-----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, D+Wd6k4yx+ZYb7zihUCihcNDZRLXxyQrL+iezVA+/B7vrAm5ySGmc8SoyZ3gJJYC y+rHOgyG1JFGK9+9Svak3g== 0000899652-98-000120.txt : 19980817 0000899652-98-000120.hdr.sgml : 19980817 ACCESSION NUMBER: 0000899652-98-000120 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINERGY CORP CENTRAL INDEX KEY: 0000899652 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 311385023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11377 FILM NUMBER: 98687341 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5133812000 MAIL ADDRESS: STREET 1: 139 E FOURTH STREET CITY: CINCINATI STATE: OH ZIP: 45202 10-Q 1 1998 2ND QUARTER 10-Q CINERGY CORP. 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-10 2 AMENDMENT TO EMPLOYMENT AGREEMENT THIRD AMENDMENT TO EMPLOYMENT AGREEMENT This Third Amendment to Employment Agreement (the "Third Amendment") dated effective May 1, 1998, is by and among Cinergy Corp., a Delaware corporation ("Cinergy"), Cinergy Services, Inc., a Delaware corporation ("Cinergy Services"), The Cincinnati Gas & Electric Company, an Ohio corporation ("CG&E"), PSI Energy, Inc., an Indiana corporation ("PSI"), and Larry E. Thomas (the "Executive"). Cinergy, Cinergy Services, CG&E, and PSI will sometimes be referred to in this Third Amendment collectively as the "Corporation". WHEREAS, the Executive has been employed by the Corporation since October 5, 1967; WHEREAS, the Executive has been employed by the Corporation pursuant to an Employment Agreement dated effective as of October 24, 1994 (the "Employment Agreement"), as amended by a First Amendment to Employment Agreement dated effective as of October 24, 1994 (the "First Amendment") and a Second Amendment to Employment Agreement dated effective as of January 29, 1997 (the "Second Amendment"); WHEREAS, the parties desire to amend the retirement and relocation provisions of the Employment Agreement; NOW, THEREFORE, the parties have agreed to enter into this Third Amendment which amends the Employment Agreement, as previously amended, as follows: 1. The substantive provisions of Section 3 (b) are deleted in their entirety and replaced with the following: "b. Retirement, Incentive, Welfare Benefit Plans and Other Benefits. During the Employment Period and so long as the Executive is employed by the Corporation, the Executive shall be eligible, and the Corporation shall take Page 1 of 3 such actions as may be necessary or required to cause the Executive to become eligible, to participate in all short-term and long-term incentive, stock option, restricted stock, savings, retirement and welfare plans, practices, policies and programs applicable generally to employees and/or other senior executives of the Corporation who are considered Tier II executives for compensation purposes, including, but not limited to, the Annual Incentive Plan, the 1996 Long-Term Incentive Compensation Plan, the Executive Supplemental Life Insurance Program, the Nonqualified Deferred Incentive Compensation Plan, the Excess 401(k) Plan, the NonUnion Employees' 401(k) Plan, the Non-Union Employees' Pension Plan and the Excess Benefit Plan, or any successors thereto, except with respect to any plan, practice, policy or program to which the Executive has waived his rights in writing. With regard to the Executive's retirement benefits, the Executive shall be entitled to a 'Contractual Retirement Supplement' (paid from the Corporation's general assets) which extends to the Executive upon retirement on or after age fifty-five (55) a non-qualified benefit that, when added to the Executive's benefit under the Pension Plan and the Excess Benefit Plan, or any successor thereto, will provide total retirement income equivalent to a full career employee with equal annual earnings. For purposes of the preceding sentence, a 'full career employee' shall mean an employee with thirty-five (35) full years of 'service' under the Pension Plan." 2. The substantive provisions of Section 3 (e) are deleted in their entirety and replaced with the following: "e. Relocation Benefits. The Executive shall be entitled to reimbursement from the Corporation pursuant to the terms of the Corporation's Relocation Program in Page 2 of 3 effect as of the day and year first written above, as well as actual expenses for temporary housing until such time as he has moved into a new primary residence in the general area of the Corporation's principal corporate office located in Cincinnati, Ohio. In addition, following termination of the Executive's employment for any reason, the Corporation shall reimburse the Executive for the reasonable costs of relocating from the Cincinnati, Ohio, area to a new primary residence in a manner that is consistent with the Corporation's Relocation Program in effect as of May 1, 1998. The expenses described in this Section shall be 'grossed-up' to provide for adverse tax consequences to the Executive." 3. All other provisions of the Employment Agreement, First Amendment, and Second Amendment remain unchanged by this Third Amendment. IN WITNESS WHEREOF, the Executive and the Corporation have caused this Third Amendment to Employment Agreement to be executed effective as of the day and year first above written. CINERGY CORP., CINERGY SERVICES, INC., THE CINCINNATI GAS & ELECTRIC COMPANY, and PSI ENERGY, INC. By: _________________________ James E. Rogers Vice Chairman and Chief Executive Officer EXECUTIVE - ----------------------------- Larry E. Thomas Page 3 of 3 EX-27 3 CINERGY 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 6,291,113 0 857,597 1,645,847 385,746 9,180,303 1,585 1,599,435 902,226 2,503,246 0 92,688 2,192,975 1,120,559 0 0 251,569 0 0 0 3,019,266 9,180,303 1,072,003 (10,897) 1,058,455 1,047,558 24,445 11,743 36,188 62,121 (25,933) 0 (25,933) 71,006 43,835 374,684 (0.16) (0.16)
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