______________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 2-7793
THE UNION LIGHT, HEAT AND POWER COMPANY
(Exact name of registrant as specified in its charter)
KENTUCKY 31-0473080
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
139 East Fourth Street
Cincinnati, Ohio 45202
(Address of principal executive offices)
Registrant's telephone number: (513) 381-2000
Securities registered pursuant to Sections 12(b) and 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Requirements pursuant to Item 405 of Regulation S-K are not applicable.
The Union Light, Heat and Power Company meets the conditions set forth in
General Instruction J(1)(a) and (b) of Form 10-K and is therefore filing this
Form 10-K with the reduced disclosure format specified in General Instruction
J(2) to Form 10-K.
As of February 28, 1995, 585,333 shares of Common Stock, par value $15.00 per
share, were outstanding, all of which were held by The Cincinnati Gas &
Electric Company.
______________________________________________________________________________
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THE UNION LIGHT, HEAT AND POWER COMPANY
TABLE OF CONTENTS
Item
Number
PART I
1 Business
Organization . . . . . . . . . . . . . . . . . . . . . .
The Company. . . . . . . . . . . . . . . . . . . . . . .
Customer, Sales, and Revenue Data. . . . . . . . . . . .
Financial Information by Business Segment. . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . .
Rate Matters . . . . . . . . . . . . . . . . . . . . . .
Power Supply . . . . . . . . . . . . . . . . . . . . . .
Gas Supply . . . . . . . . . . . . . . . . . . . . . . .
Competition. . . . . . . . . . . . . . . . . . . . . . .
Capital Requirements . . . . . . . . . . . . . . . . . .
Environmental Matters. . . . . . . . . . . . . . . . . .
Employees. . . . . . . . . . . . . . . . . . . . . . . .
2 Properties . . . . . . . . . . . . . . . . . . . . . . . .
3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . .
4 Submission of Matters to a Vote of Security Holders. . . .
PART II
5 Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . .
6 Selected Financial Data. . . . . . . . . . . . . . . . . .
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . .
Index to Financial Statements and Financial Statement
Schedules. . . . . . . . . . . . . . . . . . . . . . . .
8 Financial Statements and Supplementary Data. . . . . . . .
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . .
PART III
10 Directors and Executive Officers of the Registrant . . . .
11 Executive Compensation . . . . . . . . . . . . . . . . . .
12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . .
13 Certain Relationships and Related Transactions . . . . . .
PART IV
14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Financial Statements and Schedules . . . . . . . . . .
Reports on Form 8-K. . . . . . . . . . . . . . . . . .
Exhibits . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
PART I
ITEM 1. BUSINESS
Organization
The Union Light, Heat and Power Company (ULH&P) is a wholly-owned subsidiary
of The Cincinnati Gas & Electric Company (CG&E). In October 1994, CG&E became
a subsidiary of CINergy Corp. (CINergy) as a result of the merger of CG&E and
PSI Resources, Inc. (Resources). CINergy is a registered holding company
under the Public Utility Holding Company Act of 1935 (PUHCA).
The Company
ULH&P is primarily engaged in the transmission, distribution, and sale of
electric energy and the sale and transportation of natural gas in northern
Kentucky. The area served with electricity, gas, or both covers approximately
500 square miles, has an estimated population of 284,000 people, and includes
the cities of Covington and Newport in Kentucky.
Customer, Sales, and Revenue Data
Approximately 71% and 28% of ULH&P's operating revenues are derived from the
sale of electricity and the sale and transportation of natural gas,
respectively. The service territory of ULH&P is heavily populated and
characterized by a stable residential customer base and a diverse mix of
industrial customers. As of December 31, 1994, ULH&P supplied electric
service to over 111,000 customers and provided gas service to more than 71,000
customers. ULH&P's service territory spans six counties in Kentucky. No one
customer accounts for more than 10% of electric or gas operating revenues of
ULH&P. Sales of electricity and gas sales and transportation are affected by
seasonal weather patterns, and, therefore, operating revenues and associated
operating expenses are not distributed evenly during the year.
Financial Information by Business Segment
For financial information by business segment, see Note 12 of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary
Data". For a discussion of the potential divestiture of gas operations, see
Note 11(c) of the "Notes to Financial Statements" in "Item 8. Financial
Statements and Supplementary Data".
Regulation
As an indirect subsidiary of CINergy, ULH&P is subject to regulation by the
Securities and Exchange Commission (SEC) under the PUHCA with respect to,
among other things, issuances and sales of securities, acquisitions and sales
of certain utility properties, acquisitions and retentions of interests in
non-utility businesses, intrasystem sales of certain goods and services, the
method of keeping accounts, and access to books and records. In addition, the
PUHCA generally limits registered holding companies to a single "integrated"
public utility system, which the SEC traditionally has interpreted to prohibit
a registered holding company, with limited exceptions, from owning both gas
and electric properties. (Refer to the information appearing under the
caption "Potential Divestiture of Gas Operations" in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations".)
As to retail rates and other matters, ULH&P is regulated by the Kentucky
Public Service Commission (KPSC). ULH&P is also subject to regulation by the
Federal Energy Regulatory Commission (FERC) under the Federal Power Act with
respect to the classification of accounts, rates for wholesale sales of
electricity, interconnection agreements, and acquisitions and sales
of certain utility properties. Transportation of gas between CG&E and ULH&P
is subject to regulation by the FERC under the Natural Gas Act.
Rate Matters
Refer to the information appearing under the caption "Regulatory Matters" in
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Power Supply
ULH&P does not own or operate any electric generating facilities. Its
requirements for electric energy are purchased from CG&E at rates regulated by
the FERC.
Gas Supply
The FERC's Order 636 restructured the operations of gas pipelines and the
supply portfolios of gas distribution companies. As gas pipelines unbundled
their historic service of supply aggregating, direct term contracting by gas
distribution companies with producers and marketers diminished the once
prominent spot market (see the information appearing under the caption "Order
636" in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations").
CG&E and its subsidiaries, including ULH&P, now obtain the majority of their
natural gas supply (89%) from firm supply agreements, with remaining volumes
purchased in the spot market. These firm contracts feature dual levels of gas
supply: base load for continuous supply for CG&E's and its subsidiaries' core
requirements, and "swing" load, which is gas available on a daily basis for
changes in demand. While a premium is paid for the swing load, the use of
industry indices to price firm gas volumes on a monthly basis ensures that the
price CG&E and its subsidiaries pay remains economically competitive.
Gas is transported on interstate pipelines either directly to CG&E's and its
subsidiaries' distribution systems, or it is injected into pipeline storage
facilities for withdrawal and delivery in the future. Most of CG&E's and its
subsidiaries' gas supplies are sourced from the Gulf of Mexico coastal area.
CG&E and its subsidiaries have also obtained limited supply sourced from the
Appalachian region and the mid-continent (Arkansas - Oklahoma) basin, and from
methane gas recovered from an Ohio landfill. Over the long-term, natural gas
is expected to retain its competitiveness with alternative fuels; however, the
costs of discovery and development of new sources of supply will influence
prices.
Competition
Refer to the information appearing under the caption "Competitive Pressures"
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Capital Requirements
Refer to the information under the caption "Capital Requirements" in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Environmental Matters
Refer to the information appearing in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Employees
The number of employees of ULH&P at December 31, 1994, was 342, of whom 277
belonged to bargaining units. These bargaining unit employees were
represented by the same labor agreements between CG&E and the applicable union
organization. Approximately 88 employees were represented by the
International Brotherhood of Electrical Workers (IBEW), 110 were represented
by the United Steel Workers of America (USWA), and 79 were represented by the
Independent Utilities Union (IUU).
The current contract between ULH&P and the IUU will expire in March 1998.
ULH&P has three-year agreements with the USWA and IBEW that will expire May
15, 1997, and April 1, 1997, respectively.
ITEM 2. PROPERTIES
Substantially all utility plant is subject to the lien of ULH&P's first
mortgage bond indenture.
As of December 31, 1994, ULH&P owned 104 circuit miles of 69,000 volt electric
transmission line, an electric distribution system consisting of 2,468 circuit
miles, and a gas distribution system consisting of 1,190 miles of mains and
service lines in northern Kentucky. ULH&P also owns a seven million gallon
capacity underground cavern for the storage of liquid propane and a related
vaporization and mixing plant and feeder lines, located in northern Kentucky
and adjacent to one of the gas lines that transports natural gas to CG&E. The
cavern and vaporization and mixing plant are used primarily to augment CG&E's
and ULH&P's supply of natural gas during periods of peak demand and
emergencies.
ITEM 3. LEGAL PROCEEDINGS
ULH&P has no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to Instruction J(2)(c).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
All ULH&P common stock is held by CG&E; therefore, there is no public trading
market for ULH&P common stock.
ULH&P declared common dividends per share of $6.00 and $5.00 during the fourth
quarters of 1994 and 1993, respectively.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to Instruction J(2)(a).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MERGER CONSUMMATION
CINergy Corp. (CINergy) was created for the October 1994 merger of The
Cincinnati Gas & Electric Company (CG&E) -- the parent company of The Union
Light, Heat and Power Company (ULH&P) -- and PSI Resources, Inc. (Resources)
and is a registered holding company under the Public Utility Holding Company
Act of 1935 (PUHCA). The business combination was accounted for as a pooling
of interests. Each outstanding share of common stock of CG&E and Resources
was exchanged for one share and 1.023 shares, respectively, of CINergy common
stock. Following the merger, CINergy became the parent holding company of
CG&E, its utility subsidiaries, and PSI Energy, Inc. (Energy), previously
Resources' utility subsidiary. ULH&P remains a wholly-owned subsidiary of
CG&E, and the outstanding debt securities of ULH&P were not affected by the
merger. Following the merger, CG&E, its utility subsidiaries, and Energy (the
Operating Companies) began jointly dispatching their generating units.
FINANCIAL CONDITION
Competitive Pressures
Electric Utility Industry
Introduction The primary factor influencing the future profitability of
CINergy and its utility subsidiaries is the changing competitive environment
for energy services and the related commoditization of electric power markets.
Changes in the industry include more competition in wholesale power markets
and the imminent likelihood of "customer choice" by large industrial customers
and, ultimately, by all retail customers. For an electric utility to be
successful in this competitive environment, it is critical that regulatory
reform keep pace with the competitive realities facing electric utilities and
their customers. Strict adherence to traditional, cost-based rate of return
regulation will significantly disadvantage a utility's ability to successfully
compete to supply customer needs. For example, performance-based regulation
(e.g., price caps) would likely add substantial flexibility for the franchise
utility in the transition to a fully competitive environment.
