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 September 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 November 11, 1997
Kentucky Utilities Company: Common stock, no par value, 37,817,878
shares outstanding and held by KU Energy
Corporation at November 11, 1997
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KU ENERGY CORPORATION
AND
KENTUCKY UTILITIES COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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 15-24
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 25
Item 4: Submission of Matters to a Vote of
Security Holders 25
Item 5: Other Information 25
Item 6: Exhibits and Reports on Form 8-K 34
Signatures 35
*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.
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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
September 30,
1997 1996
Operating Revenues $192,095 $178,269
Operating Expenses:
Fuel, principally coal,
used in generation 51,962 48,781
Electric power purchased 18,277 15,847
Other operating expenses 30,948 32,094
Maintenance 15,167 14,414
Depreciation 21,131 20,235
Federal and state income taxes 16,225 13,374
Other taxes 3,755 3,704
Total Operating Expenses 157,465 148,449
Net Operating Income 34,630 29,820
Other Income and Deductions:
Interest and dividend income 749 638
Other income and deductions - net 1,787 2,426
Total Other Income and Deductions 2,536 3,064
Income Before Interest and Other Charges 37,166 32,884
Interest and Other Charges 10,613 10,391
Net Income $ 26,553 $ 22,493
Average Common Shares Outstanding 37,818 37,818
Earnings Per Common Share $ .70 $ .60
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
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KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except for per share amounts)
For the Nine
Months Ended
September 30,
1997 1996
Operating Revenues $533,864 $536,769
Operating Expenses:
Fuel, principally coal,
used in generation 138,288 147,885
Electric power purchased 55,479 50,940
Other operating expenses 93,197 92,818
Maintenance 47,674 46,224
Depreciation 62,970 60,454
Federal and state income taxes 37,487 38,710
Other taxes 11,681 11,965
Total Operating Expenses 446,776 448,996
Net Operating Income 87,088 87,773
Other Income and Deductions:
Interest and dividend income 1,933 2,189
Other income and deductions - net 5,962 6,421
Total Other Income and Deductions 7,895 8,610
Income Before Interest and Other Charges 94,983 96,383
Interest and Other Charges 31,517 31,498
Net Income $ 63,466 $ 64,885
Average Common Shares Outstanding 37,818 37,818
Earnings Per Common Share $ 1.68 $ 1.72
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
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KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the
Nine Months
Ended September 30,
1997 1996
Cash Flows from Operating Activities:
Net Income $ 63,466 $ 64,885
Items not requiring (providing) cash currently:
Depreciation 62,970 60,454
Deferred income taxes and investment tax credit 3,245 1,356
Changes in current assets and liabilities:
Change in fuel inventory 1,892 (5,527)
Change in accounts receivable 3,810 2,438
Change in accounts payable (4,866) (8,340)
Change in accrued taxes 2,942 3,948
Change in accrued utility revenues 886 8,642
Change in liability to ratepayers - (6,599)
Change in escrow funds - 6,599
Change in other current assets and liabilities 5,336 10,771
Other--net (6,280) 5,419
Net Cash Provided by Operating Activities 133,401 144,046
Cash Flows from Investing Activities:
Construction expenditures - utility (68,423) (72,928)
Investment in independent power projects (4,805) (1,048)
Proceeds from insurance reimbursements 4,265 211
Other 1,801 1,545
Net Cash Used by Investing Activities (67,162) (72,220)
Cash Flows from Financing Activities:
Short-term borrowings - net (24,300) (25,700)
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 (49,919) (48,785)
Net Cash Used by Financing Activities (74,240) (71,216)
Net Increase (Decrease) in Cash and Cash Equivalents (8,001) 610
Cash and Cash Equivalents Beginning of Period 30,270 29,492
Cash and Cash Equivalents End of Period $ 22,269 $ 30,102
Supplemental Disclosures
Cash paid for:
Interest $ 25,316 $ 24,643
Income taxes $ 31,748 $ 37,175
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
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KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
