SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 the Registrants were required to file such reports), and (2) have
been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
Securities registered pursuant to
Section 12(b) of the Act:
KU Energy Corporation
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, without par value New York Stock Exchange
Pacific Stock Exchange
Kentucky Utilities Company
Name of Each Exchange
Title of Each Class on Which Registered
Preferred Stock, 4 3/4% cumulative, Philadelphia Stock
Exchange
stated value $100 Per Share
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Securities registered pursuant to
Section 12(g) of the Act:
KU Energy Corporation
None
Kentucky Utilities Company
Preferred Stock, cumulative, stated value $100 per share
(Title of Class)
KU Energy Corporation
Aggregate market value at March 25, 1998 of the voting stock held by
nonaffiliates of KU Energy Corporation (KU Energy): $1,602,517,283.
Number of shares of Common Stock outstanding at March 25, 1998:
37,817,517 shares.
Kentucky Utilities Company
Aggregate market value of the voting stock held by nonaffiliates of
Kentucky Utilities Company (KU): None
Number of shares of Common Stock outstanding at March 25, 1998: 37,817,878
shares (owned by the parent - KU Energy).
Documents Incorporated by Reference:
A portion of KU Energy's 1997 Annual Report to Shareholders is
incorporated by reference in Parts I, II and IV.
A portion of KU Energy's Proxy Statement relating to the 1998 Annual
Shareholders Meeting is incorporated by reference in Part III.
Exhibit Index appears on page 42.
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KU ENERGY CORPORATION
AND
KENTUCKY UTILITIES COMPANY
Form 10-K
Annual Report to the Securities and Exchange Commission
For the Year Ended December 31, 1997*
TABLE OF CONTENTS
Item Page
PART I
1.Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 13
4.Submission of Matters to a Vote of Security Holders . . . . . . 13
Executive Officers of the Registrants . . . . . . . . . . . . . 14
PART II
5.Market for Registrants Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . 17
6.Selected Financial Data . . . . . . . . . . . . . . . . . . . . 18
7.Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 22
7A.Quantitative and Qualitative Disclosures About Market Risk . . 22
8.Financial Statements and Supplementary Data . . . . . . . . . . 22
9.Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . 40
PART III
10.Directors and Executive Officers of the Registrants . . . . . . 40
11.Executive Compensation . . . . . . . . . . . . . . . . . . . . 40
12.Security Ownership of Certain Beneficial Owners and Management 40
13.Certain Relationships and Related Transactions . . . . . . . . 40
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 42
Pro Forma Financial Statements . . . . . . . . . . . . . . . . 50
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 58
*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 Annual Report on Form 10-K of Kentucky
Utilities Company.
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<PAGE>
PART I
Item 1. Business
KU ENERGY CORPORATION
KU Energy Corporation (KU Energy or the Company), an exempt utility holding
company, was incorporated in the state of Kentucky on June 23, 1988. On
December 1, 1991, KU Energy became the holder of all common stock of
Kentucky Utilities Company (KU). KU Energy has two wholly owned
subsidiaries, KU, an electric utility, and KU Capital Corporation (KU
Capital), a nonutility subsidiary. KU is KU Energy's principal subsidiary.
The Company is a public utility holding company as defined in the Public
Utility Holding Company Act of 1935 (the Holding Company Act). On
November 13, 1991, the Company obtained an order from the Securities and
Exchange Commission which granted an exemption from all provisions of the
Holding Company Act, except Section 9(a)(2) thereof which relates to the
acquisition of securities of public utility companies.
The ability of the Company to pay dividends on its common stock is
dependent upon distributions made to it by KU and KU Capital and on amounts
that may be earned by the Company on investments.
Merger
On May 20, 1997, KU Energy and LG&E Energy Corp. (LG&E Energy) entered into
an Agreement and Plan of Merger (Merger) providing for a tax-free, stock
for stock merger of KU Energy and LG&E Energy. As a result of the Merger,
LG&E Energy, the surviving corporation, will become the parent company of
KU and will continue as parent of Louisville Gas and Electric Company.
When the Merger is completed, shareholders of KU Energy common stock will
receive 1.67 shares of LG&E Energy common stock for each share of KU Energy
common stock held.
The Merger has been approved by shareholders of KU Energy and LG&E Energy,
by the Kentucky Public Service Commission (PSC) and the Virginia State
Corporation Commission (SCC). The Merger was approved by the Federal Energy
Regulatory Commission (FERC) on March 25, 1998. The Merger must still be
approved by the the Securities and Exchange Commission and reviewed by the
Federal Trade Commission. Following receipt of the remaining regulatory
approvals, the Merger is expected to be effective as early as the first
half of 1998. See Management's Discussion and Analysis of Financial
Condition and Results of Operations - The Merger in KU Energy's 1997 Annual
Report to Shareholders (Exhibit 13), which is incorporated herein by
reference for further information related to the Merger.
LG&E Energy serves about 351,000 electric customers and 277,000 gas
customers in Louisville and adjacent areas in Kentucky through its utility
subsidiary, Louisville Gas and Electric Company. At December 31, 1997,
LG&E Energy had assets of $3.4 billion. For 1997, LG&E Energy had electric
revenues of $615 million, gas revenues of $231 million and net income of
$97.8 million. Further information concerning LG&E Energy is contained in
LG&E Energy's Annual Report on Form 10-K for the year ended December 31,
1997. See Unaudited Pro Forma Combined Condensed Financial Information of
KU Energy and LG&E Energy contained under Item 14 of this report for
selected historical and unaudited pro forma combined condensed financial
information of KU Energy and LG&E Energy.
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KU CAPITAL CORPORATION
KU Capital continues to pursue a core energy strategy for its nonutility
business activities. Under this strategy, targeted opportunities are
energy-related activities that build on the Company's knowledge and
expertise and have the appropriate risk/reward profile.
KENTUCKY UTILITIES COMPANY
General
KU is a wholly owned subsidiary of KU Energy. KU was incorporated in
Kentucky in 1912 and incorporated in Virginia in 1991. KU is a public
utility engaged in producing, transmitting and selling electric energy. KU
provides electric service to about 441,200 customers in over 600
communities and adjacent suburban and rural areas in 77 counties in
central, southeastern and western Kentucky, and to about 29,000 customers
in 5 counties in southwestern Virginia. In Virginia, KU operates under the
name Old Dominion Power Company. KU operates under appropriate franchises
in substantially all of the 160 Kentucky incorporated municipalities
served. No franchises are required in unincorporated Kentucky communities.
Service has been provided in Virginia without franchises for a number of
years. The lack of franchises is not expected to have a material adverse
effect on KU's operations. KU also sells electric energy at wholesale for
resale in 12 municipalities.
The territory served by KU has an aggregate population estimated at about
1,000,000. The largest city served is Lexington, Kentucky. The population
of the metropolitan Lexington area is estimated at about 225,000. The
populations of the next 10 largest cities served at retail range from about
21,000 to 9,000. The territory served includes most of the Bluegrass
Region of central Kentucky and parts of the coal mining areas in
southeastern and western Kentucky and southwestern Virginia. Lexington is
the center of the Bluegrass Region, in which thoroughbred horse, burley
tobacco and bourbon whiskey distilling industries are located. Among the
principal industries in the territory served are automotive and related
industries, coal mining, the manufacture of paper and paper products,
rubber and miscellaneous plastic products and electrical and other
machinery.
Revenues
KU's sources of electric revenues and the respective percentages of total
revenues for the three years 1995-1997 were as follows:
<TABLE>
Year Ended December 31, 1997 1996 1995
Amount % Amount % Amount %
<CAPTION>
(dollars in thousands)
<S> <C> <C> <C>
Residential $ 231,824 32 $ 236,229 33 $ 232,760 34
Commercial 150,794 21 150,640 21 151,778 22
Industrial 146,801 21 136,856 19 130,066 19
Mine Power 34,541 5 34,014 5 36,076 5
Public Authorities 56,243 8 56,023 8 54,161 8
Sales for Resale 87,330 12 89,208 13 75,940 11
Miscellaneous Revenues 8,904 1 8,741 1 5,649 1
Total $ 716,437 100 $ 711,711 100 $ 686,430 100
</TABLE>
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The electric utility business is affected by seasonal weather patterns. As
a result, operating revenues (and associated operating expenses) are not
generated evenly throughout the year. See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Sales and
Revenues in KU Energy's 1997 Annual Report to Shareholders (Exhibit 13)
which is incorporated herein by reference for information related to
revenues.
Operations
KU's net generating capability was 3,718 megawatts at December 31, 1997.
The net generating capability available for operation at any time may be
lower because of periodic outages of generating units due to inspection,
maintenance, fuel restrictions, or modifications required by regulatory
agencies. KU obtains power from other utilities under bulk power purchase
and interchange contracts. At December 31, 1997, KU's system capability,
including purchases from others, was 4,274 megawatts. On July 28, 1997, an
all-time system peak demand, on a one-hour integrated basis, was set at
3,510 megawatts. See Item 2, Properties-Construction for a discussion of
KU's plans to add additional peaking capacity.
The percentage of KU's system output which was internally generated and
purchased for the periods indicated was as follows:
1997 1996 1995
Internally Generated 81% 84% 82%
Purchased 19% 16% 18%
KU is one of 18 full members of the East Central Area Reliability
Coordination Agreement, the purpose of which is to augment the reliability
of the members' bulk power supply through coordination of planning and
operation of generation and transmission facilities. The members are
engaged in the generation, transmission and sale of electric power and
energy in the east central area of the United States, which covers all or
portions of Michigan, Indiana, Ohio, Kentucky, Pennsylvania, Virginia, West
Virginia and Maryland. KU also has interconnections and contractually
established operating arrangements with neighboring utilities and
cooperatives.
Under a contract expiring 2020 with Owensboro Municipal Utilities (OMU), KU
has agreed to purchase from OMU the surplus output of the 150-megawatt and
250-megawatt generating units at OMU's Elmer Smith station. Purchases
under the contract are made under a contractual formula which has resulted
in costs which were and are expected to be comparable to the cost of other
power purchased or generated by KU. Such power constituted about 10% of
KU's net system output during 1997. See Note 4 of the Notes to Financial
Statements, Commitments and Contingencies under Item 8.
KU owns 20% of the common stock of Electric Energy, Inc. (EEI), which owns
and operates a 1,000-megawatt generating station in southern Illinois.
KU's entitlement is 20% of the available capacity of the station.
Purchases from EEI are made under a contractual formula which has resulted
in costs which were and are expected to be comparable to the cost of other
power purchased or generated by KU. Such power constituted about 8% of
KU's net system output in 1997. See Note 4 of the Notes to Financial
Statements, Commitments and Contingencies, under Item 8.
KU had approximately 2,060 employees at December 31, 1997, of which about
300 are covered by union contracts expiring August 1, 1998.
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<PAGE>
Fuel Matters
Coal-fired generating units provided more than 99% of KU's net kilowatt-
hour generation for 1997. The remainder of KU's net generation for 1997
was provided by oil and/or natural gas burning units and hydroelectric
plants. The average delivered cost of coal purchased per million BTU
(MBTU) and the percentage of spot coal purchases for the periods indicated
were as follows:
1997 1996 1995
Per MBTU - all sources $ 1.15 $ 1.14 $ 1.16
Per MBTU - spot purchases only $ 1.12 $ 1.08 $ 1.10
Spot purchases as % of all sources 34% 33% 30%
KU maintains its fuel inventory at levels estimated to be necessary to
avoid operational disruptions at its coal-fired generating units.
