities include forward-looking information and statements that involve risks and uncertainties. The forward-looking information and statements presented are only estimates of what may occur in the future, assuming certain adverse market conditions, due to their dependence on model characteristics and assumptions. As a result, actual future results may differ materially from those presented. These disclosures are not precise indicators of expected future losses, rather they merely present indications of reasonably possible losses. Cinergy, CG&E, and PSI Energy Commodities Sensitivity The Company markets and trades over-the-counter forward and option contracts for the purchase and sale of electricity. The Company also trades exchange-traded futures contracts. See Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information" for the Company's accounting policies for certain derivative instruments. During a few days late in the second quarter, wholesale electric power markets in the Midwest exhibited unprecedented price volatility due to several market factors including an extended period of unseasonably hot weather, scheduled and unplanned generating unit outages, transmission constraints, and defaults by certain power marketers on their supply obligations. The simultaneous culmination of these events resulted in temporary but extreme price spikes in the hourly and daily markets and very little trading liquidity and price transparency in the term markets. During this period of extreme price volatility and trading illiquidity, Cinergy's power marketing and trading function maintained its ability to provide trading-based services, including the physical delivery of power to fulfill all of its contractual obligations. As of June 30, 1998, Cinergy's daily value-at-risk for its power marketing and trading activities increased by 80% from December 31, 1997. The daily value-at-risk as of June 30, 1998 was less than 3% of Cinergy's "Income Before Interest And Other Charges" for the twelve months then ended. The value-at risk model utilizes a 95% confidence interval and uses the variance-covariance statistical modeling technique and historical volatilities and correlations over the past 200 day period. The estimated market prices used to value these transactions for value-at-risk purposes reflect the use of established pricing models and various factors including quotations from exchanges and over-the-counter markets, price volatility factors, the time value of money, and location differentials. The variables used for value-at-risk purposes at June 30, 1998, reflect the impacts of the events which transpired in the Midwestern electric power markets during late June 1998. The Company provided reserves of $65 million ($41 million after tax), or $.26 per share (basic and diluted), in the second quarter for its electric power marketing and trading business. The reserve represents potential unrealized losses in the fair value of its portfolio of open forward and option contract positions and potential unrealized losses due to nonperformance of certain counterparties pursuant to contractual supply obligations. Despite the volatile activity at the end of June, the Company experienced modest net realized gains from its electric power marketing and trading operations during the second quarter. Due to the basic lack of liquidity, price transparency, and extreme price volatility currently experienced in the electric power markets, significant assumptions regarding estimated market prices and potential counterparty credit risk must be made by the Company for the purposes of providing appropriate reserves. It is possible that actual realized results from the Company's power marketing and trading activities could differ substantially from those currently estimated. As of June 30, 1998, approximately 62% of Cinergy's power marketing and trading activity represents commitments with 10 counterparties. The majority of these contracts are for terms of one year or less. The temporary but extreme price volatility and trading illiquidity exhibited in the Midwestern electric power markets late in the second quarter resulted in a few power marketers defaulting on contractual supply obligations and industry-wide uncertainty as to whether others will be able to fulfill existing contractual supply obligations for future delivery of electricity. As of June 30, 1998, Cinergy believes it has adequately reserved for credit exposure relating to its portfolio of existing contracts. Cinergy remains committed to being a long-term participant in the evolving competitive wholesale electric power market and will continue to manage its power marketing and trading portfolio to maximize its existing value while creating additional value. The New York Mercantile Exchange electricity futures contracts for delivery into Cinergy's transmission grid, which started trading on July 10, 1998, should provide additional liquidity and greater price transparency as well as additional risk management capabilities in Cinergy's core service territory and trading region. Cinergy continues to review and enhance its current risk management practices to ensure their responsiveness to evolving and changing market and business conditions. In addition, efforts are ongoing to develop and enhance systems to improve the timeliness and quality of market and credit risk information. Cinergy Exchange Rate Sensitivity Cinergy utilizes foreign exchange forward contracts and currency swaps to hedge certain of its net investments in foreign operations. See Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information" for Cinergy's accounting policies for certain derivative instruments. Cinergy's market risks have not changed materially from the market risks reported in the 1997 Form 10-K. Cinergy, CG&E, PSI, and ULH&P Interest Rate Sensitivity The Company's net exposure to changes in interest rates primarily consists of debt instruments with floating interest rates that are benchmarked to various market indices. To manage the Company's exposure to fluctuations in interest rates and to lower funding costs, the Company constantly evaluates the use of, and has entered into, interest rate swaps. See Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information" for the Company's accounting policies for certain derivative instruments. The Company's market risks have not changed materially from the market risks reported in the 1997 Form 10-K. Accounting Issues Cinergy, CG&E, PSI, and ULH&P New Accounting Standards See Note 12 of the "Notes to Financial Statements" in "Part I. Financial Information." Other Commitments Cinergy, CG&E, and PSI Enertech See Note 10 of the "Notes to Financial Statements" in "Part I. Financial Information." Cinergy, CG&E, and PSI MGP Sites See Note 11 of the "Notes to Financial Statements" in "Part I. Financial Information." Cinergy and PSI WVPA See Note 14 of the "Notes to Financial Statements" in "Part I. Financial Information." CAPITAL RESOURCES AND REQUIREMENTS Cinergy, CG&E, PSI, and ULH&P Long-term Debt For information regarding recent issuances and redemptions of long-term debt securities, see Notes 2, 3, 4, 5, 6, 7, and 8 of the "Notes to Financial Statements" in "Part I. Financial Information." Cinergy, CG&E, PSI, and ULH&P Short-term Debt Obligations representing notes payable and other short-term obligations (excluding notes payable to affiliated companies) at June 30, 1998, were as follows: Cinergy Established Lines Outstanding (in millions) Cinergy Committed lines Acquisition line $ 350 $ 350 Revolving line 400 160 Commercial paper - 189 Utility subsidiaries Committed lines 300 10 Uncommitted lines 360 67 Pollution control notes 244 244 Non-utility subsidiaries 118 101 Total $1,772 $1,121 CG&E Established Lines Outstanding (in millions) Committed lines $100 $ - Uncommitted lines 190 30 Pollution control notes 184 184 Total $474 $214 PSI Established Lines Outstanding (in millions) Committed lines $200 $ 10 Uncommitted lines 170 37 Pollution control notes 60 60 Total $430 $107 Cinergy, CG&E, and PSI Cinergy's committed lines are comprised of an acquisition line and a revolving line. The established revolving line (as shown in the above table) also provides credit support for Cinergy's commercial paper program. As of June 30, 1998, this program was limited to a maximum outstanding principal amount of $200 million. During July 1998, the commercial paper program was increased to a maximum principal amount of $400 million. This increase is supported by an additional revolving line of $200 million, which was also established in July 1998. The majority of the proceeds from the commercial paper sales were used to reduce the acquisition line to the year-end level of $350 million. CG&E and PSI also have the capacity to issue commercial paper that must be supported by committed lines (unsecured lines of credit) of the respective company. Neither CG&E nor PSI issued commercial paper during the second quarter of 1998. Cinergy, CG&E, PSI, and ULH&P Cinergy's utility subsidiaries had regulatory authority to borrow up to $853 million ($453 million for CG&E and its subsidiaries, including $50 million for ULH&P, and $400 million for PSI) as of June 30, 1998. In connection with this authority, committed lines, as well as uncommitted lines, have been arranged. The established committed lines (as shown in the above table) include $100 million designated as backup for certain of the uncommitted lines at June 30, 1998. Further, the committed lines are maintained by commitment fees. Cinergy, CG&E, PSI, and ULH&P Year 2000 Cinergy, like most owners and users of IT systems, will be impacted by what has become known as Year 2000 issues. Cinergy is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The Year 2000 issues are the result of computer programs being written using two digits, rather than four, to define the applicable year. Any of Cinergy's programs which have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system malfunctions. The Year 2000 issue impacts not only IT systems but also non-IT systems (i.e., systems incorporating "embedded processors"). Cinergy is addressing the impacts of the Year 2000 issues by focusing on IT systems, non-IT systems associated with its generating stations and its transmission and distribution systems, and an assessment of the ability of its critical vendors to provide an uninterrupted supply of goods and/or services to Cinergy. Cinergy anticipates that its Year 2000 plan will be completed by June 1999. As of July 31, 1998, the extent of completion ranged from approximately 75% for IT systems to approximately 25% regarding assessment of critical vendors. Cinergy estimates the total cost related to the Year 2000 plan will be approximately $13 million, of which approximately $10 million has been incurred through June 30, 1998. These costs are being funded through operating cash flows. The Company is in the process of developing a Year 2000 contingency plan. Cinergy Other Commitments In connection with its energy marketing and trading activities, Cinergy has issued performance guarantees to numerous counterparties totaling approximately $170 million. RESULTS OF OPERATIONS Cinergy, CG&E, PSI, and ULH&P Reference is made to "Item 1. Financial Statements" in "Part I. Financial Information." ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Cinergy, CG&E, PSI, and ULH&P Reference is made to the "Market Risk Sensitive Instruments and Positions" section in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in "Part I. Financial Information." PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Cinergy, CG&E, and PSI See Notes 10, 11, 14, and 15 of the "Notes to Financial Statements" in "Part I. Financial Information." ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits identified with a pound sign (#) are being filed herewith by the registrant identified in the exhibit discussion below and are incorporated herein by reference with respect to any other designated registrant. Exhibits not so identified are filed herewith: Exhibit Designation Nature of Exhibit Cinergy and CG&E 4-A #Fifth Supplemental Indenture dated as of June 9, 1998, between CG&E and The Fifth Third Bank, as Trustee. (Exhibit to CG&E's June 30, 1998, Form 10-Q in File No. 1-1232.) Cinergy and PSI 4-B #Fourth Supplemental Indenture dated as of August 5, 1998, between PSI and The Fifth Third Bank, as Trustee. (Exhibit to PSI's June 30, 1998, Form 10-Q in File No. 1-3543.) 4-C #Loan Agreement between PSI and the Indiana Department Finance Authority dated as of July 15, 1998. (Exhibit to PSI's June 30, 1998, Form 10-Q in File No. 1-3543.) Cinergy, CG&E, and PSI 10-A #Third Amendment to Employment Agreement dated May 1, 1998, between Cinergy, Cinergy Services, Inc., CG&E, PSI and Larry E. Thomas. (Exhibit to Cinergy's June 30, 1998, Form 10-Q in File No. 1- 11377.) Cinergy, CG&E, PSI, and ULH&P 27 Financial Data Schedules (included in electronic submission only). The following reports on Form 8-K were filed during the quarter or prior to the filing of the Form 10-Q for the quarter ended June 30, 1998. Date of Report Item Filed Cinergy July 15, 1998 Item 5. Other Events Item 7. Financial Statements and Exhibits CG&E July 15, 1998 Item 5. Other Events PSI July 15, 1998 Item 5. Other Events SIGNATURES Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although Cinergy, CG&E, PSI, and ULH&P believe that the disclosures are adequate to make the information presented not misleading. In the opinion of Cinergy, CG&E, PSI, and ULH&P, these statements reflect all adjustments (which include only normal, recurring adjustments) necessary to reflect the results of operations for the respective periods. The unaudited statements are subject to such adjustments as the annual audit by independent public accountants may disclose to be necessary. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed by an officer and the chief accounting officer on their behalf by the undersigned thereunto duly authorized. CINERGY CORP. THE CINCINNATI GAS & ELECTRIC COMPANY PSI ENERGY, INC. THE UNION LIGHT, HEAT AND POWER COMPANY Registrants Date: August 13, 1998 /s/John P. Steffen --------------------------------------- John P. Steffen Duly Authorized Officer and Chief Accounting Officer EX-4 2 PSI FOURTH SUPPLEMENTAL INDENTURE PSI ENERGY, INC. AND THE FIFTH THIRD BANK, Trustee Fourth Supplemental Indenture Dated as of August 5, 1998 To Indenture Dated as of November 15, 1996 6.50% Synthetic Putable Yield Securities (SPYSsm) Due 2026 FOURTH SUPPLEMENTAL INDENTURE, dated as of August 5, 1998 (this "Fourth Supplemental Indenture"), between PSI Energy, Inc., a corporation duly organized and existing under the laws of the State of Indiana (herein called the "Company"), having its principal office at 1000 East Main Street, Plainfield, Indiana 46168, and The Fifth Third Bank, an Ohio banking corporation, as Trustee (herein called the "Trustee") under the Indenture dated as of November 15, 1996 between the Company and the Trustee (the "Original Indenture"). Recitals of the Company The Company has executed and delivered the Original Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the "Securities"), to be issued in one or more series as in the Original Indenture provided. Pursuant to the terms of the Original Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 6.50% Synthetic Putable Yield Securities (SPYSsm) Due 2026 (herein called the "Debentures"), in this Fourth Supplemental Indenture. All things necessary to make this Fourth Supplemental Indenture a valid agreement of the Company have been done. Now, Therefore, This Fourth Supplemental Indenture Witnesseth: For and in consideration of the premises and the purchase of the Debentures by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Debentures, as follows: ARTICLE ONE Defined Terms Section 101. Defined Terms. Except as otherwise expressly provided in this Fourth Supplemental Indenture or in the form of Debenture or otherwise clearly required by the context hereof or thereof, all capitalized terms used and not defined herein or in said form of Debenture that are defined in the Original Indenture shall have the meanings assigned to them in the Original Indenture. The Original Indenture, as supplemented from time to time, including by this Fourth Supplemental Indenture, is hereafter referred to as the "Indenture". ARTICLE TWO Terms of the Debentures Section 201. Establishment of the Debentures. There is hereby authorized a series of Securities designated the "6.50% Synthetic Putable Yield Securities (SPYSsm) Due 2026", limited in aggregate principal amount to $50,000,000. The Debentures shall be substantially in the form set forth in Exhibit A hereto and shall include substantially the legend shown so long as the Debentures are Global Securities. Section 202. Terms of the Debentures. The Debentures will be issued and maintained exclusively in the form of a registered Global Security without coupons, registered in the name of Cede & Co., as nominee of The Depository Trust Company (the "Depositary" or "DTC") except in the limited circumstances described in Section 305 of the Original Indenture, and beneficial interests therein may be acquired, or subsequently transferred, only in denominations of $1,000 or integral