UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-10944 KU Energy Corporation 61-1141273
(A Kentucky Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(606) 255-2100
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(606) 255-2100
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that such Registrants were required to file such
reports) and (2) have been subject to such filing requirements for the
past 90 days.
Yes X No .
Indicate the number of shares outstanding of each of the issuers'
classes of common stock, as of the latest practicable date:
KU Energy Corporation: Common stock, no par value, 37,817,517
shares outstanding at August 12, 1997
Kentucky Utilities Company: Common stock, no par value, 37,817,878
shares outstanding and held by KU Energy
Corporation at August 12, 1997
-1-
<PAGE>
KU ENERGY CORPORATION
AND
KENTUCKY UTILITIES COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
CONTENTS*
PART I. FINANCIAL INFORMATION Page
No.
Item 1: Financial Statements
KU ENERGY CORPORATION
Consolidated Statements of Income 3-4
Consolidated Statements of Cash Flows 5
Consolidated Balance Sheets 6
KENTUCKY UTILITIES COMPANY
Statements of Income 7-8
Statements of Cash Flows 9
Balance Sheets 10
CONDENSED NOTES TO FINANCIAL STATEMENTS OF KU ENERGY
CORPORATION AND KENTUCKY UTILITIES COMPANY 11-14
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
KU ENERGY CORPORATION AND KENTUCKY
UTILITIES COMPANY 15-23
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 24
Item 4: Submission of Matters to a Vote of
Security Holders 24
Item 5: Other Information 25
Item 6: Exhibits and Reports on Form 8-K 39
Signatures 40
*Information included herein which relates solely to KU Energy Corporation
is provided solely by KU Energy Corporation and not by Kentucky Utilities
Company and shall be deemed not included in the Quarterly Report of
Kentucky Utilities Company.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except for per share amounts)
For the Three
Months Ended
June 30,
1997 1996
Operating Revenues $162,861 $167,510
Operating Expenses:
Fuel, principally coal,
used in generation 41,613 45,079
Electric power purchased 19,599 17,589
Other operating expenses 31,093 30,727
Maintenance 20,494 17,606
Depreciation 20,957 20,154
Federal and state income taxes 5,928 9,636
Other taxes 3,855 3,894
Total Operating Expenses 143,539 144,685
Net Operating Income 19,322 22,825
Other Income and Deductions:
Interest and dividend income 572 666
Other income and deductions - net 2,620 2,927
Total Other Income and Deductions 3,192 3,593
Income Before Interest and Other Charges 22,514 26,418
Interest and Other Charges 10,464 10,345
Net Income $ 12,050 $ 16,073
Average Common Shares Outstanding 37,818 37,818
Earnings Per Common Share $ .32 $ .42
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-3-
<PAGE>
PART I. FINANCIAL INFORMATION
KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except for per share amounts)
For the Six
Months Ended
June 30,
1997 1996
Operating Revenues $341,769 $358,500
Operating Expenses:
Fuel, principally coal,
used in generation 86,326 99,104
Electric power purchased 37,202 35,093
Other operating expenses 62,249 60,724
Maintenance 32,507 31,810
Depreciation 41,839 40,219
Federal and state income taxes 21,262 25,336
Other taxes 7,926 8,261
Total Operating Expenses 289,311 300,547
Net Operating Income 52,458 57,953
Other Income and Deductions:
Interest and dividend income 1,184 1,551
Other income and deductions - net 4,175 3,995
Total Other Income and Deductions 5,359 5,546
Income Before Interest and Other Charges 57,817 63,499
Interest and Other Charges 20,904 21,107
Net Income $ 36,913 $ 42,392
Average Common Shares Outstanding 37,818 37,818
Earnings Per Common Share $ .98 $ 1.12
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-4-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the
Six Months
Ended June 30,
1997 1996
Cash Flows from Operating Activities:
Net Income $ 36,913 $ 42,392
Items not requiring (providing) cash currently:
Depreciation 41,839 40,219
Deferred income taxes and investment tax credit 4,370 701
Changes in current assets and liabilities:
Change in fuel inventory (6,294) (8,089)
Change in accounts receivable 6,903 1,505
Change in accounts payable (1,316) 3,050
Change in liability to ratepayers - (6,599)
Change in escrow funds - 6,599
Change in other current assets and liabilities (3,398) 6,467
Other--net (10,467) 2,806
Net Cash Provided by Operating Activities 68,550 89,051
Cash Flows from Investing Activities:
Construction expenditures - utility (41,824) (47,431)
Investment in independent power projects (4,805) (666)
Proceeds from insurance reimbursements 4,056 201
Other 872 874
Net Cash Used by Investing Activities (41,701) (47,022)
Cash Flows from Financing Activities:
Short-term borrowings - net (2,400) (14,900)
Issuance of long-term debt - 35,682
Funds deposited with trustee - net - 3,779
Retirement of long-term debt, incl. premiums (21) (36,192)
Payment of common stock dividends (33,280) (32,523)
Net Cash Used by Financing Activities (35,701) (44,154)
Net Decrease in Cash and Cash Equivalents (8,852) (2,125)
Cash and Cash Equivalents Beginning of Period 30,270 29,492
Cash and Cash Equivalents End of Period $ 21,418 $ 27,367
Supplemental Disclosures
Cash paid for:
Interest $ 18,504 $ 17,896
Income taxes $ 20,448 $ 26,975
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-5-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
As of As of
Jun. 30, Dec. 31,
ASSETS 1997 1996
Utility Plant:
Plant in service, at cost $ 2,498,103 $ 2,482,812
Less: Accumulated depreciation 1,099,749
1,067,911
1,398,354 1,414,901
Construction work in progress 79,508 63,435
1,477,862 1,478,336
Current Assets:
Cash and cash equivalents 21,418 30,270
Accounts receivable 39,840 50,498
Accrued utility revenues 26,585 24,239
Fuel, principally coal, at average cost 37,189 30,895
Materials and supplies, at average cost 23,370 21,656
Other 6,679 7,486
155,081 165,044
Other Assets:
Investment in leveraged leases 26,352 24,650
Investment in independent power projects 9,614 4,745
Unamortized loss on reacquired debt 10,297 10,838
Other 47,535 43,335
93,798 83,568
Total Assets $ 1,726,741 $ 1,726,948
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 649,135 $ 645,513
Preferred stock of Subsidiary 40,000 40,000
Long-term debt of Subsidiary 546,351 546,373
1,235,486 1,231,886
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings 51,800 54,200
Accounts payable 26,937 28,253
Accrued interest 7,892 8,048
Accrued taxes 2,849 4,005
Customers' deposits 9,454 8,746
Accrued payroll and vacations 10,230 9,921
Other 7,730 5,954
116,913 119,148
Other Liabilities:
Accumulated deferred income taxes 249,208 242,674
Accumulated deferred investment tax credits 28,123 30,167
Regulatory tax liability 52,642 54,388
Other 44,369 48,685
374,342 375,914
Total Capitalization and Liabilities $ 1,726,741 $ 1,726,948
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-6-
<PAGE>
KENTUCKY UTILITIES COMPANY
STATEMENTS OF INCOME
(Unaudited)
(in thousands)
For the Three
Months Ended
June 30,
1997 1996
Operating Revenues $162,868 $167,516
Operating Expenses:
Fuel, principally coal,
used in generation 41,613 45,079
Electric power purchased 19,599 17,589