Reliability of coal deliveries can be affected from time to time by a
number of factors, including fluctuations in demand, coal mine labor issues
and other supplier or transporter operating difficulties.
KU believes there are adequate reserves available to supply its existing
base-load generating units with the quantity and quality of coal required
for those units throughout their useful lives. KU intends to meet a
substantial portion of its coal requirements with 3-year or shorter
contracts. KU anticipates that coal supplied under such contracts will
represent about one-half to two-thirds of the requirements over the next
several years. As part of this strategy, KU will continue to negotiate
replacement contracts as contracts expire. KU does not anticipate any
problems negotiating new contracts for future coal needs. The balance of
coal requirements will be met through spot purchases. See Note 4 of the
Notes to Financial Statements, Commitments and Contingencies, under
Item 8 for the estimated obligations under existing fuel contracts for each
of the years 1998 through 2002.
KU has no long-term contracts in place for the purchase of natural gas for
its combustion turbine peaking units. KU has met its gas requirements
through spot purchases. KU does not anticipate encountering any
significant problems acquiring an adequate supply of fuel necessary to
operate its peaking units. See Item 2, Properties-Construction, for a
discussion of KU's plans to add additional peaking capacity.
Environmental Matters
Federal and state agencies have adopted environmental protection standards
which apply to the electric operations of KU. Capital expenditures to
comply with environmental requirements amounted to about $182 million
during the 1993-1997 time period.
KU's generating units are operated in compliance with the Kentucky Natural
Resources and Environmental Protection Cabinet's (Cabinet) State
Implementation Plan (KYSIP) and New Source Performance Standards developed
under the Clean Air Act. The KYSIP is a federally approved plan for the
attainment of the national ambient air quality standards. The KYSIP
contains standards relating to the emissions of various pollutants (sulfur
dioxide, particulates and nitrogen oxides) from KU's fossil-fuel fired
steam electric generating units. These emission standards are of varying
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stringencies and compliance with these standards is attained through a
variety of air pollution control technologies (scrubbers, electrostatic
precipitators, and low nitrogen oxide burners) and the use of low-sulfur
coal. KU's operations are in substantial compliance with current emission
standards. The operating permit program under the 1990 Clean Air Act
Amendments required KU to make application to the Cabinet for new operating
permits for its six generating stations. KU's existing permits to operate
air contaminant sources continue in effect until new permits are issued.
The acid rain control provisions of the 1990 Clean Air Act Amendments,
which are effective in two phases, require KU to further decrease the
emissions of sulfur dioxide and nitrogen oxides from its fossil-fuel fired
steam electric generating units. Ghent Unit 1, E. W. Brown Units 1, 2
and 3, and Green River Unit 4 were designated as Phase I affected units
which were required to comply with sulfur dioxide emission reduction
obligations beginning January 1, 1995. In order to comply with these
sulfur dioxide emission limitations, KU installed a scrubber and related
facilities on Ghent Unit 1 and switched to lower sulfur coal on some other
Phase I affected units. In addition, these units were retrofitted with low
nitrogen oxide burners in order to comply with applicable nitrogen oxide
limitations under United States Environmental Protection Agency (EPA)
regulations. The EPA issued final acid rain permits for each of KU's
Phase I affected units. The EPA's approval of KU's acid rain compliance
plan was accompanied by bonus allowances awarded for the installation of
the scrubber on Ghent Unit 1. KU's current emission allowance strategy, in
part, includes the accumulation of unused sulfur dioxide emission
allowances. These unused allowances result from the bonus allowances
received from the EPA and the expected reduced sulfur dioxide emissions
from the installation of the Ghent Unit 1 scrubber. The accumulated
allowances are expected to allow KU to delay capital expenditures
associated with KU's Phase II acid rain compliance obligations, which are
effective January 1, 2000. KU's Phase II compliance strategy, in addition
to utilizing accumulated allowances, may include additional fuel switching
or the installation of additional scrubbers. However, KU will continue to
reassess its options for complying with Phase II emission reduction
requirements to determine an overall least cost strategy. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Environmental Matters in KU Energy's 1997 Annual Report to Shareholders
(Exhibit 13) incorporated herein by reference for additional discussion.
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) 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 costs, are likely to be substantial and are
dependent on the ultimate control program agreed to by the targeted states
and the EPA. KU further believes that such capital and operating costs are
the type of costs that are eligible for recovery from customers under its
environmental surcharge mechanism. However, approval from the PSC is
required. See Note 9 of the Notes to Financial Statements, Environmental
Cost Recovery under Item 8. KU will continue to closely monitor
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<PAGE>
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.
During 1996, each of KU's five fossil-fuel fired steam electric generating
stations was re-issued a wastewater discharge permit by the Cabinet under
the Clean Water Act's National Pollutant Discharge Elimination System.
These 5-year permits place water quality-based effluent limitations (i.e.,
thermal and chemical limits) on each of the power plant's discharges. KU's
operations are in substantial compliance with the conditions in the
permits.
Pursuant to the Resource Conservation and Recovery Act, utility wastes (fly
ash, bottom ash and scrubber sludge) have been categorized as special
wastes (i.e., wastes of large volume, but low environmental hazard). The
EPA has concluded that the disposal of coal combustion byproducts by
practices common to the utility industry is adequate for the protection of
human health and the environment. The Cabinet also regulates utility
wastes as special wastes under its waste management program.
Under the Toxic Substances Control Act, the EPA regulates the use,
servicing, repair, storage and disposal of electrical equipment containing
polychlorinated biphenyls (PCB). KU is in substantial compliance with
applicable PCB regulations.
Regulation
KU is subject to the jurisdiction of the PSC and the SCC as to retail rates
and service, accounts, issuance of securities and in other respects. The
FERC has jurisdiction under the Federal Power Act (FPA) over certain of the
electric utility facilities and operations, wholesale sale of power and
related transactions and accounting practices of KU, and in certain other
respects as provided in the FPA. The FERC has classified KU as a "public
utility" as defined in the FPA. By reason of owning and operating a small
amount of electric utility property in one county in Tennessee (having a
gross book value of about $225,000), KU may also be subject to the
jurisdiction of the Tennessee Regulatory Authority as to retail rates,
accounts, issuance of securities and in other respects. Since 1992,
utilities in Kentucky have had the option to use either a historical test
period or a forward-looking test period in base rate filings.
KU's fuel adjustment clause for Kentucky customers operates to reflect
changes in the cost of fuel in billings to customers, and is designed to
conform with a PSC regulation providing for a uniform monthly fuel
adjustment clause for all electric utilities in Kentucky subject to the
jurisdiction of the PSC. The PSC regulation is based on a formula approved
by the FERC but with certain modifications, including the exclusion of
excess fuel expense attributable to certain forced outages, the filing of
fuel procurement documentation, a procedure for billing over- and under-
recoveries of fuel cost fluctuations from the base rate level and provision
for periodic public hearings to review past adjustments, to make allowance
for any past adjustments found not justified, to disallow any improper
expenses and to re-index base rates to include current fuel costs. The
fuel adjustment clause mechanism for Virginia customers uses an average
fuel cost factor based primarily on projected fuel costs. The fuel cost
factor may be adjusted annually for over- or under- collections of fuel
costs from the previous year.
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Rate regulation in Kentucky allows each electric utility, with a PSC-
approved environmental compliance plan and environmental surcharge, to
recover on a current basis the cost of complying with federal, state or
local environmental requirements, including the Federal Clean Air Act as
amended, applicable to coal combustion wastes and byproducts from
facilities utilized for the production of energy from coal. In 1994, the
PSC approved KU's environmental surcharge, which is designed to allow KU to
recover compliance related operating expenses and to earn a return on those
compliance-related capital expenditures not already included in existing
rates through the application of the surcharge each month to customers'
bills. Surcharge billings are subject to periodic PSC review of the level
of environmental expenditures and reconciliation of previous surcharge
billings with actual costs. For additional information regarding the
environmental surcharge, including information concerning pending legal
proceedings, see Management's Discussion and Analysis of Financial
Condition and Results of Operations - Environmental Cost Recovery in KU
Energy's 1997 Annual Report to Shareholders (Exhibit 13) incorporated
herein by reference and Note 9 of the Notes to Financial Statements,
Environmental Cost Recovery, under Item 8.
Integrated resource planning regulations in Kentucky require KU and the
other major utilities to make triennial filings with the PSC, of various
historical and forecasted information relating to forecasted load, capacity
margins and demand-side management techniques.
Pursuant to Kentucky law, the PSC has established the boundaries of the
service territory or area of each retail electric supplier in Kentucky
(including KU), other than municipal corporations, within which each such
supplier has the exclusive right to render retail electric service.
The SCC requires each Virginia utility to make annual filings of either a
base rate change or an Annual Informational Filing consisting of a set of
standard financial schedules. These filings are subject to review by the
SCC Staff (Staff). The Staff issues a Staff Report, which includes any
findings or recommendations to the SCC relating to the individual utility's
financial performance during the historic 12-month period, including
previously accepted adjustments. The Staff Report may lead to an
adjustment in rates.
KU is presently exempt from all the provisions of the Public Utility
Holding Company Act of 1935, except Section 9(a)(2) thereof (which relates
to the acquisition of securities of public utility companies), by virtue of
the exemption granted by an order of the Securities and Exchange Commission
dated April 19, 1949 and, absent further action by the Commission, by
virtue of annual exemption statements filed by KU with the Commission
pursuant to Rule 2 prescribed under the Act.
For information regarding regulatory matters related to the Merger, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations - The Merger in KU Energy's 1997 Annual Report to Shareholders
(Exhibit 13) incorporated herein by reference.
Competition
The electric utility industry has been rapidly moving to a less regulated
and more competitive environment since the passage of the National Energy
Policy Act of 1992 (NEPA). NEPA gave the FERC the authority to order
electric utilities to provide wholesale transmission access to independent
power producers and other utilities. It also reduced restrictions on the
ownership and operation of independent power producers. See Management's
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Discussion and Analysis of Financial Condition and Results of Operation -
Utility Issues - Competition in KU Energy's 1997 Annual Report to
Shareholders (Exhibit 13) incorporated herein by reference for further
discussion of competition.
In April 1996, the FERC issued two final rules and a new Notice of Proposed
Rulemaking (NOPR) to promote competition and deregulation in the wholesale
electric market. FERC Order No. 888 (Order 888) addressed both open access
transmission service and stranded cost issues. FERC Order No. 889 (Order
889) required utilities to establish an electronic Open Access Same-Time
Information System (OASIS) to share information about available
transmission capacity and also required the establishment by each utility
of standards of conduct for its transmission system operation. The 1996
NOPR proposes to establish a new system for utilities to use in reserving
capacity on their own and other s transmission lines. See Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Competition - Wholesale in KU Energy's 1997 Annual Report to Shareholders
(Exhibit 13) incorporated herein by reference for further discussion of the
FERC orders.