multiples thereof. The provisions of Section 305 of the Original Indenture applicable to Global Securities shall apply to the Debentures. The Debentures will bear interest at the rate of 6.50% from August 5, 1998 to but excluding August 1, 2005 (the "First Coupon Reset Date"). The First Coupon Reset Date, August 1, 2012 and August 1, 2019, are each referred to herein as a "Coupon Reset Date." If the Company has not theretofore purchased the aggregate principal amount of the Debentures, in whole, the upcoming Coupon Reset Date at any time is referred to herein as the "Applicable Coupon Reset Date." Interest on the Debentures is payable semiannually on February 1 and August 1 of each year, commencing February 1, 1999 (each an "Interest Payment Date"). Interest will be calculated based on a 360-day year consisting of twelve 30-day months. On each Interest Payment Date, interest shall be payable to the persons in whose name the Debentures are registered on the books of the Trustee on the Business Day immediately preceding the related Interest Payment Date (each a "Regular Record Date"). "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the City of New York are authorized or required by law or regulation to be closed. If the Callholder (as defined below) elects to purchase the principal amount of the Debentures pursuant to its Call Option (as defined below), the Calculation Agent (as defined below) will reset the interest rate effective on the Applicable Coupon Reset Date for the Debentures, pursuant to procedures set forth in the Calculation Agency Agreement (as defined below). In such circumstance, (i) the principal amount of Debentures will be purchased by the Callholder at 100% of the principal amount thereof on the Applicable Coupon Reset Date, on the terms and subject to the conditions described herein and in the Calculation Agency Agreement (interest accrued to but excluding the Applicable Coupon Reset Date will be paid by the Company on such date to the holders of the Debentures on the most recent Regular Record Date) and (ii) on and after the Applicable Coupon Reset Date, the Debentures will bear interest at the rate determined by the Calculation Agent in accordance with the procedures set forth in the Calculation Agency Agreement and the form of Debentures. The Debentures will mature on August 1, 2026 (the "Maturity Date"). On the Applicable Coupon Reset Date, however, holders of the Debentures will be entitled to receive 100% of the principal amount thereof either from (i) the Callholder, if the Callholder purchases the Debentures, in whole but not in part, pursuant to its Call Option described in Article Three hereof or (ii) the Company, by the exercise of the Put Option (as defined below) by the Trustee for and on behalf of the holders of the Debentures, if the Callholder does not purchase the Debentures pursuant to the Call Option. If the Call Option is not exercised or if the Call Option otherwise terminates, the Trustee shall exercise the Put Option described in Article Four hereof without the consent of, or notice to, the holders of the Debentures. Principal of and interest on the Debentures will initially be payable and the Debentures will be transferable at the corporate trust office of the Trustee in the City of Cincinnati, located at 38 Fountain Square Plaza, Cincinnati, Ohio 45263 provided that payment of interest may be made at the option of the Company, by checks mailed to registered holders of the Debentures. If the Debentures are issued in certificated form under the circumstances described in Section 305 of the Original Indenture, payment shall be made at the Corporate Trust Office of the Trustee against surrender of the applicable Debentures. ARTICLE THREE Call Option Section 301. Call Option. The Callholder, by giving notice to the Trustee in accordance with Section 302 hereof, has the right to purchase the aggregate principal amount of Debentures, in whole but not in part (the "Call Option"), on the Applicable Coupon Reset Date, at a price equal to 100% of the principal amount thereof (the "Call Price") (interest accrued to but excluding the Applicable Coupon Reset Date to be paid by the Company on such date to the holders of the Debentures on the most recent Regular Record Date). The Company, as holder of the Call Option in respect of the Debentures, or any person to which the Call Option is assigned in accordance with Section 305 hereof, is referred to herein as the "Callholder" in respect of the Debentures. In the event the Callholder exercises its rights under the Call Option, unless terminated in accordance with its terms, then (i) not later than 2:00 p.m., New York time on the Business Day prior to the Applicable Coupon Reset Date, the Callholder shall deliver the Call Price in immediately available funds to the Trustee for payment of the Call Price on the Applicable Coupon Reset Date and (ii) the holders of the Debentures will be required to deliver and will be deemed to have delivered the Debentures to the Callholder against payment therefor on the Applicable Coupon Reset Date through the facilities of the Depositary. The Callholder is not required to exercise the Call Option, and no holder of the Debentures or any interest therein shall have any right or claim against the Callholder as a result of the Callholder's decision whether or not to exercise the Call Option or performance or non-performance of its obligations with respect thereto. Section 302. Notice. With respect to the Debentures and the Call Option related thereto, the Callholder must deliver irrevocable, written notice (the "Call Notice") to the Trustee of its exercise of the Call Option prior to 4:00 p.m. New York City, no later than fifteen (15) calendar days prior to the Applicable Coupon Reset Date. The Call Notice shall contain the requisite delivery details, including the identification of the Callholder's Depositary Account. The Trustee shall send a copy of the Call Notice to the holders of the Debentures no later than the immediately succeeding Business Day. Section 303. Termination of Call Option. Except as otherwise specified in clause (a) below, the Call Option will automatically and immediately terminate, no payment will be due from the Callholder and the Coupon Reset Process will terminate, if any of the following occurs: (a) at any time prior to the sale of the Debentures on the third Business Day immediately preceding the Applicable Coupon Reset Date (the "Bid Date"), (i) an Event of Default has occurred and is continuing under Sections 501(1), (2), (3), (4) or (7) under the Original Indenture, (ii) a default, event of default or other similar condition or event (however described) in respect of the Company or any of its subsidiaries has occurred under one or more agreements or instruments relating to indebtedness of the Company or any of its subsidiaries (individually or collectively) in an aggregate amount of not less than $25,000,000, which has resulted in such indebtedness becoming due and payable, under such agreements or instruments, before it would otherwise have been due and payable, or (iii) the Company or any of its subsidiaries has defaulted in making one or more payments on the due date thereof in an aggregate amount of not less than $25,000,000 under such agreements or instruments (after giving effect to any applicable notice requirement or grace period) (in any such event, termination is at Callholder's option) or an Event of Default has occurred and is continuing under Sections 501(5) or (6) under the Original Indenture (in any such event, termination is automatic), (b) if following the Call Notice, less than two dealers named on a list of dealers provided by the Company to Donaldson, Lufkin & Jenrette Securities Corporation, as calculation agent (the "Calculation Agent"), have provided an irrevocable written offer for the purchase of the Debentures, settling on the Applicable Coupon Reset Date, in a timely manner as provided in the Calculation Agency Agreement, dated as of August 5, 1998 (the "Calculation Agency Agreement"), between the Company and the Calculation Agent, (c) if, following the Call Notice, the Callholder fails to pay the Call Price by 2:00 p.m., New York time, on the Business Day prior to the Applicable Coupon Reset Date due to the occurrence of a Market Disruption Event, (d) if the Company elects to have Section 1302 (Defeasance and Discharge) or Section 1303 (Covenant Defeasance) under the Original Indenture applied to any of its Securities or any series of its Securities or (e) if the Company exercises the Optional Redemption (as defined herein) under Section 501 hereof. "Market Disruption Event" shall mean any of the following events, if such events occur or are continuing on any day from, and including, 15 calendar days prior to the upcoming Coupon Reset Date to, and including, the Bid Date in the judgment of the Calculation Agent: (A) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or the establishment of minimum prices on such exchange; (B) a general moratorium on commercial banking activities declared by either federal or New York State authorities; (C) any material adverse change in the existing financial, political or economic conditions in the United States of America; (D) an outbreak or escalation of major hostilities involving the United States of America or the declaration of a national emergency or war by the United States of America; or (E) any material disruption of the U.S. Treasury securities market, U.S. corporate bond market or U.S. federal wire system; provided, in each case, that in the judgment of the Calculation Agent the effect of the foregoing makes it impractical to conduct the Coupon Reset Process. Section 304. Trustee Notification. (i) The Company and, if different, the Callholder will promptly notify the Trustee in writing of the termination of the Call Option. The Trustee will promptly thereafter notify the holders of the Debentures that the Trustee, on behalf of such holders, is required to exercise the Put Option on the Applicable Coupon Reset Date. (ii) In anticipation of the exercise of the Call Option or the Put Option on the Applicable Coupon Reset Date, the Trustee shall notify the holders of the Debentures, not less than 30 days nor more than 60 days prior to the Applicable Coupon Reset Date, that all Debentures shall be delivered on the Applicable Coupon Reset Date through the facilities of the Depositary against payment of the Call Price by the Callholder under the Call Option or payment of the Put Price (as defined below) by the Company under the Put Option. Section 305. Successors and Assigns. A Callholder may at any time assign its rights and obligations under its Call Option; provided, however, (i) such rights and obligations are assigned in whole and not in part and (ii) it provides the Trustee and the Company with notice of such assignment contemporaneously with such assignment. Upon receipt of notice of assignment, the Trustee shall treat the assignee as Callholder under such Call Option for all purposes hereunder. A Callholder may assign its rights under its Call Option without notice to, or consent of, the holders of the Debentures. ARTICLE FOUR Put Option Section 401. If the Call Option is not exercised or if the Call Option otherwise terminates, the Trustee is required to exercise the right of the holders of the Debentures to require the Company to purchase the aggregate principal amount of Debentures, in whole but not in part (the "Put Option"), on the Applicable Coupon Reset Date at a price equal to 100% of the principal amount thereof (the "Put Price"), plus accrued but unpaid interest to but excluding such Applicable Coupon Reset Date, in each case, to be paid by the Company to such Holders on the Applicable Coupon Reset Date. If the Trustee exercises the Put Option then the Company shall deliver the Put Price in immediately available funds to the Trustee by no later than 12:00 p.m. New York time on the Applicable Coupon Reset Date and the holders of the Debentures will be required to deliver and will be deemed to have delivered the Debentures to the Company against payment therefor on the Applicable Coupon Reset Date through the facilities of the Depositary. By its purchase of Debentures, each holder irrevocably agrees that the Trustee shall exercise the Put Option relating to such Debentures for or on behalf of each holder of such Debentures as provided herein. No holder of any Debentures or of any interest therein has the right to consent or object to the exercise of the Trustee's duties under the Put Option. ARTICLE FIVE Optional Redemption Section 501. Subject to the terms of Article Eleven of the Original Indenture, the Company shall have the right to redeem the Offered Debentures, in whole but not in part, from time to time and at any time (such redemption, an "Optional Redemption", and the date thereof, the "Optional Redemption Date") upon not less than 30 days' notice to the holders, at a redemption price equal to the sum of (A) the greater of (i) 100% of the principal amount of the Debentures to be redeemed or (ii) the sum of the present values of the Remaining Scheduled Payments thereon discounted to the Optional Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 15 basis points, less the Applicable Accrued Interest Amount plus (B) the Applicable Accrued Interest Amount. "Applicable Accrued Interest Amount" means, at the Optional Redemption Date, the amount of interest accrued and unpaid from the prior interest payment date to the Optional Redemption Date on the Debentures subject to the Optional Redemption determined at the rate per annum shown in the title thereof, computed on the basis of a 360-day year of twelve 30-day months. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Debentures to be redeemed pursuant to the Optional Redemption. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company. "Comparable Treasury Price" means, with respect to the Optional Redemption Date, the average of the Reference Treasury Dealer Quotations for such Optional Redemption Date. "Reference Treasury Dealer" means a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"). "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such redemption date. "Remaining Scheduled Payments" means, with respect to any Debenture, the amount of interest that is unpaid and would but for the Optional Redemption accrue to but excluding the next scheduled succeeding Coupon Reset Date or, if there are no more Coupon Reset Dates, the Maturity Date plus 100% of the principal amount thereof scheduled to be received on the next scheduled Coupon Reset Date or the Maturity Date, as the case may be. "Treasury Rate" means, with respect to the Optional Redemption Date (if any), the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Optional Redemption Date. ARTICLE SIX Original Issuance of Debentures Section 601. Debentures in the aggregate principal amount of $50,000,000, may, upon execution of this Fourth Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Debentures upon a Company Order without any further action by the Company. ARTICLE SEVEN Paying Agent and Security Registrar Section 701. The Fifth Third Bank will be the paying Agent and Security Registrar for the Debentures. ARTICLE EIGHT Sundry Provisions Section 801. Appointment of Replacement Calculation Agent. If the Calculation Agent is removed or resigns pursuant to Section 7 of the Calculation Agency Agreement and within 30 days of notice of such removal or resignation no new Calculation Agent shall have been appointed by the Company, and shall have accepted such appointment, the Trustee may, on behalf of the holders of the Debentures, appeal to a court to appoint a new Calculation Agent. Section 802. The Original Indenture, as supplemented by this Fourth Supplemental Indenture, is in all respects ratified and confirmed, and this Fourth Supplemental Indenture shall be deemed part of the Original Indenture in the manner and to the extent herein and therein provided. Section 803. Counterparts. This Fourth Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Supplemental Indenture to be duly executed as of the date first written above. PSI ENERGY, INC. By /s/ William L. Sheafer William L. Sheafer Vice President and Treasurer THE FIFTH THIRD BANK, as Trustee By /s/ Kerry Byrne Kerry Byrne Vice President EXHIBIT A [FORM OF FACE OF DEBENTURE] PSI ENERGY, INC. No. R-1 CUSIP No.693627AF8 $50,000,000 UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. PSI ENERGY, INC., a corporation duly organized and existing under the laws of the State of Indiana (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of Fifty Million and No/100 Dollars ($50,000,000) on August 1, 2026, and to pay interest thereon from August 5, 1998 or from the most recent Interest Payment Date to which interest has been paid or duly provided for at the rate determined as set forth on the reverse hereof, semiannually on February 1 and August 1 of each year (each an "Interest Payment Date"), commencing February 1, 1999, on said principal sum. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the Business Day immediately preceding such Interest Payment Date. Any such interest which is payable, but is not punctually paid or duly provided for on any Interest Payment Date ("Defaulted Interest") will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be then listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of (and premium, if any) and interest on this Security shall be made at the corporate trust office of the Trustee maintained for that purpose in the City of Cincinnati, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Any payment on this Security due on any day which is not a Business Day in the City of New York need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on the due date and no interest shall accrue for the period from and after such due date, unless such payment is a payment at maturity or upon redemption, in which case interest shall accrue thereon at the stated rate for such additional days. As used herein, "Business Day" means any day, other than a Saturday or Sunday or a day on which banking institutions in New York, New York are authorized or required by law or regulation to be closed. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, including those describing the Call Option, the Put Option, the Optional Redemption and the Coupon Reset Process, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: PSI ENERGY, INC. By:_________________________________ CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: THE FIFTH THIRD BANK, as Trustee By:_________________________________ Authorized Signatory [FORM OF REVERSE OF SECURITY] This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of November 15, 1996 (herein called the "Indenture", which term shall have the meaning assigned to it in such instrument as supplemented), between the Company and The Fifth Third Bank, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities of this series and of the terms upon which the Securities of this series are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $50,000,000. Subject to the Call Option, the Put Option and the Optional Redemption described below, the Securities of this series are not redeemable prior to maturity. The terms of the Securities of this series include those stated in the Indenture. The Securities of this series are subject to all such terms and Holders (including the Holder hereof) are referred to the Indenture for a statement of those terms. Capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Indenture. Interest Rate and Interest Payment Dates This Security will bear interest at the rate of 6.50% from August 5, 1998 to but excluding August 1, 2005 (the "First Coupon Reset Date"). The First Coupon Reset Date, August 1, 2012 and August 1, 2019, are each referred to herein as a "Coupon Reset Date." If the Company has not theretofore purchased the aggregate principal amount of the Securities of this series , in whole, the upcoming Coupon Reset Date at any time is referred to herein as the "Applicable Coupon Reset Date." Interest on this Security is payable semiannually on February 1 and August 1 of each year, commencing February 1, 1999 (each an "Interest Payment Date"). Interest on this Security will be calculated based on a 360-day year consisting of twelve 30-day months. On each Interest Payment Date, interest shall be payable to the persons in whose names the Securities of this series are registered (including the Holder hereof) on the books of the Trustee on the Business Day immediately preceding the related Interest Payment Date (each a "Regular Record Date"). If the Callholder (as defined below) elects to purchase the principal amount of this Security pursuant to its Call Option (as defined below), the Calculation Agent (as defined below) will reset the interest rate effective on the Applicable Coupon Reset Date for this Security, pursuant to the procedures set forth in the Calculation Agency Agreement (as defined below). In such circumstance, (i) the principal amount hereof will be purchased by the Callholder at 100% of the principal amount hereof on the Applicable Coupon Reset Date, on the terms and subject to the conditions described herein and in the Calculation Agency Agreement (interest accrued to but excluding the Applicable Coupon Reset Date will be paid by the Company on such date to the Holder hereof on the most recent Regular Record Date) and (ii) on and after the Applicable Coupon Reset Date, this Security will bear interest at the rate determined by the Calculation Agent in accordance with the procedures set forth in the Calculation Agency Agreement and described herein. Maturity Date This Security will mature on August 1, 2026 (the "Maturity Date"). On the Applicable Coupon Reset Date, however, the Holder hereof will be entitled to receive 100% of the principal amount hereof from (i) the Callholder, if the Callholder purchases this Security pursuant to its Call Option or (ii) the Company, by the exercise of the Put Option by the Trustee for and on behalf of the Holder hereof, if the Callholder does not purchase this Security pursuant to the Call Option. If the Call Option is not exercised or if the Call Option otherwise terminates, the Trustee shall exercise the Put Option described below without the consent of, or notice to, the Holder hereof. Call Option; Put Option (i) Call Option. The Callholder, by giving notice to the Trustee (the "Call Notice"), has the right to purchase the aggregate principal amount hereof, in whole but not in part (the "Call Option"), on the Applicable Coupon Reset Date, at a price equal to 100% of the principal amount hereof (the "Call Price") (interest accrued to but excluding the Applicable Coupon Reset Date to be paid by the Company on such date to the Holder hereof on the most recent Regular Record Date). The Company, as holder of the Call Option in respect of the Securities of this series, or any person to which the Call Option is assigned in accordance with Section 305 of the Fourth Supplemental Indenture, is referred to herein as the "Callholder" in respect of the Securities of this series. The Call Notice shall be given to the Trustee, in writing, prior to 4:00 p.m. New York City, no later than fifteen calendar days prior to the Applicable Coupon Reset Date. The Call Notice shall contain the requisite delivery details, including the identification of the Callholder's DTC Account. The Trustee shall send a copy of the Call Notice to the Holder hereof no later than the immediately succeeding Business Day. In the event the Callholder exercises its rights under the Call Option, unless terminated in accordance with its terms, then (i) not later than 2:00 p.m., New York time, on the Business Day prior to the Applicable Coupon Reset Date, the Callholder shall deliver the Call Price in immediately available funds to the Trustee for payment thereof to the Holder hereof of the Call Price on the Applicable Coupon Reset Date and (ii) the Holder hereof will be required to deliver and will be deemed to have delivered this Security to the Callholder against payment therefor on the Applicable Coupon Reset Date through the facilities of DTC. The Callholder is not required to exercise the Call Option, and no Holder of the Securities of this series (including, the Holder hereof) or any interest herein shall have any right or claim against the Callholder as a result of the Callholder's decision whether or not to exercise the Call Option or performance or non-performance of its obligations with respect thereto. The Callholder may at any time assign its rights and obligations under its Call Option; provided, however, (i) such rights and obligations are assigned in whole and not in part and (ii) it provides the Trustee and the Company with notice of such assignment contemporaneously with such assignment. Upon receipt of notice of assignment, the Trustee shall treat the assignee as Callholder under such Call Option for all purposes hereunder. The Callholder may assign its rights under its Call Option without notice to, or consent of, the Holder hereof The Indenture sets forth certain circumstances in which the Call Option will automatically be terminated. (ii) Put Option. If the Call Option is not exercised or if the Call Option otherwise terminates, the Trustee is required to exercise the right of the Holder hereof to require the Company to purchase the aggregate principal amount of this Security, in whole but not in part (the "Put Option"), on the Applicable Coupon Reset Date at a price equal to 100% of the principal amount hereof (the "Put Price"), plus accrued but unpaid interest to but excluding such Applicable Coupon Reset Date, in each case, to be paid by the Company to the Holder hereof on the Applicable Coupon Reset Date. If the Trustee exercises the Put Option then the Company shall deliver the Put Price in immediately available funds to the Trustee by no later than 12:00 p.m. New York time on the Applicable Coupon Reset Date and the Holder hereof will be required to deliver and will be deemed to have delivered this Security to the Company against payment therefor on the Applicable Coupon Reset Date through the facilities of DTC. By its purchase of this Security, each Holder irrevocably agrees that the Trustee shall exercise the Put Option relating to such Security for or on behalf each Holder of such Security as provided herein. No Holder of this Security or of any interest herein has the right to consent or object to the exercise of the Trustee's duties under the Put Option. Notice to Holders by Trustee In anticipation of the exercise of the Call Option or the Put Option on the Applicable Coupon Reset Date, the Trustee shall notify the Holder hereof, not less than 30 days nor more than 60 days prior to the Applicable Coupon Reset Date, that this Security shall be delivered on the Applicable Coupon Reset Date through the facilities of DTC against payment of the Call Price by the Callholder under the Call Option or payment of the Put Price by the Company under the Put Option. Coupon Reset Process if Securities are Called Pursuant to and subject to the terms of a Calculation Agency Agreement, dated August 5, 1998, between the Company and Donaldson, Lufkin & Jenrette Securities Corporation, Donaldson, Lufkin & Jenrette Securities Corporation has been appointed the calculation agent for the Securities of this series in connection with the Call Option (in such capacity as calculation agent, together with any successors or assigns, the "Calculation Agent"). If the Callholder has exercised the Call Option, then the following steps (the "Coupon Reset Process") shall be taken in order to determine the interest rate to be paid on the Securities of this series from and including the Applicable Coupon Reset Date to but excluding the next succeeding Coupon Reset Date or, if there are no more Coupon Reset Dates after the Applicable Coupon Reset Date, the Maturity Date. The Company and the Calculation Agent shall use reasonable efforts to cause the actions contemplated below to be completed in as timely a manner as possible. (a) The Company shall provide the Calculation Agent with (i) a list (the "Dealer List"), no later than five Business Days prior to each Coupon Reset Date (unless the Call Option has been terminated prior to such Coupon Reset Date), containing the names and addresses of three dealers, one of which shall be Donaldson, Lufkin & Jenrette Securities Corporation, from which the Company desires the Calculation Agent to obtain the Bids (as defined below) for the purchase of the Securities of this series and (ii) a copy of any other material reasonably requested by the Calculation Agent to facilitate a successful Coupon Reset Process. (b) Within one Business Day following receipt by the Calculation Agent of the Dealer List, the Calculation Agent shall provide to each dealer ("Dealer") on the Dealer List (i) a copy of the Prospectus Supplement dated July 29, 1998 and Prospectus dated July 29, 1998, relating to the offering of the Securities of this series (collectively, the "Prospectus"), (ii) a copy of the form of Securities of this series and (iii) a written request that each such dealer submit a Bid to the Calculation Agent no later than 3:00 p.m., New York time, on the third Business Day prior to the Applicable Coupon Reset Date (the "Bid Date"). "Bid" shall mean an irrevocable written offer given by a Dealer for the purchase of all of the Securities of this series, settling on the Applicable Coupon Reset Date, and shall be quoted by such Dealer as a stated yield to maturity on the Securities of this series ("Yield to Maturity"). Each Dealer shall also be provided with (i) the name of the Company, (ii) an estimate of the Purchase Price (which shall be stated as a US Dollar amount and be calculated by the Calculation Agent in accordance with clause (c) below), (iii) the principal amount and Maturity Date of the Securities of this series and (iv) the method by which interest will be calculated on the Securities of this series . (c) The purchase price to be paid by any Dealer for the Securities of this series in connection with the exercise of the Call Option (the "Purchase Price") shall be equal to the sum of (i) the principal amount of the Securities of this series, and (ii) an amount (the "Debentures Difference") which shall be equal to the difference, if any, of (A) the discounted present value to the Applicable Coupon Reset Date of a debenture with a maturity of seven years from the Applicable Coupon Reset Date which has an interest rate of 5.585%, semiannual interest payments on each February 1st and August 1st, commencing the February 1 following the Applicable Coupon Reset Date, and a principal amount equal to the principal amount of the Securities of this series and assuming a discount rate equal to the Treasury Rate minus (B) such principal amount of Securities of this series. The "Treasury Rate" means the per annum rate equal to the offer side yield to maturity of the linearly interpolated 7-year United States Treasury rate which shall be defined as 60% of the per annum rate of the current on-the-run 5-year United States Treasury security plus 40% of the per annum rate of the current on-the-run 10-year United States Treasury security per Telerate page 500, or any successor page, no later than 3:00 p.m., New York time, on the Bid Date (or such other date and time that may be agreed upon by the Company and the Calculation Agent) or, if such rate does not appear on Telerate page 500, or any successor page, at such time, the rate shall be the 7-year Constant Maturity Treasury rate as defined on Federal Reserve Statistical Release H-15 at 3:00 p.m., New York time, on the Bid Date (or such other date and time that may be agreed upon by the Company and the Calculation Agent) (d) The Calculation Agent shall provide written notice to the Company as soon as practicable on the Bid Date, setting forth (i) the names of each of the Dealers from whom the Calculation Agent received Bids on the Bid Date, (ii) the Bid submitted by each such Dealer and (iii) the Purchase Price as determined pursuant to paragraph (c) hereof. Except as provided below, the Calculation Agent shall thereafter select from the Bids received the Bid with the lowest Yield to Maturity (the "Selected Bid"); provided, however, that if the Calculation Agent has not received a timely Bid from a Dealer on or before the Bid Date, the Selected Bid shall be the lowest of all Bids received by such time; provided further that if any two or more of the lowest Bids submitted are equivalent, the Company shall in its sole discretion select any of such equivalent Bids (and such selected Bid shall be the Selected Bid). The Calculation Agent shall set the Coupon Reset Rate equal to the interest rate which would amortize the Debentures Difference fully over the term of the Securities of this series at the Yield to Maturity indicated by the Selected Bid (the "Coupon Reset Rate"). (e) Immediately after calculating the Coupon Reset Rate for the Securities of this series, the Calculation Agent shall provide written notice to the Company and the Trustee, setting forth such Coupon Reset Rate. At the request of the Holders, the Calculation Agent will provide to the Holders the Coupon Reset Rate. The Coupon Reset Rate for the Securities of this series will be effective from and including the Applicable Coupon Reset Date to but excluding the next succeeding Coupon Reset Date, or if there are no more Applicable Coupon Reset Dates after the Applicable Coupon Reset Date, the Maturity Date. (f) The Callholder shall sell the Securities of this series to the Dealer that made the Selected Bid at the Purchase Price, such sale to be settled on the Applicable Coupon Reset Date in immediately available funds. (g) In the event that the Call Option is terminated in accordance with its terms, the Coupon Reset Process shall also terminate. Optional Redemption The Securities of this series are subject to optional redemption, in whole but not in part, from time to time and at any time (such redemption, an "Optional Redemption", and the date thereof, the "Optional Redemption Date") upon not less than 30 days' notice to the holders, at a redemption price equal to the sum of (A) the greater of (i) 100% of the principal amount of the Securities of this series to be redeemed or (ii) the sum of the present values of the Remaining Scheduled Payments thereon discounted to the Optional Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 15 basis points, less the Applicable Accrued Interest Amount plus (B) the Applicable Accrued Interest Amount. "Applicable Accrued Interest Amount" means, at the Optional Redemption Date, the amount of interest accrued and unpaid from the prior interest payment date to the Optional Redemption Date on the Securities of this series subject to the Optional Redemption determined at the rate per annum shown in the title thereof, computed on the basis of a 360-day year of twelve 30-day months. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities of this series to be redeemed pursuant to the Optional Redemption. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company. "Comparable Treasury Price" means, with respect to the Optional Redemption Date, the average of the Reference Treasury Dealer Quotations for such Optional Redemption Date. "Reference Treasury Dealer" means a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"). "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such redemption date. "Remaining Scheduled Payments" means, with respect to any Securities of this series, that amount of interest that is unpaid and would but for the Optional Redemption accrue to but excluding the next scheduled succeeding Coupon Reset Date or, if there are no more Coupon Reset Dates, the Maturity Date plus 100% of the principal amount thereof scheduled to be received on the next scheduled Coupon Reset Date or the Maturity Date, as the case may be. "Treasury Rate" means, with respect to the Optional Redemption Date (if any), the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Optional Redemption Date. No Sinking Fund The Securities of this series shall not be subject to a sinking fund requirement. Discharge and Defeasance The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security upon compliance by the Company with certain conditions set forth in the Indenture. Events of Default If an Event of Default with respect to the Securities of this series shall occur and be continuing, the unpaid principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. Amendments to Indenture; Waiver of Defaults The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of a majority in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all the Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. As provided in, and subject to, the provisions of the Indenture, the Holder of this Security shall not have any right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 35% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonably satisfactory indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of the Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. Obligations Unconditional No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. Transfer and Exchange As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities of this series, and of like tenor, of authorized denominations and for the same aggregate unpaid principal amount, shall be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Holders Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. CUSIP Number Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused a CUSIP number to be printed on this Security as a convenience to the Holder hereof. No representation is made as to the accuracy of such number and reliance may be placed only on the other identifying information printed hereon. Governing Law The Indenture and this Security shall be governed by and construed in accordance with the laws of the State of New York. EX-4 3 PSI LOAN AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LOAN AGREEMENT between INDIANA DEVELOPMENT FINANCE AUTHORITY and PSI ENERGY, INC. ------------------------------- $23,000,000 Indiana Development Finance Authority Environmental Refunding Revenue Bonds, Series 1998 (PSI Energy, Inc. Project) ------------------------------- Dated as of July 15, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS........................................... 2 Section 1.1. Use of Defined Terms.................................. 2 Section 1.2. Definitions........................................... 2 Section 1.3. Interpretation........................................ 7 Section 1.4. Captions and Headings................................. 7 ARTICLE II REPRESENTATIONS....................................... 8 Section 2.1. Representations of the Issuer......................... 8 Section 2.2. No Warranty by Issuer of Condition or Suitability of the Project 8 Section 2.3. Representations and Covenants of the Company.......... 8 ARTICLE III COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS..... 12 Section 3.1. Acquisition, Construction and Installation........... 12 Section 3.2. Project Description.................................. 12 Section 3.3. Issuance of the Bonds; Application of Proceeds....... 12 Section 3.4. Investment of Fund Moneys............................ 13 Section 3.5. Rebate Fund.......................................... 13 ARTICLE IV LOAN BY ISSUER; LOAN PAYMENTS; ADDITIONAL PAYMENTS; AND CREDIT FACILITY................................ 15 Section 4.1. Loan Repayment....................................... 15 Section 4.2. Additional Payments.................................. 15 Section 4.3. Place of Payments.................................... 16 Section 4.4. Obligations Unconditional............................ 16 Section 4.5. Assignment of Revenues and Agreement................. 16 Section 4.6. Credit Facility; Alternate Credit Facility; Cancellation....................................... 16 Section 4.7. Company's Option to Elect Rate Period................ 17 Section 4.8. Company's Obligation to Purchase Bonds............... 17 ARTICLE V ADDITIONAL AGREEMENTS AND COVENANTS.................. 18 Section 5.1. Right of Inspection.................................. 18 Section 5.2. Maintenance.......................................... 18 Section 5.3. Removal of Portions of the Project Facilities........ 18 Section 5.4. Operation of Project Facilities...................... 18 Section 5.5. Insurance............................................ 19 Section 5.6. Workers' Compensation Coverage....................... 19 Section 5.7. Damage; Destruction and Eminent Domain............... 19 Section 5.8. Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted........ 19 Section 5.9. Indemnification...................................... 20 Section 5.10. Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes................................ 21 Section 5.11. Use of Project Facilities............................ 21 Section 5.12. Assignment by Company................................ 21 ARTICLE VI REDEMPTION........................................... 23 Section 6.1. Optional Redemption.................................. 23 Section 6.2. Extraordinary Optional Redemption.................... 23 Section 6.3. Mandatory Redemption................................. 25 Section 6.4. Notice of Redemption................................. 25 Section 6.5. Actions by Issuer.................................... 25 ARTICLE VII EVENTS OF DEFAULT AND REMEDIES....................... 26 Section 7.1. Events of Default.................................... 26 Section 7.2. Remedies on Default.................................. 27 Section 7.3. No Remedy Exclusive.................................. 28 Section 7.4. Agreement to Pay Attorneys' Fees and Expenses........ 28 Section 7.5. No Waiver............................................ 28 Section 7.6. Notice of Default.................................... 28 ARTICLE VIII MISCELLANEOUS........................................ 29 Section 8.1. Term of Agreement.................................... 29 Section 8.2. Amounts Remaining in Funds........................... 29 Section 8.3. Notices.............................................. 29 Section 8.4. Extent of Covenants of the Issuer; No Personal Liability.......................................... 29 Section 8.5. Binding Effect....................................... 30 Section 8.6. Amendments and Supplements........................... 30 Section 8.7. References to Credit Facility........................ 30 Section 8.8. Execution Counterparts............................... 30 Section 8.9. Severability......................................... 30 Section 8.10. Governing Law........................................ 30 LOAN AGREEMENT THIS LOAN AGREEMENT is made and entered into as of July 15, 1998 between the INDIANA DEVELOPMENT FINANCE AUTHORITY (the "Issuer"), a separate body corporate and politic organized and existing under the laws of the State of Indiana, and PSI ENERGY, INC. (the "Company"), a public utility and corporation duly organized and validly existing under the laws of the State of Indiana. Capitalized terms used in the following recitals are used as defined in Article I of this Agreement. Pursuant to Indiana Code, Title 4, Article 4, Chapters 10.9 and 11 (collectively, the "Act"), the Issuer has determined to issue, sell and deliver the Bonds, and to lend the proceeds derived from the sale thereof to the Company to assist in the refunding of the Refunded Bonds as defined below. The Refunded Bonds were issued to provide funds to make a loan to the Company to assist in the financing of its portion of the costs of the Project as defined below. The Company and the Issuer each have full right and lawful authority to enter into this Agreement and to perform and observe the provisions hereof on their respective parts to be performed and observed. NOW THEREFORE, in consideration of the premises and the mutual representations and agreements hereinafter contained, the Issuer and the Company agree as follows (provided that any obligation of the Issuer or the State created by or arising out of this Agreement shall never constitute a general debt of the Issuer or the State or give rise to any pecuniary liability of the Issuer or the State but shall be payable solely out of Revenues, including the Loan Payments made pursuant hereto and moneys drawn under any Credit Facility): ARTICLE I DEFINITIONS Section I.1. Use of Defined Terms. In addition to the words and terms defined elsewhere in this Agreement or by reference to another document, the words and terms set forth in Section 1.2 hereof shall have the meanings set forth therein unless the context or use clearly indicates another meaning or intent. Such definitions shall be equally applicable to both the singular and plural forms of any of the words and terms defined therein. Section I.2. Definitions. As used herein: "Act" means, collectively, Indiana Code, Title 4, Article 4, Chapters 10.9 and 11. "Additional Payments" means the amounts required to be paid by the Company pursuant to the provisions of Section 4.2 hereof. "Administration Expenses" means the compensation (which compensation shall not be greater than that typically charged in similar circumstances) and reimbursement of reasonable expenses and advances payable to the Trustee, the Registrar, the Remarketing Agent, any Paying Agent and any Authenticating Agent. "Agreement" means this Loan Agreement, as amended or supplemented from time to time. "Alternate Credit Facility" means an Alternate Credit Facility as defined in the Indenture. "Authenticating Agent" means the Authenticating Agent as defined in the Indenture. "Bank" means the Bank as defined in the Indenture. "Bond Fund" means the Bond Fund created in the Indenture. "Bond Purchase Fund" means the Bond Purchase Fund as defined in the Indenture. "Bond Resolution" means the resolution of the Issuer providing for the issuance of the Bonds and approving this Agreement, the Indenture and related matters, as amended or supplemented from time to time. "Bond Service Charges" means, for any period or time, the principal of, premium, if any, and interest due on the Bonds for that period or payable at that time whether due at maturity or upon acceleration or redemption or otherwise. "Bonds" means the $23,000,000 Indiana Development Finance Authority Environmental Refunding Revenue Bonds, Series 1998 (PSI Energy, Inc. Project), issued by the Issuer pursuant to the Bond Resolution and the Indenture. "Bonds Outstanding" or "Outstanding Bonds" means Outstanding Bonds as defined in the Indenture. "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to the Code and Sections of the Code include relevant applicable regulations and proposed regulations thereunder and under the 1954 Code and any successor provisions to those Sections, regulations or proposed regulations and, in addition, all applicable official rulings and judicial determinations under the foregoing applicable to the Bonds. "Conversion Date" means the Conversion Date as defined in the Indenture. "Credit Facility" means a Credit Facility as defined in the Indenture. "Credit Facility Account" means the Credit Facility Account as defined in the Indenture. "Credit Facility Issuer" means a Credit Facility Issuer as defined in the Indenture. "Eligible Investments" means Eligible Investments as defined in the Indenture. "Engineer" means an engineer (who may be an employee of the Company) or engineering firm qualified to practice the profession of engineering under the laws of the State and who or which is acceptable to the Trustee. "EPA" means the Department of Environmental Management of the State and any successor body, agency, commission or department. "Event of Default" means any of the events described as an Event of Default in Section 7.1 hereof. "Force Majeure" means any of the causes, circumstances or events described as constituting Force Majeure in Section 7.1 hereof. "Generating Stations" means collectively the Gibson Generating Station, Cayuga Generating Station, Edwardsport Generating Station, Gallagher Generating Station and the Wabash River Generating Station and "Generating Station" means any one of such separately. "Government Obligations" means Government Obligations as defined in the Indenture. "Holder" or "Holder of a Bond" means the Person in whose name a Bond is registered on the Register. "Indenture" means the Trust Indenture, dated as of the same date as this Agreement, between the Issuer and the Trustee, as amended or supplemented from time to time. "Interest Rate for Advances" means the interest rate per year payable on the Bonds. "Letter of Credit" means the Letter of Credit as defined in the Indenture. "Loan" means the loan by the Issuer to the Company of the proceeds received from the sale of the Bonds. "Loan Payment Date" means any date on which any Bond Service Charges are due and payable. "Loan Payments" means the amounts required to be paid by the Company in repayment of the Loan pursuant to Section 4.1 hereof. "1954 Code" means the Internal Revenue Code of 1954 as amended from time to time through the date of enactment of the Code. References to the 1954 Code and Sections of the 1954 Code include relevant applicable regulations (including temporary regulations) and proposed regulations thereunder and any successor provisions to those Sections, regulations or proposed regulations. "Notice Address" means: (a) As to the Issuer: Indiana Development Finance Authority One North Capitol, Suite 320 Indianapolis, Indiana 46204 Attention: Executive Director (b) As to the Company: PSI Energy, Inc. 1000 East Main Street Plainfield, Indiana 46168 Attention: Treasurer with a copy to: PSI Energy, Inc. 139 East Fourth Street Cincinnati, Ohio 45202 Attention: Treasurer (c) As to the Trustee: The Fifth Third Bank of Central Indiana Fifth Third Center 38 Fountain Square Cincinnati, Ohio 45263 Attention: Corporate Trust Administration or such additional or different address, notice of which is given under Section 8.3 hereof. "Opinion of Bond Counsel" means a written opinion of nationally recognized bond counsel selected by the Company and acceptable to the Trustee who is experienced in matters relating to the exclusion from gross income for federal income tax purposes of interest on obligations issued by states and their political subdivisions. Bond Counsel may be counsel to the Trustee or the Company. "Original Purchaser" means the Original Purchaser as defined in the Indenture. "Paying Agent" means the Paying Agent as defined in the Indenture. "Person" or words importing persons mean firms, associations, partnerships (including without limitation, general and limited partnerships), limited liability entities, joint ventures, societies, estates, trusts, corporations, public or governmental bodies, other legal entities and natural persons. "Pollution Control Facility" or "Pollution Control Facilities" means those facilities which are pollution control facilities as defined in Section 24 of Chapter 10.9 of the Act and those facilities described in Section 103(b)(4)(F) of the Internal Revenue Code of 1954, as amended, and the final, proposed and temporary regulations promulgated thereunder and other administrative authority in effect. "Project" or "Project Facilities" means the real, personal or real and personal property, including undivided or other interests therein, identified in the Project Description, financed with the proceeds of the Refunded Bonds. "Project Description" means collectively the description of the Project Facilities originally financed with the proceeds of the Refunded Bonds, attached hereto as Exhibit A. "Project Purposes" means