Other operating expenses 30,483 30,214
Maintenance 20,490 17,604
Depreciation 20,911 20,107
Federal and state income taxes 6,215 9,215
Other taxes 3,815 3,845
Total Operating Expenses 143,126 143,653
Net Operating Income 19,742 23,863
Other Income and Deductions:
Interest and dividend income 353 401
Other income and deductions - net 1,891 1,706
Total Other Income and Deductions 2,244 2,107
Income Before Interest Charges 21,986 25,970
Interest Charges 9,898 9,780
Net Income 12,088 16,190
Preferred Stock Dividend Requirements 564 564
Net Income Applicable to Common Stock $ 11,524 $ 15,626
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-7-
<PAGE>
KENTUCKY UTILITIES COMPANY
STATEMENTS OF INCOME
(Unaudited)
(in thousands)
For the Six
Months Ended
June 30,
1997 1996
Operating Revenues $341,782 $358,512
Operating Expenses:
Fuel, principally coal,
used in generation 86,326 99,104
Electric power purchased 37,202 35,093
Other operating expenses 61,271 59,902
Maintenance 32,501 31,806
Depreciation 41,746 40,125
Federal and state income taxes 21,742 25,551
Other taxes 7,828 8,080
Total Operating Expenses 288,616 299,661
Net Operating Income 53,166 58,851
Other Income and Deductions:
Interest and dividend income 719 1,014
Other income and deductions - net 2,937 3,806
Total Other Income and Deductions 3,656 4,820
Income Before Interest Charges 56,822 63,671
Interest Charges 19,773 19,978
Net Income 37,049 43,693
Preferred Stock Dividend Requirements 1,128 1,128
Net Income Applicable to Common Stock $ 35,921 $ 42,565
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-8-
<PAGE>
KENTUCKY UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Six
Months Ended
June 30,
1997 1996
Cash Flows from Operating Activities:
Net Income $ 37,049 $ 43,693
Items not requiring (providing) cash currently:
Depreciation 41,746 40,125
Deferred income taxes
and investment tax credit 1,789 (497)
Changes in current assets and liabilities:
Change in fuel inventory (6,294) (8,089)
Change in accounts receivable 7,247 1,447
Change in accounts payable (1,754) 3,650
Change in liability to ratepayers - (6,599)
Change in escrow funds - 6,599
Change in other current assets
and liabilities (2,112) 6,435
Other--net (4,845) 3,307
Net Cash Provided by Operating Activities 72,826 90,071
Cash Flows from Investing Activities:
Construction expenditures - utility (41,824) (47,431)
Proceeds from insurance reimbursements 4,056 201
Net Cash Used by Investing Activities (37,768) (47,230)
Cash Flows from Financing Activities:
Short-term borrowings - net (2,400) (14,900)
Issuance of long-term debt - 35,682
Funds deposited with trustee - net - 3,779
Retirement of long-term debt, incl. premiums (21) (36,192)
Payment of dividends (34,408) (33,651)
Net Cash Used by Financing Activities (36,829) (45,282)
Net Decrease in Cash and Cash Equivalents (1,771) (2,441)
Cash and Cash Equivalents Beginning of Period 5,719 5,697
Cash and Cash Equivalents End of Period $ 3,948 $ 3,256
Supplemental Disclosures
Cash paid for:
Interest $ 18,504 $ 17,896
Income taxes $ 21,139 $ 27,918
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-9-
<PAGE>
KENTUCKY UTILITIES COMPANY
BALANCE SHEETS
(Unaudited)
(in thousands)
As of As of
Jun. 30, Dec. 31,
1997 1996
ASSETS
Utility Plant:
Plant in service, at cost $2,498,103 $2,482,812
Less: Accumulated depreciation 1,099,749 1,067,911
1,398,354 1,414,901
Construction work in progress 79,508 63,435
1,477,862 1,478,336
Current Assets:
Cash and cash equivalents 3,948 5,719
Accounts receivable 39,580 50,582
Accrued utility revenues 26,585 24,239
Fuel, principally coal, at average cost 37,189 30,895
Materials and supplies, at average cost 23,370 21,656
Other 6,679 7,486
137,351 140,577
Other Assets:
Unamortized loss on reacquired debt 10,297 10,838
Other 44,863 43,304
55,160 54,142
Total Assets $1,670,373 $1,673,055
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 598,038 $ 595,397
Preferred stock 40,000 40,000
Long-term debt 546,351 546,373
1,184,389 1,181,770
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings 51,800 54,200
Accounts payable 27,206 28,960
Accrued interest 7,892 8,048
Accrued taxes 5,396 5,383
Customers' deposits 9,454 8,746
Accrued payroll and vacations 10,184 9,862
Other 7,607 5,728
119,560 120,948
Other Liabilities:
Accumulated deferred income taxes 242,494 238,542
Accumulated deferred investment tax credits 28,123 30,167
Regulatory tax liability 52,642 54,388
Other 43,165 47,240
366,424 370,337
Total Capitalization and Liabilities $1,670,373 $1,673,055
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-10-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. PRESENTATION OF CONDENSED INFORMATION
The unaudited interim financial statements presented herein
include the consolidated statements of KU Energy Corporation and
Subsidiaries (KU Energy or the Company) as well as separate financial
statements for Kentucky Utilities Company (KU). KU Energy Corporation
is a holding company organized under the laws of Kentucky with two
first-tier subsidiaries: KU Capital Corporation (KU Capital), a non-
utility subsidiary, and KU, an electric utility. KU Energy
Corporation owns 100 percent of the common equity of KU Capital and
KU. KU is KU Energy Corporation's principal subsidiary.
The unaudited statements have been prepared by the Company and
KU, respectively, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations,
although the Company and KU believe the disclosures are adequate to
make the information presented not misleading. The Company's
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto incorporated by reference
in the Annual Report on Form 10-K of KU Energy and KU for the year
ended December 31, 1996; and the KU financial statements should be
read in conjunction with the KU financial statements and notes thereto
included in the Annual Report on Form 10-K of KU Energy and KU for the
year ended December 31, 1996.
-11-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In the opinion of the Company and KU, the respective information
furnished herein reflects all adjustments, all of which are normal and
recurring, which are necessary to present fairly the results of the
periods shown, and the disclosures which have been made are adequate
to make the information not misleading. Results of interim periods
are not necessarily indicative of results for any twelve-month period
due to the seasonal nature of KU's business. Certain prior year
amounts have been reclassified on a basis consistent with the June 30,
1997 presentation.
2. ENVIRONMENTAL COST RECOVERY
Since August 1994, KU has been collecting an environmental
surcharge from its Kentucky retail customers under a Kentucky statute
which authorizes electric utilities (including KU) to implement,
beginning January 1, 1993, an environmental surcharge. The surcharge
is designed to recover certain operating and capital costs of
compliance with federal, state or local environmental requirements
associated with the production of energy from coal, including the
Federal Clean Air Act as amended. KU's environmental surcharge was
approved by the Kentucky Public Service Commission (PSC) in July 1994
and was implemented in August 1994. The total surcharge collections
from August 1, 1994 through June 30, 1997 were approximately
$49 million.