In 1998, KU announced that it will join the Midwest Independent System
Operator (MISO). KU is among nine transmission system owners, including
Louisville Gas and Electric Company, which filed a proposal with the FERC
in January 1998 seeking approval to form the MISO. The MISO is a regional
entity that would manage and operate the transmission owners collective
transmission systems in an eight-state region. The primary objectives of
the MISO are to advance wholesale competition by ensuring nondiscriminatory
open transmission access to all wholesale customers and to enhance
transmission reliability.
Cautionary Factors
See Management's Discussion and Analysis for information concerning forward
looking statements. Forward looking statements have been and will be made
in written documents and oral presentations of the Company and KU. 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. In addition to
those forward looking statements and cautionary factors referred to in
Management's Discussion and Analysis, forward looking statements in this
Form 10-K include those relating to:
1. The need for franchise agreements.
2. The future comparability of OMU and EEI power costs to generation and
other available power.
3. The percent of future total kWh requirements provided by OMU and EEI.
4. Maintaining necessary levels of fuel inventory and adequate supplies of
coal and gas to avoid operational disruptions.
5. Availability of coal reserves to supply baseload generating units over
their useful lives.
6. The amount of coal supplied by contract versus spot purchase.
7. Negotiations of new coal contracts for future coal needs.
8. The impact of revisions to the National Ambient Air Quality Standards.
9. The availability of an adequate supply of natural gas.
10. Estimates of future construction expenditures discussed under
Item 2 - Properties--Construction.
11. The expected timing of regulatory approvals of the Merger.
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All such statements are and will be based on management's belief, judgment
and analysis as well as assumptions made by and information available to
management at the time the statements are made. When used in the Company's
or KU's documents or oral presentations, the words anticipate,
estimate, expect, believe and similar expressions are intended to
identify forward looking statements. In addition to any assumptions and
other factors referred to specifically in connection with such forward
looking statements, factors that could cause the Company's or KU's actual
results to differ materially from those contemplated in any forward looking
statements include, among others, those identified in Exhibit 99.04 hereto,
which is incorporated herein by reference.
Item 2. Properties
Currently, KU Energy and KU Capital have no significant physical property.
KU owns and operates the following electric generating stations:
<TABLE>
<CAPTION>
Nameplate Effective
Rating (KW) Capability (KW)
<S> <C> <C>
Steam: Ghent Ghent, Ky 2,226,060 1,997,000
Green River South Carrollton, Ky 263,636 239,000
E. W. Brown Burgin, Ky 739,534 717,000
Tyrone Tyrone, Ky 137,500 136,000
Pineville Four Mile, Ky 37,500 34,000
Hydro: Dix Dam &
Lock #7 Burgin, Ky 30,297 24,000
Gas/Oil Peaking: Haefling Lexington, Ky 62,100 59,000
E.W. Brown Burgin, Ky 504,000 512,000
4,000,627 3,718,000
</TABLE>
Substantially all properties are subject to the lien of KU's Mortgage
Indenture.
Construction
Four 126-MW combustion turbine peaking units have been installed over the
past four years. The first peaking unit was placed into commercial
operation in late 1994. The second and third units were placed into
commercial operation in February 1995 and December 1995, respectively. The
fourth unit was placed into commercial operation in May 1996. Total
construction expenditures for the years 1998 through 2002 are estimated at
$549 million. Such expenditures include an estimated $183 million for
generating facilities, $76 million for transmission facilities and
$290 million for distribution and general facilities. Included in total
construction expenditures for the 1998-2002 period are $105 million for
480 MW of peak generating capacity to be added during 1998-2002. KU has no
plans to install baseload generating capacity before 2010. Construction
expenditures for the years 1993 through 1997 aggregated about $695 million.
See Note 4 of the Notes to Financial Statements, Commitments and
Contingencies, under Item 8, for the estimated amounts of construction
expenditures for each of the years 1998 through 2002.
KU frequently reviews its construction program and construction
expenditures, which may be affected by numerous factors, including
competition and deregulation, the rate of load growth, changes in
construction costs, changes in environmental regulations, least cost
planning, the adequacy of rate relief and KU's ability to raise necessary
-12-
<PAGE>
capital. See Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity & Capital Resources - Capital
Requirements in KU Energy's 1997 Annual Report to Shareholders (Exhibit 13)
incorporated herein by reference. KU's planned additions to its electric
generating capacity are based on future load projections using estimated
load growth rates. Consideration is also given to projections by
neighboring utilities of their future loads and capacity. However,
forecasts of future loads are subject to numerous uncertainties, including
economic conditions and effectiveness of energy conservation measures.
Following consumation of the Merger, the Company and LG&E Energy will each
re-examine the timing of potential additional electric generation
resources. See Management's Discussion and Analysis of Financial Condition
and Results of Operations - The Merger in KU Energy's 1997 Annual Report to
Shareholders (Exhibit 13) incorporated herein by reference.
Item 3. Legal Proceedings
KU Energy and KU Capital are involved in no material legal proceedings.
See Management's Discussion and Analysis - Environmental Matters -
Environmental Cost Recovery in KU Energy's 1997 Annual Report to
Shareholders Exhibit 13) incorporated herein by reference and Note 9 of
the Notes to Financial Statements, "Environmental Cost Recovery," under
Item 8 for a discussion of KU's environmental surcharge legal proceedings.
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 on and approved by the holders of KU Energy Common
Stock.
(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 and KU Energy.
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.
-13-
<PAGE>
Executive Officers of KU Energy
Current Positions Held During at
Name and Age Positions Held Least the Last 5 Years
Michael R. Whitley Chairman and Chairman of the Board of KU Energy
Age 54 President* since August 1995 and President of
KU Energy since November 1994.
Director of KU Energy since March
1992. Senior Vice President from
1988 to November 1994.
O. M. Goodlett Senior Vice- Senior Vice-President of KU Energy
Age 50 President* since November 1994.
James W. Tipton Senior Vice- Senior Vice-President of KU Energy
Age 54 President since November 1994. Senior Vice-
President of Kentucky Utilities
from November 1986 to November
1994.
George S. Brooks II General Corporate Secretary of KU Energy
Age 47 Counsel and since November 1992, and General
Corporate Counsel since 1988.
Secretary*
William N. English Treasurer* Treasurer of KU Energy since 1988.
Age 47
Michael D. Robinson Controller* Controller of KU Energy since June
Age 42 1990.
Note: Officers are elected annually by the Board of Directors. There is
no family relationship between any executive officer and any other
executive officer or any director. Certain executive officers of KU may be
considered "executive officers" of KU Energy for certain purposes. Refer
to KU's listing of executive officers for information concerning positions
held during the last five years and information concerning KU executive
officers.
* Identified persons hold positions with the same titles at KU.
-14-
<PAGE>
Executive Officers of KU
Current Positions Held During at
Name and Age Positions Held Least the Last 5 Years
Michael R. Whitley Chairman and Chairman of the Board of KU
Age 54 President and since August 1995 and
Chief Executive President from November 1994.
Officer* Director of KU since March
1992. Senior Vice-President
of KU from March 1987 to
November 1994.
O. M. Goodlett Senior Vice- Senior Vice-President of KU
Age 50 President since November 1992.
Finance and
Administration and
Chief Financial
Officer*
Robert M. Hewett Senior Vice- Senior Vice-President of KU
Age 50 President since May 1997. Vice-
Customer Service President of KU since January
and Marketing 1982.
Wayne T. Lucas Senior Vice- Senior Vice-President of KU
Age 50 President since November 1994. Vice
Energy Supply President of KU from November
1986 to November 1994.
George S. Brooks II General Counsel Corporate Secretary of KU
Age 47 and Corporate since November 1992, and
Secretary* General Counsel since January
1988.
Gary E. Blake Vice-President Vice-President of KU since
Age 44 Retail Marketing November 1992.
William E. Casebier Vice-President Vice-President of KU since
Age 55 Information May 1988.
Technology and
Administrative
Services
Linda M. DiMascio Vice-President Vice-President of KU since
Age 43 Human Resources February 1995. Director of
Human Resources of Tucker
Housewares from September
1994 to February 1995.
Senior Area Coordinator for
U.S. Manufacturing Department
of Mobil Oil Corporation from
April 1992 to September 1994.
-15-
<PAGE>
Current Positions Held During at
Name and Age Positions Held Least the Last 5 Years
Gary L. Hawley Vice-President Vice President of KU since
Age 49 Bulk Power January 1996. Director of
Engineering Bulk Power Planning from
November 1986 to January
1996.
Henry C. A. List Vice-President Vice-President of KU since
Age 48 Governmental May 1997. Director of
Affairs Governmental Affairs from
July 1979 to May 1997.
Ronald L. Willhite Vice-President Vice-President of KU since
Age 50 Regulation and May 1997. Director of
Economic Planning Regulation from December 1992
to May 1997.
William N. English Treasurer* Treasurer of KU since April
Age 47 1982.
Michael D. Robinson Controller* Controller of KU since August
Age 42 1990.
John J. Maloy, Jr. Assistant Assistant Treasurer of KU
Age 43 Treasurer since August 1984.
(Not an Executive Officer)
Note: Officers are elected annually by the Board of Directors. There is
no family relationship between any executive officer and any other
executive officer or any director. Certain executive officers of KU may be
considered "executive officers" of KU Energy for certain purposes.
* Identified persons hold positions with the same titles at KU Energy.
-16-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
KU Energy
KU Energy's common stock is listed on the New York and Pacific stock
exchanges under the ticker symbol "KU." Quotes in daily newspapers can be
found under the listing KU Engy.
The table below sets forth the high and low sales prices and the dividends
paid for the Company's common stock for the periods shown.
1997 1996
Dividend Price Dividend Price
Quarter Paid High Low Paid High Low
First $.44 31-1/8 29-3/8 $.43 30-5/8 28-5/8
Second $.44 35-5/8 29-3/4 $.43 30 28-3/8
Third $.44 36-1/8 32-9/16 $.43 30 27
Fourth $.44 39-13/16 32-7/8 $.43 30-1/2 28-1/8
KU Energy's Board has declared a common stock dividend of $.45 per share
payable March 13, 1998, to shareholders of record on February 25, 1998.
As of December 31, 1997, KU Energy had approximately 29,300 common
shareholders of record.
The Company (or its predecessor, KU) has paid cash dividends since 1939.
Future dividends are dependent on future earnings, capital requirements and
financial conditions. Future dividend policy will also be dependent on the
Company's pending Merger with LG&E Energy. See Management's Discussion and
Analysis of Finacial Condition and Results of Operations - The Merger in KU
Energy's 1997 Annual Report to Shareholders (Exhibit 13) incorporated
herein by reference. The dividend payout ratio (cash dividends as a
percentage of net income) was 78% for 1997 and 79% for 1996. See Note 5 of
the Notes to Consolidated Financial Statements, Common Stock, in KU
Energy's 1997 Annual Report to Shareholders (Exhibit 13) incorporated
herein by reference for information regarding dividend restrictions.
KU
All of the outstanding common stock of KU is held by KU Energy.
The following table sets forth the cash distributions (in thousands of
dollars) on common stock paid by KU for the periods indicated:
1997 1996
First Quarter $16,639 $16,261
Second Quarter $16,640 $16,262
Third Quarter $16,640 $16,262
Fourth Quarter $16,640 $16,262
See Note 5 of the Notes to Financial Statements, Common Stock, under
Item 8 for information regarding dividend restrictions.