As of As of
Sept. 30, Dec. 31,
ASSETS 1997 1996
Utility Plant:
Plant in service, at cost $ 2,524,395 $ 2,482,812
Less: Accumulated depreciation 1,112,102 1,067,911
1,412,293 1,414,901
Construction work in progress 67,890 63,435
1,480,183 1,478,336
Current Assets:
Cash and cash equivalents 22,269 30,270
Accounts receivable 42,933 50,498
Accrued utility revenues 23,353 24,239
Fuel, principally coal, at average cost 29,003 30,895
Materials and supplies, at average cost 23,793 21,656
Other 6,121 7,486
147,472 165,044
Other Assets:
Investment in leveraged leases 27,157 24,650
Investment in independent power projects 9,357 4,745
Unamortized loss on reacquired debt 10,027 10,838
Other 48,846 43,335
95,387 83,568
Total Assets $ 1,723,042 $ 1,726,948
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 659,049 $ 645,513
Preferred stock 40,000 40,000
Long-term debt 546,351 546,373
1,245,400 1,231,886
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings 29,900 54,200
Accounts payable 23,387 28,253
Accrued interest 10,634 8,048
Accrued taxes 6,947 4,005
Customer deposits 9,655 8,746
Accrued payroll and vacations 12,119 9,921
Other 7,874 5,954
100,537 119,148
Other Liabilities:
Accumulated deferred income taxes 250,074 242,674
Accumulated deferred investment tax credits 27,127 30,167
Regulatory tax liability 51,773 54,388
Other 48,131 48,685
377,105 375,914
Total Capitalization and Liabilities $ 1,723,042 $ 1,726,948
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
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KENTUCKY UTILITIES COMPANY
STATEMENTS OF INCOME
(Unaudited)
(in thousands)
For the Three
Months Ended
September 30,
1997 1996
Operating Revenues $192,102 $178,275
Operating Expenses:
Fuel, principally coal,
used in generation 51,962 48,781
Electric power purchased 18,277 15,847
Other operating expenses 29,851 31,348
Maintenance 15,165 14,412
Depreciation 21,084 20,189
Federal and state income taxes 16,703 13,585
Other taxes 3,717 3,656
Total Operating Expenses 156,759 147,818
Net Operating Income 35,343 30,457
Other Income and Deductions:
Interest and dividend income 546 370
Other income and deductions - net 1,082 1,709
Total Other Income and Deductions 1,628 2,079
Income Before Interest Charges 36,971 32,536
Interest Charges 10,047 9,812
Net Income 26,924 22,724
Preferred Stock Dividend Requirements 564 564
Net Income Applicable to Common Stock $ 26,360 $ 22,160
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
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KENTUCKY UTILITIES COMPANY
STATEMENTS OF INCOME
(Unaudited)
(in thousands)
For the Nine
Months Ended
September 30,
1997 1996
Operating Revenues $533,884 $536,787
Operating Expenses:
Fuel, principally coal,
used in generation 138,288 147,885
Electric power purchased 55,479 50,940
Other operating expenses 91,122 91,250
Maintenance 47,666 46,218
Depreciation 62,830 60,314
Federal and state income taxes 38,445 39,136
Other taxes 11,545 11,736
Total Operating Expenses 445,375 447,479
Net Operating Income 88,509 89,308
Other Income and Deductions:
Interest and dividend income 1,265 1,384
Other income and deductions - net 4,019 5,515
Total Other Income and Deductions 5,284 6,899
Income Before Interest Charges 93,793 96,207
Interest Charges 29,820 29,790
Net Income 63,973 66,417
Preferred Stock Dividend Requirements 1,692 1,692
Net Income Applicable to Common Stock $ 62,281 $ 64,725
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
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KENTUCKY UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Nine
Months Ended
September 30,
1997 1996
Cash Flows from Operating Activities:
Net Income $ 63,973 $ 66,417
Items not requiring (providing) cash currently:
Depreciation 62,830 60,314
Deferred income taxes
and investment tax credit 204 (214)
Changes in current assets and liabilities:
Change in fuel inventory 1,892 (5,527)
Change in accounts receivable 4,274 2,230
Change in accounts payable (5,152) (8,363)
Change in accrued taxes 4,045 4,027
Change in accrued utility revenues 886 8,642
Change in liability to ratepayers - (6,599)
Change in escrow funds - 6,599
Change in other current assets
and liabilities 5,372 10,634
Other--net 1,374 6,906
Net Cash Provided by Operating Activities 139,698 145,066
Cash Flows from Investing Activities:
Construction expenditures - utility (68,423) (72,928)
Proceeds from insurance reimbursements 4,265 211