Although the Operating Companies provide service in separate retail regulatory
jurisdictions, as a result of the merger, strategies and opportunities for
success in a more competitive environment are most appropriately discussed for
CINergy as a whole. Consequently, the discussion that follows addresses
issues for CINergy as a whole while recognizing that regulatory response to
competitive pressures may vary between regulatory jurisdictions.
Pressures for "Customer Choice" The granting of choice to end-user customers,
commonly referred to as retail wheeling, would allow a customer within a
particular utility's service territory to buy power directly from another
source using the power lines of the local utility for delivery. The
regulatory and legislative reform to facilitate this result is primarily
driven by large industrial energy users' needs for low-cost power to remain
competitive in the global marketplace. These industrial customers are
intensifying their efforts to change the regulatory process that currently
denies them access to lower-cost power. The current restrictions on access to
low-cost power are exacerbated by cost-of-service regulation which has
produced average industrial rates to customers that vary substantially across
the United States (from approximately 3 cents per kilowatt-hour [kwh] to 10
cents per kwh).
Federal Law, the New Competitors, and the Commoditization of Electric Power
Markets The Energy Policy Act of 1992 (Energy Act), the most comprehensive
energy legislation enacted since the late 1970s, has essentially provided for
open competition at the wholesale level. The Energy Act created a new class
of wholesale power providers, exempt wholesale generators (EWGs), that are not
subject to the restrictive requirements of the PUHCA nor the ownership
restrictions of the Public Utility Regulatory Policies Act of 1978. However,
due to excess capacity in the industry, EWGs have not yet significantly
affected competition in the wholesale power market. To date, the primary
impetus for increased wholesale competition has been the provision of the
Energy Act that granted the Federal Energy Regulatory Commission (FERC) the
authority to order wholesale transmission access. This provision, combined
with the excess capacity in the bulk-power markets, has resulted in the
emergence of power marketers and brokers.
Brokers are intermediaries between buyers and sellers (i.e., they do not take
title to the power). Power marketers are entities licensed by the FERC to
conduct bulk power trades at market-based prices. They manage portfolios of
power contracts (which they have title to) and owned generation and package
energy products for customers of bulk power, including price risk management
contracts such as options on fixed price energy or guaranteed fixed price
contracts.
As regulatory issues such as transmission pricing are resolved, power
marketers and brokers will become more significant factors in wholesale power
markets and, ultimately, the retail markets. With respect to transmission
pricing, the FERC recently issued a policy statement indicating its intent to
allow flexibility in pricing, permitting parties to submit either traditional,
cost-based plans or pricing schemes based on non-traditional designs. The
transmission pricing policy enumerates five principles that the FERC will
consider in approving future proposals, including cost-based rates, adherence
to the FERC's comparability standard, economic efficiency, fairness, and
practicality.
States' Role in Customer Choice (Retail Wheeling) As discussed above, the
Energy Act allows real competition in the wholesale power market; however, it
prohibits the FERC from ordering utilities to provide transmission access to
retail customers (retail wheeling) and is silent with respect to the states'
role and authority in this issue.
Several states are currently reviewing retail wheeling proposals. In
particular, the California Public Utilities Commission proposed a plan in 1994
that would allow all customers to choose their electric supplier by the year
2002. However, it is currently anticipated that implementation of this
proposal could be substantially delayed due to the complex issues involved
(e.g., exclusive use of a power pool run by an impartial third party vs.
bilateral contract arrangements). In addition to California, Michigan
regulators have proposed a limited retail wheeling experiment, and Wisconsin
regulators are reviewing numerous proposals for restructuring that state's
electric supply and related services. Connecticut regulators, on the other
hand, recently decided to delay consideration of retail wheeling until new
capacity is needed in the state (approximately the year 2007).
A significant issue for states and utilities to resolve with respect to retail
wheeling is the regulatory treatment of any stranded investments, or costs
without a customer. California's proposal and a recent proposal by the FERC
contain mechanisms for recovery by the franchise utility of certain sunk costs
or investments "stranded" by the loss of the monopoly franchise; however,
there are numerous arguments being advanced against the collection of stranded
costs. For example, there are concerns that an efficient competitive market
cannot exist if regulators allow recovery in the future of all uncollected
past costs. Given that the most severe electric competition is expected to be
in the commodity sector, stranded costs are usually considered uneconomical
generating property. In addition, stranded costs could include assets created
by the actions of regulators (i.e., regulatory assets) under the provisions of
Statement of Financial Accounting Standards No. 71, Accounting for the Effects
of Certain Types of Regulation (Statement 71), or operating costs such as fuel
supply contracts. The accounting implications from the loss of franchise
territory and related regulatory protections are discussed further herein.
CINergy's Response to the Changing Competitive Environment CINergy and its
utility subsidiaries support increased competition in the electric utility
industry. In fact, the foresight that competition was about to substantially
increase and that retail wheeling was inevitable was a catalyst for the merger
(which was announced in 1992). CINergy possesses certain competitive
advantages (e.g., low-cost generation) that could be substantially eroded by
restrictive regulations that lag the development of a competitive market and
limit CINergy's ability to preempt the competition in responding to customer
needs. As such, CINergy has chosen to initiate the retail wheeling debate and
be a leader in establishing the "ground rules" in its franchise area.
Energy recently announced its plans to offer its larger industrial customers
some form of retail wheeling in Indiana. Energy plans to submit a proposal
that would permit certain customers to choose their electric supplier. In
return, Energy would require some form of reciprocal arrangement (i.e., the
opportunity to similarly compete for customers of the selected supplier).
Under this proposal, Energy would be free to negotiate specific contracts with
customers who choose to give up the protection of the franchise obligation to
serve. Energy intends for these contractual relationships to satisfy customer
needs, while at the same time provide an appropriate risk-return relationship
for investors. In addition to the above proposal, Energy, along with other
Indiana utilities, proposed legislation in 1995 that would allow the Indiana
Utility Regulatory Commission (IURC) to adopt alternative regulatory schemes
such as performance-based regulation and the use of more flexible pricing
mechanisms. Energy is also participating in a series of informal conferences
sponsored by the IURC to discuss the consequences of competition and
appropriate responses thereto.
With respect to Ohio, a retail wheeling bill was introduced in early 1994 that
would have given customers the ability to purchase power from their provider
of choice and would have required utilities to provide access to their
transmission lines for delivery of the electric service. No action was taken
on the bill in 1994; however, similar legislation may be introduced in 1995.
CG&E is also participating in roundtable discussions being held by the Public
Utilities Commission of Ohio (PUCO) to more fully consider the emerging
competitive environment.
In Kentucky, the subject of retail wheeling is under review and discussion by
state legislators and the Kentucky Public Service Commission (KPSC); although,
no action is expected in the near term. The next legislative session in which
the issue of retail wheeling may be addressed does not begin until January
1996.
CINergy will continue to aggressively pursue any legislative or regulatory
reforms necessary to provide the opportunity for its success in a competitive
environment.
CINergy's Competitive Position As stand-alone companies, CG&E and its utility
subsidiaries and Energy were well positioned to succeed in a more competitive
environment -- as a combined organization, CINergy believes it is even better
positioned to compete in such an environment. The merger (1) combines two
low-cost providers, resulting in savings in nominal dollars of approximately
$1.5 billion over the first 10 years; (2) enhances the companies' transmission
capabilities; (3) diversifies the customer base; and (4) creates a financially
stronger company -- all of which improve an already competitively strong
position. CINergy's strategy will be to aggressively build on its cost
advantage by continually focusing on flexible strategies that are directed
toward reducing the cost structure and shifting the cost mix from fixed to
variable. CG&E and Energy have industrial rates that are below the national
average (based on 1993 data) and own generating plants that are consistently
ranked among the most efficient in the country.
CINergy believes its low-cost position and strategic initiatives will allow it
to maintain, and perhaps expand, its wholesale market share and its current
base of industrial customers. Recent successes in these markets include
Energy's 10-year agreement to serve the power needs of Blue Ridge Power
Agency, a group of municipal utilities organized in Virginia, and CG&E's 14-
year agreement to provide power to a municipal utility serving a portion of
Cleveland, Ohio. Also, CG&E's and Energy's low industrial rates have produced
regional leadership over the last five years (1989 through 1993) with respect
to growth in industrial kwh sales.
In addition, CINergy intends to aggressively pursue the substantial
opportunities that exist in the electricity markets for power marketing and
brokering. These opportunities are being created by the increasing
commoditization of electricity. CINergy believes that the ability to identify
and manage various business risks and innovative packaging of power supply
services and products based upon superior acquisition and analysis of
information will be key factors that will ensure successful participation in
these markets. CINergy's strategy for success in this business is to leverage
its understanding of customer needs and the intricacies of operating in power
markets with new skills and expertise of operating in commodity markets that
are being developed and selectively acquired from outside the industry.
Outsiders' View of CINergy's Competitive Position Major credit rating
agencies have issued reports recognizing the increased risk in the electric
utility industry due to competition. Specifically, in conjunction with
fundamentally changing the way it evaluates the credit quality of electric
utilities, Standard & Poor's has categorized each electric utility's business
position in one of seven categories ranging from "Above Average" to "Below
Average". As a result, Standard & Poor's placed Energy in the second highest
category, "Somewhat Above Average", and CG&E in the third highest category,
"High Average". In addition, Moody's recently issued a credit report stating
its belief that Energy is well positioned to compete in a more competitive
environment. At the same time, certain sell-side equity analysts have placed
CINergy near the top of their lists of those best equipped to handle
increasing competitive pressures. CINergy believes these actions support its
position that its competitive strategy will be successful.
With respect to accessing financial markets for capital needs, U.S. utilities
must compete for capital in world markets where some forecasts indicate that
as much as $250 billion will be needed by the year 2000 for state-owned
electricity privatization. These forecasts enforce CINergy's belief that
regulatory reform establishing a market structure for utilities similar to
that already existing in other countries is critical in order to successfully
compete for not only customers, but also capital.