-17-
<PAGE>
Item 6. Selected Financial Data - KU Energy
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995 1994 1993
(dollars in thousands)
Operating Revenues:
<S> <C> <C> <C> <C> <C>
Residential $ 231,824 $ 236,229 $ 232,760 $ 213,574 $ 210,759
Commercial 150,794 150,640 151,778 142,207 138,271
Industrial 146,801 136,856 130,066 120,043 111,857
Mine power 34,541 34,014 36,076 36,498 34,977
Public authorities 56,243 56,023 54,161 49,869 48,142
Total retail revenues 620,203 613,762 604,841 562,191 544,006
Sales for resale 87,330 89,208 75,940 89,665 62,463
Miscellaneous revenues and other 8,877 8,716 5,619 4,157 3,448
Provision for refund - litigation
settlement - - - (19,385) (3,309)
Total operating revenues 716,410 711,686 686,400 636,628 606,608
Operating Expenses:
Fuel used in generation (1) 188,439 198,198 189,845 170,654 178,910
Electric power purchased 72,542 62,490 69,579 61,442 34,711
Other operating expenses 123,537 125,351 124,044 114,551 106,124
Maintenance 65,004 64,170 62,599 66,141 59,458
Depreciation 84,297 80,612 75,268 65,441 60,811
Federal and state income taxes 50,501 50,247 43,426 43,904 47,752
Other taxes 15,459 15,049 15,038 14,789 14,357
Total operating expenses 599,779 596,117 579,799 536,922 502,123
Net Operating Income 116,631 115,569 106,601 99,706 104,485
Other Income and Deductions 10,458 8,203 11,655 11,530 10,362
Income Before Interest and
Other Charges and AFUDC 127,089 123,772 118,256 111,236 114,847
Interest and Other Charges:
Interest on long-term debt 37,405 37,584 36,095 32,147 31,650
Preferred stock dividend
requirements of Subsidiary 2,256 2,256 2,256 2,384 2,558
Other interest 2,329 2,120 4,031 2,414 1,249
Total interest and other charges 41,990 41,960 42,382 36,945 35,457
AFUDC 80 137 179 1,585 593
Net Income $ 85,179 $ 81,949 $ 76,053 $ 75,876 $ 79,983
Basic Earnings per Average
Common Share $ 2.25 $ 2.17 $ 2.01 $ 2.01 $ 2.11
Common Stock Data:
Shares Outstanding - average and
year-end 37,818 37,818 37,818 37,818 37,818
Dividends per Share of
Common Stock $ 1.76 $ 1.72 $ 1.68 $ 1.64 $ 1.60
(1) Amounts for 1994 and 1993 reflect reductions of $23 million and $4 million,
respectively, associated with refunds to customers related to a litigation
settlement with a former coal supplier.
</TABLE>
-18-
<PAGE>
Item 6. Selected Financial Data - KU Energy
(continued)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Assets (in thousands) $1,737,262 $1,726,948 $1,714,974 $1,669,294 $1,573,194
Capitalization: (in thousands)
Bonds $ 546,330 $ 546,330 $ 545,830 $ 495,830 $ 441,830
Notes 21 43 64 86 107
Unamortized premium on
long-term debt - - 86 96 108
Preferred stock 40,000 40,000 40,000 40,000 40,000
Common stock equity 664,122 645,513 628,611 616,092 602,503
Total capitalization $1,250,473 $1,231,886 $1,214,591 $1,152,104 $1,084,548
% Total Capitalization
Represented by:
Long-term debt 43.7 44.4 44.9 43.0 40.8
Preferred stock 3.2 3.2 3.3 3.5 3.7
Common stock equity 53.1 52.4 51.8 53.5 55.5
Kilowatt-hours Generated,
Purchased and Sold:
(in thousands)
Power generated 15,845,089 16,510,347 15,223,851 15,524,844 14,934,839
Power purchased 3,767,458 3,165,589 3,254,861 3,066,917 1,926,299
Power interchanged - net (831) 12,450 (6,569) 2,638 1,556
Total 19,611,716 19,688,386 18,472,143 18,594,399 16,862,694
Less - losses and company use 986,347 1,057,808 1,054,589 998,010 1,066,251
Kilowatt-hours sold 18,625,369 18,630,578 17,417,554 17,596,389 15,796,443
Sales classified:
Residential 5,060,935 5,148,364 5,016,012 4,706,058 4,702,697
Commercial 3,422,167 3,410,710 3,403,054 3,272,370 3,217,504
Industrial 4,464,332 4,107,537 3,850,647 3,641,469 3,409,213
Mine power 925,882 893,650 926,873 974,233 933,317
Public authorities 1,354,630 1,349,948 1,297,913 1,225,668 1,199,893
Total retail sales 15,227,946 14,910,209 14,494,499 13,819,798 13,462,624
Sales for resale 3,397,423 3,720,369 2,923,055 3,776,591 2,333,819
Total 18,625,369 18,630,578 17,417,554 17,596,389 15,796,443
Average Number of Customers 464,165 456,167 449,144 440,590 432,636
Residential Sales (per customer):
Average kilowatt-hours 13,083 13,531 13,377 12,781 12,995
Average revenue $ 599.30 $ 620.87 $ 620.75 $ 580.05 $ 582.41
System Capability - Megawatts:
KU's plants 3,718 3,639 3,509 3,265 3,164
Purchased contracts 556 393 394 540 365
Total system capability 4,274 4,032 3,903 3,805 3,529
Net System Maximum Demand -
Megawatts 3,510 3,391 3,341 3,127 3,176
Load Factor (%) 58.2 59.3 58.7 59.8 57.7
Heat Rate (BTU per KWH) (1) 10,335 10,351 10,377 10,306 10,367
Fuel - Average Cost per Ton (1) $ 27.96 $ 27.68 $ 28.49 $ 28.84 $ 28.31
Average Cost per Million BTU (1) $ 1.14 $ 1.14 $ 1.18 $ 1.19 $ 1.17
(1) Based on coal consumed
</TABLE>
-19-
<PAGE>
Item 6. Selected Financial Data - KU
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995 1994 1993
(in thousands)
Operating Revenues:
<S> <C> <C> <C> <C> <C>
Residential $ 231,824 $ 236,229 $ 232,760 $ 213,574 $ 210,759
Commercial 150,794 150,640 151,778 142,207 138,271
Industrial 146,801 136,856 130,066 120,043 111,857
Mine power 34,541 34,014 36,076 36,498 34,977
Public authorities 56,243 56,023 54,161 49,869 48,142
Total retail revenues 620,203 613,762 604,841 562,191 544,006
Sales for resale 87,330 89,208 75,940 89,665 62,463
Miscellaneous revenues and other 8,904 8,741 5,649 4,181 3,428
Provision for refund -
litigation settlement - - - (19,385) (3,309)
Total operating revenues 716,437 711,711 686,430 636,652 606,588
Operating Expenses:
Fuel used in generation (1) 188,439 198,198 189,845 170,654 178,910
Electric power purchased 72,542 62,490 69,579 61,442 34,711
Other operating expenses 120,951 122,872 121,426 112,712 104,930
Maintenance 64,990 64,161 62,592 66,134 59,451
Depreciation 84,111 80,424 75,080 65,259 60,800
Federal and state income taxes 51,690 51,452 44,670 44,683 48,178
Other taxes 15,306 14,777 14,694 14,582 14,347
Total operating expenses 598,029 594,374 577,886 535,466 501,327
Net Operating Income 118,408 117,337 108,544 101,186 105,261
Other Income and Deductions 6,954 8,377 8,235 9,299 8,331
Income Before Interest Charges
and AFUDC 125,362 125,714 116,779 110,485 113,592
Interest Charges:
Interest on long-term debt 37,405 37,584 36,095 32,147 31,650
Other interest 2,324 2,104 4,021 2,411 1,249
Total interest charges 39,729 39,688 40,116 34,558 32,899
AFUDC 80 137 179 1,585 593
Net Income $ 85,713 $ 86,163 $ 76,842 $ 77,512 $ 81,286
Preferred Stock Dividend
Requirements 2,256 2,256 2,256 2,384 2,558
Net Income Applicable to Common
Stock $ 83,457 $ 83,907 $ 74,586 $ 75,128 $ 78,728
Common Dividends $ 66,559 $ 65,047 $ 63,250 $ 61,644 $ 60,509
(1) Amounts for 1994 and 1993 reflect reductions of $23 million and $4 million,
respectively, associated with refunds to customers related to a litigation settlement
with a former coal supplier.
</TABLE>
-20-
<PAGE>
Item 6. Selected Financial Data - KU
(continued)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Assets (in thousands) $1,679,880 $1,673,055 $1,659,988 $1,618,100 $1,523,274
Capitalization: (in thousands)
Bonds $ 546,330 $ 546,330 $ 545,830 $ 495,830 $ 441,830
Notes 21 43 64 86 107
Unamortized premium on
long-term debt - - 86 96 108
Preferred stock 40,000 40,000 40,000 40,000 40,000
Common stock equity 612,295 595,397 576,537 565,201 552,106
Total capitalization $1,198,646 $1,181,770 $1,162,517 $1,101,213 $1,034,151
% Total Capitalization
Represented by:
Long-term debt 45.6 46.2 47.0 45.1 42.7
Preferred stock 3.3 3.4 3.4 3.6 3.9
Common stock equity 51.1 50.4 49.6 51.3 53.4
Kilowatt-hours Generated,
Purchased and Sold:
(in thousands)
Power generated 15,845,089 16,510,347 15,223,851 15,524,844 14,934,839
Power purchased 3,767,458 3,165,589 3,254,861 3,066,917 1,926,299
Power interchanged - net (831) 12,450 (6,569) 2,638 1,556
Total 19,611,716 19,688,386 18,472,143 18,594,399 16,862,694
Less - losses and company use 986,347 1,057,808 1,054,589 998,010 1,066,251
Kilowatt-hours sold 18,625,369 18,630,578 17,417,554 17,596,389 15,796,443
Sales classified:
Residential 5,060,935 5,148,364 5,016,012 4,706,058 4,702,697
Commercial 3,422,167 3,410,710 3,403,054 3,272,370 3,217,504
Industrial 4,464,332 4,107,537 3,850,647 3,641,469 3,409,213
Mine power 925,882 893,650 926,873 974,233 933,317
Public authorities 1,354,630 1,349,948 1,297,913 1,225,668 1,199,893
Total retail sales 15,227,946 14,910,209 14,494,499 13,819,798 13,462,624
Sales for resale 3,397,423 3,720,369 2,923,055 3,776,591 2,333,819
Total 18,625,369 18,630,578 17,417,554 17,596,389 15,796,443
Average Number of Customers 464,165 456,167 449,144 440,590 432,636
Residential Sales (per customer):
Average kilowatt-hours 13,083 13,531 13,377 12,781 12,995
Average revenue $ 599.30 $ 620.87 $ 620.75 $ 580.05 $ 582.41
System Capability - Megawatts:
KU's plants 3,718 3,639 3,509 3,265 3,164
Purchased contracts 556 393 394 540 365
Total system capability 4,274 4,032 3,903 3,805 3,529
Net System Maximum Demand -
Megawatts 3,510 3,391 3,341 3,127 3,176
Load Factor (%) 58.2 59.3 58.7 59.8 57.7
Heat Rate (BTU per KWH) (1) 10,335 10,351 10,377 10,306 10,367
Fuel - Average Cost per Ton(1) $ 27.96 $ 27.68 $ 28.49 $ 28.84 $ 28.31
Average Cost per Million BTU(1) $ 1.14 $ 1.14 $ 1.18 $ 1.19 $ 1.17
(1) Based on coal consumed
</TABLE>
-21-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information under the heading Management's Discussion and Analysis of
Financial Condition and Results of Operation is combined for KU Energy and
KU on pages 16 through 21 of KU Energy's 1997 Annual Report to Shareholders
(Exhibit 13) and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is not applicable to KU Energy or KU.