Net Cash Used by Investing Activities (64,158) (72,717)
Cash Flows from Financing Activities:
Short-term borrowings - net (24,300) (25,700)
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 (51,611) (50,477)
Net Cash Used by Financing Activities (75,932) (72,908)
Net Decrease in Cash and Cash Equivalents (392) (559)
Cash and Cash Equivalents Beginning of Period 5,719 5,697
Cash and Cash Equivalents End of Period $ 5,327 $ 5,138
Supplemental Disclosures
Cash paid for:
Interest $ 25,316 $ 24,643
Income taxes $ 32,810 $ 38,010
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
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KENTUCKY UTILITIES COMPANY
BALANCE SHEETS
(Unaudited)
(in thousands)
As of As of
Sept. 30, Dec. 31,
1997 1996
ASSETS
Utility Plant:
Plant in service, at cost $2,524,395 $2,482,812
Less: Accumulated depreciation 1,112,102 1,067,911
1,412,293 1,414,901
Construction work in progress 67,890 63,435
1,480,183 1,478,336
Current Assets:
Cash and cash equivalents 5,327 5,719
Accounts receivable 42,553 50,582
Accrued utility revenues 23,353 24,239
Fuel, principally coal, at average cost 29,003 30,895
Materials and supplies, at average cost 23,793 21,656
Other 6,121 7,486
130,150 140,577
Other Assets:
Unamortized loss on reacquired debt 10,027 10,838
Other 45,547 43,304
55,574 54,142
Total Assets $1,665,907 $1,673,055
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 607,758 $ 595,397
Preferred stock 40,000 40,000
Long-term debt 546,351 546,373
1,194,109 1,181,770
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings 29,900 54,200
Accounts payable 23,808 28,960
Accrued interest 10,634 8,048
Accrued taxes 9,428 5,383
Customer deposits 9,655 8,746
Accrued payroll and vacations 12,059 9,862
Other 7,687 5,728
103,192 120,948
Other Liabilities:
Accumulated deferred income taxes 242,900 238,542
Accumulated deferred investment tax credits 27,127 30,167
Regulatory tax liability 51,773 54,388
Other 46,806 47,240
368,606 370,337
Total Capitalization and Liabilities $1,665,907 $1,673,055
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
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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.
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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
September 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 September 30, 1997 were approximately
$55 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
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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 September 30, 1997
were approximately $51 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
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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 September 30, 1997, from the implementation of the
surcharge would be approximately $14 million, and from February 1,
1995 would be approximately $12 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.
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KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
FINANCIAL CONDITION
At September 30, 1997, KU's short-term borrowings were
$29.9 million compared to $54.2 million at December 31, 1996. The
short-term borrowings have been used primarily to temporarily finance
ongoing construction expenditures and general corporate requirements.
The decrease between September 30, 1997 and December 31, 1996 is due
primarily to cash provided by operations exceeding cash required for
investing and financing activities (exclusive of short-term
borrowings) through the third quarter of 1997.
RESULTS OF OPERATIONS
Quarter ended September 30, 1997 compared
to the Quarter ended September 30, 1996
The Company's earnings per common share for the three-month
period ended September 30, 1997 were $.70 compared to $.60 for the
corresponding period of 1996. The increase was primarily due to
increases in kilowatt-hour sales throughout the retail sector and to
an increase in sales for resale. The increase in retail sales was
primarily the result of warmer weather in the third quarter of 1997
when compared to 1996 and to an increase in sales to industrial
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KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 is intercompany revenues that are eliminated in the
consolidated financial statements. These intercompany amounts are
immaterial.