the purposes of Pollution Control Facilities as described in the Act and as particularly described in Exhibit A hereto. "Project Site" means as applicable to the various Project Facilities the respective Generating Station site. "Rate Period" means a Rate Period as defined in the Indenture. "Rebate Fund" means the Rebate Fund created in the Indenture. "Refunded Bonds" means the $23,000,000 Indiana Employment Development Commission 8 1/4% Environmental Revenue Bonds, Series 1988 (Public Service Company of Indiana, Inc.) issued on July 7, 1988. "Refunded Bonds Indenture" means the Trust Indenture dated as of June 15, 1988 between Bank One, Indianapolis, National Association (as successor to American Fletcher National Bank and Trust Company) and the Indiana Employment Development Commission, as predecessor of the Issuer. "Refunded Bonds Loan Agreement" means the Loan Agreement dated as of June 15, 1988 between the Indiana Employment Development Commission, as predecessor of the Issuer and Public Service Company of Indiana, Inc., as predecessor of the Company, as amended as of March 15, 1990 and as of March 15, 1992. "Refunded Bonds Trustee" means Bank One, Indianapolis, National Association (as successor to American Fletcher National Bank and Trust Company), as trustee under the Refunded Bonds Indenture. "Refunding Fund" means the Refunding Fund created in the Indenture. "Register" means the books kept and maintained for the registration and transfer of Bonds pursuant to Section 3.05 of the Indenture. "Registrar" means the Registrar as defined in the Indenture. "Reimbursement Agreement" means the Reimbursement Agreement as defined in the Indenture. "Remarketing Agent" means the Remarketing Agent as defined in the Indenture. "Revenues" means (a) the Loan Payments, (b) all other moneys received or to be received by the Issuer (excluding the Issuer Fee) or the Trustee in respect of repayment of the Loan, including without limitation, all moneys and investments in the Bond Fund, (c) any moneys and investments in the Refunding Fund, and (d) all income and profit from the investment of the foregoing moneys. The term "Revenues" does not include any moneys or investments in the Rebate Fund or the Bond Purchase Fund. "Solid Waste Disposal Facility" or "Solid Waste Disposal Facilities" means those facilities defined as pollution control facilities in Section 24 of Chapter 10.9 of the Act and those facilities described in Section 142(a)(6) of the Code. "State" means the State of Indiana. "Term Rate Period" means a Term Rate Period as defined in the Indenture. "Trustee" means The Fifth Third Bank of Central Indiana located in Indianapolis, Indiana, a corporation duly organized and validly existing under the laws of the State, until a successor Trustee shall have become such pursuant to the applicable provisions of the Indenture, and thereafter "Trustee" shall mean the successor Trustee. "Principal Office" of the Trustee shall mean the principal corporate trust office of the Trustee, which office at the date of issuance of the Bonds is located at its Notice Address. "Unassigned Issuer Rights" means all of the rights of the Issuer to receive Additional Payments under Section 4.2 hereof, to inspection pursuant to Section 5.1 hereof, to be held harmless and indemnified under Section 5.9 hereof, to be reimbursed for attorney's fees and expenses under Section 7.4 hereof and to give or withhold consent to amendments, changes, modifications, alterations and termination of this Agreement under Section 8.6 hereof and its right to enforce such rights. "Variable Rate" means a Variable Rate as defined in the Indenture. Section I.3. Interpretation. Any reference herein to the State, to the Issuer or to any member or officer of either includes entities or officials succeeding to their respective functions, duties or responsibilities pursuant to or by operation of law or lawfully performing their functions. Any reference to a section or provision of the Constitution of the State or the Act, or to a section, provision or chapter of the Indiana Code, or to any statute of the United States of America, includes that section, provision or chapter as amended, modified, revised, supplemented or superseded from time to time; provided, that no amendment, modification, revision, supplement or superseding section, provision or chapter shall be applicable solely by reason of this provision, if it constitutes in any way an impairment of the rights or obligations of the Issuer, the State, the Holders, the Trustee, the Registrar, an Authenticating Agent, a Paying Agent, any Credit Facility Issuer, the Remarketing Agent, or the Company under this Agreement, the Indenture or the Bonds. Unless the context indicates otherwise, words importing the singular number include the plural number, and vice versa; the terms "hereof", "hereby", "herein", "hereto", "hereunder" and similar terms refer to this Agreement; and the term "hereafter" means after, and the term "heretofore" means before, the date of delivery of the Bonds. Words of any gender include the correlative words of the other genders, unless the sense indicates otherwise. Section I.4. Captions and Headings. The captions and headings in this Agreement are used solely for convenience of reference and in no way define, limit or describe the scope or intent of any Articles, Sections, subsections, paragraphs or subparagraphs or clauses hereof. (End of Article I) ARTICLE II REPRESENTATIONS Section II.1. Representations of the Issuer. The Issuer represents that: (a) it is a body corporate and politic duly organized and validly existing under the laws of the State; (b) it has duly accomplished all conditions necessary to be accomplished by it prior to the issuance and delivery of the Bonds and the execution and delivery of this Agreement and the Indenture; (c) it is not in violation of or in conflict with any provisions of the laws of the State which would impair its ability to carry out its obligations contained in this Agreement or the Indenture; (d) it is empowered to enter into the transactions contemplated by this Agreement and the Indenture; (e) it has duly authorized the execution, delivery and performance of this Agreement and the Indenture; (f) it will do all things in its power in order to maintain its existence or assure the assumption of its obligations under this Agreement and the Indenture by any successor municipal corporation; and (g) following reasonable notice, a public hearing was held on July 20, 1998 with respect to the issuance of the Bonds as required by Section 147(f) of the Code. Section II.2. No Warranty by Issuer of Condition or Suitability of the Project. The Issuer makes no warranty, either express or implied, as to the suitability or utilization of the Project for the Project Purposes, or as to the condition of the Project Facilities or that the Project Facilities are or will be suitable for the Company's purposes or needs. Section II.3. Representations and Covenants of the Company. The Company represents that: (a) The Company has been duly incorporated and is validly existing as a corporation under the laws of the State, with power and authority (corporate and other) to own its properties and conduct its business, to execute and deliver this Agreement and to perform its obligations under this Agreement. (b) This Agreement has been duly authorized, executed and delivered by the Company and this Agreement constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (c) The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby will not violate any provision of law or regulation applicable to the Company, or of any writ or decree of any court or governmental instrumentality, or of the Amended Articles of Consolidation, as amended, or the By-laws of the Company, or of any mortgage, indenture, contract, agreement or other undertaking to which the Company is a party or which purports to be binding upon the Company or upon any of its assets. (d) The portions of the Project (i) which are Pollution Control Facilities were designed to meet or exceed applicable federal, state and local requirements then in effect for the control of air pollution and have been and will be used to abate or control air pollution or contamination by removing, altering, disposing of or storing pollutants, contaminants, wastes or heat, and the Pollution Control Facilities components of the Project as designed constitute "air pollution control facilities" or facilities functionally related or subordinate thereto within the meaning of Section 103(b)(4)(F) of the 1954 Code, and the final, temporary and proposed regulations promulgated thereunder and other administrative authority in effect; and (ii) which are Solid Waste Disposal Facilities have been and will be used for the collection, storage, treatment, utilization, processing or final disposal of solid waste and constitute "solid waste disposal facilities" within the meaning of Section 142(a)(6) of the Code and the regulations applicable thereto. (e) The Project has been and will be used wholly to control pollution and dispose of solid waste and was designed for no significant purpose other than pollution control and disposal of solid waste, and the Project was not designed to result in an increase in production or capacity, in a material extension of the useful life of the Generating Stations or, in the case of the portions of the Project which are Pollution Control Facilities, in the recovery of by-products of any substantial value (f) Substantially all (at least 95%) of the proceeds of the Refunded Bonds were used to provide "Solid Waste Disposal Facilities" within the meaning of Section 142(a)(6) of the Code and "Pollution Control Facilities" within the meaning of Section 103(b)(4)(F) of the 1954 Code. (g) Acquisition, construction and installation or the incurrence of Cost of Construction (as defined in the Refunded Bonds Loan Agreement) for the Pollution Control Facilities portion of the Project or any separate facility thereof was not commenced prior to the adoption of the resolution of the City of Princeton, Indiana, on October 16, 1978; and acquisition, construction and installation or the incurrence of Cost of Construction for the Solid Waste Disposal Facilities portion of the Project or any separate facility thereof was not commenced prior to the adoption of the resolution of the Issuer on April 18, 1988, and no such portion of the Project had reached a degree of completion which would permit the Company to operate the Project at substantially the level for which it was designed and no such portion of the Project was, in fact, operated at such design level prior to October 1, 1987. (h) All of the proceeds of the Refunded Bonds were spent for the Project pursuant to the Refunded Bonds Loan Agreement or to pay costs of issuance of the Refunded Bonds. The proceeds of the Bonds (other than any accrued interest thereon) will be used exclusively to refund the Refunded Bonds; any investment earnings on such proceeds of the Bonds will be used to pay principal, premium or interest on the Refunded Bonds; and none of the proceeds of the Bonds will be used to pay for any costs of issuance of the Bonds. The principal amount of the Bonds does not exceed the outstanding principal amount of the Refunded Bonds. The proceeds of the Bonds will be used to retire the Refunded Bonds not later than 90 days after the date of issuance of the Bonds. (i) It has caused the Project to be substantially completed. The Project constitutes Pollution Control Facilities under the Act and is consistent with the purposes of the Act. The Project is being, and the Company will cause the Project to be, operated and maintained in such manner to conform with all applicable zoning, planning, building, environmental and other applicable governmental regulations and all permits, variances and orders issued or granted pursuant thereto, including the permit-to-install for the Project, which permits, variances and orders have not been withdrawn or otherwise suspended, and to be consistent with the Act. (j) It has used or operated or has caused to be used or operated, and presently intends to use or operate or cause to be used or operated the Project Facilities in a manner consistent with the Project Purposes until the date on which the Bonds have been fully paid and knows of no reason why the Project Facilities will not be so operated. The Company does not intend to sell or otherwise dispose of the Project or any portion thereof. (k) None of the proceeds of the Refunded Bonds was used and none of the proceeds of the Bonds will be used to provide any airplane, skybox or other private luxury box, or health club facility, any facility primarily used for gambling or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. (l) Less than 25% of the proceeds of the Refunded Bonds have been used and less than 25% of the proceeds of the Bonds will be used directly or indirectly to acquire land or any interest therein, and none of such proceeds has been or will be used to provide land which is to be used for farming purposes. (m) No portion of the proceeds of the Refunded Bonds has been used and no portion of the proceeds of the Bonds will be used to acquire existing property or any interest therein unless the first use of such property was by the Company and was pursuant to and followed such acquisition. (n) At no time will any funds constituting gross proceeds of the Bonds be used in a manner as would constitute failure of compliance with Section 148 of the Code. (o) The Refunded Bonds were not, and the Bonds will not be, "federally guaranteed" within the meaning of Section 149(b) of the Code. (p) It is not anticipated that as of the date hereof, there will be created any "replacement proceeds", within the meaning of Section 1.148-1(c) of the Treasury Regulations, with respect to the Bonds; however, in the event that any such replacement proceeds are deemed to have been created, such amounts will be invested in compliance with Section 148 of the Code. (q) On the date of issuance and delivery of the Refunded Bonds, the Company reasonably expected that at least 85% of the spendable proceeds of the Refunded Bonds would be expended to carry out the governmental purpose of such issue within the 3-year period beginning on the issue date of such issue and the Company reasonably expected that the proceeds of the Refunded Bonds would be spent in accordance with the spending requirements of Section 149(g)(2) of the Code. All of the spendable proceeds of the Refunded Bonds were expended as of the date of issuance of the Bonds. None of the proceeds of the Refunded Bonds were invested in nonpurpose investments having a substantially guaranteed yield for four years or more. (r) The weighted average maturity of the Bonds does not exceed 120% of the average reasonably expected economic life of the Project Facilities financed by the proceeds of the Refunded Bonds (determined under Section 147(b) of the Code). (s) The information furnished by the Company and used by the Issuer in preparing the certifications and statements pursuant to Sections 148 and 149(e) of the Code or their statutory predecessors with respect to the Refunded Bonds was accurate and complete as of the respective date of issuance of the Refunded Bonds, and the information furnished by the Company and used by the Issuer in preparing the certification pursuant to Section 148 of the Code and in preparing the information statement pursuant to Section 149(e) of the Code, both referred to in the Bond Resolution, will be accurate and complete as of the date of issuance of the Bonds. (t) The Project Facilities do not include any office except for offices (i) located on the Project Site and (ii) not more than a de minimis amount of the functions to be performed at which is not directly related to the day-to-day operations of the Project Facilities. (End of Article II) ARTICLE III COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS Section III.1. Acquisition, Construction and Installation. The Company represents that it has caused the Project Facilities to be acquired, constructed and installed on the respective Project Sites, substantially in accordance with the Project Description and in conformance with all applicable zoning, planning, building and other similar regulations of all governmental authorities having jurisdiction over the Project and all permits, variances and orders issued in respect of the Project by EPA, and that the proceeds derived from the Refunded Bonds, including any investment thereof, were expended in accordance with the Refunded Bonds Indenture and the Refunded Bonds Loan Agreement, respectively. Section III.2. Project Description. The Project Description may be changed from time to time by, or with the consent of, the Company provided that any such change shall also be filed with the Issuer and provided further that no change in the Project Description shall materially change the function of the Project Facilities unless the Trustee shall have received (i) an Engineer's certificate that such changes will not impair the significance or character of the Project Facilities as Pollution Control Facilities and (ii) an Opinion of Bond Counsel or ruling of the Internal Revenue Service to the effect that such