Item 8. Financial Statements and Supplementary Data
KU ENERGY
The financial statements and supplementary data on pages 22 through 35 of KU
Energy's 1997 Annual Report to Shareholders (Exhibit 13) are incorporated
herein by reference.
KU
Page(s)
Index to Financial Statements and Supplementary Data:
Report of Independent Public Accountants 23
Statements of Income and Retained Earnings 24
Statements of Cash Flows 25
Balance Sheets 26
Statements of Capitalization 27
Notes to Financial Statements 28-38
Supplemental Quarterly Financial Information 39
-22-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kentucky Utilities Company:
We have audited the accompanying balance sheets and statements of
capitalization of Kentucky Utilities Company (a Kentucky and Virginia
corporation) as of December 31, 1997 and 1996, and the related statements of
income and retained earnings, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the management of Kentucky Utilities Company. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kentucky Utilities
Company as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
January 26, 1998
-23-
<PAGE>
Statements of
Income and
Retained
Earnings
<TABLE>
<CAPTION>
Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
<S> <C> <C> <C>
Operating Revenues $ 716,437 $ 711,711 $ 686,430
Operating Expenses:
Fuel, principally coal, used in generation 188,439 198,198 189,845
Electric power purchased 72,542 62,490 69,579
Other operating expenses 120,951 122,872 121,426
Maintenance 64,990 64,161 62,592
Depreciation 84,111 80,424 75,080
Federal and state income taxes 51,690 51,452 44,670
Other taxes 15,306 14,777 14,694
Total Operating Expenses 598,029 594,374 577,886
Net Operating Income 118,408 117,337 108,544
Other Income and Deductions:
Interest and dividend income 1,673 1,733 2,838
Other income and deductions - net 5,330 6,710 5,467
Total Other Income and Deductions 7,003 8,443 8,305
Income Before Interest Charges 125,411 125,780 116,849
Interest Charges:
Interest on long-term debt 37,405 37,584 36,095
Other interest charges 2,293 2,033 3,912
Total Interest Charges 39,698 39,617 40,007
Net Income 85,713 86,163 76,842
Preferred Stock Dividend Requirements 2,256 2,256 2,256
Net Income Applicable to Common Stock $ 83,457 $ 83,907 $ 74,586
Retained Earnings Beginning of Year $ 287,852 $ 268,992 $ 257,656
Add Net Income 85,713 86,163 76,842
373,565 355,155 334,498
Deduct:
Dividends on preferred stock 2,256 2,256 2,256
Dividends on common stock 66,559 65,047 63,250
68,815 67,303 65,506
Retained Earnings End of Year $ 304,750 $ 287,852 $ 268,992
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
-24-
<PAGE>
Statements of
Cash Flows
<TABLE>
<CAPTION>
Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income $ 85,713 $ 86,163 $ 76,842
Items not requiring (providing) cash currently:
Depreciation 84,111 80,424 75,080
Deferred income taxes 4,606 3,750 15,502
Investment tax credit deferred (4,036) (4,013) (4,095)
Deferred merger-related costs (4,062) - -
Changes in current assets and liabilities:
Change in accounts receivable 5,726 (1,111) (7,759)
Change in accounts payable 4,426 (9,040) (11,517)
Change in other current assets and liabilities 1,785 6,923 (509)
Other - net 637 8,701 5,515
Net Cash Provided by Operating Activities 178,906 171,797 149,059
Cash Flows from Investing Activities:
Construction expenditures - utility (94,006) (106,503) (124,515)
Proceeds from insurance reimbursements 4,270 257 152
Other - (79) (271)
Net Cash Used by Investing Activities (89,736) (106,325) (124,634)
Cash Flows from Financing Activities:
Short-term borrowings - net (20,600) (1,400) (20,700)
Issuance of long-term debt - 35,666 49,288
Funds deposited with trustee - net - 3,779 15,100
Retirement of long-term debt, including premiums (21) (36,192) (21)
Payment of dividends (68,815) (67,303) (65,506)
Net Cash Used by Financing Activities (89,436) (65,450) (21,839)
Net Increase (Decrease) in Cash and Cash Equivalents (266) 22 2,586
Cash and Cash Equivalents Beginning of Year 5,719 5,697 3,111
Cash and Cash Equivalents End of Year $ 5,453 $ 5,719 $ 5,697
Supplemental Disclosures
Cash paid for:
Interest $ 37,053 $ 36,729 $ 37,961
Income Taxes $ 44,857 $ 47,539 $ 31,974
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
-25-
<PAGE>
Balance
Sheets
<TABLE>
<CAPTION>
Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1997 1996
Assets
Utility Plant:
<S> <C> <C>
Plant in service, at cost $ 2,552,695 $ 2,482,812
Less: Accumulated depreciation 1,128,282 1,067,911
1,424,413 1,414,901
Construction work in progress 58,939 63,435
Total Utility Plant 1,483,352 1,478,336
Current Assets:
Cash and cash equivalents 5,453 5,719
Accounts receivable, net of allowance
for doubtful accounts 44,856 50,582
Accrued utility revenues 29,668 24,239
Fuel, principally coal, at average cost 27,799 30,895
Plant materials and operating supplies, at average cost 23,648 21,656
Other 5,769 7,486
Total Current Assets 137,193 140,577
Other Assets:
Regulatory assets 14,773 11,531
Other 44,562 42,611
Total Other Assets 59,335 54,142
Total Assets $ 1,679,880 $ 1,673,055
Capitalization and Liabilities
Capitalization: (See Statements of Capitalization)
Common stock equity $ 612,295 $ 595,397
Preferred stock 40,000 40,000
Long-term debt 546,351 546,373
Total Capitalization 1,198,646 1,181,770
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings 33,600 54,200
Accounts payable 33,386 28,960
Accrued interest 8,283 8,048
Accrued taxes 7,473 5,383
Customer deposits 9,841 8,746
Accrued payroll and vacations 10,348 9,862
Other 6,215 5,728
Total Current Liabilities 109,167 120,948
Other Liabilities:
Accumulated deferred income taxes 245,150 238,542
Accumulated deferred investment tax credits 26,131 30,167
Regulatory tax liability - net 50,904 54,388
Other 49,882 47,240
Total Other Liabilities 372,067 370,337
Total Capitalization and Liabilities $ 1,679,880 $ 1,673,055
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
-26-
<PAGE>
Statements of
Capitalization
<TABLE>
<CAPTION>
Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1997 1996
Common Stock Equity:
Common stock, without par value, outstanding 37,817,878
<S> <C> <C>
shares and 37,817,878 shares, respectively $ 308,140 $ 308,140
Capital stock expense and other (595) (595)
Retained earnings 304,750 287,852
Total Common Stock Equity 612,295 595,397
Preferred Stock, cumulative, without par value, $100 stated value
4 3/4%, outstanding 200,000 shares 20,000 20,000
6.53%, outstanding 200,000 shares 20,000 20,000
Total Preferred Stock 40,000 40,000
Long-Term Debt:
First Mortgage Bonds:
5.95% Series Q, due June 15, 2000 61,500 61,500
6.32% Series Q, due June 15, 2003 62,000 62,000
5.99% Series S, due January 15, 2006 36,000 36,000
7.92% Series P, due May 15, 2007 53,000 53,000
7.55% Series R, due June 1, 2025 50,000 50,000
8.55% Series P, due May 15, 2027 33,000 33,000
295,500 295,500
First Mortgage Bonds, Pollution Control Series:
7 3/8% Pollution Control Series 7, due May 1, 2010 4,000 4,000
7.45% Pollution Control Series 8, due September 15, 2016 96,000 96,000
6 1/4% Pollution Control Series 1B, due February 1, 2018 20,930 20,930
6 1/4% Pollution Control Series 2B, due February 1, 2018 2,400 2,400
6 1/4% Pollution Control Series 3B, due February 1, 2018 7,200 7,200
6 1/4% Pollution Control Series 4B, due February 1, 2018 7,400 7,400
7.60% Pollution Control Series 7, due May 1, 2020 8,900 8,900
5 3/4% Pollution Control Series 9, due December 1, 2023 50,000 50,000
Variable Rate Pollution Control Series 10, due
November 1, 2024 54,000 54,000
250,830 250,830
Total First Mortgage Bonds 546,330 546,330
8% secured note, due January 5, 1999 (net of current maturity) 21 43
Total Long-Term Debt 546,351 546,373
Total Capitalization $ 1,198,646 $1,181,770
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
-27-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
1. Summary of Significant Accounting Policies
General
Kentucky Utilities Company (KU) is the principal subsidiary of KU Energy
Corporation (KU Energy). The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain amounts from prior
periods have been reclassified to conform with the current year
presentation.
KU is a public utility engaged in producing, transmitting and selling
electric energy. KU provides electric service to about 441,200 customers
in over 600 communities and adjacent suburban and rural areas in 77
counties in central, southeastern and western Kentucky and to about
29,000 customers in 5 counties in southwestern Virginia.
Regulation
KU is exempt from regulation as a registered holding company under the
Public Utility Holding Company Act of 1935. KU is subject to regulation
by the Kentucky Public Service Commission (PSC), the Virginia State
Corporation Commission (SCC) and the Federal Energy Regulatory Commission
(FERC). With respect to accounting matters, KU maintains its accounts in
accordance with the Uniform System of Accounts as defined by these
agencies. KU's accounting policies conform to generally accepted
accounting principles applicable to rate regulated enterprises and
reflect the effects of the ratemaking process.
The following is a summary of the components of regulatory assets:
As of December 31, (in thousands of dollars) 1997 1996
Unamortized loss on reacquired debt $ 9,756 $ 10,838
Merger costs 4,062 -
Other 955 693
Regulatory Assets $ 14,773 $ 11,531
KU is currently not earning a return on these regulatory assets.
Utility Plant
Utility plant is stated at the original cost of construction. The cost
of repairs of property units and replacements of minor items is charged
to maintenance expense as incurred. Property unit replacements are
capitalized and the depreciation reserve is charged with the cost, less
net salvage, of units retired.
-28-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
Depreciation
Provision for depreciation of utility plant is based on straight-line
composite rates applied to the cost of depreciable property. The rates
approximated 3.5% in 1997, 1996 and 1995.
Cash and Cash Equivalents
For purposes of reporting cash flows, KU considers highly liquid
investments with a maturity of three months or less from the date of
purchase to be cash equivalents.