Increase (Decrease)
From Prior Year
Three Months
Ended Sept. 30, 1997
kWh Revenues
(%) (000's)
Residential 5 $ 2,966
Commercial 5 1,982
Industrial 11 3,535
Mine Power - 178
Public Authorities 5 705
Total Retail Sales 6 9,366
Sales for Resale 4 3,863
Miscellaneous Revenues & Other - 597
Total 6 $ 13,826
Operating revenues increased $13.8 million (8%). The increase
reflects a 6% increase in kilowatt-hour sales. The increases in
residential and commercial sales were primarily due to warmer weather
during the third quarter of 1997 compared to the corresponding period
of 1996. KU set an all-time record peak demand for electricity of
3,510 megawatts on July 28, 1997. The increase in industrial sales
reflects continued economic growth in the manufacturing sector of KU's
service area. The increase in sales for resale (893,622 megawatt-
hours versus 855,475 megawatt-hours) was primarily due to increased
demand.
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KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel expense increased $3.2 million (7%). The increase in fuel
expense was primarily attributable to a 3% increase in million British
thermal units (MBTU) used and to a 3% increase in the cost per MBTU.
The increased consumption was primarily caused by the previously
mentioned increase in kilowatt-hour sales.
Purchased power expense increased $2.4 million (15%). The
increase was primarily due to an 18% increase in megawatt-hour
purchases resulting from increased availability of surplus power on
favorable pricing terms.
Federal and state income taxes increased $2.9 million (21%). The
increase was primarily attributable to an increase in pretax income.
Nine Months ended September 30, 1997 compared
to the Nine Months ended September 30, 1996
The Company's earnings per common share for the nine-month period
ended September 30, 1997 were $1.68 compared to $1.72 for the
corresponding period of 1996. The decrease was primarily due to lower
residential and commercial sales as a result of milder weather during
the first half of 1997 when compared to the same period of 1996,
offset somewhat by the warmer weather in the third quarter of 1997
compared to the third quarter of 1996 and also by an increase in sales
to industrial customers in the first nine months of 1997 compared to
the same period of 1996.
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KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Increase (Decrease)
From Prior Year
Nine Months
Ended Sept. 30, 1997
kWh Revenues
(%) (000's)
Residential (4) $ (8,561)
Commercial (1) (1,507)
Industrial 8 6,391
Mine Power 3 86
Public Authorities - (355)
Total Retail Sales 1 (3,946)
Sales for Resale (5) 614
Miscellaneous Revenues & Other - 427
Total - $ (2,905)
Operating revenues were fairly flat compared to the same period
of 1996, decreasing only $2.9 million (1%) which reflects a decline in
residential and commercial sales offset by an increase in industrial
sales. The decreases in residential and commercial sales were
primarily due to milder weather during the first half of 1997 compared
to the corresponding period of 1996, offset somewhat by the warmer
weather in the third quarter of 1997 compared to the third quarter of
1996. The increase in industrial sales reflects continued economic
growth in the manufacturing sector of KU's service area. About 18% of
the industrial sales increase was due to greater sales to Toyota Motor
Manufacturing U.S.A., Inc., KU's largest customer. Although sales for
resale declined (2,442,727 megawatt-hours versus 2,574,604 megawatt-
hours), revenues increased due to higher prices per megawatt-hour
compared to the same period of 1996.
Fuel expense decreased $9.6 million (6%). The decrease was
primarily due to a 4% decrease in MBTU used. The decreased
consumption was due primarily to an increase in kilowatt-hour
purchases discussed below.
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KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Purchased power expense increased $4.5 million (9%). The
increase was primarily due to a 17% increase in megawatt-hour
purchases resulting from increased availability of surplus power on
favorable pricing terms.
Federal and state income taxes decreased $1.2 million (3%). 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
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 from the date of the Merger
Agreement. 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.