The constitutionality of the surcharge statute was challenged in
the Franklin County (Kentucky) Circuit Court in an action brought
against KU and the PSC by the Attorney General of Kentucky and joined
-12-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
by representatives of consumer groups. In July 1995, the Circuit
Court entered a judgment upholding the constitutionality of the
statute, but vacating that part of the PSC's July 1994 order which the
judgment describes as allowing KU to recover, under the surcharge,
certain environmental expenditures characterized by the Circuit Court
as having been incurred before January 1, 1993. The Circuit Court
further ordered the case remanded to the PSC for a determination in
accordance with the judgment. KU and the PSC assert that none of the
costs included in the surcharge were incurred prior to June 1994.
The Attorney General and other consumer representatives appealed
to the Kentucky Court of Appeals that part of the Circuit Court
judgment upholding the constitutionality of the surcharge statute.
The PSC and KU appealed that part of the judgment denying recovery of
certain environmental expenditures characterized by the Circuit Court
as having been incurred before January 1, 1993. The PSC has ordered
all surcharge revenues collected by KU from February 1, 1995 subject
to refund pending final determination of all appeals. The total
surcharge collections from February 1, 1995 through June 30, 1997 were
approximately $45 million.
KU believes the constitutionality of the surcharge statute will
be upheld, but it cannot predict the outcome of that part of the
Circuit Court judgment disallowing recovery of certain environmental
expenditures characterized by the Circuit Court as having been
incurred before January 1, 1993. If the Circuit Court judgment is
ultimately upheld as entered, KU estimates that the amount it would be
required to refund (which is based solely on costs associated with
-13-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
certain environmental expenditures characterized by the Circuit Court
as having been incurred before January 1, 1993) for surcharge
collections through June 30, 1997, from the implementation of the
surcharge would be approximately $13 million, and from February 1,
1995 would be approximately $11 million. At this time, KU has not
recorded any reserve for refund.
3. MERGER AGREEMENT WITH LG&E ENERGY CORP.
KU Energy and LG&E Energy Corp. entered into a Merger Agreement
dated May 20, 1997. For information concerning the agreement, see
Managements' Discussion and Analysis - Merger Agreement with LG&E
Energy Corp.
The following discussion and analysis of financial condition and
results of operations are for the Company unless otherwise stated.
Material changes in the consolidated financial condition and operating
results of KU Energy are based primarily upon the operations of KU.
-14-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended June 30, 1997 compared
to the Quarter ended June 30, 1996
The Company's earnings per common share for the three-month
period ended June 30, 1997 were $.32 compared to $.42 for the
corresponding period of 1996. The decrease was primarily due to lower
residential and commercial sales as a result of milder weather in the
second quarter of 1997 when compared to 1996 and increased maintenance
expense. The negative effects of these factors were somewhat offset
by an increase in sales to industrial customers.
The changes in operating revenues and kilowatt-hour sales
described below are for the Company. The only difference between
changes in operating revenues for the Company and operating revenues
for KU are intercompany revenues that are eliminated in the
consolidated financial statements. These intercompany amounts are
immaterial.
Increase (Decrease)
From Prior Year
Three Months
Ended Jun. 30, 1997
kWh Revenues
(%) (000's)
Residential (8) $ (3,512)
Commercial (5) (1,650)
Industrial 7 2,142
Mine Power 10 452
Public Authorities (6) (756)
Total Retail Sales (1) (3,324)
Sales for Resale (8) (975)
Miscellaneous Revenues & Other - (350)
Total (3) $ (4,649)
Operating revenues decreased $4.6 million (3%). The decrease
reflects a 3% decrease in kilowatt-hour sales. The decline in
-15-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
kilowatt-hour sales is primarily attributable to decreases in
residential and commercial sales and sales for resale partially offset
by an increase in industrial sales. The decreases in residential and
commercial sales were primarily due to milder weather during the
second quarter of 1997 compared to the corresponding period of 1996.
The decrease in sales for resale (714,214 megawatt-hours versus
780,027 megawatt-hours) was primarily due to decreased demand for
power from neighboring utilities. The increase in industrial sales
reflects continued economic growth in the manufacturing sector of KU's
service area.
Fuel expense decreased $3.5 million (8%). The decrease in fuel
expense was primarily attributable to an 11% decrease in tons of coal
consumed offset by a 3% increase in the cost per million British
thermal units (MBTU). The decreased consumption was primarily caused
by the previously mentioned decrease in kilowatt-hour sales and to an
increase in kilowatt-hour purchases discussed below.
Purchased power expense increased $2.0 million (11%). The
increase was primarily due to a 24% increase in megawatt-hour
purchases resulting from increased availability of economical surplus
power.
Maintenance expense increased $2.9 million (16%). The increase
was primarily due to the timing of expenditures for maintenance
activities.
Federal and state income taxes decreased $3.7 million (38%). The
decrease was primarily attributable to a decline in pretax income.
-16-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months ended June 30, 1997 compared
to the Six Months ended June 30, 1996
The Company's earnings per common share for the six-month period
ended June 30, 1997 were $.98 compared to $1.12 for the corresponding
period of 1996. The decrease was primarily due to lower residential
and commercial sales as a result of milder weather in 1997 when
compared to 1996 and lower sales for resale when compared to 1996.
The negative effects of these factors were offset somewhat by an
increase in industrial sales.
Increase (Decrease)
From Prior Year
Six Months
Ended Jun. 30, 1997
kWh Revenues
(%) (000's)
Residential (9) $(11,527)
Commercial (4) (3,489)
Industrial 7 2,856
Mine Power 4 (92)
Public Authorities (3) (1,060)
Total Retail Sales (2) (13,312)
Sales for Resale (10) (3,249)
Miscellaneous Revenues & Other - (170)
Total (4) $(16,731)
In February 1997, pursuant to a PSC order, KU made a one-time
refund through the fuel adjustment clause to Kentucky customers
associated with the disposition of Company-owned railroad cars. As a
result of the refund, revenues and fuel expense were reduced by
approximately $3 million in the first quarter of 1997. KU had
reserved for the refund amount in prior periods.
Excluding the effect of the refund mentioned above, operating
revenues decreased $13.5 million (4%). The decrease reflects a 4%
decline in kilowatt-hour sales. The decline in kilowatt-hour sales is
primarily attributable to decreases in residential and commercial
sales and sales for resale partially offset by an increase in
-17-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
industrial sales. The decreases in residential and commercial sales
were primarily due to milder weather during 1997 compared to the
corresponding period of 1996. The decrease in sales for resale
(1,549,106 megawatt-hours versus 1,719,128 megawatt-hours) was
primarily due to decreased demand for power from neighboring
utilities. The increase in industrial sales reflects continued
economic growth in the manufacturing sector of KU's service area.
Excluding the effect of the above mentioned refund, fuel expense
decreased $9.9 million (10%). The decrease was primarily due to an 8%
decrease in tons of coal consumed and to a 2% decrease in the price
per MBTU. The decreased consumption was due primarily to the
previously mentioned decrease in kilowatt-hour sales and to an
increase in kilowatt-hour purchases discussed below.
Purchased power expense increased $2.1 million (6%). The
increase was primarily due to a 16% increase in megawatt-hour
purchases. As mentioned previously, the increase in megawatt-hour
purchases was primarily due to increased availability of economical
surplus power.
Federal and state income taxes decreased $4.1 million (16%). The
decrease was primarily attributable to a decline in pretax income.
MERGER AGREEMENT WITH LG&E ENERGY CORP.