Unamortized Loss on Reacquired Debt
KU defers costs (primarily call premiums) arising from the reacquisition
or retirement of long-term debt. Costs related to refinanced debt are
amortized over the lives of the new debt issues. Costs related to
retired debt not refinanced are amortized over the period to the
scheduled maturity of the retired debt.
Operating Revenues and Fuel Costs
Revenues are recorded based on services rendered to customers. KU
accrues an estimate of revenues for electric service furnished from the
meter reading dates to the end of each accounting period. Cost of fuel
used in electric generation is charged to expense as the fuel is
consumed. Fuel adjustment clauses adjust operating revenues for changes
in the level of fuel costs charged to expense. An environmental
surcharge for Kentucky retail customers, implemented in August 1994,
permits the utility to recover certain ongoing 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. See Note 9 of the Notes
to Financial Statements, "Environmental Cost Recovery," for information
about environmental surcharge legal proceedings.
Income Taxes
KU establishes deferred tax assets and liabilities, as appropriate, for
all temporary differences, and adjusts deferred tax balances to reflect
changes in tax rates expected to be in effect during the periods the
temporary differences reverse. Investment tax credits resulted from
provisions of the tax law which permitted a reduction of KU's tax
liability based on certain construction expenditures. Such credits have
been deferred in the accounts and are being amortized as reductions in
income tax expense over the life of the related property. Because of
rate regulation, changes in tax rates are deferred and amortized as the
temporary differences reverse.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 130, Reporting
-29-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
Comprehensive Income, and No. 131, Disclosures about Segments of an
Enterprise and Related Information, effective for periods beginning
after December 15, 1997. These statements do not affect the accounting
recognition or measurement of transactions, but rather require expanded
disclosures regarding financial results. KU will adopt these standards
in 1998 as required by the FASB.
Stock-Based Compensation
KU adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, in 1996 by continuing to
account for stock compensation in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. If KU
had recognized compensation expense for awards under its stock-based
compensation plan according to the new standard, net income and net
income applicable to common stock for the years ended 1997, 1996 and 1995
would not have been materially different from amounts recorded.
2. Income Taxes
KU is included in the consolidated federal tax return of its parent
company, KU Energy. Income taxes are allocated to the individual
companies, including KU, based on their respective taxable income or
loss.
The accumulated deferred income taxes as set forth in the Balance Sheet
arise from the following temporary differences:
<TABLE>
<CAPTION>
As of December 31, (in thousands of dollars) 1997 1996
Deferred Tax Assets:
Unamortized investment tax credit and other property
<S> <C> <C>
related differences $ 48,364 $ 50,629
Other 20,577 20,583
Less: Amounts included in current assets 3,242 4,723
65,699 66,489
Deferred Tax Liabilities:
Accelerated depreciation and other property
related differences 305,461 299,371
Other 5,388 5,660
310,849 305,031
Net Accumulated Deferred Income Tax Liability $245,150 $238,542
</TABLE>
-30-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
Income Taxes Charged to Operating Income:
<S> <C> <C> <C>
Current - federal $ 39,353 $ 35,656 $ 23,597
- state 8,964 7,387 5,134
48,317 43,043 28,731
Deferred - federal 1,996 5,510 12,165
- state 1,377 2,899 3,845
3,373 8,409 16,010
Deferred investment tax credit - - (71)
51,690 51,452 44,670
Income Taxes Charged to Other Income and Deductions:
Current - federal (853) 3,565 854
- state (246) 861 190
(1,099) 4,426 1,044
Deferred - federal 975 (3,665) (406)
- state 258 (994) (102)
1,233 (4,659) (508)
Amortization of deferred investment tax credit (4,036) (4,013) (4,024)
(3,902) (4,246) (3,488)
Total Income Tax Expense $ 47,788 $ 47,206 $ 41,182
</TABLE>
KU's effective income tax rate, determined by dividing income taxes by
the sum of such taxes and net income, was 35.8% in 1997, 35.4% in 1996
and 34.9% in 1995. The difference between the effective rate and the
statutory federal income tax rate is attributable to the following
factors:
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
<S> <C> <C> <C>
Federal Income Tax Computed at 35% $ 46,726 $ 46,679 $ 41,308
Add (Deduct):
State income taxes, net of federal
income tax benefit 6,729 6,599 5,894
Amortization of deferred investment tax credit (4,036) (4,013) (4,095)
Other, net (1,631) (2,059) (1,925)
Total Income Tax Expense $ 47,788 $ 47,206 $ 41,182
3. Retirement Benefits
Pensions
KU has a noncontributory defined benefit pension plan covering
substantially all of its employees. Benefits under this plan are based
on years of service, final average base pay and age at retirement. KU's
funding policy is to make such contributions as are necessary to finance
the benefits provided under the plan. KU's contributions meet the
funding standards set forth in the Employee Retirement Income Security
Act of 1974. The plan assets consist primarily of common stocks,
corporate bonds and U.S. Government Securities.
-31-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
KU also has a Supplemental Security Plan for certain management
personnel. Retirement benefits under this plan are based on years of
service, earnings and age at retirement. The plan has no advance
funding. Benefit payments are made to retired employees or their
beneficiaries from the general assets of KU.
On May 20, 1997, KU Energy and LG&E Energy Corp. (LG&E Energy) entered
into a Merger Agreement. For information concerning the agreement, see
Management's Discussion and Analysis - The Merger in KU Energy's 1997
Annual Report to Shareholders (Exhibit 13) incorporated herein by
reference. Under the provisions of the Supplemental Security Plan, the
Merger Agreement constituted a change-in-control which required that a
lump sum present value payment be made to retired employees entitled to
retirement benefits on the date of the Merger Agreement. On May 30,
1997, lump sum payments totalling $4.7 million were made to retired
employees.
The reconciliation of the funded status of the retirement plans and the
pension liability recorded by KU is as follows:
As of December 31, (in thousands of dollars) 1997 1996
Fair value of plan assets $ 217,424 $ 191,778
Projected benefit obligation (214,657) (194,874)
Plan assets more (less) than projected benefit obligation 2,767 (3,096)
Unrecognized net (gain)/loss from past
experience different than that assumed (19,775) (12,448)
Unrecognized prior service cost 3,635 3,990
Unrecognized net asset (1,350) (1,500)
Regulatory effect recorded 462 201
Pension liability $ (14,261) $ (12,853)
Accumulated benefit obligation (including vested benefits
of $164,498 and $147,103, respectively) $ 168,810 $ 149,814
Components of Net Pension Cost:
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
Service cost (benefits earned during the period) $ 6,728 $ 6,399 $ 6,060
Interest cost on projected benefit obligation 14,680 13,856 13,560
Actual return on plan assets (34,211) (20,798) (27,064)
Net amortization and deferral 19,320 6,568 14,608
Regulatory effect recorded (261) (1,835) (1,595)
Net pension cost $ 6,256 $ 4,190 $ 5,569
-32-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
</TABLE>
<TABLE>
<CAPTION>
Assumptions Used in Determining Actuarial Valuations:
1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rate used to
determine the projected benefit obligation 7.00% 7.75% 7.75%
Rate of increase for compensation levels 4.00% 4.75% 4.75%
Weighted average expected long-term rate
of return on assets 8.25% 8.25% 8.25%
</TABLE>
Other Postretirement Benefits
KU provides certain health care and life insurance benefits to eligible
retired employees and their dependents. KU accrues, during the years
that employees render service, the expected cost of providing these
benefits upon retirement to such employees, their beneficiaries and
covered dependents. The postretirement health care plan is contributory
for employees who retired after December 31, 1992, with retiree
contributions indexed annually based upon the experience of retiree
medical expenses for the preceding year. Pre-1993 retirees are not
required to contribute to the plan. KU's employees become eligible for
retiree medical benefits after 15 years of service and attainment of age
55. The life insurance plan is noncontributory and is based on
compensation levels prior to retirement.
In 1993, KU began funding, in addition to current requirements for
benefit payments, the maximum tax-favored amount allowed through certain
tax deductible funding vehicles. KU anticipates making similar funding
decisions in future years, but will consider and make such funding
decisions on the basis of tax, regulatory and other relevant conditions
in effect at such times. The plan assets consist primarily of equity
investments.
The reconciliation of the funded status of the plans and the
postretirement benefit liability recorded by KU is as follows:
<TABLE>
<CAPTION>
As of December 31, (in thousands of dollars) 1997 1996
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees $ (30,777) $ (29,313)
Fully eligible active plan participants (9,777) (8,678)
Other active plan participants (31,585) (28,528)
(72,139) (66,519)
Plan assets at fair value 17,763 13,322
Accumulated postretirement benefit obligation
in excess of plan assets (54,376) (53,197)
Unrecognized net (gain)/loss from past
experience different from that assumed (19,697) (20,029)
Unrecognized transition obligation 50,118 53,460
Accrued postretirement benefit liability $ (23,955) $ (19,766)
</TABLE>
-33-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
<TABLE>
Components of the net periodic postretirement benefit cost are as follows:
<CAPTION>
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
Service cost (benefits attributed to service
<S> <C> <C> <C>
during the period) $ 1,853 $ 1,859 $ 1,918
Interest cost on accumulated postretirement
benefit obligation 4,895 4,751 4,926
Actual return on plan assets (3,569) (1,633) (1,722)
Net amortization and deferral 1,706 103 792
Amortization of transition obligation 3,341 3,341 3,341
Net periodic postretirement benefit cost $ 8,226 $ 8,421 $ 9,255
Assumptions Used in Determining Actuarial Valuations: 1997 1996 1995
Weighted average discount rate used to
determine the projected benefit obligation 7.00% 7.75% 7.75%
Rate of increase for compensation levels 4.00% 4.75% 4.75%
Weighted average expected long-term rate of
return on assets 7.90% 8.00% 8.00%
</TABLE>
For measurement purposes, a 7.0% annual rate of increase in the per
capita cost of covered health care benefits is assumed for 1998. The
health care cost trend rate is assumed to decrease gradually to 4.25%
through 2004 and remain at that level thereafter over the projected
payout period of the benefits. Increasing the assumed health care cost
trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997, by
$11.5 million (16%) and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for the year
by $1.2 million (18%).
4. Commitments and Contingencies
<TABLE>
<CAPTION>
The effects of certain commitments made by KU are estimated below:
(in thousands of dollars) 1998 1999 2000 2001 2002 1998-2002
Estimated Construction
<S> <C> <C> <C> <C> <C> <C>
Expenditures $ 97,200 $103,200 $ 120,000 $ 115,600 $112,700 $ 548,700
Estimated Contract
Obligations:
Fuel 157,800 50,400 9,000 - - 217,200
Purchased power 31,300 30,200 29,500 32,300 32,300 155,600
Operating leases 2,900 2,800 2,800 2,800 2,700 14,000
First Mortgage Bond
Maturities:
Series Q $ - $ - $ 61,500 $ - $ - $ 61,500
</TABLE>
Construction Program
KU frequently reviews its construction program and may revise its
projections of related expenditures based on revisions to its estimated
-34-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
load growth and projections of its future load.
See Management's Discussion and Analysis - Capital Requirements in KU
Energy's 1997 Annual Report to Shareholders (Exhibit 13) incorporated
herein by reference for a discussion of future construction expenditures
including those relating to construction of peaking units.