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<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In July, 1997, KU Energy and LG&E Energy filed joint
applications for approval of the Merger with the PSC and the SCC. The
PSC approved the proposed Merger on September 12, 1997, making only
minor changes to the regulatory plan proposed by KU Energy and LG&E
Energy. Further details about the PSC's Order approving the proposed
Merger are provided in KU Energy's current report on Form 8-K dated
September 12, 1997 filed with the SEC on September 19, 1997. At
special meetings held October 14, 1997, the shareholders of both KU
Energy and LG&E Energy approved the Merger. The SCC issued an order
to extend the date it was required to rule on approval of the Merger
by 120 days to January 21, 1998. A joint application for approval was
filed with the FERC on October 9, 1997. The Company cannot predict
when the remaining regulatory approvals will be completed or what
conditions, if any, may be attached to such approvals.
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
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.
-20-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UTILITY ISSUES
Competition
Refer to Managements' 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.
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
-21-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 September 30, 1997, from the implementation of the surcharge
would be approximately $14 million, and from February 1, 1995 would be
approximately $12 million. At this time, KU has not recorded any
reserve for refund. For additional discussion, refer to Note 2 of the
Condensed Notes to Financial Statements, Environmental Cost
Recovery.
Nitrogen Oxide Emissions Reductions
The Environmental Protection Agency (EPA) 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 (including those at KU's generating stations)
-22-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
beginning in 2004. Certain implementation proposals, which are not
yet finalized, would target coal-fired utilities in the Midwest and
South, including Kentucky, for more substantial reductions than other
areas and other sources of emissions. Implementation methods will be
determined by the EPA as well as state regulatory authorities. KU
believes that the costs relating to compliance with the new standards,
including capital costs, as well as associated increases in operating
and maintenance costs, are likely to be substantial, but in any event
would qualify for recovery from customers under its environmental
surcharge mechanism, subject to PSC approval. (See Note 2 of the
Condensed Notes to Financial Statements, Environmental Cost
Recovery). KU will continue to closely monitor developments in this
area and anticipates that the exact nature of the impact of the new
standards on its operations will not be known for some time.
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
No. 47, Disclosure of Long-Term Obligations. Both statements are
-23-
<PAGE>
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Managements'
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.
-24-
<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
At the October 14, 1997, Special Meeting of Shareholders, the
following proposal was acted upon and approved.
(a) To consider and vote upon the adoption and approval of the
Agreement and Plan of Merger, dated as of May 20, 1997,
between LG&E Energy Corp. and KU Energy Corporation.
Affirming Negative Broker
Votes Votes Abstentions Non-Votes
29,113,099 441,062 943,712 0
The Merger was approved by 77% of the outstanding common shares
and by 95% of those shares represented at the meeting.
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 September 30, 1997
gives effect to the Merger as if it had occurred at September 30,
1997. The unaudited pro forma combined condensed statements of
income for all periods give effect to the Merger as if it had
occurred at January 1, 1996. 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
-25-
<PAGE>
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 nine-month periods ended September 30,
1997 and 1996 are not necessarily indicative of trends for any
twelve-month period.
-26-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
At September 30, 1997