On May 20, 1997, KU Energy and LG&E Energy Corp. (LG&E Energy)
entered into an Agreement and Plan of Merger (Merger Agreement)
providing for a tax-free, stock-for-stock merger of KU Energy and LG&E
Energy, with the latter as the survivor (the Merger). In addition,
simultaneously with the Merger Agreement, KU Energy and LG&E Energy
-18-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
entered into stock option agreements pursuant to which each company
grants to the other an option to purchase, under certain
circumstances, a certain number of shares of common stock of such
company at a specified price. The Merger is subject to customary
closing conditions, including, the approval of the shareholders of
both companies and receipt of certain regulatory and governmental
approvals including the PSC, the Virginia State Corporation Commission
(SCC), the Federal Energy Regulatory Commission (FERC), the SEC and
the Federal Trade Commission. The approval process is expected to
take approximately 12 to 18 months to complete. The Company cannot
predict when such regulatory approvals will be completed or what
conditions, if any, may be attached to such approvals. Further
details about the proposed merger are provided in KU Energy's current
reports on Form 8-K, filed with the SEC on May 21, 1997 and May 30,
1997.
In July, 1997, KU Energy and LG&E Energy filed joint
applications for approval of the Merger with the PSC and the SCC. A
joint application for approval is expected to be filed with the FERC
in late August or early September. KU Energy and LG&E Energy plan to
seek shareholders' approval of the Merger at special meetings expected
to be held on October 14, 1997.
NONUTILITY ACTIVITIES
KU Solutions, an indirect non-regulated subsidiary of KU Energy
Corporation, was formed in March 1997. KU Solutions will offer
products and services designed to complement the Company's core energy
-19-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
business. In March 1997, KU Solutions entered into a gas marketing
joint venture with Alliance Energy Services Partnership (AES), a
Kentucky general partnership between Conoco, Inc., and Alliance Gas
Services, Inc. The venture will allow KU Solutions and AES to
capitalize on their combined marketing expertise in electricity and
natural gas by offering both sources of energy to respond to the
increasing demands of customers for a single supplier to meet all of
their energy needs.
UTILITY ISSUES
Competition
Refer to Management's Discussion and Analysis incorporated by
reference in the 1996 Annual Report on Form 10-K of KU Energy and KU
under the heading Utility Issues - Competition for a discussion of
FERC Order No. 888 (Order 888) and FERC Order No. 889 (Order 889). In
March 1997 the FERC issued its Final Rule (Order 888-A), reaffirming
the legal and policy basis on which Orders 888 and 889 were based.
The Final Rule for the Orders responded to public comments on the
various provisions of Orders 888 and 889; but no major changes were
made. The Final Rule was effective May 13, 1997. On July 14, 1997,
KU filed its Transmission Services Tariff, which management believes
is in compliance with the provisions set forth in the Final Rule. KU
requested an effective date for the tariff of September 12, 1997,
sixty days following the July 14, 1997 filing.
-20-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENVIRONMENTAL MATTERS
Environmental Cost Recovery
In August 1994, KU implemented an environmental cost recovery
mechanism (surcharge) in Kentucky. Authorized by a 1992 state statute
and approved by the PSC, the surcharge is designed to recover certain
environmental compliance costs, including costs to comply with the
1990 Clean Air Act Amendments, through a surcharge on customers
bills.
The constitutionality of the surcharge was challenged in a
Kentucky state court action brought against KU and the PSC by the
Attorney General of Kentucky and representatives of consumer groups.
In July 1995, the state court upheld the constitutionality of the
surcharge statute but vacated that part of the PSC's order which the
state court described as allowing KU to recover certain environmental
expenditures characterized by the state court as having been incurred
before January 1, 1993. All parties (including KU) have appealed to
the Kentucky Court of Appeals.
KU believes the constitutionality of the surcharge statute will
be upheld, but it cannot predict the outcome of that part of the state
court judgment disallowing recovery of certain environmental
expenditures characterized by the state court as having been incurred
before January 1, 1993. If the state court judgment is ultimately
upheld as entered, KU estimates that the amount it would be required
to refund (which is based solely on costs associated with certain
environmental expenditures characterized by the state court as having
been incurred before January 1, 1993) for surcharge collections
through June 30, 1997, from the implementation of the surcharge would
be approximately $13 million, and from February 1, 1995 would be
approximately $11 million. At this time, KU has not recorded any
-21-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reserve for refund. For additional discussion, refer to Note 2 of the
Condensed Notes to Financial Statements, Environmental Cost
Recovery.
National Ambient Air Quality Standards
The Environmental Protection Agency issued final rules on
July 18, 1997 revising the National Ambient Air Quality Standards for
ozone and particulate matter. The revised standards would require
significant reductions in sulfur dioxide and nitrogen oxide emissions
from coal-fired boilers beginning in 2005. Because of the magnitude
of these additional reductions (50 percent beyond that already
required by the Phase II acid rain control provisions of the 1990
Clean Air Act Amendments which become effective January 1, 2000), KU
could be required to incur substantial costs to meet future compliance
obligations for its coal-fired boilers.
IMPACT OF ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS 128), and Statement of Financial Accounting Standards
No. 129, Disclosure of Information about Capital Structure (SFAS
129). SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with
publicly held common stock. SFAS 129 was issued in conjunction with
the FASB's earnings per share project and incorporated related
disclosure requirements from APB Opinion No. 10, Disclosure of Long-
Term Obligations, and Statement of Financial Accounting Standards
-22-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
No. 47, Disclosure of Long-Term Obligations. Both statements are
effective for fiscal years ending after December 15, 1997. The
Company will adopt the statements for year-end 1997 and does not
expect adoption of the statements to have any impact on its current
earnings per share calculation or disclosures.
FORWARD LOOKING STATEMENTS
This report includes forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All
statements made herein which are not based on historical facts are
forward looking and, accordingly, involve risks and uncertainties that
could cause actual results to differ materially from those discussed.
Such forward looking statements include those under Management's
Discussion and Analysis relating to the anticipated results of
proceedings related to the environmental surcharge, the impact of the
revisions to the National Ambient Air Quality Standards, Management's
belief as to the nature of its recently filed Transmission Services
Tariff and the expected timing of regulatory approvals of the Merger.
Such statements are based on management's belief, judgment and
analysis as well as assumptions made by and information available to
management at the date hereof. In addition to any assumptions and
cautionary factors referred to specifically in this report in
connection with such forward looking statements, factors that could
cause actual results to differ materially from those contemplated by
the forward looking statements include unanticipated or adverse
decisions in regulatory proceedings or litigation and other matters
detailed in Exhibit 99.06, Cautionary Statements, to the 1996 Annual
Report on Form 10-K of KU Energy and KU, incorporated herein by
reference.
-23-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 2 of the Condensed Notes to Financial Statements,
Environmental Cost Recovery, for a discussion of KU's
environmental surcharge.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
KU Energy Corporation
At the April 22, 1997, Annual Meeting of Shareholders, the
following proposals were acted upon and approved.
(1) To elect three Directors to the Board of Directors of the
Company.
Votes
Votes For Withheld
Milton W. Hudson 32,208,540 557,678
John T. Newton 32,319,688 554,713
William L. Rouse, Jr. 32,252,200 554,963
(2) To consider and vote upon the adoption by the Company of
a Long Term Incentive Plan whereby officers and other key
employees of the Company and its affiliates will receive
grants of options or other awards based on predetermined
financial and other performance goals.