amendment will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. Section III.3. Issuance of the Bonds; Application of Proceeds. To provide funds to make the Loan to the Company to assist the Company in the refunding of the Refunded Bonds, the Issuer will issue, sell and deliver the Bonds to the Original Purchaser. The Bonds will be issued pursuant to the Indenture in the aggregate principal amount, will bear interest, will mature and will be subject to redemption as set forth therein. The Company hereby approves the terms and conditions of the Indenture and the Bonds, and the terms and conditions under which the Bonds will be issued, sold and delivered. The Company hereby requests that the Issuer notify the Refunded Bonds Trustee (unless the Refunded Bonds Trustee has already received such notice), pursuant to the Refunded Bonds Indenture, that the entire outstanding principal amount of the Refunded Bonds is to be redeemed on September 15, 1998 at a redemption price of 102% of the principal amount thereof plus accrued interest to that redemption date. The proceeds from the sale of the Bonds (other than any accrued interest) shall be loaned to the Company to assist the Company in refunding the Refunded Bonds in order to reduce the interest cost payable by the Company; those proceeds shall be deposited in the Refunding Fund. On September 15, 1998 all moneys on deposit in the Refunding Fund shall be disbursed by the Trustee as provided in Section 5.02 of the Indenture to the Refunded Bonds Trustee for deposit in the Bond Fund created in the Refunded Bonds Indenture and applied by the Refunded Bonds Trustee to the payment of principal of and interest on the Refunded Bonds on their redemption on September 15, 1998. The Company shall pay to the Refunded Bonds Trustee such additional amounts as shall be required to pay in full on such date the entire amount of principal of, premium and interest due on the Refunded Bonds. Pending disbursement pursuant to this Section, the proceeds so deposited in the Refunding Fund, together with any investment earnings thereon, shall constitute a part of the Revenues assigned by the Issuer to the Trustee for the payment of Bond Service Charges. Any accrued interest shall be deposited in the Bond Fund. Section III.4. Investment of Fund Moneys. At the oral (confirmed promptly in writing) or written request of the Company, any moneys held as part of the Bond Fund, the Refunding Fund or the Rebate Fund shall be invested or reinvested by the Trustee in Eligible Investments; provided, that such moneys shall be invested or reinvested by the Trustee only in Eligible Investments which shall mature, or which shall be subject to redemption by the holder thereof at the option of such holder, not later than the date upon which the moneys so invested are needed to make payments from those Funds. The Issuer (to the extent it retained or retains direction or control) and the Company each hereby represents that the investment and reinvestment and the use of the proceeds of the Refunded Bonds were restricted in such manner and to such extent as was necessary so that the Refunded Bonds would not constitute arbitrage bonds under Section 148 of the Code or its statutory predecessor and each hereby covenants that it will restrict that investment and reinvestment and the use of the proceeds of the Bonds in such manner and to such extent, if any, as may be necessary so that the Bonds will not constitute arbitrage bonds under Section 148 of the Code. The Company shall provide the Issuer with, and the Issuer may base its certificate and statement, each as authorized by the Bond Resolution, on a certificate of an appropriate officer, employee or agent of or consultant to the Company for inclusion in the transcript of proceedings for the Bonds, setting forth the reasonable expectations of the Company on the date of delivery of and payment for the Bonds regarding the amount and use of the proceeds of the Bonds and the facts, estimates and circumstances on which those expectations are based. Section III.5. Rebate Fund. To the extent required by Section 5.08 of the Indenture, within five days after the end of the fifth Bond Year (as defined in the Indenture) and every fifth Bond Year thereafter, and within five days after payment in full of all outstanding Bonds, the Company shall calculate the amount of Excess Earnings (as defined in the Indenture) as of the end of that Bond Year or the date of such payment and shall notify the Trustee of that amount. If the amount then on deposit in the Rebate Fund created under the Indenture is less than the amount of Excess Earnings (computed by taking into account the amount or amounts, if any, previously paid to the United States pursuant to Section 5.08 of the Indenture and this Section), the Company shall, within five days after the date of the aforesaid calculation, pay to the Trustee for deposit in the Rebate Fund an amount sufficient to cause the Rebate Fund to contain an amount equal to the Excess Earnings. The obligation of the Company to make such payments shall remain in effect and be binding upon the Company notwithstanding the release and discharge of the Indenture. The Company shall obtain and keep such records of the computations made pursuant to this Section as are required under Section 148(f) of the Code. (End of Article III) ARTICLE IV LOAN BY ISSUER; LOAN PAYMENTS; ADDITIONAL PAYMENTS; AND CREDIT FACILITY Section IV.1. Loan Repayment. Upon the terms and conditions of this Agreement, the Issuer agrees to make the Loan to the Company. The proceeds of the Loan shall be deposited with the Trustee pursuant to Section 3.3 hereof. In consideration of and in repayment of the Loan, the Company shall make, as Loan Payments, to the Trustee for the account of the Issuer, payments which correspond, as to time, and are equal in amount as of the Loan Payment Date, to the corresponding Bond Service Charges payable on the Bonds. All Loan Payments received by the Trustee shall be held and disbursed in accordance with the provisions of the Indenture and this Agreement for application to the payment of Bond Service Charges. The Company shall be entitled to a credit against the Loan Payments required to be made on any Loan Payment Date to the extent that the balance of the Bond Fund is then in excess of amounts required (a) for the payment of Bonds theretofore matured or theretofore called for redemption, or to be called for redemption pursuant to Section 6.1 hereof (b) for the payment of interest for which checks or drafts have been drawn and mailed by the Trustee or Paying Agent, and (c) to be deposited in the Bond Fund by the Indenture for use other than for the payment of Bond Service Charges due on that Loan Payment Date. The Company's obligation to make Loan Payments shall be reduced to the extent of any payments made by any Credit Facility Issuer to the Trustee in respect of the principal of, premium, if any, or interest on the Bonds when due pursuant to any Credit Facility then in effect, provided, that any such Credit Facility Issuer has been reimbursed for such payments in accordance with the terms of the Reimbursement Agreement. Except for such interest of the Company as may hereafter arise pursuant to Section 8.2 hereof or Sections 5.06 or 5.07 of the Indenture, the Company and the Issuer each acknowledge that neither the Company, the State nor the Issuer has any interest in the Bond Fund or the Bond Purchase Fund, and any moneys deposited therein shall be in the custody of and held by the Trustee in trust for the benefit of the Holders. Section IV.2. Additional Payments. The Company shall pay to the Issuer, as Additional Payments hereunder, any and all costs and expenses incurred or to be paid by the Issuer in connection with the issuance and delivery of the Bonds or otherwise related to actions taken by the Issuer under this Agreement or the Indenture. The Company shall pay the Administration Expenses to the Trustee, the Registrar, the Remarketing Agent, and any Paying Agent or Authenticating Agent, as appropriate, as Additional Payments hereunder. The Company may, without creating a default hereunder, contest in good faith the reasonableness of any such cost or expense incurred or to be paid by the Issuer and any Administration Expenses claimed to be due to the Trustee, the Registrar, the Remarketing Agent, any Paying Agent or any Authenticating Agent. In the event the Company should fail to pay any Loan Payments, Additional Payments or Administration Expenses when due, the payment in default shall continue as an obligation of the Company until the amount in default shall have been fully paid together with interest thereon during the default period at the Interest Rate for Advances. Section IV.3. Place of Payments. The Company shall make all Loan Payments directly to the Trustee at its Principal Office. Additional Payments shall be made directly to the person or entity to whom or to which they are due. Section IV.4. Obligations Unconditional. The obligations of the Company to make Loan Payments, Additional Payments and any payments required of the Company under Section 5.08 of the Indenture shall be absolute and unconditional, and the Company shall make such payments without abatement, diminution or deduction regardless of any cause or circumstances whatsoever including, without limitation, any defense, set-off, recoupment or counterclaim which the Company may have or assert against the Issuer, the Trustee, the Registrar, the Remarketing Agent or any other Person. Section IV.5. Assignment of Revenues and Agreement. To secure the payment of Bond Service Charges, the Issuer shall, by the Indenture, (a) absolutely and irrevocably assign to the Trustee, its successors in trust and its and their assigns forever, (1) all right, title and interest of the Issuer in and to all moneys and investments (including, without limitation, the proceeds of the Credit Facility) in the Bond Fund and (2) all of the Issuer's rights and remedies under this Agreement (except for the Unassigned Issuer Rights), and (b) grant a security interest to the Trustee, its successors in trust and its and their assigns forever, in all of its rights to and interest in the Revenues including, without limitation, all Loan Payments and other amounts receivable by or on behalf of the Issuer under the Agreement in respect of repayment of the Loan (other than the Credit Facility Account, all moneys and investments therein and the proceeds of any Credit Facility). The Company hereby agrees and consents to those assignments and that grant of a security interest. Section IV.6. Credit Facility; Alternate Credit Facility; Cancellation. (a) The Company agrees to provide for the payment of the principal of and interest on the Bonds and for payment of the purchase price of Bonds delivered to the Trustee or Paying Agent pursuant to the Indenture by causing the Letter of Credit to be delivered to the Trustee on the date of the delivery of the Bonds. The Company hereby authorizes and directs the Trustee to draw moneys under the Letter of Credit in accordance with its terms and the terms of the Indenture, to the extent necessary to pay the principal of and interest on the Bonds when due and to pay the purchase price of Bonds as provided in the Indenture. The Company may, at its election and with the consent of the Bank, provide for one or more extensions of the Letter of Credit beyond its then stated date of expiration. (b) Upon satisfaction of the requirements contained in Section 14.03 of the Indenture, the Company may provide for the delivery of an Alternate Credit Facility. (c) Upon satisfaction of the conditions contained in Section 14.02 of the Indenture, the Company may cancel any Credit Facility then in effect at such time and direct the Trustee in writing to surrender such Credit Facility to the Credit Facility Issuer by which it was issued in accordance with the Indenture; provided, that no such cancellation shall become effective and no such surrender shall take place until all Bonds subject to purchase pursuant to Section 4.07(d) of the Indenture have been so purchased or redeemed with the proceeds of such Credit Facility. Section IV.7. Company's Option to Elect Rate Period. The Company shall have, and is hereby granted, the option to elect to convert on any Conversion Date the interest rate borne by the Bonds to another Variable Rate to be effective for a Rate Period pursuant to the provisions of Article II of the Indenture and subject to the terms and conditions set forth therein. To exercise such options, the Company shall give the written notice required by the Indenture. Section IV.8. Company's Obligation to Purchase Bonds. The Company hereby agrees to pay or cause to be paid to the Trustee or the Paying Agent, on or before each day on which Bonds may be or are required to be tendered for purchase, amounts equal to the amounts to be paid by the Trustee or the Paying Agent with respect to the Bonds tendered for purchase on such dates pursuant to Article IV of the Indenture; provided, however, that the obligation of the Company to make any such payment under this Section shall be reduced by the amount of (A) moneys paid by the Remarketing Agent as proceeds of the remarketing of such Bonds by the Remarketing Agent, (B) moneys drawn under any Credit Facility, for the purpose of paying such purchase price and (C) other moneys made available by the Company, as set forth in Section 4.08(b)(ii) of the Indenture. (End of Article IV) ARTICLE V ADDITIONAL AGREEMENTS AND COVENANTS Section V.1. Right of Inspection. The Company agrees that, subject to reasonable security and safety regulations and to reasonable requirements as to notice, the Issuer and the Trustee and their or any of their respective duly authorized agents shall have the right at all reasonable times to enter upon the Project Site to examine and inspect the Projects. Section V.2. Maintenance. The Company shall use its best efforts to keep and maintain the Project Facilities, including all appurtenances thereto and any personal property therein or thereon, in good repair and good operating condition so that the Project Facilities will continue to constitute Pollution Control Facilities or Solid Waste Disposal Facilities, for the purposes of the operation thereof as required by Section 5.4 hereof. So long as such shall not be in violation of the Act or impair the character of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities, and provided there is continued compliance with applicable laws and regulations of governmental entities having jurisdiction thereof, the Company shall have the right to remodel the Project Facilities or make additions, modifications and improvements thereto, from time to time as it, in its discretion, may deem to be desirable for its uses and purposes, the cost of which remodeling, additions, modifications and improvements shall be paid by the Company and the same shall, when made, become a part of the Project Facilities. Section V.3. Removal of Portions of the Project Facilities. The Company shall not be under any obligation to renew, repair or replace any inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary portions of the Project Facilities, except that, subject to Section 5.4 hereof, it will use its best efforts to ensure the continued character of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities. The Company shall have the right from time to time to substitute personal property or fixtures for any portions of the Project Facilities, provided that the personal property or fixtures so substituted shall not impair the character of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities. Any such substituted property or fixtures shall, when so substituted, become a part of the Project Facilities. The Company shall also have the right to remove any portion of the Project Facilities, without substitution therefor; provided, that the Company shall deliver to the Trustee a certificate signed by an Engineer describing said portion of the Project Facilities and stating that the removal of such property or fixtures will not impair the character of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities. Section V.4. Operation of Project Facilities. The Company will, subject to its obligations and rights to maintain, repair or remove portions of the Project Facilities, as provided in Sections 5.2 and 5.3 hereof, use its best efforts to continue operation of the Project Facilities so long as and to the extent that operation thereof is required to comply with laws or regulations of governmental entities having jurisdiction thereof or unless the Issuer shall have approved the discontinuance of such operation (which approval shall not be unreasonably withheld). The Company agrees that it will, within the design capacities thereof, use its best efforts to operate and maintain the Project Facilities in accordance with all applicable, valid and enforceable rules and regulations of governmental entities having jurisdiction thereof; provided, that the Company reserves the right to contest in good faith any such laws or regulations. Nothing in this Agreement shall prevent or restrict the Company, in its sole discretion, at any time, from discontinuing or suspending either