Coal Supply
Obligations under KU's coal purchase contracts are stated at prices
effective January 1, 1998, and are subject to changes as defined by the
terms of the contracts.
Purchased Power
KU has purchase power arrangements with Owensboro Municipal Utilities
(OMU), Electric Energy, Inc. (EEI), and other parties. Under the OMU
agreement, which expires on January 1, 2020, KU purchases all of the
output of a 400-MW generating station not required by OMU. The amount of
purchased power available to KU during 1998-2002, which is expected to be
approximately 8% of KU's total kWh requirements, is dependent upon a
number of factors including the units' availability, maintenance
schedules, fuel costs and OMU requirements. Payments are based on the
total costs of the station allocated per terms of the OMU agreement,
which generally follows delivered kWh. Included in the total costs is
KU's proportionate share of debt service requirements on $186.6 million
of OMU bonds outstanding at December 31, 1997. The debt service is
allocated to KU based on its annual allocated share of capacity, which
averaged approximately 50% in 1997.
KU has a 20% equity ownership in EEI, which is accounted for on the
equity method of accounting. KU's entitlement is 20% of the available
capacity of a 1,000-MW station. Payments are based on the total costs of
the station allocated per terms of an agreement among the owners, which
generally follows delivered kWh.
KU has several other contracts for purchased power during 1998-2002 of
various MW capacities and for varying periods with a maximum entitlement
at any time of 282 MW.
Credit Arrangements
KU has aggregate bank lines of credit of $60 million, all of which
remained unused at December 31, 1997. All of these credit lines expire
in December 1999. In support of these lines of credit, KU compensates
the banks by paying a commitment fee.
5. Common Stock
KU is subject to restrictions applicable to all corporations under
Kentucky and Virginia law on the use of retained earnings for cash
dividends on common stock, as well as those contained in its Mortgage
Indenture and Articles of Incorporation. At December 31, 1997, there
-35-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
were no restricted retained earnings.
6. Preferred and Preference Stock
Each series of preferred stock is redeemable at the option of KU upon 30
days' written notice as follows:
Redemption Price per Share
Series (plus accrued and unpaid dividends, if any)
4 3/4% $101.00
6.53% (Not redeemable prior to December 1, 2003.)
$103.265 through November 30, 2004, decreasing
approximately $.33 each twelve months thereafter to
$100 on or after December 1, 2013.
As of December 31, 1997, there were 5.3 million shares of KU preferred
stock, having a maximum aggregate stated value of $200 million,
authorized for issuance, of which 400,000 shares were outstanding.
As of December 31, 1997, there were 2 million shares of KU preference
stock, without par value, authorized for issuance.
7. Short-Term and Long-Term Debt
KU's short-term financing requirements are satisfied through the sale of
commercial paper. The weighted average interest rate on the year-end
balance was 6.79% for 1997 and 6.17% for 1996.
Under the provisions for the variable rate Pollution Control Series 10
Bonds, KU can choose between various interest rate options. Currently,
the daily interest rate option is being utilized. The average annual
interest rate on the bonds during 1997 and 1996 was 3.77% and 3.53%,
respectively. The variable rate bonds are subject to tender for purchase
at the option of the holder and to mandatory tender for purchase upon the
occurrence of certain events. If tendered bonds are not remarketed, KU
has available lines of credit which may be used to repurchase the bonds.
In January 1996, KU issued $36 million of Series S First Mortgage Bonds
which bear interest at 5.99% and will mature January 15, 2006. The
proceeds were used to redeem $35.5 million of Series K First Mortgage
Bonds which carried a rate of 7-3/8%.
Substantially all of KU's utility plant is pledged as security for the
first mortgage bonds.
-36-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
8. Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
The carrying values of cash and cash equivalents, escrow funds, short-
term borrowings, commercial paper and customer deposits approximate fair
value because of the short maturity of these amounts. KU's temporary
cash investments are classified as held-to-maturity and are reported
under the caption Cash and Cash Equivalents on the Balance Sheet.
Long-term debt fair values are based on quoted market prices for KU's
first mortgage bonds and on current rates available to KU for debt of the
same remaining maturities for KU's pollution control bonds and promissory
note. The carrying value of long-term debt on December 31, 1997 and 1996
was $546 million, and the estimated fair value was $579 million and
$587 million, respectively.
If the difference between fair value and carrying value of KU's long-term
debt were settled at amounts approximating those above, the anticipated
regulatory treatment (based on the current regulatory environment) would
allow recovery of these amounts in rates over a prescribed amortization
period. Accordingly, any settlement would not have a material impact on
KU's financial position or results of operations.
9. 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 December 31, 1997
were approximately $60 million.
The PSC's order approving the surcharge and the constitutionality of the
surcharge statute were challenged in the Franklin County (Kentucky)
Circuit Court (Circuit Court) in an action brought against KU and the PSC
by the Attorney General of Kentucky and joined by representatives of
consumer groups. In July 1995, the Circuit Court entered a judgment
upholding the constitutionality of the surcharge statute, but vacating
that part of the PSC's July 1994 order which the Circuit Court's judgment
described as retroactively applying the surcharge statute. The Circuit
Court further ordered the case remanded to the PSC for a determination in
accordance with the judgment. KU and the PSC argued that the PSC's July
1994 order did not retroactively apply the statute.
-37-
<PAGE>
Notes to
Financial
Statements
Kentucky Utilities Company
The Kentucky Attorney General and other consumer representatives appealed
to the Kentucky Court of Appeals (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 concerning
the retroactive application of the surcharge statute. 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 December 31, 1997
were approximately $56 million.
In December 1997, the Court of Appeals rendered an opinion upholding the
portion of the Circuit Court's judgment regarding the constitutionality
of the surcharge statute but reversing that portion of the Circuit
Court's judgment concerning the claim of retroactive application of the
statute.
The Kentucky Attorney General and other consumer representatives have
filed motions for discretionary review with the Kentucky Supreme Court
(Supreme Court). The Supreme Court has the discretion to grant or deny
the motions. KU and the PSC have asked the Supreme Court to deny the
motions. KU cannot predict whether the Supreme Court will grant review
of the case or when it will act on the matter.
KU continues to believe that the constitutionality of the surcharge
statute will be upheld. Although KU cannot predict the outcome of the
claim of retroactive application of the statute, it is the position of KU
and the PSC that the July 1994 PSC order did not retroactively apply the
statute. If the Court of Appeals opinion reversing the Circuit Court's
judgment on the claim of retroactivity is overturned and the Circuit
Court's judgment, as entered, is upheld, KU estimates that the amount it
could be required to refund for surcharge collections through December
31, 1997, from the implementation of the surcharge would be approximately
$15 million and from February 1, 1995, would be approximately
$13 million. At this time, KU has not recorded any reserve for refund.
10. Merger Agreement With LG&E Energy
KU Energy and LG&E Energy entered into a Merger Agreement dated May 20,
1997. For information concerning the agreement, see Management's
Discussion and Analysis of Financial Condition and Results of Operations
- The Merger in KU Energy's 1997 Annual Report to Shareholders
(Exhibit 13) incorporated herein by reference.
-38-
<PAGE>
Supplementary
Quarterly
Financial
Information
(Unaudited)
Kentucky Utilities Company
Quarterly financial results for 1997 and 1996 are summarized below.
Generally, quarterly results may fluctuate due to seasonal variations,
changes in fuel costs and other factors.
<TABLE>
<CAPTION>
Quarter 4th 3rd 2nd 1st
(in thousands of dollars)
1997
<S> <C> <C> <C> <C>
Operating Revenues $ 182,553 $ 192,102 $ 162,868 $ 178,914
Net Operating Income 29,899 35,343 19,742 33,424
Net Income 21,740 26,924 12,088 24,961
Net Income Applicable
to Common Stock 21,176 26,360 11,524 24,397
1996
Operating Revenues $ 174,924 $ 178,275 $ 167,516 $ 190,996
Net Operating Income 28,029 30,457 23,863 34,988
Net Income 19,746 22,724 16,190 27,503
Net Income Applicable
to Common Stock 19,182 22,160 15,626 26,939
</TABLE>
These quarterly amounts reflect, in KU's opinion, all adjustments
(including only normal recurring adjustments) necessary for a fair
presentation.
-39-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None for KU Energy or KU.
PART III
Item 10. Directors and Executive Officers of the Registrants
The information required by Item 10 for the Company and KU relating to each
director and each nominee for election as a director at the Company's and
KU's 1998 Annual Shareholders Meetings is set forth in the Company's
definitive proxy statement (the Proxy Statement) filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with the Company's 1998 Annual
Shareholders Meeting. Such information is incorporated herein by reference
to the material appearing in the Proxy Statement under the caption
"Election of Directors--General" and is also filed herewith as
Exhibit 99.03. Information required by this item relating to executive
officers of the Company and KU is set forth under a separate caption in
Part I hereof.
Item 11. Executive Compensation
The information required by Item 11 for the Company and KU is incorporated
herein by reference to the material appearing in the Proxy Statement under
the caption "Election of Directors -- Directors' Compensation, and --
Executive Compensation" and is also filed herewith as Exhibit 99.03 (but
excluding any information contained under the subheadings -- "Report of
Compensation Committee on Executive Compensation," -- "Performance Graph").
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 for the Company and KU is incorporated
herein by reference to the material appearing in the Proxy Statement under
the caption "Election of Directors--Voting Securities Beneficially Owned by
Directors, Nominees and Executive Officers" and is also filed herewith as
Exhibit 99.03.
Item 13. Certain Relationships and Related Transactions
None for KU Energy or KU.
-40-
<PAGE>
PART IV
KU ENERGY AND KU
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page of this Report
on Form 10-K
KU Energy KU Pro Forma
(a) (1) Financial Statements**
Report of Independent Public
Accountants * 23 N/A
Statements of Income and Retained
Earnings for the years ended
December 31, 1997, 1996 and 1995 * 24 N/A
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 * 25 N/A
Balance Sheets as of December 31,
1997 and 1996 * 26 N/A
Statements of Capitalization as of
December 31, 1997, and 1996 * 27 N/A
Notes to Financial Statements * 28-38 N/A
(a) (2) All financial statement schedules for
KU Energy and KU are omitted as not
applicable or not required under
Regulation S-X. N/A N/A N/A
(a) (3) Unaudited Pro Forma Combined Condensed
Financial Information of KU Energy and
LG&E Energy.
Balance Sheet - December 31, 1997 N/A N/A 51-52
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 N/A N/A 53-55
Notes to Unaudited Pro Forma Combined
Condensed Financial Statements N/A N/A 56-57
* Incorporated by reference from KU Energy's 1997 Annual Report to
Shareholders which is Exhibit 13.
** The KU Energy consolidated financial statements, including notes, and the
Unaudited Pro Forma Information are not included in the KU Annual Report on
Form 10-K.