Despite the numerous published reports discussing the increased business risk
that investors face from deregulation of the electric utility industry, the
1994 decline in electric utility stocks, taken as a whole, can be
substantially attributed to historical relationships of common stock prices to
changes in interest rates. Therefore, electric utility stocks could see
additional pressures to reflect the increased fundamental business risk as
markets become more workably competitive, particularly, without regulatory
recognition through higher allowed returns and increased flexibility (e.g.,
price caps) in order to compete. On the other hand, there is an increasingly
large disparity between the fundamental valuation measures (e.g., yield,
market-to-book ratio) of low-cost producers, like CINergy, and high-cost
producers. For example, it should be noted that the merger of Resources and
CG&E combined two utilities whose common stocks have outperformed the industry
average for the five-year period 1990 through 1994.
Gas Utility Industry
Customer Choice Energy's retail wheeling proposal discussed above is
consistent with a recent step taken by CG&E to extend a program to its natural
gas customers that is the equivalent of electric retail wheeling. For several
years, large-volume commercial and industrial customers in Ohio and Kentucky
have been able to purchase natural gas directly from suppliers and have it
transported by CG&E or ULH&P. In September 1994, CG&E implemented a new firm
transportation service which allows all non-residential customers of CG&E to
purchase gas directly from suppliers, up to approximately 5% of CG&E's peak
load. The suppliers assume the risk and obligation associated with supplying
the contractual volumes, while CG&E retains responsibility for delivering the
gas through its distribution system. This new service affords commercial and
industrial customers greater choice in competitively contracting for their
energy requirements.
Order 636 In April 1992, the FERC issued Order 636, which restructured
operations between interstate gas pipelines and their customers for gas sales
and transportation services. Order 636 mandated changes to the way CG&E and
ULH&P purchase gas supplies and contract for transportation and storage
services, resulting in increased risks in meeting the gas demands of their
customers.
CG&E and ULH&P are responding to the supply risks and opportunities of Order
636 by introducing innovations to their supply strategy including contracting
with major southwest producers for firm gas supply agreements with flexible,
extremely market sensitive pricing, marketing short-term unused pipeline
capacity and storage gas to other companies throughout the country through use
of electronic bulletin boards, and restructuring their allotment of interstate
pipeline capacity among delivering pipelines.
Order 636 also allowed pipelines to recover transition costs they incurred in
complying with the order from customers, including CG&E and ULH&P. In July
1994, the PUCO issued an order approving a stipulation between CG&E and its
domestic and industrial customer groups providing for recovery of these
pipeline transition costs. CG&E is presently recovering its Order 636
transition costs pursuant to a PUCO approved tariff. ULH&P recovers such
costs through its gas cost recovery mechanism.
Accounting Implications
A potential outcome of the changing competitive environment could be the
inability of regulated utilities to continue application of Statement 71, the
linchpin of regulated industry accounting, which allows the deferral of costs
(i.e., regulatory assets) to future periods based on assurances of a regulator
as to the recoverability of the costs in rates charged to customers. In
connection with assessing the financial exposure related to stranded costs,
regulatory assets would have to be evaluated to determine the portion for
which deferral could be continued based on the existence of the necessary
regulatory assurances.
Although CINergy's current regulatory orders and regulatory environment fully
support the recognition of its regulatory assets, the ultimate outcome of the
changing competitive environment could result in CINergy discontinuing
application of Statement 71 for all or part of its business. Such an event
would require the write-off of the portion of any regulatory asset for which
no regulatory assurance of recovery continues to exist. No evidence currently
exists that would support a write-off of any portion of CINergy's regulatory
assets. CINergy intends to pursue competitive strategies that would mitigate
the impact of this issue on the financial condition of CINergy or its utility
subsidiaries.
Securities Ratings
As a result of the merger, ULH&P's first mortgage bonds continue to be on
review for possible upgrade. The rating of ULH&P's first mortgage bonds has
been placed on Standard & Poor's ratings watch. ULH&P's goal is to achieve at
least an "A" credit rating on its first mortgage bonds.
ULH&P's first mortgage bonds are currently rated Baa1 by Moody's and BBB+ by
Standard & Poor's. These ratings may be revised or withdrawn at any time, and
each rating should be evaluated independently of any other rating.
Regulatory Matters
Potential Divestiture of Gas Operations Under the PUHCA, the divestiture of
CG&E's and ULH&P's gas operations may be required. In its order approving the
merger, the Securities and Exchange Commission (SEC) reserved judgement over
CINergy's ownership of the gas operations for a period of three years. In
November 1994, the SEC requested comments on the modernization of the PUHCA
given the industry's movement toward a more competitive environment, including
whether or not a utility registered under the PUHCA may own a combination
system (i.e., electric and gas). CINergy believes it has a justifiable basis
for retention of its gas operations and will continue pursuit of SEC approval
to retain the gas portions of the business. If divestiture is ultimately
required, the SEC has historically allowed companies sufficient time to
accomplish divestitures in a manner that protects shareholder value. Further,
CINergy believes that divestiture of the gas operations, if required, would
not have a material effect on merger savings.
Rate Matters and Merger Savings In mid-1993, the KPSC issued orders
authorizing ULH&P to increase annual gas revenues by $4.2 million.
In exchange for the KPSC's support of the merger, in May 1994, ULH&P accepted
the KPSC's request for an electric rate moratorium commencing after ULH&P's
next retail rate case and extending to January 1, 2000. The KPSC also
required CG&E and ULH&P to agree that, for 12 months from consummation of the
merger, no filings will be made to adjust CG&E's base purchase power rate
charged to ULH&P or ULH&P's base electric rates.
In 1994, ULH&P deferred $1.8 million of merger transaction costs and costs to
achieve merger savings. ULH&P intends to continue deferring its portion of
merger transaction costs and costs to achieve merger savings (current estimate
of $3.3 million) for future recovery in customer rates.
Environmental Issues
Regulations Future environmental regulations may increase the cost of
electric energy purchased by ULH&P from CG&E by reducing the amount of
electricity available for delivery or by necessitating increased fuel and/or
operating and capital costs.
Manufactured Gas Plants Coal tar residues and other substances associated
with manufactured gas plant (MGP) sites have been found at former MGP sites.
ULH&P is aware of potential sites where MGP activities may have occurred at
some time in the past. None of these sites are known to present a risk to the
environment. ULH&P has not undertaken responsibility for investigating
potential MGP sites.
CAPITAL REQUIREMENTS
Construction For 1995, construction expenditures for ULH&P are forecasted to
be $20 million, and over the next five years (1995 through 1999), are
forecasted to be approximately $120 million. (All forecasted amounts are in
nominal dollars and reflect assumptions as to the economy, capital markets,
construction programs, legislative and regulatory actions, frequency and
timing of rate increase requests, and other related factors which may change
significantly.)
Long-term Debt In 1999, ULH&P must redeem at maturity $20 million of first
mortgage bonds. Prior to 1999, ULH&P has no mandatory redemptions of
long-term debt.
The first mortgage bond indenture of ULH&P provides that so long as any series
of bonds issued prior to 1978 is outstanding, ULH&P will pay to the trustee as
a Maintenance and Replacement Fund (M&R Fund) on or before April 30 of each
year, in cash, unfunded property additions, or principal amount of first
mortgage bonds of any series issued under the mortgage, a formularized amount
related to the net revenues of ULH&P. For 1994, the M&R Fund requirement
(payable on or before April 30, 1995) for ULH&P is approximately $5 million.
Most of ULH&P's first mortgage bonds are redeemable at par value, plus accrued
interest, through cash deposited to satisfy the annual M&R Fund requirement.
On March 24, 1995, ULH&P announced its intention to redeem $5 million
principal amount of its 10.25% first mortgage bonds (due June 1, 2020) at par
with cash deposited in the M&R Fund, and to redeem the remaining amount of
such bonds at the redemption price of 107.34% on June 1, 1995.
ULH&P will continue to evaluate the use of this provision of its mortgage
indenture for the possible redemption of first mortgage bonds in future years.
CAPITAL RESOURCES
ULH&P currently projects that internal generation of funds will be adequate to
finance substantially all of its capital needs during the 1995 through 1999
period. ULH&P projects that its need, if any, for external funds during this
period will primarily be for the refinancing of long-term debt. (All
forecasted amounts are in nominal dollars and reflect assumptions as to the
economy, capital markets, construction programs, legislative and regulatory
actions, frequency and timing of rate increase requests, and other related
factors which may change significantly.)
Long-term Debt ULH&P has an existing shelf registration statement permitting
the sale of up to $20 million of long-term debt and has an application pending
before the KPSC for authority to issue up to $55 million of long-term debt.
ULH&P will request regulatory approval to issue additional amounts of debt
securities as needed.
Short-term Debt ULH&P has authority to borrow up to $35 million as of
December 31, 1994. In connection with this authority, ULH&P has established
unsecured lines of credit (Committed Lines) which currently permit borrowings
of up to $30 million, of which $15.5 million remained unused. This authority
allows ULH&P to arrange for additional short-term borrowings with various
banks on an "as offered" basis (Uncommitted Lines). All Uncommitted Lines
provide for maturities of up to 365 days with various interest rate options.
INFLATION
Over the past several years, the rate of inflation has been relatively low.
ULH&P believes that the recent inflation rates do not materially affect its
results of operations or financial condition. However, under existing
regulatory practice, only the historical cost of plant is recoverable from
customers. As a result, cash flows designed to provide recovery of historical
plant costs may not be adequate to replace plant in future years.
RESULTS OF OPERATIONS
Kwh Sales
Total kwh sales in 1994, as compared to 1993, increased 2.8% primarily due to
increased retail sales to commercial and industrial customers. Industrial
sales reflected a higher level of economic activity, including growth in the
primary metals, industrial machinery, food products, and rubber and plastic
products sectors. The increase in commercial sales was due, in part, to new
customers. A decrease in domestic sales resulted from the milder weather
experienced during the third and fourth quarters of 1994.
A return to more normal weather contributed to the 5.8% increase in total kwh
sales in 1993, as compared to 1992. In addition, growth in the food products,
industrial machinery, transportation equipment, and fabricated metal products
sectors resulted in increased industrial sales.
The 1.4% increase in kwh sales in 1992, as compared to 1991, was primarily due
to an increase in industrial sales resulting from growth in the primary metals
and rubber and miscellaneous plastic products sectors. This increase was
partially offset by a decrease in domestic sales due to the milder weather
experienced during the 1992 cooling season.