permanently or temporarily its use of any facility of the Company served by the Project Facilities and in the event such discontinuance or suspension shall render unnecessary the continued operation of the Project Facilities, the Company shall have the right to discontinue the operation of the Project Facilities during the period of any such discontinuance or suspension. Section V.5. Insurance. The Company shall cause the Project Facilities to be kept insured against fire or other casualty to the extent that property of similar character is usually so insured by companies similarly situated and operating like properties, to a reasonable amount by reputable insurance companies or, in lieu of or supplementing such insurance in whole or in part, adopt some other method or plan of protection against loss by fire or other casualty at least equal in protection to the method or plan of protection against loss by fire or other casualty of companies similarly situated and operating properties subject to similar or greater fire or other hazards or on which properties an equal or higher primary fire or other casualty insurance rate has been set by reputable insurance companies. Section V.6. Workers' Compensation Coverage. Throughout the term of this Agreement, the Company shall comply, or cause compliance, with applicable workers' compensation laws of the State. Section V.7. Damage; Destruction and Eminent Domain. If, during the term of this Agreement, the Project Facilities or any portion thereof is destroyed or damaged in whole or in part by fire or other casualty, or title to, or the temporary use of, the Project Facilities or any portion thereof shall have been taken by the exercise of the power of eminent domain, the Company (unless it shall have exercised its option to prepay the Loan Payments pursuant to Section 6.2 hereof) shall promptly repair, rebuild or restore the portion of the Project Facilities so damaged, destroyed or taken with such changes, alterations and modifications (including the substitution and addition of other property) as may be necessary or desirable for the administration and operation of the Project Facilities as Pollution Control Facilities or Solid Waste Disposal Facilities and as shall not impair the character or significance of the Project Facilities as furthering the purposes of the Act. Section V.8. Company to Maintain its Corporate Existence; Conditions Under Which Exceptions Permitted. The Company agrees that, during the term of this Agreement, it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another corporation or permit one or more other corporations to consolidate with or merge into it; provided that the Company may, without violating its agreement contained in this Section, consolidate with or merge into another corporation, or permit one or more other corporations to consolidate with or merge into it, or sell or otherwise transfer to another corporation all or substantially all of its assets as an entirety and thereafter dissolve, provided the surviving, resulting or transferee corporation, as the case may be (if other than the Company), is a corporation organized and existing under the laws of one of the states of the United States, and assumes in writing all of the obligations of the Company herein, and, if not an Indiana corporation, is qualified to do business in the State. If consolidation, merger or sale or other transfer is made as provided in this Section, the provisions of this Section shall continue in full force and effect and no further consolidation, merger or sale or other transfer shall be made except in compliance with the provisions of this Section. Section V.9. Indemnification. The Company releases the Issuer from, agrees that the Issuer shall not be liable for, and indemnifies the Issuer against, all liabilities, claims, costs and expenses imposed upon or asserted against the Issuer on account of: (a) any loss or damage to property or injury to or death of or loss by any person that may be occasioned by any cause whatsoever pertaining to the construction, maintenance, operation and use of the Project Facilities; (b) any breach or default on the part of the Company in the performance of any covenant or agreement of the Company under this Agreement or any related document, or arising from any act or failure to act by the Company, or any of its agents, contractors, servants, employees or licensees; (c) the authorization, issuance and sale of the Bonds, and the provision of any information furnished in connection therewith concerning the Project Facilities or the Company (including, without limitation, any information furnished by the Company for inclusion in any certifications made by the Issuer under Section 3.4 hereof or for inclusion in, or as a basis for preparation of, the Form 8038 information statement to be filed by the Issuer); and (d) any claim or action or proceeding with respect to the matters set forth in (a), (b) and (c) above brought thereon. The Company agrees to indemnify the Trustee, the Paying Agent, the Remarketing Agent and the Registrar (each hereinafter referred to in this section as an "indemnified party") for and to hold each of them harmless against all liabilities, claims, costs and expenses incurred without negligence or willful misconduct on the part of the indemnified party, on account of any action taken or omitted to be taken by the indemnified party in accordance with the terms of this Agreement, the Bonds or the Indenture or any action taken at the request of or with the consent of the Company, including the costs and expenses of the indemnified party in defending itself against any such claim, action or proceeding brought in connection with the exercise or performance of any of its powers or duties under this Agreement, the Bonds or the Indenture. In case any action or proceeding is brought against the Issuer, or an indemnified party in respect of which indemnity may be sought hereunder, the party seeking indemnity promptly shall give notice of that action or proceeding to the Company, and the Company upon receipt of that notice shall have the obligation and the right to assume the defense of the action or proceeding; provided, that failure of a party to give that notice shall not relieve the Company from any of its obligations under this Section unless that failure prejudices the defense of the action or proceeding by the Company. At its own expense, an indemnified party may employ separate counsel and participate in the defense; provided, however, where it is ethically inappropriate for one firm to represent the interests of the Issuer, and any other indemnified party or parties, the Company shall pay the Issuer's legal expenses in connection with the Issuer's retention of separate counsel. The Company shall not be liable for any settlement made without its consent. The indemnification set forth above is intended to and shall include the indemnification of all affected officials, directors, officers and employees of the Issuer, the Trustee, the Paying Agent, the Remarketing Agent and the Registrar, respectively. That indemnification is intended to and shall be enforceable by the Issuer, the Trustee, the Paying Agent, the Remarketing Agent and the Registrar, respectively, to the full extent permitted by law. Section V.10. Company Not to Adversely Affect Exclusion of Interest on Bonds From Gross Income For Federal Income Tax Purposes. The Company hereby covenants and represents that it has taken and caused to be taken and shall take and cause to be taken all actions that may be required of it for the interest on the Bonds to be and remain excluded from the gross income of the Holders for federal income tax purposes, and that it has not taken or permitted to be taken on its behalf, and covenants that it will not take, or permit to be taken on its behalf, any action which, if taken, would adversely affect that exclusion under the provisions of the Code. Section V.11. Use of Project Facilities. The Issuer agrees that it will not take any action, or cause any action to be taken on its behalf, to interfere with the Company's ownership interest in the Project or to prevent the Company from having possession, custody, use and enjoyment of the Project other than pursuant to Article VII of this Agreement or Article VII of the Indenture. Section V.12. Assignment by Company. This Agreement may be assigned in whole or in part by the Company without the necessity of obtaining the consent of either the Issuer or the Trustee, subject, however, to each of the following conditions: (a) No assignment (other than pursuant to Section 5.8 hereof) shall relieve the Company from primary liability for any of its obligations hereunder, and in the event of any such assignment the Company shall continue to remain primarily liable for the payment of the Loan Payments and Additional Payments and for performance and observance of the agreements on its part herein provided to be performed and observed by it. (b) Any assignment by the Company must retain for the Company such rights and interests as will permit it to perform its obligations under this Agreement, and any assignee from the Company shall assume the obligations of the Company hereunder to the extent of the interest assigned. (c) The Company shall, within 30 days after execution thereof, furnish or cause to be furnished to the Issuer and the Trustee a true and complete copy of each such assignment together with any instrument of assumption. (d) Any assignment from the Company shall not materially impair fulfillment of the Project Purposes to be accomplished by operation of the Project as herein provided. (End of Article V) ARTICLE VI REDEMPTION Section VI.1. Optional Redemption. Provided no Event of Default shall have occurred and be subsisting, at any time and from time to time, the Company may deliver moneys to the Trustee in addition to Loan Payments or Additional Payments required to be made and direct the Trustee to use the moneys so delivered for the purpose of calling Bonds for optional redemption in accordance with the applicable provisions of the Indenture providing for optional redemption at the redemption price stated in the Indenture. Pending application for those purposes, any moneys so delivered shall be held by the Trustee in a special account in the Bond Fund and delivery of those moneys shall not, except as set forth in Section 4.1 hereof, operate to abate or postpone Loan Payments or Additional Payments otherwise becoming due or to alter or suspend any other obligations of the Company under this Agreement. Section VI.2. Extraordinary Optional Redemption. The Company shall have, subject to the conditions hereinafter imposed, the option during a Term Rate Period to direct the redemption of the Bonds in whole upon the occurrence of the event described below in paragraph (c) and in part upon the occurrence of the other events described below in accordance with the applicable provisions of the Indenture. In the event that any of the events described below affect less than all of the Project Facilities and the Generating Stations which they serve, the Bonds may be redeemed in an amount equal to the outstanding principal amount of the Bonds multiplied by the allocable percentage figure for each Project Facility, to-wit: 43.5% for Facility 1, 1% for Facility 2, 0% for Facility 3, 0% for Facility 4, 5% for Facility 5, 44.5% for Facility 6, 0% for Facility 7 and 6% for Facility 8. (a) One or more of the Project Facilities or the Generating Stations which they serve shall have been damaged or destroyed to such an extent that (1) such Project Facilities or such Generating Stations cannot reasonably be expected to be restored, within a period of six consecutive months, to the condition thereof immediately preceding such damage or destruction or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of such Project Facilities or such Generating Stations for a period of six consecutive months. (b) Title to, or the temporary use of, all or a significant part of one or more of the Project Facilities or the Generating Stations which they serve shall have been taken under the exercise of the power of eminent domain to such an extent (1) that such Project Facilities or such Generating Stations cannot reasonably be expected to be restored within a period of six consecutive months to a condition of usefulness comparable to that existing prior to the taking or (2) the Company is reasonably expected to be prevented from carrying on its normal use and operation of such Project Facilities or such Generating Stations for a period of six consecutive months. (c) As a result of any changes in the Constitution of the State, the Constitution of the United States of America or any state or federal laws or as a result of legislative or administrative action (whether state or federal) or by final decree, judgment or order of any court or administrative body (whether state or federal) entered after any contest thereof by the Issuer or the Company in good faith, this Agreement shall have become void or unenforceable or impossible of performance in accordance with the intent and purpose of the parties as expressed in this Agreement. (d) Unreasonable burdens or excessive liabilities shall have been imposed upon the Issuer or the Company with respect to one or more of the Project Facilities or the Generating Stations which they serve or the operation thereof, including, without limitation, the imposition of federal, state or other ad valorem, property, income or other taxes other than ad valorem taxes at the rates presently levied upon privately owned property used for the same general purpose as such Project Facilities or such Generating Stations. (e) Changes in the economic availability of raw materials, operating supplies, energy sources or supplies or facilities (including, but not limited to, facilities in connection with the disposal of industrial wastes) necessary for the operation of one or more of the Project Facilities or the Generating Stations which they serve for the Project Purposes occur or technological or other changes occur which the Company cannot reasonably overcome or control and which in the Company's reasonable judgment render such Project Facilities or such Generating Stations uneconomic or obsolete for the Project Purposes. (f) Any court or administrative body shall enter a judgment, order or decree, or shall take administrative action, requiring the Company to cease all or any substantial part of its operations served by one or more of the Project Facilities or the Generating Stations which they serve to such extent that the Company is or will be prevented from carrying on its normal operations at such Project Facilities or such Generating Stations for a period of six consecutive months. (g) The termination by the Company of operations at any of the Generating Stations which are served by any of the Project Facilities. The amount payable by the Company in the event of its exercise of the option granted in this Section shall be the sum of the following: (i) An amount of money which, when added to the moneys and investments held to the credit of the Bond Fund, will be sufficient pursuant to the provisions of the Indenture to pay, at 100% of the principal amount thereof plus accrued interest to the redemption date, and discharge, all or such portion of Outstanding Bonds to be redeemed on the earliest applicable redemption date, that amount to be paid to the Trustee, plus (ii) An amount of money equal to the Additional Payments relating to those Bonds accrued and to accrue until actual final payment and redemption of those Bonds, that amount or applicable portions thereof to be paid to the Trustee or to the Persons to whom those Additional Payments are or will be due. The requirement of (ii) above with respect to Additional Payments to accrue may be met if provisions satisfactory to the Trustee and the Issuer are made for paying those amounts as they accrue. The rights and options granted to the Company in this Section may be exercised whether or not the Company is in default hereunder; provided, that such default will not relieve the Company from performing those actions which are necessary to exercise any such right or option granted hereunder. Section VI.3. Mandatory Redemption. The Company shall deliver to the Trustee the moneys needed to redeem the Bonds in accordance with any mandatory redemption provisions relating thereto as may be set forth in Sections 4.01(b) of the Indenture. Section VI.4. Notice of Redemption. In order to exercise an option granted in, or to consummate a redemption required by, this Article VI, the Company shall, within 180 days following the event authorizing the exercise of such option, or at any time during the continuation of the condition referred to in paragraphs (c), (d) or (e) of Section 6.2 hereof, or at any time that optional redemption of the Bonds is permitted under the Indenture as provided in Section 6.1 hereof, or promptly upon the occurrence of a Determination of Taxability (as defined in the Indenture), give written notice to the Issuer and the Trustee that it is exercising its option to direct the redemption of Bonds, or that the redemption thereof is required by Section 4.01(b) of the Indenture due to the