(Thousands of Dollars)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
<CAPTION>
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and temporary cash investments $ 155,703 $ 22,269 $ - $ 177,972
Marketable securities 11,317 - - 11,317
Accounts receivable - less reserve 455,276 66,286 (11) 521,551
Materials and supplies - primarily
at average cost:
Fuel (predominately coal) 16,128 29,003 - 45,131
Gas stored underground 42,346 - - 42,346
Other 32,662 23,793 - 56,455
Price risk management assets 83,105 - - 83,105
Prepayments and other 4,927 6,121 - 11,048
Total current assets 801,464 147,472 (11) 948,925
Utility plant, at original cost:
Electric 2,258,247 2,592,285 - 4,850,532
Gas 345,023 - - 345,023
Common 142,104 - - 142,104
Gross utility plant 2,745,374 2,592,285 - 5,337,659
Less: reserve for depreciation 1,057,511 1,112,102 - 2,169,613
Net utility plant 1,687,863 1,480,183 - 3,168,046
Other property and investments
- less reserve:
Investments in affiliates 172,339 2,180 - 174,519
Non-utility property and plant, net 407,650 2,690 - 410,340
Price risk management assets 42,400 - - 42,400
Other 22,332 41,788 - 64,120
Total other property and
investments 644,721 46,658 - 691,379
Deferred debits and other assets 113,869 48,729 8,250 170,848
Total assets $ 3,247,917 $ 1,723,042 $ 8,239 $ 4,979,198
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-27-
<PAGE>
<TABLE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
At September 30, 1997
(Thousands of Dollars)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
<CAPTION>
CAPITAL AND LIABILITIES
Current liabilities:
<S> <C> <C> <C> <C>
Long term debt due within one year $ 20,000 $ 21 $ - $ 20,021
Notes payable 289,161 29,900 - 319,061
Accounts payable 418,162 23,387 16,489 458,038
Trimble County settlement 14,032 - - 14,032
Accrued taxes 27,012 6,947 (3,330) 30,629
Price risk management liabilities 108,962 - - 108,962
Other 80,773 40,282 - 121,055
Total current liabilities 958,102 100,537 13,159 1,071,798
Long-Term Debt 664,315 546,351 - 1,210,666
Deferred credits and other liabilities:
Accumulated deferred income taxes 310,262 250,074 - 560,336
Investment tax credit, in process
of amortization 76,783 27,127 - 103,910
Regulatory liability 74,756 52,454 - 127,210
Price risk management liabilities 13,018 - - 13,018
Other 121,482 47,450 - 168,932
Total deferred credits and
other liabilities 596,301 377,105 - 973,406
Minority interests 104,901 - - 104,901
Cumulative preferred stock 95,328 40,000 - 135,328
Common equity 828,970 659,049 (4,920) 1,483,099
Total capital and liabilities $ 3,247,917 $ 1,723,042 $ 8,239 $ 4,979,198
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 September 30, 1997
(Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
<CAPTION>
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 855,741 $ - $ - $ 855,741
Electric utility 189,638 192,095 (39) 381,694
Gas utility 18,953 - - 18,953
Other 49,189 1,521 - 50,710
Total revenues 1,113,521 193,616 (39) 1,307,098
Cost of revenues
Energy marketing and trading 857,789 - - 857,789
Fuel and power purchased 46,807 70,239 (39) 117,007
Gas supply expenses 11,541 - - 11,541
Other 26,829 - - 26,829
Total cost of revenues 942,966 70,239 (39) 1,013,166
Gross Profit 170,555 123,377 - 293,932
Operating expenses
Operation and maintenance
Utility 55,744 48,734 - 104,478
Energy marketing and trading
and other 22,759 1,350 - 24,109
Depreciation and amortization 30,852 21,131 - 51,983
Non-recurring charges - - - -
Total operating expenses 109,355 71,215 - 180,570
Equity in earnings of joint ventures 5,985 - - 5,985
Operating Income 67,185 52,162 - 119,347
Other Income and (deductions) 1,368 741 - 2,109
Interest charges, minority interest
and preferred dividends 20,347 10,613 - 30,960
Income before income taxes 48,206 42,290 - 90,496
Income taxes 19,013 15,737 - 34,750
Net Income (Note 5) $ 29,193 $ 26,553 $ - $ 55,746
Average common shares outstanding
(Note 4) 66,491 37,818 25,338 129,647
Earnings per share of common stock $ .44 $ .70 $ - $ .43
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
Three Months Ended September 30, 1996
(Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
<CAPTION>
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 645,163 $ - $ - $ 645,163
Electric utility 183,624 178,269 (67) 361,826
Gas utility 20,306 - - 20,306
Other 4,835 1,115 - 5,950