Affirming Negative
Votes Votes Abstentions
25,550,638 5,859,830 1,408,520
(3) To consider and vote upon the adoption by the Company of
an Annual Performance Incentive Plan whereby officers and
other key employees of the Company or its affiliates will
receive cash incentive compensation awards based on
predetermined financial and other performance goals.
Affirming Negative
Votes Votes Abstentions
27,944,475 3,605,768 1,268,746
Kentucky Utilities Company
At the April 22, 1997, Annual Meeting of Shareholders, the
following proposal was acted upon and approved.
To elect three Directors to the Board of Directors of KU.
Votes
Votes For Withheld
Milton W. Hudson 37,817,878 0
John T. Newton 37,817,878 0
William L. Rouse, Jr. 37,817,878 0
-24-
<PAGE>
ITEM 5. OTHER INFORMATION
Unaudited Pro Forma Combined Condensed Consolidated Financial
Information
The following unaudited pro forma financial information
combines the historical balance sheets and statements of income
of LG&E Energy and KU Energy, including their respective
subsidiaries, after giving effect to the Merger. The unaudited
pro forma combined condensed balance sheet at June 30, 1997 gives
effect to the Merger as if it had occurred at June 30, 1997. The
unaudited pro forma combined condensed statements of income for
each of the years in the three-year period ended December 31,
1996, the three- and six-month periods ended June 30, 1997 and
1996, and the twelve-month period ended June 30, 1997 give effect
to the Merger as if it had occurred at January 1, 1994. These
statements are prepared on the basis of accounting for the Merger
as a pooling of interests and are based on the assumptions set
forth in the notes thereto. The pro forma financial information
does not give effect to the expected synergies of the
transaction.
The following pro forma financial information has been
prepared from, and should be read in conjunction with, the
historical financial statements and related notes thereto of LG&E
Energy and KU Energy as included in their respective Annual
Reports on Form 10-K for the year ended December 31, 1996. The
following information is not necessarily indicative of the
financial position or operating results that would have occurred
had the Merger been consummated on the date as of which, or at
the beginning of the periods for which, the Merger is being given
effect, nor is it necessarily indicative of future operating
results or financial position. In addition, due to the effect of
seasonal fluctuations in temperature and other weather-related
factors on the operations of LG&E Energy and KU Energy, financial
results for the three- and six-month periods ended June 30, 1997
and 1996 are not necessarily indicative of trends for any future
period.
-25-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
At June 30, 1997
(Thousands of Dollars)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and temporary cash investments $ 132,210 $ 21,418 $ - $ 153,628
Marketable securities 10,996 - - 10,996
Accounts receivable - less reserve 376,327 66,425 (21) 442,731
Materials and supplies - primarily
at average cost:
Fuel (predominately coal) 15,651 37,189 - 52,840
Gas stored underground 16,174 - - 16,174
Other 31,802 23,370 - 55,172
Price risk management assets 62,782 - - 62,782
Prepayments and other 3,472 6,679 - 10,151
Total current assets 649,414 155,081 (21) 804,474
Other property and investments
- less reserve:
Investments in affiliates 171,384 2,172 - 173,556
Non-utility property and plant, net 408,058 2,714 - 410,772
Price risk management assets 49,924 - - 49,924
Other 25,261 41,327 - 66,588
Total other property and
investments 654,627 46,213 - 700,840
Utility plant, at original cost:
Electric 2,245,213 2,577,611 - 4,822,824
Gas 337,324 - - 337,324
Common 138,724 - - 138,724
Gross utility plant 2,721,261 2,577,611 - 5,298,872
Less: reserve for depreciation 1,037,437 1,099,749 - 2,137,186
Net utility plant 1,683,824 1,477,862 - 3,161,686
Deferred debits and other assets 121,389 47,585 8,250 177,224
Total assets $ 3,109,254 $ 1,726,741 $ 8,229 $ 4,844,224
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-26-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
At June 30, 1997
(Thousands of Dollars)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
CAPITAL AND LIABILITIES
Current liabilities:
<S> <C> <C> <C> <C>
Long term debt due within one year $ 20,000 $ 21 $ - $ 20,021
Notes payable 298,000 51,800 - 349,800
Accounts payable 322,749 26,937 16,479 366,165
Trimble County settlement 15,072 - - 15,072
Accrued taxes 5,532 2,849 (3,330) 5,051
Price risk management liabilities 77,637 - - 77,637
Other 76,006 35,306 - 111,312
Total current liabilities 814,996 116,913 13,149 945,058
Long-Term Debt 664,284 546,351 - 1,210,635
Deferred credits and other liabilities:
Accumulated deferred income taxes 312,326 249,208 - 561,534
Investment tax credit, in process
of amortization 77,869 28,123 - 105,992
Regulatory liability 75,600 53,305 - 128,905
Price risk management liabilities 23,824 - - 23,824
Other 123,939 43,706 - 167,645
Total deferred credits and
other liabilities 613,558 374,342 - 987,900
Minority interests 102,594 - - 102,594
Cumulative preferred stock 95,328 40,000 - 135,328
Common equity 818,494 649,135 (4,920) 1,462,709
Total capital and liabilities $ 3,109,254 $ 1,726,741 $ 8,229 $ 4,844,224
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-27-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Three Months Ended June 30, 1997
(Thousands of Dollars Except Per Share Data)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 522,515 $ - $ - $ 522,515
Electric utility 145,919 162,861 (35) 308,745
Gas utility 34,191 - - 34,191
Other 44,636 1,550 - 46,186
Total revenues 747,261 164,411 (35) 911,637
Cost of revenues
Energy marketing and trading 507,933 - - 507,933
Fuel and power purchased 38,407 61,212 (35) 99,584
Gas supply expenses 21,144 - - 21,144
Other 26,199 - - 26,199
Total cost of revenues 593,683 61,212 (35) 654,860
Gross Profit 153,578 103,199 - 256,777
Operating expenses
Operation and maintenance
Utility 55,965 54,787 - 110,752
Energy marketing and trading
and other 23,927 844 - 24,771
Depreciation and amortization 28,875 20,957 - 49,832
Non-recurring charges (592) - - (592)
Total operating expenses 108,175 76,588 - 184,763
Equity in earnings of joint ventures 5,557 - - 5,557
Operating Income 50,960 26,611 - 77,571
Other Income and (deductions) 2,710 1,833 - 4,543
Interest charges, minority interest
and preferred dividends 19,468 10,464 - 29,932
Income before income taxes 34,202 17,980 - 52,182
Income taxes 12,585 5,930 - 18,515
Net Income (Note 5) $ 21,617 $ 12,050 $ - $ 33,667
Average common shares outstanding
(Note 4) 66,492 37,818 25,338 129,648
Earnings per share of common stock $ 0.33 $ 0.32 $ - $ 0.26
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-28-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Three Months Ended June 30, 1996
(Thousands of Dollars Except Per Share Data)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 575,160 $ - $ - $ 575,160
Electric utility 151,857 167,510 (250) 319,117