occurrence of a Determination of Taxability, as the case may be, in accordance with the Agreement and the Indenture, and shall specify therein the date on which such redemption is to be made, which date shall not be more than 180 days from the date such notice is mailed. The Company shall make arrangements satisfactory to the Trustee for the giving of the required notice of redemption to the Holders of the Bonds, in which arrangements the Issuer shall cooperate. Section VI.5. Actions by Issuer. At the request of the Company or the Trustee, the Issuer shall take all steps required of it under the applicable provisions of the Indenture or the Bonds to effect the redemption of all or a portion of the Bonds pursuant to this Article VI. (End of Article VI) ARTICLE VII EVENTS OF DEFAULT AND REMEDIES Section VII.1. Events of Default. Each of the following shall be an Event of Default: (a) The occurrence of an event of default as defined in Section 7.01 (a), (b), (c) or (d) of the Indenture; (b) The Company shall fail to observe and perform any other agreement, term or condition contained in this Agreement, other than such failure as will have resulted in an event of default described in (a) above and the continuation of that failure for a period of 90 days after notice thereof shall have been given to the Company by the Issuer or the Trustee, or for such longer period as the Issuer and the Trustee may agree to in writing; provided, that failure shall not constitute an Event of Default so long as the Company institutes curative action within the applicable period and diligently pursues that action to completion within 150 days after the expiration of initial cure period as determined above, or within such longer period as the Issuer and the Trustee may agree to in writing; and (c) By decree of a court of competent jurisdiction the Company shall be adjudicated a bankrupt, or an order shall be made approving a petition or answer filed seeking reorganization or readjustment of the Company under the federal bankruptcy laws or other law or statute of the United States of America or of the state of incorporation of the Company or of any other state, or, by order of such a court, a trustee in bankruptcy, a receiver or receivers shall be appointed of all or substantially all of the property of the Company, and any such decree or order shall have continued unstayed on appeal or otherwise and in effect for a period of sixty (60) days; and (d) The Company shall file a petition in voluntary bankruptcy or shall make an assignment for the benefit of creditors or shall consent to the appointment of a receiver or receivers of all or any part of its property, or shall file a petition seeking reorganization or readjustment under the Federal bankruptcy laws or other law or statute of the United States of America or any state thereof, or shall file a petition to take advantage of any debtors' act. Notwithstanding the foregoing, if, by reason of Force Majeure, the Company is unable to perform or observe any agreement, term or condition hereof which would give rise to an Event of Default under subsection (b) hereof, the Company shall not be deemed in default during the continuance of such inability. However, the Company shall promptly give notice to the Trustee and the Issuer of the existence of an event of Force Majeure and shall use its best efforts to remove the effects thereof; provided that the settlement of strikes or other industrial disturbances shall be entirely within its discretion. The term Force Majeure shall mean the following: (i) acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the government of the United States of America or of the State or any of their departments, agencies, political subdivisions or officials, or any civil or military authority; insurrections; civil disturbances; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; tornados; storms; droughts; floods; arrests; restraint of government and people; explosions; breakage, nuclear accidents or other malfunction or accident to facilities, machinery, transmission pipes or canals; partial or entire failure of a utility serving the Project; shortages of labor, materials, supplies or transportation; or (ii) any cause, circumstance or event not reasonably within the control of the Company. The exercise of remedies hereunder shall be subject to any applicable limitations of federal bankruptcy law affecting or precluding that declaration or exercise during the pendency of or immediately following any bankruptcy, liquidation or reorganization proceedings. Section VII.2. Remedies on Default. Whenever an Event of Default shall have happened and be subsisting, either or both of the following remedial steps may be taken: (a) The Issuer or the Trustee may have access to, inspect, examine and make copies of the books, records, accounts and financial data of the Company, only, however, insofar as they pertain to the Project; or (b) The Issuer or the Trustee may pursue all remedies now or hereafter existing at law or in equity to recover all amounts, including all Loan Payments and Additional Payments and under Section 4.8 hereof the purchase price of Bonds tendered for purchase, then due and thereafter to become due under this Agreement, or to enforce the performance and observance of any other obligation or agreement of the Company under this Agreement. Notwithstanding the foregoing, the Issuer shall not be obligated to take any step which in its opinion will or might cause it to expend time or money or otherwise incur liability unless and until a satisfactory indemnity bond has been furnished to the Issuer at no cost or expense to the Issuer. Any amounts collected as Loan Payments or applicable to Loan Payments and any other amounts which would be applicable to payment of Bond Service Charges collected pursuant to action taken under this Section shall be paid into the Bond Fund and applied in accordance with the provisions of the Indenture or, if the outstanding Bonds have been paid and discharged in accordance with the provisions of the Indenture, shall be paid as provided in Section 5.07 of the Indenture for transfers of remaining amounts in the Bond Fund. The provisions of this Section are subject to the further limitation that the rescission and annulment by the Trustee of its declaration that all of the Bonds are immediately due and payable also shall constitute a rescission and annulment of any corresponding declaration made pursuant to this Section and a rescission and annulment of the consequences of that declaration and of the Event of Default with respect to which that declaration has been made, provided that no such rescission and annulment shall extend to or affect any subsequent or other default or impair any right consequent thereon. Section VII.3. No Remedy Exclusive. No remedy conferred upon or reserved to the Issuer or the Trustee by this Agreement is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement, or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair that right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Issuer or the Trustee to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than any notice required by law or for which express provision is made herein. Section VII.4. Agreement to Pay Attorneys' Fees and Expenses. If an Event of Default should occur and the Issuer or the Trustee should incur expenses, including attorneys' fees, in connection with the enforcement of this Agreement or the collection of sums due hereunder, the Company shall be required, to the extent permitted by law, to reimburse the Issuer and the Trustee, as applicable, for the expenses so incurred upon demand. Section VII.5. No Waiver. No failure by the Issuer or the Trustee to insist upon the strict performance by the Company of any provision hereof shall constitute a waiver of their right to strict performance and no express waiver shall be deemed to apply to any other existing or subsequent right to remedy the failure by the Company to observe or comply with any provision hereof. Section VII.6. Notice of Default. The Company shall notify the Trustee and the Credit Facility Issuer immediately if it becomes aware of the occurrence of any Event of Default hereunder or of any fact, condition or event which, with the giving of notice or passage of time or both, would become an Event of Default. (End of Article VII) ARTICLE VIII MISCELLANEOUS Section VIII.1. Term of Agreement. This Agreement shall be and remain in full force and effect from the date of delivery of the Bonds to the Original Purchaser until such time as (i) all of the Bonds shall have been fully paid (or provision made for such payment) and the Indenture has been released pursuant to Section 9.01 thereof and (ii) all other sums payable by the Company under this Agreement shall have been paid; provided, however, the obligations of the Company under Sections 4.2 and 5.9 hereof shall survive any termination of this Agreement. Section VIII.2. Amounts Remaining in Funds. Any amounts in the Bond Fund remaining unclaimed by the Holders of Bonds for four years after the due date thereof (whether at stated maturity, by redemption, upon acceleration or otherwise), at the option of the Company, shall be deemed to belong to and shall be paid, subject to Section 5.06 of the Indenture, at the written request of the Company, to the Company by the Trustee. With respect to that principal of and any premium and interest on the Bonds to be paid from moneys paid to the Company pursuant to the preceding sentence, the Holders of the Bonds entitled to those moneys shall look solely to the Company for the payment of those moneys. Further, any amounts remaining in the Bond Fund and any other special funds or accounts created under this Agreement or the Indenture, except the Rebate Fund, after all of the Bonds shall be deemed to have been paid and discharged under the provisions of the Indenture and all other amounts required to be paid under this Agreement and the Indenture have been paid, shall be paid to the Company to the extent that those moneys are in excess of the amounts necessary to effect the payment and discharge of the Outstanding Bonds. Section VIII.3. Notices. All notices, certificates, requests or other communications hereunder shall be in writing, except as provided in Section 3.4 hereof, and shall be deemed to be sufficiently given when mailed by registered or certified mail, postage prepaid, and addressed to the appropriate Notice Address. A duplicate copy of each notice, certificate, request or other communication given hereunder to the Issuer, the Company, any Credit Facility Issuer or the Trustee shall also be given to the others. The Company, the Issuer, any Credit Facility Issuer and the Trustee, by notice given hereunder, may designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent. Section VIII.4. Extent of Covenants of the Issuer; No Personal Liability. All covenants, obligations and agreements of the Issuer contained in this Agreement or the Indenture shall be effective to the extent authorized and permitted by applicable law. No such covenant, obligation or agreement shall be deemed to be a covenant, obligation or agreement of any present or future member, officer, agent or employee of the Issuer in other than his official capacity, and neither the members of the Issuer nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof or by reason of the covenants, obligations or agreements of the Issuer contained in this Agreement or in the Indenture. Section VIII.5. Binding Effect. This Agreement shall inure to the benefit of and shall be binding in accordance with its terms upon the Issuer, the Company and their respective permitted successors and assigns provided that this Agreement may not be assigned by the Company (except as permitted under Sections 5.8 or 5.12 hereof) and may not be assigned by the Issuer except to (i) the Trustee pursuant to the Indenture or as otherwise may be necessary to enforce or secure payment of Bond Service Charges or (ii) any successor public body to the Issuer. Section VIII.6. Amendments and Supplements. Except as otherwise expressly provided in this Agreement or the Indenture, subsequent to the issuance of the Bonds and prior to all conditions provided for in the Indenture for release of the Indenture having been met, this Agreement may not be effectively amended, changed, modified, altered or terminated by the parties hereto except with the consents required by, and in accordance with, the provisions of Article XI of the Indenture, as applicable. Section VIII.7. References to Credit Facility. During such time or times as no Credit Facility is in effect, and during the continuation of any event of default under the Indenture due to a failure by the Credit Facility Issuer to honor a drawing by the Trustee under the Credit Facility then in effect in accordance with the terms thereof, references herein to the Credit Facility Issuer shall be ineffective. Section VIII.8. Execution Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be regarded as an original and all of which shall constitute but one and the same instrument. Section VIII.9. Severability. If any provision of this Agreement, or any covenant, obligation or agreement contained herein is determined by a judicial or administrative authority to be invalid or unenforceable, that determination shall not affect any other provision, covenant, obligation or agreement, each of which shall be construed and enforced as if the invalid or unenforceable portion were not contained herein. That invalidity or unenforceability shall not affect any valid and enforceable application thereof, and each such provision, covenant, obligation or agreement shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law. Section VIII.10. Governing Law. This Agreement shall be deemed to be a contract made under the laws of the State and for all purposes shall be governed by and construed in accordance with the laws of the State. (End of Article VIII) IN WITNESS WHEREOF, the Issuer and the Company have caused this Agreement to be duly executed in their respective names, all as of the date hereinbefore written. INDIANA DEVELOPMENT FINANCE AUTHORITY By: /s/ William H. King ------------------------------------ William H. King, Chairman Attest: /s/ Thomas McKenna - -------------------------------------------- Thomas McKenna, Designee of the Lt. Governor PSI ENERGY, INC. By: /s/ William L. Sheafer ------------------------------------ Treasurer Exhibit A DESCRIPTION OF SOLID WASTE DISPOSAL AND POLLUTION CONTROL FACILITIES The Project as amended is comprised of the following Solid Waste Disposal Facilities and Pollution Control Facilities constructed and installed in connection with the following Generating Stations. Facility 1 - Flue gas desulfurization system and sludge fixation system for Gibson Generating Station, Unit 5, including facilities for transport of fly ash for sludge fixation purposes and modifications and upgrades to the Company's undivided ownership interest in the Gibson Generating Station, Unit 5, ash handling and sludge disposal system. Facility 2 - An ash sluice pump, ash pond dike addition and an irrigation system functionally related and subordinate to the ash handling and disposal system for the Cayuga Generating Station. Facility 3 - Surfacing of loading area for loading of unregenerated spent resin on industrial vacuum trucks for the disposal of the unregenerated spend resin for the Cayuga Generating Station. Facility 4 - The discrete portions of the demineralizer used in the regeneration of spent resin or the Edwardsport Generating Station. Facility 5 - Miscellaneous improvements to the ash handling and disposal system for the Gallagher Generating Station, including the replacement of insulation on Units No. 1, No. 2 and No. 4 economizer hoppers, replacement of Unit No. 1, No. 2 and No. 4 economizer dust lines, replacement of ash sluice pumps and replacement of low pressure service water pumps for Units 1, 2, 3 and 4. Facility 6 - Miscellaneous improvements to and expansion of ash handling and disposal facilities for the Gibson Generating Station, including the acquisition of land and construction of a 500 acre ash storage pond for Unit 5, replacement of ash sluice 2B pump, motor, coupling and monitoring relay for Unit 2, replacement of ash sluice 4A pump and extensions of existing ash transport lines for Unit 4, and improvements and modifications of fly ash disposal equipment for Unit 1 and Unit 2. Facility 7 - Addition to landfill aggregate materials building for housing of solid waste transport and disposal equipment for the Gibson Generating Station Unit 5. Facility 8 - Miscellaneous improvements to and expansion of ash handling and disposal facilities for the Wabash River Generating Station, including an ash hopper modifications for Wabash River Generating Station, Units 1-6. EX-27 4 PSI FDS
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 MAR-01-1998 JUN-30-1998 PER-BOOK 2,554,056 0 362,562 375,773 114,753 3,407,144 539 400,904 576,796 978,239 0 71,953 950,425 195,419 0 0 141,569 0 0 0 1,069,539 3,407,144 511,530 (19,543) 540,764 521,221 (9,691) 1,571 (8,120) 22,898 (31,018) 1,150 (32,168) 0 19,420 140,584 0.00 0.00
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