Total revenues 853,928 179,384 (67) 1,033,245
Cost of revenues
Energy marketing and trading 635,375 - (47) 635,328
Fuel and power purchased 43,377 64,628 (20) 107,985
Gas supply expenses 13,327 - - 13,327
Other 3,323 - - 3,323
Total cost of revenues 695,402 64,628 (67) 759,963
Gross Profit 158,526 114,756 - 273,282
Operating expenses
Operation and maintenance
Utility 48,928 49,416 - 98,344
Energy marketing and trading
and other 15,910 796 - 16,706
Depreciation and amortization 25,893 20,235 - 46,128
Total operating expenses 90,731 70,447 - 161,178
Equity in earnings of joint ventures 2,512 - - 2,512
Operating Income 70,307 44,309 - 114,616
Other Income and (deductions) 1,812 1,296 - 3,108
Interest charges and preferred dividends 12,525 10,391 - 22,916
Income before income taxes 59,594 35,214 - 94,808
Income taxes 17,858 12,721 - 30,579
Net Income $ 41,736 $ 22,493 $ - $ 64,229
Average common shares outstanding
(Note 4) 66,307 37,818 25,338 129,463
Earnings per share of common stock $ .63 $ .60 $ - $ .50
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
Nine Months Ended September 30, 1997
(Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
<CAPTION>
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 2,436,707 $ - $ (4) $ 2,436,703
Electric utility 464,689 533,864 (278) 998,275
Gas utility 149,882 - - 149,882
Other 113,052 4,248 - 117,300
Total revenues 3,164,330 538,112 (282) 3,702,160
Cost of revenues
Energy marketing and trading 2,412,118 - (14) 2,412,104
Fuel and power purchased 120,233 193,767 (268) 313,732
Gas supply expenses 100,510 - - 100,510
Other 64,422 - - 64,422
Total cost of revenues 2,697,283 193,767 (282) 2,890,768
Gross Profit 467,047 344,345 - 811,392
Operating expenses
Operation and maintenance
Utility 165,140 150,334 - 315,474
Energy marketing and trading
and other 66,458 2,811 - 69,269
Depreciation and amortization 87,614 62,970 - 150,584
Non-recurring charges (592) - - (592)
Total operating expenses 318,620 216,115 - 534,735
Equity in earnings of joint ventures 14,926 - - 14,926
Operating Income 163,353 128,230 - 291,583
Other Income and (deductions) 7,140 3,100 - 10,240
Interest charges, minority interest
and preferred dividends 54,805 31,517 - 86,322
Income before income taxes 115,688 99,813 - 215,501
Income taxes 43,639 36,347 - 79,986
Net Income (Note 5) $ 72,049 $ 63,466 $ - $ 135,515
Average common shares outstanding
(Note 4) 66,453 37,818 25,338 129,609
Earnings per share of common stock $ 1.08 $ 1.68 $ - $ 1.05
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
Nine months Ended September 30, 1996
(Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
<CAPTION>
Revenues
<S> <C> <C> <C> <C>
Energy marketing and trading $ 1,863,877 $ - $ - $ 1,863,877
Electric utility 471,300 536,769 (642) 1,007,427
Gas utility 140,724 - - 140,724
Other 14,369 3,325 - 17,694
Total revenues 2,490,270 540,094 (642) 3,029,722
Cost of revenues
Energy marketing and trading 1,813,641 - (234) 1,813,407
Fuel and power purchased 124,256 198,825 (408) 322,673
Gas supply expenses 90,211 - - 90,211
Other 10,270 - - 10,270
Total cost of revenues 2,038,378 198,825 (642) 2,236,561
Gross Profit 451,892 341,269 - 793,161
Operating expenses
Operation and maintenance
Utility 159,420 149,204 - 308,624
Energy marketing and trading
and other 48,341 1,803 - 50,144
Depreciation and amortization 77,385 60,454 - 137,839
Non-recurring charges (Note 7) - 1,480 - 1,480
Total operating expenses 285,146 212,941 - 498,087
Equity in earnings of joint ventures 11,313 - - 11,313
Operating Income 178,059 128,328 - 306,387
Other Income and (deductions) 3,353 4,798 - 8,151
Interest charges and preferred dividends 40,404 31,498 - 71,902
Income before income taxes 141,008 101,628 - 242,636
Income taxes 48,355 36,743 - 85,098
Net Income $ 92,653 $ 64,885 $ - $ 157,538
Average common shares outstanding
(Note 4) 66,278 37,818 25,338 129,434
Earnings per share of common stock $ 1.40 $ 1.72 $ - $ 1.22
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-32-
</TABLE>
<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. Merger-related transaction costs are currently estimated to be
approximately $16.5 million (including fees for financial advisors,
attorneys, accountants, consultants, filings and printing). None
of the estimated cost savings resulting from the Merger 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.