Year-to-year changes in kwh sales for each class of customers are shown below:
Increase (Decrease) from Prior Year
1994 1993 1992
Retail
Domestic. . . . . . . . . . . . . . . (4.6)% 6.6% (6.1)%
Commercial. . . . . . . . . . . . . . 6.0 5.8 .5
Industrial. . . . . . . . . . . . . . 7.2 4.4 15.2
Total retail. . . . . . . . . . . . . . 2.8 5.9 1.4
Firm power sales for resale . . . . . . 5.1 4.7 .9
Total sales . . . . . . . . . . . . . . 2.8 5.8 1.4
ULH&P currently forecasts a 2% annual compound growth rate in kwh sales over
the 1995 through 2004 period.
Mcf Sales and Transportation
The milder weather experienced in 1994 contributed to a decrease in domestic
gas sales volumes and led to the decrease in total Mcf sales and
transportation of 4.3%, as compared to 1993. The increase in gas
transportation more than offset the decrease in industrial sales volumes and
was attributable to additional demand for gas transportation services by
industrial customers mainly in the primary metals, paper products, and food
products sectors.
The increase in Mcf sales and transportation of 5.8% in 1993, when compared to
1992, was attributable to higher sales to retail customers. This increase was
primarily attributable to higher sales to domestic customers caused by the
return to more normal weather during the 1993 heating season and the addition
of a number of customers to ULH&P's gas system during the year. Gas
transportation volumes for 1993 decreased largely as a result of lower
industrial demand for gas transportation services in the paper products
sector. However, the decrease in Mcf transported was more than offset by the
increase in Mcf sold to industrial customers.
In 1992, total gas sales and transportation volumes increased 7.0%, as
compared to 1991. Contributing to the increase in total retail Mcf sales were
the less mild weather during the 1992 heating season and an increase in the
average number of gas customers, both of which resulted in greater domestic
and commercial gas sales volumes. Both Mcf sold and Mcf transported for
industrial customers increased primarily as a result of additional growth in
the primary metals sector.
Year-to-year changes in Mcf sales and transportation for each class of
customers are shown below:
Increase (Decrease) from Prior Year
1994 1993 1992
Retail
Domestic. . . . . . . . . . . . . . . (11.2)% 8.2% 9.5%
Commercial. . . . . . . . . . . . . . 4.1 4.1 4.1
Industrial. . . . . . . . . . . . . . (9.2) 23.9 1.8
Total retail. . . . . . . . . . . . . . (6.6) 8.3 7.0
Gas transported . . . . . . . . . . . . 12.9 (10.5) 7.5
Total gas sold and transported. . . . . (4.3) 5.8 7.0
Revenues
Electric Operating Revenues
In 1994, electric operating revenues increased $1.9 million (1.1%) over 1993
as a result of increased kwh sales. Electric operating revenues increased
$16.0 million (10.0%) in 1993 due to an increase in electric kwh sales of 5.8%
and to the full effect of a rate increase that became effective in May 1992.
In 1992, electric operating revenues increased $6.3 million (4.1%) primarily
due to a rate increase that became effective in May 1992 and to a 1.4%
increase in electric kwh sales.
An analysis of electric operating revenues for the past three years is shown
below:
1994 1993 1992
(in thousands)
Previous year's electric
operating revenues . . . . . . . . . . . $175 712 $159 690 $153 366
Increase (Decrease) due to change in:
Price per kwh
Retail . . . . . . . . . . . . . . . . (3 095) 6 355 4 221
Firm power sales for resale. . . . . . 170 82 (64)
Total change in price per kwh. . . . . . (2 925) 6 437 4 157
Kwh sales
Retail . . . . . . . . . . . . . . . . 4 761 9 196 2 146
Firm power sales for resale. . . . . . 92 78 14
Total change in kwh sales. . . . . . . . 4 853 9 274 2 160
Other. . . . . . . . . . . . . . . . . . (76) 311 7
Current year's electric
operating revenues . . . . . . . . . . . $177 564 $175 712 $159 690
Gas Operating Revenues
In 1994, gas operating revenues decreased $3.8 million (5.0%), as compared to
1993, primarily as a result of a decline in total volumes sold and transported
of 4.3%. This decrease was partially offset by the effect of a gas rate
increase which became effective in mid-1993. Gas operating revenues increased
$13.1 million (21.0%) in 1993 due to the operation of an adjustment clause
reflecting an increase in the cost of gas purchased, the mid-1993 rate
increase, and a 5.8% increase in total volumes sold and transported. In 1992,
gas operating revenues increased $3.7 million (6.2%) primarily due to a 7.0%
increase in total volumes sold and transported.
Operating Expenses
Electricity Purchased from Parent Company for Resale
Electricity purchased increased $7.1 million (5.6%) in 1993 due to a 6.3%
increase in volumes purchased. In 1992, electricity purchased increased
$14.8 million (13.2%) due to a 10.9% increase in the average cost per kwh
purchased and a 2.1% increase in volumes purchased.
Gas Purchased
In 1994, gas purchased expense decreased $2.9 million (6.6%) from 1993
primarily due to a 5.2% decrease in volumes purchased. A decrease in the
average cost per Mcf of gas purchased of 1.5% also contributed to the decrease
in 1994. Gas purchased expense in 1993 increased $8.0 million (22.5%) due to
an 11.8% increase in the average cost per Mcf of gas purchased and to a 9.5%
increase in volumes purchased. In 1992, gas purchased expense increased $1.9
million (5.6%) due to a 3.5% increase in volumes purchased and a 2.0% increase
in the average cost per Mcf of gas purchased.
Other Operation
In 1994, other operation expense increased $1.9 million (6.2%), as compared to
1993, due to increased gas and electric distribution expenses, increased wages
and benefits, and a number of additional factors. Other operation expense
decreased $1.2 million (3.8%) in 1993 due to a number of factors including
reduced electric and gas distribution expenses and cost control efforts.
Maintenance
Maintenance expense decreased $.8 million (12.7%) in 1994, as compared to
1993, primarily as a result of reduced maintenance costs related to gas and
electric distribution facilities. In 1992, maintenance expense decreased
$.8 million (10.9%) also primarily due to reduced maintenance costs related to
gas and electric distribution facilities.
Depreciation
Depreciation expense increased $.8 million (8.5%) in 1994 and $1.5 million
(18.0%) in 1993 due to increases in depreciable plant in service and to
increases in depreciation accrual rates on gas and common plant in accordance
with a KPSC rate order issued in 1993.
<PAGE>
Index to Financial Statements and Financial Statement Schedules
Financial Statements
Report of Independent Public Accountants. . . . . . . . .
Statements of Income for the three years
ended December 31, 1994 . . . . . . . . . . . . . . . .
Balance Sheets at December 31, 1994 and 1993. . . . . . .
Statements of Changes in Common Stock
Equity for the three years ended December 31, 1994. . .
Statements of Cash Flows
for the three years ended December 31, 1994 . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . .
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts . . . . .
The information required to be submitted in schedules other than those
indicated above has been included in the balance sheets, the statements of
income, related schedules, the notes thereto, or omitted as not required by
the Rules of Regulation S-X.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of The Union Light, Heat and Power Company:
We have audited the balance sheets of THE UNION LIGHT, HEAT AND POWER COMPANY
(a Kentucky Corporation and a wholly owned subsidiary of The Cincinnati Gas &
Electric Company) as of December 31, 1994 and 1993, and the related statements
of income, changes in common stock equity and cash flows for each of the three
years in the period ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Union Light, Heat and
Power Company as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles.
As explained in Notes 6 and 10 to the financial statements, the Company
changed its methods of accounting for postretirement health care benefits and
income taxes effective January 1, 1993.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in
Item 14 are presented for purposes of complying with the Securities and
Exchange Commission's Rules and Regulations under the Securities Exchange Act
of 1934 and are not a required part of the basic financial statements. The
supplemental schedules have been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Cincinnati, Ohio,
January 23, 1995
<PAGE>
<TABLE>
<CAPTION>
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF INCOME
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES
Electric . . . . . . . . . . . . . . . . . . . . . . . . . . . $177 564 $175 712 $159 690
Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 971 75 744 62 604
249 535 251 456 222 294
OPERATING EXPENSES
Electricity purchased from parent
company for resale. . . . . . . . . . . . . . . . . . . . . 134 887 134 290 127 185
Gas purchased. . . . . . . . . . . . . . . . . . . . . . . . . 40 508 43 380 35 411
Other operation. . . . . . . . . . . . . . . . . . . . . . . . 32 289 30 396 31 597
Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . 5 473 6 267 6 547
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 10 644 9 813 8 316
Income taxes (Note 10) . . . . . . . . . . . . . . . . . . . . 5 342 5 751 304
Taxes other than income taxes. . . . . . . . . . . . . . . . . 4 002 3 623 3 627
233 145 233 520 212 987
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . 16 390 17 936 9 307
OTHER INCOME AND EXPENSES - NET
Allowance for equity funds used
during construction. . . . . . . . . . . . . . . . . . . . . 78 297 (46)
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . 292 (534) 19
370 (237) (27)
INCOME BEFORE INTEREST . . . . . . . . . . . . . . . . . . . . . 16 760 17 699 9 280
INTEREST
Interest on long-term debt . . . . . . . . . . . . . . . . . . 8 161 8 297 7 605
Other interest . . . . . . . . . . . . . . . . . . . . . . . . 395 331 897
Allowance for borrowed funds used
during construction. . . . . . . . . . . . . . . . . . . . . (183) (268) (324)
8 373 8 360 8 178
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 387 $ 9 339 $ 1 102
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE UNION LIGHT, HEAT AND POWER COMPANY
BALANCE SHEETS
ASSETS
December 31
1994 1993
(dollars in thousands)
<S> <C> <C>
UTILITY PLANT - ORIGINAL COST
In service
Electric . . . . . . . . . . . . . . . . . . . . . $179 098 $172 589
Gas . . . . . . . . . . . . . . . . . . . . . . . . 134 103 128 242
Common . . . . . . . . . . . . . . . . . . . . . . 19 122 18 772
332 323 319 603
Accumulated depreciation. . . . . . . . . . . . . . . 104 113 96 164
228 210 223 439
Construction work in progress . . . . . . . . . . . . 8 638 5 060
Total utility plant. . . . . . . . . . . . . . . 236 848 228 499
CURRENT ASSETS
Cash and temporary cash investments . . . . . . . . . 1 071 2 477
Accounts receivable less accumulated provision
of $457,429 in 1994 and $1,609,144 in 1993
for doubtful accounts . . . . . . . . . . . . . . . 33 892 42 693