Gas utility 29,362 - - 29,362
Other 4,534 1,091 - 5,625
Total revenues 760,913 168,601 (250) 929,264
Cost of revenues
Energy marketing and trading 563,605 - (45) 563,560
Fuel and power purchased 41,863 62,668 (205) 104,326
Gas supply expenses 18,652 - - 18,652
Other 3,248 - - 3,248
Total cost of revenues 627,368 62,668 (250) 689,786
Gross Profit 133,545 105,933 - 239,478
Operating expenses
Operation and maintenance
Utility ` 51,773 51,664 - 103,437
Energy marketing and trading
and other 11,517 563 - 12,080
Depreciation and amortization 25,764 20,154 - 45,918
Non-recurring charges - - - -
Total operating expenses 89,054 72,381 - 161,435
Equity in earnings of joint ventures 4,201 - - 4,201
Operating Income 48,692 33,552 - 82,244
Other Income and (deductions) 1,555 1,456 - 3,011
Interest charges, minority interest
and preferred dividends 13,834 10,345 - 24,179
Income before income taxes 36,413 24,663 - 61,076
Income taxes 12,591 8,590 - 21,181
Net Income $ 23,822 $ 16,073 $ - $ 39,895
Average common shares outstanding
(Note 4) 66,294 37,818 25,338 129,450
Earnings per share of common stock $ 0.36 $ 0.42 $ - $ 0.31
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-29-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Six Months Ended June 30, 1997
(Thousands of Dollars Except Per Share Data)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 1,580,966 $ - $ (4) $ 1,580,962
Electric utility 274,746 341,769 (240) 616,275
Gas utility 130,929 - - 130,929
Other 63,863 2,727 - 66,590
Total revenues 2,050,504 344,496 (244) 2,394,756
Cost of revenues
Energy marketing and trading 1,554,329 - (15) 1,554,314
Fuel and power purchased 73,426 123,528 (229) 196,725
Gas supply expenses 88,969 - - 88,969
Other 37,593 - - 37,593
Total cost of revenues 1,754,317 123,528 (244) 1,877,601
Gross Profit 296,187 220,968 - 517,155
Operating expenses
Operation and maintenance
Utility 109,396 101,599 - 210,995
Energy marketing and trading
and other 43,699 1,463 - 45,162
Depreciation and amortization 56,762 41,839 - 98,601
Non-recurring charges (592) - - (592)
Total operating expenses 209,265 144,901 - 354,166
Equity in earnings of joint ventures 8,941 - - 8,941
Operating Income 95,863 76,067 - 171,930
Other Income and (deductions) 6,077 2,361 - 8,438
Interest charges, minority interest
and preferred dividends 34,458 20,904 - 55,362
Income before income taxes 67,482 57,524 - 125,006
Income taxes 24,626 20,611 - 45,237
Net Income (Note 5) $ 42,856 $ 36,913 $ - $ 79,769
Average common shares outstanding
(Note 4) 66,433 37,818 25,338 129,589
Earnings per share of common stock $ 0.65 $ 0.98 $ - $ 0.62
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-30-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Six Months Ended June 30, 1996
(Thousands of Dollars Except Per Share Data)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 1,218,714 $ - $ - $ 1,218,714
Electric utility 287,676 358,500 (575) 645,601
Gas utility 120,418 - - 120,418
Other 9,534 2,210 - 11,744
Total revenues 1,636,342 360,710 (575) 1,996,477
Cost of revenues
Energy marketing and trading 1,178,266 - (186) 1,178,080
Fuel and power purchased 80,879 134,197 (389) 214,687
Gas supply expenses 76,884 - - 76,884
Other 6,947 - - 6,947
Total cost of revenues 1,342,976 134,197 (575) 1,476,598
Gross Profit 293,366 226,513 - 519,879
Operating expenses
Operation and maintenance
Utility 110,492 99,788 - 210,280
Energy marketing and trading
and other 32,431 1,007 - 33,438
Depreciation and amortization 51,492 40,219 - 91,711
Non-recurring charges (Note 8) - 1,480 - 1,480
Total operating expenses 194,415 142,494 - 336,909
Equity in earnings of joint ventures 8,801 - - 8,801
Operating Income 107,752 84,019 - 191,771
Other Income and (deductions) 1,541 3,502 - 5,043
Interest charges, minority interest
and preferred dividends 27,879 21,107 - 48,986
Income before income taxes 81,414 66,414 - 147,828
Income taxes 30,497 24,022 - 54,519
Net Income $ 50,917 $ 42,392 $ - $ 93,309
Average common shares outstanding
(Note 4) 66,263 37,818 25,338 129,419
Earnings per share of common stock $ 0.77 $ 1.12 $ - $ 0.72
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-31-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Twelve Months Ended June 30, 1997
(Thousands of Dollars Except Per Share Data)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
Revenues
Energy marketing and trading
<S> <C> <C> <C> <C>
(Note 6) $ 3,099,192 $ - $ (4) $ 3,099,188
Electric utility 594,230 694,955 (425) 1,288,760
Gas utility 224,930 - - 224,930
Other 85,275 5,039 - 90,314
Total revenues 4,003,627 699,994 (429) 4,703,192
Cost of revenues
Energy marketing and trading 3,039,965 - (85) 3,039,880
Fuel and power purchased 158,870 250,020 (344) 408,546
Gas supply expenses 152,567 - - 152,567
Other 44,202 - - 44,202
Total cost of revenues 3,395,604 250,020 (429) 3,645,195
Gross Profit 608,023 449,974 - 1,057,997
Operating expenses
Operation and maintenance
Utility 213,690 203,622 - 417,312
Energy marketing and trading
and other 79,175 3,215 - 82,390
Depreciation and amortization 108,826 82,232 - 191,058
Non-recurring charges
(Notes 7 and 8) 25,738 4,012 - 29,750
Total operating expenses 427,429 293,081 - 720,510
Equity in earnings of joint ventures 18,958 - - 18,958
Operating Income 199,552 156,893 - 356,445
Other Income and (deductions) 8,344 4,186 - 12,530
Interest charges, minority interest
and preferred dividends 60,466 41,687 - 102,153
Income before income taxes 147,430 119,392 - 266,822
Income taxes 51,488 42,923 - 94,411
Net Income (Note 5) $ 95,942 $ 76,469 $ - $ 172,411
Average common shares outstanding
(Note 4) 66,378 37,818 25,338 129,534
Earnings per share of common stock $ 1.45 $ 2.02 $ - $ 1.33
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-32-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 1996
(Thousands of Dollars Except Per Share Data)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
Revenues
Energy marketing and trading
<S> <C> <C> <C> <C>
(Note 6) $ 2,736,940 $ - $ - $ 2,736,940
Electric utility 607,160 711,686 (760) 1,318,086
Gas utility 214,419 - - 214,419
Other 30,946 4,522 - 35,468
Total revenues 3,589,465 716,208 (760) 4,304,913
Cost of revenues
Energy marketing and trading 2,663,902 - (257) 2,663,645
Fuel and power purchased 166,323 260,688 (503) 426,508
Gas supply expenses 140,482 - - 140,482
Other 13,556 - - 13,556
Total cost of revenues 2,984,263 260,688 (760) 3,244,191
Gross Profit 605,202 455,520 - 1,060,722
Operating expenses
Operation and maintenance
Utility 214,786 201,811 - 416,597
Energy marketing and trading
and other 67,907 2,759 - 70,666
Depreciation and amortization 103,556 80,612 - 184,168
Non-recurring charges
(Notes 7 and 8) 26,330 5,493 - 31,823
Total operating expenses 412,579 290,675 - 703,254
Equity in earnings of joint ventures 18,818 - - 18,818
Operating Income 211,441 164,845 - 376,286
Other Income and (deductions) 3,808 5,327 - 9,135
Interest charges, minority interest
and preferred dividends 53,887 41,889 - 95,776
Income before income taxes 161,362 128,283 - 289,645
Income taxes 57,359 46,334 - 103,693
Net Income $ 104,003 $ 81,949 $ - $ 185,952