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 nine months ended September 30,
1997, includes the receipt of an $8.5 million insurance settlement
related to losses resulting from unauthorized transactions entered
into in 1996 by a marketer in the Company's Calgary, Alberta,
office. A one-time restructuring charge of $7.5 million for the
consolidation of LG&E Energy's energy marketing group partially
offsets the insurance recovery.
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 increases in energy marketing and trading revenues
and income from operations of $1.1 million for the three months
ended September 30, 1996, and $10.6 million for the nine months
ended September 30, 1996. The impact on prior period financial
results was immaterial.
7. KU Energy's net income for the nine months ended September 30, 1996
includes a nonrecurring write-off of nonutility investments. This
charge is reflected in nonrecurring charges on the income
statement.
-33-
<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.
KU Energy and KU filed a report on Form 8-K dated September 12,
1997 to report an order by the Kentucky Public Service Commission
approving the proposed merger of KU Energy with LG&E Energy Corp.
-34-
<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 November 11, 1997 /s/ Michael R. Whitley
Michael R. Whitley
Chairman and President
Date November 11, 1997 /s/ Michael D. Robinson
Michael D. Robinson
Controller
-35-
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS TABLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR
THE PERIOD ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,480,183
<OTHER-PROPERTY-AND-INVEST> 12,643
<TOTAL-CURRENT-ASSETS> 130,150
<TOTAL-DEFERRED-CHARGES> 42,931
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,665,907
<COMMON> 308,140
<CAPITAL-SURPLUS-PAID-IN> (594)
<RETAINED-EARNINGS> 300,212
<TOTAL-COMMON-STOCKHOLDERS-EQ> 607,758
0
40,000
<LONG-TERM-DEBT-NET> 546,351
<SHORT-TERM-NOTES> 29,900
<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> 441,877
<TOT-CAPITALIZATION-AND-LIAB> 1,665,907
<GROSS-OPERATING-REVENUE> 533,884
<INCOME-TAX-EXPENSE> 38,445
<OTHER-OPERATING-EXPENSES> 406,930
<TOTAL-OPERATING-EXPENSES> 445,375
<OPERATING-INCOME-LOSS> 88,509
<OTHER-INCOME-NET> 5,284
<INCOME-BEFORE-INTEREST-EXPEN> 93,793
<TOTAL-INTEREST-EXPENSE> 29,820
<NET-INCOME> 63,973
1,692
<EARNINGS-AVAILABLE-FOR-COMM> 62,281
<COMMON-STOCK-DIVIDENDS> 49,919
<TOTAL-INTEREST-ON-BONDS> 28,039
<CASH-FLOW-OPERATIONS> 139,698
<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
APLICABLE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS TABLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR
THE PERIOD ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,480,183
<OTHER-PROPERTY-AND-INVEST> 49,183
<TOTAL-CURRENT-ASSETS> 147,472
<TOTAL-DEFERRED-CHARGES> 46,204
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,723,042
<COMMON> 308,137
<CAPITAL-SURPLUS-PAID-IN> (594)
<RETAINED-EARNINGS> 351,506
<TOTAL-COMMON-STOCKHOLDERS-EQ> 659,049
0
40,000
<LONG-TERM-DEBT-NET> 546,351
<SHORT-TERM-NOTES> 29,900
<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> 447,721
<TOT-CAPITALIZATION-AND-LIAB> 1,723,042
<GROSS-OPERATING-REVENUE> 533,864
<INCOME-TAX-EXPENSE> 37,487
<OTHER-OPERATING-EXPENSES> 409,289
<TOTAL-OPERATING-EXPENSES> 446,776
<OPERATING-INCOME-LOSS> 87,088
<OTHER-INCOME-NET> 7,895
<INCOME-BEFORE-INTEREST-EXPEN> 94,983
<TOTAL-INTEREST-EXPENSE> 31,517
<NET-INCOME> 63,466
0
<EARNINGS-AVAILABLE-FOR-COMM> 63,466
<COMMON-STOCK-DIVIDENDS> 49,919
<TOTAL-INTEREST-ON-BONDS> 28,039
<CASH-FLOW-OPERATIONS> 133,401
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
</TABLE>