Materials, supplies, and fuel - at average cost
Gas stored for current use. . . . . . . . . . . . . 6 216 4 527
Other materials and supplies. . . . . . . . . . . . 1 406 4 138
Property taxes applicable to subsequent year. . . . . 2 200 -
Prepayments and other . . . . . . . . . . . . . . . . 593 703
45 378 54 538
OTHER ASSETS
Deferred merger costs . . . . . . . . . . . . . . . . 1 785 -
Other . . . . . . . . . . . . . . . . . . . . . . . . 3 117 3 008
4 902 3 008
$287 128 $286 045
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE UNION LIGHT, HEAT AND POWER COMPANY
CAPITALIZATION AND LIABILITIES
December 31
1994 1993
(dollars in thousands)
<S> <C> <C>
COMMON STOCK EQUITY (Note 3)
Common stock - $15.00 par value;
authorized shares - 1,000,000;
outstanding shares - 585,333 in 1994
and 1993. . . . . . . . . . . . . . . . . . . . . . $ 8 780 $ 8 780
Paid-in capital . . . . . . . . . . . . . . . . . . . 18 839 18 839
Retained earnings . . . . . . . . . . . . . . . . . . 74 203 69 327
Total common stock equity . . . . . . . . . . . . . 101 822 96 946
LONG-TERM DEBT (Note 4) . . . . . . . . . . . . . . . . 89 238 89 172
Total capitalization. . . . . . . . . . . . . . . . 191 060 186 118
CURRENT LIABILITIES
Notes payable (Note 8). . . . . . . . . . . . . . . . 14 500 25 000
Accounts payable . . . . . . . . . . . . . . . . . . 21 655 24 032
Accrued taxes . . . . . . . . . . . . . . . . . . . . 2 876 (434)
Accrued interest. . . . . . . . . . . . . . . . . . . 2 123 2 126
Other . . . . . . . . . . . . . . . . . . . . . . . . 4 123 3 632
45 277 54 356
OTHER LIABILITIES
Deferred income taxes (Note 10) . . . . . . . . . . . 23 226 20 487
Unamortized investment tax credits. . . . . . . . . . 5 364 5 651
Accrued pension and other postretirement
benefit costs (Notes 5 and 6) . . . . . . . . . . . 10 356 7 273
Income taxes refundable through rates . . . . . . . . 4 282 4 692
Other . . . . . . . . . . . . . . . . . . . . . . . . 7 563 7 468
50 791 45 571
COMMITMENTS AND CONTINGENCIES (Note 11)
$287 128 $286 045
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
Common Paid-in Retained Total Common
Stock Capital Earnings Stock Equity
(dollars in thousands)
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1991. . . . . . . . . . . . . . $7 280 $ 5 339 $61 813 $ 74 432
Net income . . . . . . . . . . . . . . . . . . . . 1 102 1 102
Issuance of 100,000 shares of
common stock . . . . . . . . . . . . . . . . . . 1 500 13 500 15 000
BALANCE DECEMBER 31, 1992. . . . . . . . . . . . . . 8 780 18 839 62 915 90 534
Net income . . . . . . . . . . . . . . . . . . . . 9 339 9 339
Dividends on common stock. . . . . . . . . . . . . (2 927) (2 927)
BALANCE DECEMBER 31, 1993. . . . . . . . . . . . . . 8 780 18 839 69 327 96 946
Net income . . . . . . . . . . . . . . . . . . . . 8 387 8 387
Dividends on common stock. . . . . . . . . . . . . (3 511) (3 511)
BALANCE DECEMBER 31, 1994. . . . . . . . . . . . . . $8 780 $18 839 $74 203 $101 822
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE UNION LIGHT, HEAT AND POWER COMPANY
STATEMENTS OF CASH FLOWS
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 387 $ 9 339 $ 1 102
Items providing (using) cash currently:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 644 9 813 8 316
Deferred income taxes and investment
tax credits - net. . . . . . . . . . . . . . . . . . . . . . . . 2 042 999 1 526
Allowance for equity funds used during
construction . . . . . . . . . . . . . . . . . . . . . . . . . . (78) (297) 46
Deferred gas and electric fuel costs - net. . . . . . . . . . . . (1 635) (45) (626)
Deferred merger costs . . . . . . . . . . . . . . . . . . . . . . (1 785) - -
Changes in current assets and current
liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 8 801 (5 859) (6 174)
Materials, supplies, and fuel . . . . . . . . . . . . . . . . 1 043 (1 583) (1 845)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (2 377) 2 311 400
Accrued taxes and interest. . . . . . . . . . . . . . . . . . 3 307 (1 390) 88
Other items - net . . . . . . . . . . . . . . . . . . . . . . . . 4 585 2 455 5 833
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . . . . . . . . 32 934 15 743 8 666
FINANCING ACTIVITIES
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . - - 15 000
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . - - 19 671
Redemption of long-term debt . . . . . . . . . . . . . . . . . . . - (6 500) -
Change in short-term debt . . . . . . . . . . . . . . . . . . . . . (10 500) 18 500 (18 500)
Dividends on common stock . . . . . . . . . . . . . . . . . . . . . (3 511) (2 927) -
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . . . . . . . . (14 011) 9 073 16 171
INVESTING ACTIVITIES
Construction expenditures (less allowance for
equity funds used during construction) . . . . . . . . . . . . . . (20 329) (24 127) (24 608)
Net cash provided by (used in)
investing activities. . . . . . . . . . . . . . . . . . . . (20 329) (24 127) (24 608)
Net increase (decrease) in cash and temporary
cash investments . . . . . . . . . . . . . . . . . . . . . . . . . . (1 406) 689 229
Cash and temporary cash investments at
beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 2 477 1 788 1 559
Cash and temporary cash investments at end
of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 071 $ 2 477 $ 1 788
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . $ 8 281 $ 8 404 $ 7 597
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 714 4 001 (441)
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
(a) Merger On October 24, 1994, a subsidiary of CINergy Corp. (CINergy) was
merged with and into The Cincinnati Gas & Electric Company (CG&E) -- the
parent company of The Union Light, Heat and Power Company (ULH&P or Company)
-- and PSI Resources, Inc. (Resources) was merged with and into CINergy. Each
outstanding share of common stock of CG&E and Resources was exchanged for one
share and 1.023 shares, respectively, of CINergy common stock, resulting in
the issuance of approximately 148 million shares of CINergy common stock, par
value $.01 per share. ULH&P remains a wholly-owned subsidiary of CG&E, and
the outstanding debt securities of ULH&P were not affected by the merger.
Following the merger, CINergy became the parent holding company of CG&E and
PSI Energy, Inc., previously Resources' utility subsidiary. The merger was
accounted for as a pooling of interests, and the Financial Statements, along
with the related notes, are presented as if the merger was consummated as of
the beginning of the earliest period presented. Due to immateriality, no
adjustments were made to conform the accounting policies of the companies.
(b) Regulation ULH&P is subject to regulation by the Securities and Exchange
Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA).
ULH&P is also subject to regulation by the Federal Energy Regulatory
Commission (FERC) and the Kentucky Public Service Commission (KPSC). The
accounting policies of ULH&P conform to the accounting requirements and
ratemaking practices of these regulatory authorities and to generally accepted
accounting principles, including the provisions of Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation (Statement 71).
(c) Utility Plant Utility plant is stated at the original cost of
construction, which includes an allowance for funds used during construction
(AFUDC) and a proportionate share of overhead costs. Construction overhead
costs include salaries, payroll taxes, fringe benefits, and other expenses.
Substantially all utility plant is subject to the lien of the Company's first
mortgage bond indenture.
(d) AFUDC ULH&P capitalizes AFUDC, a non-cash income item, which is defined
in the regulatory system of accounts prescribed by the FERC as including "the
net cost for the period of construction of borrowed funds used for
construction purposes and a reasonable rate on other funds when so used".
AFUDC accrual rates averaged 5.9%, 8.8%, and 4.0% in 1994, 1993, and 1992,
respectively, and are compounded semi-annually.
(e) Depreciation and Maintenance Provisions for depreciation are determined
by using the straight-line method applied to the cost of depreciable plant in
service. The rates are based on periodic studies of the estimated service
lives and net cost of removal of the properties. The depreciation rates for
utility plant during each of the following three years were:
1994 1993 1992
Electric. . . . . . . . . . . . 3.3% 3.4% 3.3%
Gas . . . . . . . . . . . . . . 3.1 2.9 2.7
Common. . . . . . . . . . . . . 5.1 4.1 1.7
In a July 1993 rate order, the KPSC authorized changes in depreciation accrual
rates on ULH&P's gas and common plant. The changes resulted in an increase in
depreciation expense of approximately $500,000 for 1993.
Maintenance and repairs of property units and replacements of minor items of
property are charged to maintenance expense. The costs of replacements of
property units are capitalized. The original cost of the property retired and
the related costs of removal, less salvage recovered, are charged to
accumulated depreciation.
(f) Federal and State Income Taxes Deferred tax assets and liabilities are
recognized for the expected future tax consequences of existing differences
between the financial reporting and tax reporting bases of assets and
liabilities. Investment tax credits utilized to reduce Federal income taxes
payable have been deferred for financial reporting purposes and are being
amortized over the useful lives of the property which gave rise to such
credits.
Income tax provisions reflected in customer rates are regulated by the various
regulatory commissions overseeing the regulated business operations of the
Company. To the extent deferred income taxes recovered in rates exceed
amounts payable in future periods, such amounts are reflected in the
accompanying Financial Statements as "Income taxes refundable through rates"
on the basis of their probable repayment in future periods.
(g) Operating Revenues and Purchased Gas and Electricity Costs ULH&P
recognizes revenues for electric and gas service rendered during the month,
which includes revenues for sales unbilled at the end of each month. ULH&P
expenses the costs of electricity and gas purchased as recovered through
revenues and defers the portion of these costs recoverable or refundable in
future periods.
(h) Debt Discount, Premium, and Issuance Expense Debt discount, premium, and
issuance expense on the Company's outstanding long-term debt are amortized
over the lives of the respective issues.
(i) Order 636 In April 1992, the FERC issued Order 636, which restructured
operations between interstate gas pipelines and their customers for gas sales
and transportation services. Order 636 also allowed pipelines to recover
transition costs they incurred in complying with the order from customers,
including ULH&P. ULH&P recovers such costs through its gas cost recovery
mechanism. These costs are deferred as incurred by ULH&P and amortized as
recovered from customers.
(j) Statements of Cash Flows All temporary cash investments with maturities
of three months or less, when acquired, are reported as cash equivalents.