Average common shares outstanding
(Note 4) 66,294 37,818 25,338 129,450
Earnings per share of common stock $ 1.57 $ 2.17 $ - $ 1.44
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-33-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 1995
(Thousands of Dollars Except Per Share Data)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 630,249 $ - $ (1,616) $ 628,633
Electric utility 571,086 686,400 (2,212) 1,255,274
Refund - Trimble County (Note 9) (28,300) - - (28,300)
Gas utility 181,126 - - 181,126
Other 20,519 4,028 - 24,547
Total revenues 1,374,680 690,428 (3,828) 2,061,280
Cost of revenues
Energy marketing and trading 604,302 - - 604,302
Fuel and power purchased 154,832 259,424 (3,828) 410,428
Gas supply expenses 110,738 - - 110,738
Other 19,858 - - 19,858
Total cost of revenues 889,730 259,424 (3,828) 1,145,326
Gross Profit 484,950 431,004 - 915,954
Operating expenses
Operation and maintenance
Utility 203,284 198,712 - 401,996
Energy marketing and trading
and other 39,874 2,969 - 42,843
Depreciation and amortization 94,393 75,268 - 169,661
Total operating expenses 337,551 276,949 - 614,500
Equity in earnings of joint ventures 28,158 - - 28,158
Operating Income 175,557 154,055 - 329,612
Other Income and (deductions) 5,389 6,092 - 11,481
Interest charges, minority interest
and preferred dividends 53,822 42,273 - 96,095
Income before income taxes 127,124 117,874 - 244,998
Income taxes 44,294 41,821 - 86,115
Net Income $ 82,830 $ 76,053 $ - $ 158,883
Average common shares outstanding
(Note 4) 66,105 37,818 25,338 129,261
Earnings per share of common stock $ 1.25 $ 2.01 $ - $ 1.23
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-34-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 1994
(Thousands of Dollars Except Per Share Data)
<CAPTION>
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 1,289 $ - $ - $ 1,289
Electric utility (Note 10) 559,327 636,628 (328) 1,195,627
Gas utility 200,129 - - 200,129
Other 68,918 2,604 - 71,522
Total revenues 829,663 639,232 (328) 1,468,567
Cost of revenues
Energy marketing and trading 1,222 - - 1,222
Fuel and power purchased (Note 10) 153,356 232,096 (328) 385,124
Gas supply expenses 131,561 - - 131,561
Other 56,395 - - 56,395
Total cost of revenues 342,534 232,096 (328) 574,302
Gross Profit 487,129 407,136 - 894,265
Operating expenses
Operation and maintenance
Utility 202,123 193,428 - 395,551
Energy marketing and trading
and other 24,629 2,053 - 26,682
Depreciation and amortization 84,173 65,441 - 149,614
Non-recurring charges (Note 11) 48,743 - - 48,743
Total operating expenses 359,668 260,922 - 620,590
Equity in earnings of joint ventures 12,883 - - 12,883
Operating Income 140,344 146,214 - 286,558
Other Income and (deductions) 13,718 8,121 - 21,839
Cont.to charitable foundation (Note 12) 15,000 - - 15,000
Interest charges and
preferred dividends 48,839 36,453 - 85,292
Income from continuing operations
before income taxes 90,223 117,882 - 208,105
Income taxes 33,394 42,006 - 75,400
Income from continuing operations 56,829 75,876 - 132,705
Gain on sale of discontinued
operations, net of income taxes
of $35,048 (Note 13) 51,805 - - 51,805
Income before cumulative effect of
change in accounting principle 108,634 75,876 - 184,510
Cumulative effect of change in
accounting for post-employment
benefits, net of income taxes of
$2,280 (Note 14) (3,369) - - (3,369)
Net Income $ 105,265 $ 75,876 $ - $ 181,141
Average common shares outstanding
(Note 4) 65,982 37,818 25,338 129,138
Earnings per share of common stock
From continuing operations $ 0.86 $ 2.01 $ - $ 1.03
Gain on sale of discontinued
operations 0.79 - - 0.40
Cumulative effect of accounting
change (0.05) - - (0.03)
Total $ 1.60 $ 2.01 $ - $ 1.40
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-35-
<PAGE>
LG&E ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. Reclassifications have been made to certain as reported account
balances reflected in KU Energy's financial statements to conform
to this reporting presentation. All other financial statement
presentation and accounting policy differences are immaterial and
have not been adjusted in the pro forma combined condensed
financial statements.
2. Intercompany transactions (power purchased and power sales
transactions) between LG&E Energy and KU Energy during the
periods presented were eliminated through pro forma adjustments.
3. The allocation between LG&E Energy and KU Energy and their
customers of the estimated cost savings resulting from the
Merger, net of the estimated costs incurred to achieve such
savings, and the treatment of transaction costs, will be subject
to regulatory review and approval. None of the estimated cost
savings or costs to achieve such savings has been reflected in
the pro forma combined condensed statements of income. A charge
of $4.92 million ($8.25 million, net of income taxes of
$3.33 million) to retained earnings and $8.25 million as deferred
debits and other assets in the pro forma combined condensed
balance sheet has been made to recognize such estimated
transaction costs. Transaction costs are currently estimated to
be approximately $16.5 million (including fees for financial
advisors, attorneys, accountants, consultants, filings and
printing).
4. The pro forma combined condensed financial statements reflect the
conversion of each share of KU Energy Common Stock (no par value)
outstanding into 1.67 shares of LG&E Energy Common Stock (no par
value) as provided in the Merger Agreement. The pro forma
combined condensed financial statements are presented as if the
companies were combined during all periods included therein.
5. LG&E Energy's net income for the three months, six months, and
twelve months, ended June 30, 1997, includes the effect of an
$8.5 million insurance settlement related to the Calgary trading
loss discussed in Note 7 below, partially offset by a one-time
restructuring charge of $7 million for the consolidation of LG&E
Energy's energy marketing group.
6. LG&E Energy adopted the mark-to-market method of accounting for
its energy trading and price risk management activities during
1996. This resulted in an increase in Energy Marketing and
Trading revenues and income from operations of $26.2 million for
1996 and $16.6 million for the twelve months ended June 30, 1997.
The impact on prior period financial results was immaterial.
7. LG&E Energy's net income for the year ended December 31, 1996 and
twelve months ended June 30, 1997, includes a non-recurring
after-tax charge of $17.1 million for losses in its natural gas
marketing business resulting from unauthorized transactions
-36-
<PAGE>
LG&E ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
entered into by a marketer in its Calgary, Alberta, office. This
charge is reflected in non-recurring charges on the respective
statements of income.
8. KU Energy's net income for the year ended 1996, the twelve months
ended June 30, 1997, and the six months ended June 30, 1996
includes a non-recurring write-off of nonutility investments.
This charge is reflected in non-recurring charges on the
respective statements of income.