ULH&P had no material non-cash investing or financing transactions during the
years 1992 through 1994.
(k) Reclassification Certain amounts in the 1992 and 1993 Financial
Statements have been reclassified to conform to the 1994 presentation.
2. Rates
In mid-1993, the KPSC issued orders authorizing ULH&P to increase annual gas
revenues by $4.2 million.
In exchange for the KPSC's support of the merger, in May 1994, ULH&P accepted
the KPSC's request for an electric rate moratorium commencing after ULH&P's
next retail rate case and extending to January 1, 2000. The KPSC also
required CG&E and ULH&P to agree that, for 12 months from consummation of the
merger, no filings will be made to adjust CG&E's base purchase power rate
charged to ULH&P or ULH&P's base electric rates.
3. Common Stock
ULH&P sold $15 million (100,000 shares) of common stock to CG&E in December
1992. Also in 1992, CG&E purchased, from the remaining minority shareholders,
36 63/94 shares of ULH&P's common stock. As a result, all outstanding shares
of the Company's common stock are held by CG&E.
4. Long-term Debt
The long-term debt of ULH&P outstanding at December 31, 1994, and 1993,
consisted of the following:
1994 1993
(in thousands)
First Mortgage Bonds
6 1/2 % Series due August 1, 1999. . . . $20 000 $20 000
8 % Series due October 1, 2003 . . . 10 000 10 000
9 1/2 % Series due December 1, 2008. . . 10 000 10 000
9.70 % Series due July 1, 2019. . . . . 20 000 20 000
10 1/4% Series due June 1, 2020
and November 15, 2020. . . . . . . . . 30 000 30 000
Total first mortgage bonds . . . . . 90 000 90 000
Unamortized Premium and Discount - Net . . (762) (828)
Total. . . . . . . . . . . . . . . . $89 238 $89 172
In 1999, ULH&P must redeem at maturity $20 million of first mortgage bonds.
Prior to 1999, ULH&P has no mandatory redemptions of long-term debt, excluding
sinking fund requirements.
The first mortgage bond indenture of ULH&P provides that so long as any series
of bonds issued prior to 1978 is outstanding, ULH&P will pay to the trustee as
a Maintenance and Replacement Fund (M&R Fund) on or before April 30 of each
year, in cash, unfunded property additions, or principal amount of first
mortgage bonds of any series issued under the mortgage, a formularized amount
related to the net revenues of ULH&P. For 1994, the M&R Fund requirement
(payable on or before April 30, 1995) for ULH&P is approximately $5 million.
Most of ULH&P's first mortgage bonds are redeemable at par value, plus accrued
interest, through cash deposited to satisfy the annual M&R Fund requirement.
On March 24, 1995, ULH&P announced its intention to redeem $5 million
principal amount of its 10.25% first mortgage bonds (due June 1, 2020) at par
with cash deposited in the M&R Fund, and to redeem the remaining amount of
such bonds at the redemption price of 107.34% on June 1, 1995.
5. Pension Plan
The defined benefit pension plans of CG&E and its subsidiaries, of which ULH&P
is a participant, cover substantially all employees meeting certain minimum
age and service requirements. Plan benefits are determined under a final
average pay formula with consideration of years of participation, age at
retirement, and the applicable average Social Security wage base or benefit
amount.
The funding policy of CG&E and its subsidiaries is to contribute annually to
the plans an amount which is not less than the minimum amount required by the
Employee Retirement Income Security Act of 1974 and not more than the maximum
amount deductible for income tax purposes. No contributions were made for the
1994 and 1992 plan years, and a contribution of $3.1 million was made for the
1993 plan year. The plans' assets consist of investments in equity and fixed
income securities.
Pension cost for 1994, 1993, and 1992 included the following components:
1994 1993 1992
(in millions)
Benefits earned during the period . . . . . . . $ 10.7 $ 9.2 $ 8.8
Interest accrued on projected
benefit obligations . . . . . . . . . . . . . 35.1 34.5 30.4
Actual (return) loss on plans' assets . . . . . 5.6 (31.4) (27.0)
Net amortization and deferral . . . . . . . . . (43.2) (4.7) (7.5)
Net periodic pension cost . . . . . . . . . . . $ 8.2 $ 7.6 $ 4.7
Additionally, during 1992 and 1994, CG&E and its subsidiaries recognized
$28.4 million ($2.8 million for ULH&P) and $15.6 million ($1.6 million for
ULH&P), respectively, of accrued pension cost in accordance with Statement of
Financial Accounting Standards No. 88, Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits. These amounts represented the costs associated with additional
benefits extended in connection with voluntary early retirement programs and
workforce reductions in those years (see Note 7).
1994 1993 1992
Actuarial Assumptions:
For determination of projected benefit
obligations
Discount rate . . . . . . . . . . . . . . . 8.50% 7.50% 8.25%
Rate of increase in future compensation . . 5.50 5.00 5.75
For determination of pension cost
Rate of return on plans' assets . . . . . . . 9.50 9.50 9.50
The following table reconciles the plans' funded status with amounts recorded
in the Consolidated Financial Statements of CG&E and its subsidiaries. Under
the provisions of Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions (Statement 87), certain assets and
obligations of the plans are deferred and recognized in subsequent periods.
1994 1993
Plan's Plan's Plans'
Assets Exceed Accumulated Assets Exceed
Accumulated Benefits Accumulated
Benefits Exceed Assets Benefits
(in millions)
Actuarial present value of benefits
Vested benefits . . . . . . . . $(123.2) $(206.5) $(328.1)
Non-vested benefits . . . . . . (17.5) (11.0) (32.3)
Accumulated benefit
obligations . . . . . . . . (140.7) (217.5) (360.4)
Effect of future compensation
increases . . . . . . . . . . (53.0) (52.2) (110.3)
Projected benefit
obligations . . . . . . . . (193.7) (269.7) (470.7)
Plans' assets at fair value . . . 182.1 198.7 423.1
Projected benefit obligations in
excess of plans' assets . . . . (11.6) (71.0) (47.6)
Remaining balance of plans' net
assets existing at date of
initial application of
Statement 87 to be recognized
as a reduction of pension
cost in future periods. . . . . (2.9) (3.8) (7.4)
Unrecognized net gain
resulting from experience
different from that assumed
and effects of changes in
assumptions . . . . . . . . . . (13.6) (1.9) (16.0)
Prior service cost not yet
recognized in net periodic
pension cost. . . . . . . . . . 20.9 18.2 29.2
Accrued pension cost at
December 31 . . . . . . . . . . $ (7.2) $ (58.5) $ (41.8)
6. Other Postretirement Benefits
CG&E and its subsidiaries, including ULH&P, provide certain health care and
life insurance benefits to retired employees and their eligible dependents.
The health care benefits include medical coverage and prescription drugs.
Prior to 1993, the cost of retiree health care was charged to expense as
claims were paid. The accounting for life insurance benefits provided by CG&E
and its subsidiaries is further discussed herein. CG&E and its subsidiaries
do not currently pre-fund their obligations for these postretirement benefits.
Effective with the first quarter of 1993, CG&E and its subsidiaries
implemented the provisions of Statement of Financial Accounting Standards No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions
(Statement 106). Under the provisions of Statement 106, the costs of health
care and life insurance benefits provided to retirees are recognized for
accounting purposes during periods of employee service (accrual basis). The
unrecognized and unfunded Accumulated Postretirement Benefit Obligation (APBO)
existing at the date of initial application of Statement 106 (i.e., the
transition obligation) of $51.7 million is being amortized over a 20-year
period.
Life insurance benefits are fully paid by CG&E and its subsidiaries for
qualified employees. Eligibility to receive postretirement coverage is
limited to those employees who participated in the plans and earned the right
to postretirement benefits prior to January 1, 1991. In 1988, CG&E and its
subsidiaries recognized the actuarially determined APBO for postretirement
life insurance benefits earned by retirees. The portion of the APBO
applicable to active employees is being amortized over 15 years, the
employees' estimated remaining service lives. The accounting for
postretirement life insurance benefits was not affected by the adoption of
Statement 106.
Postretirement benefit cost for 1994 and 1993 included the following
components:
Health Life
Care Insurance Total
(in millions)
1994
Benefits earned during the period. . . . . . $ .9 $ .1 $ 1.0
Interest accrued on APBO . . . . . . . . . . 3.9 2.0 5.9
Amortization of transition obligation. . . . 2.6 .4 3.0
Net periodic postretirement benefit cost . . $7.4 $2.5 $ 9.9
1993
Benefits earned during the period. . . . . . $1.0 $ .1 $ 1.1
Interest accrued on APBO . . . . . . . . . . 4.2 2.0 6.2
Amortization of transition obligation. . . . 2.6 .4 3.0
Net periodic postretirement benefit cost . . $7.8 $2.5 $10.3
The following table reconciles the APBO of the health care and life insurance
plans with amounts recorded in the Consolidated Financial Statements of CG&E
and its subsidiaries. Under the provisions of Statement 106, certain
obligations of the plans are deferred and recognized in subsequent periods.
Health Life
Care Insurance Total
(in millions)
1994
Actuarial present value of benefits
Fully eligible active plan participants. . $ (2.2) $ (.8) $ (3.0)
Other active plan participants . . . . . . (26.3) (1.8) (28.1)
Retirees and beneficiaries . . . . . . . . (25.2) (21.7) (46.9)
Projected APBO . . . . . . . . . . . . . (53.7) (24.3) (78.0)
Unamortized transition obligation. . . . . . 46.1 3.3 49.4
Unrecognized net gain resulting from
experience different from that assumed
and effects of changes in assumptions. . . (5.2) (2.7) (7.9)
Accrued postretirement benefit obligation
at December 31, 1994 . . . . . . . . . . . $(12.8) $(23.7) $(36.5)
1993
Actuarial present value of benefits
Fully eligible active plan participants. . $ (2.4) $ (1.5) $ (3.9)
Other active plan participants . . . . . . (27.5) (2.9) (30.4)
Retirees and beneficiaries . . . . . . . . (22.7) (22.3) (45.0)
Projected APBO . . . . . . . . . . . . . (52.6) (26.7) (79.3)
Unamortized transition obligation. . . . . . 49.1 3.7 52.8
Unrecognized net (gain) loss resulting from
experience different from that assumed
and effects of changes in assumptions. . . (3.8) .3 (3.5)
Accrued postretirement benefit obligation
at December 31, 1993 . . . . . . . . . . . $ (7.3) $(22.7) $(30.0)
The following assumptions were used to determine the APBO:
1994 1993 1992
Discount rate. . . . . . . . . . 8.50% 7.50% 8.25%
Health care cost trend rate,
gradually declining to 5%. . . 9.00-12.00% 10.00-13.00% 12.00-15.00%
Year ultimate trend rates
achieved . . . . . . . . . . . 2002 2002 2003
Increasing the health care cost trend rate by one percentage point in each
year would increase the APBO by approximately $10.0 million and $10.5 million
for 1994 and 1993, respectively, and the aggregate of the service and interest
cost components of the postretirement benefit cost for each of 1994 and 1993
by approximately $1.2 million.
CG&E and its subsidiaries began amortizing the transition obligation for
health care costs over 20 years in accordance with Statement 106. The
majority of CG&E's and its subsidiaries' postretirement benefit costs are
subject to Public Utilities Commission of Ohio (PUCO) jurisdiction. The PUCO
authorized CG&E to begin recovering these costs in September 1993. The
adoption of Statement 106 did not have a material effect on the results of
operations of CG&E and its subsidiaries.
7. Workforce Reductions
In 1992, CG&E and its subsidiaries eliminated 464 positions. The workforce
reduction was accomplished through a voluntary early retirement program and
involuntary separations. At December 31, 1992, the accrued liability
associated with the workforce reduction was $30.4 million ($3.0 million for
ULH&P), including $28.4 million of additional pension costs previously
discussed in Note 5. In accordance with a July 1993 order of the KPSC, ULH&P
is recovering the majority of these costs associated with gas operations over
a period of 10 years. Costs associated with electric operations of ULH&P have
been deferred for future recovery through rates.
Additionally, in an effort to begin to realize merger savings, CG&E and its
subsidiaries completed a voluntary workforce reduction program in 1994. Under
the program, 115 employees elected to terminate their employment with the
companies, resulting in a combined pre-tax cost of approximately $17.4 million
($1.8 million for ULH&P), including $15.6 million of additional pension costs
previously discussed in Note 5. ULH&P's portion of these costs has been
deferred for future recovery through rates.
8. Notes Payable
ULH&P had authority to borrow up to $35 million as of December 31, 1994. In
connection with this authority, ULH&P has established unsecured lines of
credit (Committed Lines) which currently permit borrowings of up to $30
million, of which $15.5 million remained unused. This authority allows ULH&P
to arrange for additional short-term borrowings with various banks on an "as
offered" basis (Uncommitted Lines). All Uncommitted Lines provide for
maturities of up to 365 days with various interest rate options.
Amounts outstanding under the Committed Lines would become immediately due
upon an event of default which includes non-payment, default under other
agreements governing company indebtedness, bankruptcy, or insolvency. Certain
of the Uncommitted Lines have similar default provisions. The lines are
maintained by compensating balances or commitment fees. Commitment fees for
the Committed Lines were immaterial during the 1992 through 1994 period.
For the years 1994, 1993, and 1992, ULH&P's short-term borrowings outstanding
at various times were as follows:
Weighted
Weighted Maximum Average Average
Average Amount Amount Interest
Balance Interest Outstanding Outstanding Rate
at Rate at at Any During the During
Dec. 31 Dec. 31 Month-end Year the Year
(dollars in millions)
1994
Bank loans. . . . . . $14.5 6.14% $26.0 $ 6.6 4.13%
1993
Bank loans. . . . . . 25.0 3.48 25.0 5.6 3.34
1992
Bank loans. . . . . . 6.5 3.57 34.0 17.9 4.17
9. Fair Values of Financial Instruments
The estimated fair values of financial instruments were as follows (this
information does not purport to be a valuation of ULH&P as a whole):
December 31 December 31
1994 1993
Carrying Fair Carrying Fair
Financial Instrument Amount Value Amount Value
(in thousands)
First mortgage bonds. . . . . $89 238 $91 361 $89 172 $107 078
The following methods and assumptions were used to estimate the fair values of
each major class of financial instrument:
Cash and temporary cash investments and notes payable Due to the short period
to maturity, the carrying amounts reflected on the Balance Sheets approximate
fair values.
Long-term debt The fair values of long-term debt issues were estimated based
on the present value of future cash flows. The discount rates used
approximate the incremental borrowing costs for similar instruments.
10. Income Taxes
Effective with the first quarter of 1993, ULH&P implemented the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (Statement 109). Statement 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of existing
differences between the financial reporting and tax reporting bases of assets
and liabilities. Net-of-tax accounting and reporting is prohibited. ULH&P
adopted this new accounting standard as the cumulative effect of a change in
accounting principle with no restatement of prior periods. The adoption of
Statement 109 had no material effect on ULH&P's earnings.
In August 1993, Congress enacted the Omnibus Budget Reconciliation Act of
1993, which included a provision to increase the Federal corporate income tax
rate from 34% to 35%, retroactive to January 1, 1993. In accordance with the
provisions of Statement 109, the income tax rate increase resulted in an
increase in the net deferred income tax liability and recognition of a
regulatory asset to reflect expected future recovery of the increased
liability through rates charged to customers.
The significant components of the Company's net deferred income tax liability
at December 31, 1994, and 1993, are as follows:
1994 1993
(in thousands)
Deferred Income Tax Liabilities
Utility plant . . . . . . . . . . . . . . . . $30 637 $30 497
Other . . . . . . . . . . . . . . . . . . . . 3 740 1 548
Total deferred income tax liabilities . . . 34 377 32 045
Deferred Income Tax Assets
Unamortized investment tax credits . . . . . 2 175 2 290
Amounts refundable through rates -
income taxes. . . . . . . . . . . . . . . . 1 810 1 977
Deferred fuel costs . . . . . . . . . . . . . 1 773 2 734
Accrued pension and other benefit costs . . . 2 179 1 188
Other . . . . . . . . . . . . . . . . . . . . 3 214 3 369
Total deferred income tax assets. . . . . . 11 151 11 558
Net Deferred Income Tax Liability . . . . . . . $23 226 $20 487
A summary of Federal and state income taxes charged (credited) to income and
the allocation of such amounts is as follows:
1994 1993 1992
(in thousands)
Current Income Taxes
Federal . . . . . . . . . . . . . . . . . . . $2 746 $3 580 $ (948)
State . . . . . . . . . . . . . . . . . . . . 498 1 126 (262)
Total current income taxes. . . . . . . . 3 244 4 706 (1 210)
Deferred Income Taxes
Federal
Depreciation and other utility plant-
related items . . . . . . . . . . . . . . 1 727 1 664 1 865
Unrecovered gas costs - net . . . . . . . . (741) 575 349
Pension and other benefit costs . . . . . . (349) (329) (188)
Unbilled revenues fuel - net. . . . . . . . 764 (685) (267)
Systems costs capitalized . . . . . . . . . (161) (5) (25)
Uncollectible accounts - net. . . . . . . . 300 (197) 24
Alternative minimum tax credit
carryforward. . . . . . . . . . . . . . . - 166 (166)
Other items - net . . . . . . . . . . . . . 141 (111) (188)
Total deferred Federal income taxes . . . 1 681 1 078 1 404
State
Depreciation and other utility plant-
related items . . . . . . . . . . . . . . 656 431 488
Unrecovered gas costs - net . . . . . . . . (196) 148 93
Pension and other benefit costs . . . . . . (89) (84) (50)
Unbilled revenues fuel - net. . . . . . . . 196 (164) (71)
Other items - net . . . . . . . . . . . . . 81 (122) (49)
Total deferred state income taxes . . . . 648 209 411
Total deferred income taxes . . . . . . . 2 329 1 287 1 815
Investment Tax Credits - Net. . . . . . . . . . (287) (288) (289)
Total Income Taxes. . . . . . . . . . . . $5 286 $5 705 $ 316
Allocated to:
Operating income. . . . . . . . . . . . . . . $5 342 $5 751 $ 304
Other income and expenses - net . . . . . . . (56) (46) 12
$5 286 $5 705 $ 316
ULH&P will participate in the filing of a consolidated Federal income tax
return with CG&E's parent holding company, CINergy, and other affiliated
companies for the year ended December 31, 1994. The current tax liability is
allocated among the members of the group pursuant to a tax sharing agreement
consistent with Rule 45(c) of the PUHCA.
Federal income taxes, computed by applying the statutory Federal income tax
rate to book income before Federal income tax, are reconciled to Federal
income tax expense reported in the Statements of Income as follows:
1994 1993 1992
(in thousands)
Statutory Federal income tax provision. . . . . $4 385 $4 798 $ 431
Increases (Reductions) in taxes resulting from:
Amortization of investment tax credits. . . . (287) (288) (289)
Depreciation and other utility plant-
related differences . . . . . . . . . . . . 138 108 11
AFUDC equity. . . . . . . . . . . . . . . . . (27) (104) 16
Employee benefits . . . . . . . . . . . . . . - - 29
Amortization of gains on intercompany
sales of assets . . . . . . . . . . . . . . 24 25 26
Provision for injuries and damages. . . . . . 70 3 (62)
Change in tax rate. . . . . . . . . . . . . . (37) (137) (56)
Other - net . . . . . . . . . . . . . . . . . (126) (35) 61
Federal income tax expense. . . . . . . . . . . $4 140 $4 370 $ 167
11. Commitments and Contingencies
(a) Construction ULH&P will have substantial commitments in connection with
its construction program. Aggregate expenditures for ULH&P's construction
program for the 1995 through 1999 period are currently estimated to be
approximately $120 million.
(b) Manufactured Gas Plants Coal tar residues and other substances
associated with manufactured gas plant (MGP) sites have been found at former
MGP sites. ULH&P is aware of potential sites where MGP activities may have
occurred at some time in the past. None of these sites are known to present a
risk to the environment. ULH&P has not undertaken responsibility for
investigating potential MGP sites.
(c) Potential Divestiture of Gas Operations Under the PUHCA, the divestiture
of ULH&P's and CG&E's gas operations may be required. In its order approving
the merger, the SEC reserved judgement over CINergy's ownership of the gas
operations for a period of three years. In November 1994, the SEC requested
comments on the modernization of the PUHCA given the industry's movement
toward a more competitive environment, including whether or not a utility
registered under the PUHCA may own a combination system (i.e., electric and
gas). CINergy believes it has a justifiable basis for retention of ULH&P's
and CG&E's gas operations and will continue its pursuit of SEC approval to
retain the gas portion of the business. If divestiture is ultimately
required, the SEC has historically allowed companies sufficient time to
accomplish divestitures in a manner that protects shareholder value. See Note
12 for financial information by business segments.