9. 1995 operating revenues were reduced by $28.3 million related to
a settlement agreement approved by the Kentucky Commission on
December 8, 1995, which resolved numerous legal and regulatory
proceedings to determine the appropriate ratemaking treatment to
implement the Kentucky Commission's 1988 decision that LG&E
should not be allowed to recover 25 percent of the cost of
Trimble County Unit 1 (Trimble County) from ratepayers.
10. Electric utility revenues and fuel and power purchased costs for
KU Energy for 1994 were reduced by $19.4 million and
$23.1 million, respectively, resulting from refunds made pursuant
to regulatory orders related to the resolution of a coal contract
dispute. The difference between the reduction in operating
revenues and the reduction in fuel expense is attributable to
incurred litigation costs, fuel cost savings related to
opportunity sales and costs incurred to administer the refund
plan. These amounts were retained by Kentucky Utilities pursuant
to regulatory orders.
11. LG&E Energy's 1994 net income includes pre-tax non-recurring
charges of $48.7 million. As part of a study of its business
strategy and realignment during 1994, LG&E re-evaluated its
regulatory strategy which previously had been to seek full
recovery of certain costs deferred in accordance with prior
precedents established by the Kentucky Commission. As a result
of this re-evaluation, LG&E wrote off certain expenses that had
previously been deferred amounting to approximately $38.6 million
before taxes. While LG&E continues to believe that it could have
reasonably expected to recover these costs in future rate
proceedings before the Kentucky Commission, LG&E decided to
deduct these expenses currently and not seek recovery for such
expenses in future rates due to increasing competitive pressures
and the existing and anticipated future economic conditions. In
addition, a nonutility subsidiary of LG&E Energy recorded a
reserve of $10.1 million before taxes for the costs related to
vacating leased office space.
12. LG&E Energy's 1994 net income includes a pre-tax charge of
$15 million. This represented an irrevocable payment made to a
tax-exempt charitable foundation formed by LG&E Energy in 1994.
This charge is reflected in the Contribution to Charitable
Foundation on the statements of income.
-37-
<PAGE>
LG&E ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
13. LG&E Energy's 1994 net income includes the recognition of a gain
on the sale of its 36.5 percent partnership interest in Natural
Gas Clearinghouse for $170 million. The transaction resulted in
an after-tax gain of approximately $52 million. This adjustment
is reflected as a gain on sale of discontinued operations, net of
income taxes.
14. LG&E Energy's 1994 net income includes an adjustment for a change
in accounting for post-employment benefits adopted pursuant to
Statement of Financial Accounting Standards No. 112, Employers
Accounting for Post-Employment Benefits. This adjustment is
reflected as a cumulative effect of change in accounting for
post-employment benefits, net of income taxes.
-38-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this report:
Exhibit Number Description
27.01 Financial Data Schedule for KU Energy
(required for electronic filing only
in accordance with Item 601 (c)(1) of
Regulation S-K.)
27.02 Financial Data Schedule for KU
(required for electronic filing only
in accordance with Item 601(c)(1) of
Regulation S-K.)
99.01 Cautionary Statements - KU Energy and KU.
(Exhibit 99.06 to Form 10-K Annual Report of KU
Energy and KU for the year ended December 31,
1996). Incorporated by reference.
(b) Reports on Form 8-K.
(1) KU Energy and KU filed a Form 8-K dated May 20, 1997 to
report a merger agreement between KU Energy and LG&E
Energy Corp.
(2) KU Energy and KU filed a Form 8-K dated May 30, 1997 to
file the merger agreement dated May 21, 1997 between KU
Energy and LG&E Energy and related exhibits.
-39-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, KU Energy Corporation and Kentucky Utilities Company have each
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
KU ENERGY CORPORATION and
KENTUCKY UTILITIES COMPANY
(Registrants)
Date August 12, 1997 /s/ Michael R. Whitley
Michael R. Whitley
Chairman and President
Date August 12, 1997 /s/ Michael D. Robinson
Michael D. Robinson
Controller
-40-
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS TABLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE
PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-Q QUARTERLY REPORT.
</LEGEND>
<CIK> 0000055387
<NAME> KENTUCKY UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,477,862
<OTHER-PROPERTY-AND-INVEST> 12,788
<TOTAL-CURRENT-ASSETS> 137,351
<TOTAL-DEFERRED-CHARGES> 42,372
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,670,373
<COMMON> 308,140
<CAPITAL-SURPLUS-PAID-IN> (594)
<RETAINED-EARNINGS> 290,492
<TOTAL-COMMON-STOCKHOLDERS-EQ> 598,038
0
40,000
<LONG-TERM-DEBT-NET> 546,351
<SHORT-TERM-NOTES> 51,800
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 21
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 434,163
<TOT-CAPITALIZATION-AND-LIAB> 1,670,373
<GROSS-OPERATING-REVENUE> 341,782
<INCOME-TAX-EXPENSE> 21,742
<OTHER-OPERATING-EXPENSES> 266,874
<TOTAL-OPERATING-EXPENSES> 288,616
<OPERATING-INCOME-LOSS> 53,166
<OTHER-INCOME-NET> 3,656
<INCOME-BEFORE-INTEREST-EXPEN> 56,822
<TOTAL-INTEREST-EXPENSE> 19,773
<NET-INCOME> 37,049
1,128
<EARNINGS-AVAILABLE-FOR-COMM> 35,921
<COMMON-STOCK-DIVIDENDS> 33,280
<TOTAL-INTEREST-ON-BONDS> 18,691
<CASH-FLOW-OPERATIONS> 72,826
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>ALL OUTSTANDING COMMON STOCK OF KENTUCKY UTILITIES COMPANY IS HELD BY ITS
PARENT COMPANY, KU ENERGY CORPORATION. THEREFORE, EARNINGS PER SHARE IS NOT
APPLICABLE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS TABLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE
PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-Q QUARTERLY REPORT.
</LEGEND>
<CIK> 0000835715
<NAME> KU ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,477,862
<OTHER-PROPERTY-AND-INVEST> 48,782
<TOTAL-CURRENT-ASSETS> 155,081
<TOTAL-DEFERRED-CHARGES> 45,016
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,726,741
<COMMON> 308,137
<CAPITAL-SURPLUS-PAID-IN> (594)
<RETAINED-EARNINGS> 341,592
<TOTAL-COMMON-STOCKHOLDERS-EQ> 649,135
0
40,000
<LONG-TERM-DEBT-NET> 546,351
<SHORT-TERM-NOTES> 51,800
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 21
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 439,434
<TOT-CAPITALIZATION-AND-LIAB> 1,726,741
<GROSS-OPERATING-REVENUE> 341,769
<INCOME-TAX-EXPENSE> 21,262
<OTHER-OPERATING-EXPENSES> 268,049
<TOTAL-OPERATING-EXPENSES> 289,311
<OPERATING-INCOME-LOSS> 52,458
<OTHER-INCOME-NET> 5,359
<INCOME-BEFORE-INTEREST-EXPEN> 57,817
<TOTAL-INTEREST-EXPENSE> 20,904
<NET-INCOME> 36,913
0
<EARNINGS-AVAILABLE-FOR-COMM> 36,913
<COMMON-STOCK-DIVIDENDS> 33,280
<TOTAL-INTEREST-ON-BONDS> 18,691
<CASH-FLOW-OPERATIONS> 68,553
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
</TABLE>