12. Financial Information by Business Segments
<TABLE>
<CAPTION>
Operating
Operating Operating Income Provision for Construction
Year Ended Revenues Income Taxes Depreciation Expenditures
(in thousands)
<S> <C> <C> <C> <C> <C>
1994
Electric......... $177 564 $ 9 736 $3 007 $ 6 213 $12 127
Gas.............. 71 971 6 654 2 335 4 431 8 277
Total.......... $249 535 $16 390 $5 342 $10 644 $20 404
1993
Electric......... $175 712 $ 9 821 $3 078 $ 5 798 $16 291
Gas.............. 75 744 8 115 2 673 4 015 8 133
Total.......... $251 456 $17 936 $5 751 $ 9 813 $24 424
1992
Electric......... $159 690 $ 4 157 $ (442) $ 5 000 $16 459
Gas.............. 62 604 5 150 746 3 316 8 102
Total.......... $222 294 $ 9 307 $ 304 $ 8 316 $24 561
</TABLE>
<TABLE>
<CAPTION>
December 31
1994 1993 1992
(in thousands)
<S> <C> <C> <C>
Property, Plant, and Equipment - net
Electric.......................... $134 508 $130 054 $119 492
Gas............................... 102 340 98 445 94 852
236 848 228 499 214 344
Other Corporate Assets.............. 50 280 57 546 54 591
Total Assets.................... $287 128 $286 045 $268 935
</TABLE>
For a discussion of the potential divestiture of ULH&P's gas operations, see
Note 11(c).
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to Instruction J(2)(c).
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to Instruction J(2)(c).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Omitted pursuant to Instruction J(2)(c).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to Instruction J(2)(c).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
Refer to the page captioned "Index to Financial Statements and Financial
Statement Schedules", page 19 of this report, for an index of the financial
statements and financial statement schedules included in this report.
(b) Reports on Form 8-K.
None.
<PAGE>
(c) Exhibits.
Copies of the documents listed below which are identified with an asterisk (*)
have heretofore been filed with the Securities and Exchange Commission and are
incorporated herein by reference and made a part hereof. Exhibits not so
identified are filed herewith.
Exhibit
Designation Nature of Exhibit
3-a *Restated Articles of Incorporation made
effective May 7, 1976. (Exhibit to The
Union Light, Heat and Power Company's
(ULH&P) Form 8-K, May 1976.)
3-b *By-laws of ULH&P as amended, adopted by
shareholders May 3, 1989. (Exhibit under
cover of ULH&P's Form SE dated August 8,
1989.)
4-a *Original Indenture (First Mortgage Bonds)
between ULH&P and The Bank of New York dated
as of February 1, 1949. (Exhibit to ULH&P's
Registration Statement No. 2-7793.)
4-b *Fifth Supplemental Indenture between ULH&P
and The Bank of New York dated as of January
1, 1967. (Exhibit to The Cincinnati Gas &
Electric Company's (CG&E) Registration
Statement No. 2-60961.)
4-c *Seventh Supplemental Indenture between
ULH&P and The Bank of New York dated as of
October 1, 1973. (Exhibit to CG&E's
Registration Statement No. 2-60961.)
4-d *Eighth Supplemental Indenture between ULH&P
and The Bank of New York dated as of
December 1, 1978. (Exhibit to CG&E's
Registration Statement No. 2-63591.)
4-e *Tenth Supplemental Indenture between ULH&P
and The Bank of New York dated as of July 1,
1989. (Exhibit to CG&E's June 30, 1989,
Form 10-Q in File No. 1-1232.)
4-f *Eleventh Supplemental Indenture between
ULH&P and The Bank of New York dated as of
June 1, 1990. (Exhibit to CG&E's June 30,
1990, Form 10-Q in File No. 1-1232.)
<PAGE>
Exhibit
Designation Nature of Exhibit
4-g *Twelfth Supplemental Indenture between
ULH&P and The Bank of New York dated as of
November 15, 1990. (Exhibit to ULH&P's 1990
Form 10-K in File No. 2-7793.)
4-h *Thirteenth Supplemental Indenture between
ULH&P and The Bank of New York dated as of
August 1, 1992. (Exhibit to ULH&P's 1992
Form 10-K in File No. 2-7793.)
23 Consent of Independent Public Accountants.
27 Financial Data Schedule (included in
electronic submission only).
<PAGE>
<TABLE>
<CAPTION>
THE UNION LIGHT, HEAT AND POWER COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994
Col. A Col. B Col. C Col. D Col. E
Additions Deductions
For Purposes
Balance at Charged For Which Balance at
Beginning Charged to to Other Reserves Were Close of
Description of Period Income Accounts Created Other Period
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Accumulated Provisions Deducted from
Applicable Assets
Allowance for Doubtful Accounts $ 1 609 $ 2 502 $ 11 $ 3 665 $ - $ 457
Accumulated Depreciation 96 164 11 066 823 3 940 1/ - 104 113
Other Accumulated Provisions
Deferred Income Taxes 2/ $ 20 487 $ 1 993 $(2 904) $(3 650) $ - $ 23 226
Accrued Pension and Other
Postretirement Benefit Costs 7 273 1 024 2 200 141 - 10 356
Environmental Liability 800 - - - - 800
Injuries & Damages 125 806 - 721 - 210
Other 242 24 19 - - 285
$ 28 927 $ 3 847 $ (685) $(2 788) $ - $ 34 877
<FN>
_1/ Includes property retired at original cost or estimated original cost less the net cost of removal.
_2/ See Notes 1(f) and 10 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" for further information with respect to deferred income taxes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE UNION LIGHT, HEAT AND POWER COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1993
Col. A Col. B Col. C Col. D Col. E
Additions Deductions
For Purposes
Balance at Charged For Which Balance at
Beginning Charged to to Other Reserves Were Close of
Description of Period Income Accounts Created Other Period
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Accumulated Provisions Deducted from
Applicable Assets
Allowance for Doubtful Accounts $ 1 001 $ 2 632 $ 3 $ 2 027 $ - $ 1 609
Accumulated Depreciation 89 132 9 655 865 3 488 1/ - 96 164
Other Accumulated Provisions
Deferred Income Taxes 2/ $ 27 609 $ 1 204 $(9 251) $ (925) $ - $ 20 487
Accrued Pension and Other
Postretirement Benefit Costs 6 014 1 237 341 319 - 7 273
Environmental Liability 800 - - - - 800
Injuries & Damages 143 642 - 660 - 125
Other - 242 - - - 242
$ 34 566 $ 3 325 $(8 910) $ 54 $ - $ 28 927
<FN>
_1/ Includes property retired at original cost or estimated original cost less the net cost of removal.
.
_2/ See Notes 1(f) and 10 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" for further information with respect to deferred income taxes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE UNION LIGHT, HEAT AND POWER COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1992
Col. A Col. B Col. C Col. D Col. E
Additions Deductions
For Purposes
Balance at Charged For Which Balance at
Beginning Charged to to Other Reserves Were Close of
Description of Period Income Accounts Created Other Period
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Accumulated Provisions Deducted from
Applicable Assets
Allowance for Doubtful Accounts $ 1 082 $ 2 448 $ 9 $ 2 538 $ - $ 1 001
Accumulated Depreciation 82 684 8 158 1 097 2 807 1/ - 89 132
Other Accumulated Provisions
Deferred Income Taxes 2/ $ 25 079 $ 2 380 $ 379 $ 229 $ - $ 27 609
Accrued Pension and Other
Postretirement Benefit Costs 2 576 604 2 834 - - 6 014
Environmental Liability - 800 - - - 800
Injuries & Damages 328 1 432 - 1 617 - 143
$ 27 983 $ 5 216 $ 3 213 $ 1 846 $ - $ 34 566
_1/ Includes property retired at original cost or estimated original cost less the net cost of removal.
_2/ See Notes 1(f) and 10 of the "Notes to Financial Statements" in "Item 8. Financial Statements and Supplementary
Data" for further information with respect to deferred income taxes.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE UNION LIGHT, HEAT AND POWER COMPANY
Registrant
Dated: March 28, 1995
By Jackson H. Randolph
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
Terry E. Bruck Group Vice President, Wholesale
Power and Transmission Operations
and Director March 28, 1995
Cheryl M. Foley Vice President, General Counsel,
Corporate Secretary and Director March 28, 1995
James E. Rogers Vice Chairman, Chief Operating
Officer and Director March 28, 1995
Stephen G. Salay Director March 28, 1995
George H. Stinson President and Director March 28, 1995
J. Wayne Leonard Group Vice President, Chief
Financial Officer and Director March 28, 1995
(Principal Financial Officer)
Jackson H. Randolph Chairman, Chief Executive Officer March 28, 1995
and Director
(Principal Executive Officer)
Charles J. Winger Comptroller March 28, 1995
(Principal Accounting Officer)
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated January 23, 1995, included in The Union Light,
Heat and Power Company's Annual Report on Form 10-K for the year ended
December 31, 1994, into its previously filed Registration Statement No.
33-40245.
Arthur Andersen LLP
Cincinnati, Ohio,
March 27, 1995
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS, STATEMENTS OF INCOME AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 236,848
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 45,378
<TOTAL-DEFERRED-CHARGES> 1,785
<OTHER-ASSETS> 3,117
<TOTAL-ASSETS> 287,128
<COMMON> 8,780
<CAPITAL-SURPLUS-PAID-IN> 18,839
<RETAINED-EARNINGS> 74,203
<TOTAL-COMMON-STOCKHOLDERS-EQ> 101,822
0
0
<LONG-TERM-DEBT-NET> 89,238
<SHORT-TERM-NOTES> 14,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 81,568
<TOT-CAPITALIZATION-AND-LIAB> 287,128
<GROSS-OPERATING-REVENUE> 249,535
<INCOME-TAX-EXPENSE> 5,342
<OTHER-OPERATING-EXPENSES> 227,803
<TOTAL-OPERATING-EXPENSES> 233,145
<OPERATING-INCOME-LOSS> 16,390
<OTHER-INCOME-NET> 370
<INCOME-BEFORE-INTEREST-EXPEN> 16,760
<TOTAL-INTEREST-EXPENSE> 8,373
<NET-INCOME> 8,387
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 3,511
<TOTAL-INTEREST-ON-BONDS> 8,161
<CASH-FLOW-OPERATIONS> 32,934
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