-41-
<PAGE>
(a) (4) Exhibits - KU Energy and KU
Applicable to Form
10-K of
KU
No. Description Energy KU Page(s)
2.01 Agreement and Plan of Merger, dated as of
May 20, 1997, by and between KU Energy and
LG&E Energy (Exhibit 2 to Form 8-K Current
Report of KU Energy and Kentucky Utilities
dated May 30, 1997). Incorporated by
reference. x x
3.01 Amended and Restated Articles of
Incorporation of KU Energy Corporation
(Exhibit 3A to Form 10-K Annual Report of KU
Energy for the year ended December 31,
1992). Incorporated by reference. x
3.02 Amended and Restated Articles of
Incorporation of Kentucky Utilities Company
(Exhibits 4.03 and 4.04 to Form 8-K Current
Report of KU, dated December 10, 1993).
Incorporated by reference. x
3.03 By-laws of KU Energy Corporation dated
July 29, 1996 (Exhibit 4.01 to Form 10-Q
Quarterly Report for the quarter ended
June 30, 1996 of KU Energy and KU).
Incorporated by reference. x
3.04 By-laws of Kentucky Utilities Company dated
July 29, 1996 (Exhibit 4.02 to Form 10-Q
Quarterly Report for the quarter ended
June 30, 1996 of KU Energy and KU).
Incorporated by reference. x
4.01 Rights Agreement, dated as of January 27,
1992, by and between KU Energy Corporation
and Illinois Stock Transfer Company
(Exhibit 4.1 to Form 8-K Current Report of
KU Energy dated January 27, 1992).
Incorporated by reference. x
4.02 Indenture of Mortgage or Deed of Trust dated
May 1, 1947, between Kentucky Utilities
Company and First Trust National Association
(successor Trustee) and a successor
individual co-trustee, as Trustees (the
Trustees) (Amended Exhibit 7(a) in File No.
2-7061), and Supplemental Indentures thereto
dated, respectively, January 1, 1949 (Second
Amended Exhibit 7.02 in File No. 2-7802),
July 1, 1950 (Amended Exhibit 7.02 in File
No. 2-8499), June 15, 1951 (Exhibit 7.02(a)
-42-
<PAGE>
Applicable to Form
10-K of
KU
No. Description Energy KU Page(s)
4.02 in File No. 2-8499), June 1, 1952 (Amended
Cont. Exhibit 4.02 in File No. 2-9658), April 1,
1953 (Amended Exhibit 4.02 in File
No. 2-10120), April 1, 1955 (Amended
Exhibit 4.02 in File No. 2-11476), April 1,
1956 (Amended Exhibit 2.02 in File
No. 2-12322), May 1, 1969 (Amended
Exhibit 2.02 in File No. 2-32602), April 1,
1970 (Amended Exhibit 2.02 in File No.
2-36410), September 1, 1971 (Amended
Exhibit 2.02 in File No. 2-41467),
December 1, 1972 (Amended Exhibit 2.02 in
File No. 2-46161), April 1, 1974 (Amended
Exhibit 2.02 in File No. 2-50344),
September 1, 1974 (Exhibit 2.04 in File
No. 2-59328), July 1, 1975 (Exhibit 2.05 in
File No. 2-59328), May 15, 1976 (Amended
Exhibit 2.02 in File No. 2-56126), April 15,
1977 (Exhibit 2.06 in File No. 2-59328),
August 1, 1979 (Exhibit 2.04 in File
No. 2-64969), May 1, 1980 (Exhibit 2 to
Form 10-Q Quarterly Report of KU for the
quarter ended June 30, 1980), September 15,
1982 (Exhibit 4.04 in File No. 2-79891),
August 1, 1984 (Exhibit 4B to Form 10-K
Annual Report of KU for the year ended
December 31, 1984), June 1, 1985 (Exhibit 4
to Form 10-Q Quarterly Report of KU for the
quarter ended June 30, 1985), May 1, 1990
(Exhibit 4 to Form 10-Q Quarterly Report of
KU for the quarter ended June 30, 1990),
May 1, 1991 (Exhibit 4 to Form 10-Q
Quarterly Report of KU for the quarter ended
June 30, 1991), May 15, 1992 (Exhibit 4.02
to Form 8-K of KU dated May 14, 1992),
August 1, 1992 (Exhibit 4 to Form 10-Q
Quarterly Report of KU for the quarter ended
September 30, 1992), June 15, 1993
(Exhibit 4.02 to Form 8-K of KU dated
June 15, 1993) and December 1, 1993
(Exhibit 4.01 to Form 8-K of KU dated
December 10, 1993), November 1, 1994
(Exhibit 4.C to Form 10-K Annual Report of
KU for the year ended December 31, 1994),
June 1, 1995 (Exhibit 4 to Form 10-Q
Quarterly Report of KU for the quarter ended
June 30, 1995) and January 15, 1996
(Exhibit 4.E to Form 10-K Annual Report of
KU for the year ended December 31, 1995).
Incorporated by reference. x x
-43-
<PAGE>
Applicable to Form
10-K of
KU
No. Description Energy KU Page(s)
4.03 Supplemental Indenture dated March 1, 1992
between Kentucky Utilities Company and the
Trustees, providing for the conveyance of
properties formerly held by Old Dominion
Power Company (Exhibit 4B to Form 10-K
Annual Report of KU for the year ended
December 31, 1992). Incorporated by
reference. x x
4.04 Amendment No. 1, dated as of May 20, 1997,
to the Rights Agreement, dated as of
January 27, 1992, between KU Energy
Corporation and Illinois Stock Transfer
Company (Exhibit 99.1 to Form 8-A/A dated
May 21, 1997). Incorporated by reference. x
10.01 KU's Amended and Restated Performance Share
Plan (Exhibit 10.A to Form 10-Q Quarterly
Report of KU for the quarter ended June 30,
1993). Incorporated by reference. x x
10.02 KU's Annual Performance Incentive Plan
(Exhibit 10B to Form 10-K Annual Report of
KU for the year ended December 31, 1990).
Incorporated by reference. x x
10.03 Amendment No. 1 to KU's Performance Share
Plan (Exhibit 10.03 to Form 10-K Annual
Report for KU for the year ended
December 31, 1996). Incorporated by
reference. x x
10.04 Amendment No. 1 to KU's Annual Performance
Incentive Plan (Exhibit 10D to Form 10-K
Annual Report of KU for the year ended
December 31, 1991). Incorporated by
reference. x x
10.05 Amendment No. 2 to KU's Annual Performance
Incentive Plan (Exhibit 10.H to Form 10-K
Annual Report of KU for the year ended
December 31, 1993). Incorporated by
reference. x x
10.06 Amendment No. 3 to KU's Annual Performance
Incentive Plan (Exhibit 10.I to Form 10-K
Annual Report of KU for the year ended
December 31, 1993). Incorporated by
reference. x x
10.07 Amendment No. 4 to KU's Annual Performance
Incentive Plan (Exhibit 10.07 to Form 10-K
Annual Report for KU for the year ended
December 31, 1996). Incorporated by
reference. x x
-44-
<PAGE>
Applicable to Form
10-K of
KU
No. Description Energy KU Page(s)
10.08 KU's Executive Optional Deferred
Compensation Plan (Exhibit 10.08 to
Form 10-K Annual Report for KU for the year
ended December 31, 1996). Incorporated by
reference. x x
10.09 KU's Director Retirement Retainer Program,
and Amendment No. 1 (Exhibit 10G to
Form 10-K Annual Report of KU for the year
ended December 31, 1991). Incorporated by
reference. x x
10.10 Amendment No. 2 to KU's Director Retirement
Retainer Program (Exhibit 10.10 to Form 10-K
Annual Report for KU for the year ended
December 31, 1996). Incorporated by
reference. x x
10.11 Amendment No. 3 to KU's Director Retirement
Retainer Program (Exhibit 10.11 to Form 10-K
Annual Report for KU for the year ended
December 31, 1996). Incorporated by
reference. x x
10.12 KU's Supplemental Security Plan (Exhibit 10I
to Form 10-K Annual Report of KU for the
year ended December 31, 1991). Incorporated
by reference. x x
10.13 Amendment No. 1 to KU's Supplemental
Security Plan (Exhibit 10.J to Form 10-K
Annual Report of KU for the year ended
December 31, 1994). Incorporated by
reference. x x
10.14 Amendment No. 2 to KU's Supplemental
Security Plan (Exhibit 10.K to Form 10-K
Annual Report of KU for the year ended
December 31, 1994). Incorporated by
reference. x x
10.15 Amendment No. 3 to KU's Supplemental
Security Plan (Exhibit 10.15 to Form 10-K
Annual Report for KU for the year ended
December 31, 1996). Incorporated by
reference. x x
10.16 KU's Amended and Restated Director Deferred
Compensation Plan (Exhibit 10.16 to Form
10-K Annual Report for KU for the year ended
December 31, 1996). Incorporated by
reference. x x
-45-
<PAGE>
Applicable to Form
10-K of
KU
No. Description Energy KU Page(s)
10.17 KU Energy's Performance Share Plan
(Exhibit 10A to Form 10-Q Quarterly Report
of KU Energy for the quarter ended June 30,
1993). Incorporated by reference. x
10.18 Amendment No. 1 to KU Energy's Performance
Share Plan (Exhibit 10.18 to Form 10-K
Annual Report of KU Energy for the year
ended December 31, 1996). Incorporated by
reference. x
10.19 KU Energy's Annual Performance Incentive
Plan of January 1993 (Exhibit 10.J to Form
10-K Annual Report of KU Energy for the year
ended December 31, 1993). Incorporated by
reference. x
10.20 Amendment No. 1 to KU Energy's Annual
Performance Incentive Plan (Exhibit 10.K to
Form 10-K Annual Report of KU Energy for the
year ended December 31, 1993).
Incorporated by reference. x
10.21 Amendment No. 2 to KU Energy's Annual
Performance Incentive Plan of January 1993
(Exhibit 10.21 to Form 10-K Annual Report of
KU Energy for the year ended December 31,
1996). Incorporated by reference. x
10.22 KU Energy's Annual Performance Incentive
Plan as amended and restated effective as of
January 28, 1997 (Exhibit 10.22 to Form 10-K
Annual Report of KU Energy for the year
ended December 31, 1996). Incorporated by
reference. x
10.23 KU Energy's Executive Optional Deferred
Compensation Plan (Exhibit 10.23 to
Form 10-K Annual Report of KU Energy for the
year ended December 31, 1996). Incorporated
by reference. x
10.24 KU Energy's Director Retirement Retainer
Program (Exhibit 10J to Form 10-K Annual
Report of KU Energy for the year ended
December 31, 1992). Incorporated by
reference. x
10.25 Amendment No. 1 to KU Energy's Director
Retirement Retainer Program (Exhibit 10.25
to Form 10-K Annual Report of KU Energy for
the year ended December 31, 1996).
Incorporated by reference. x
-46-
<PAGE>
Applicable to Form
10-K of
KU
No. Description Energy KU Page(s)
10.26 KU Energy's Amended and Restated Director
Deferred Compensation Plan (Exhibit 10.26 to
Form 10-K Annual Report of KU Energy for the
year ended December 31, 1996). Incorporated
by reference. x
10.27 KU Energy's Long-Term Incentive Plan
(Exhibit 10.27 to Form 10-K Annual Report of
KU Energy for the year ended December 31,
1996). Incorporated by reference. x
10.28 Employment Agreement by and between KU
Energy Corporation and Michael R. Whitley
(Exhibit (2)-5 to S-4 Registration Statement
File No. 333-34219; Annex E to Form DEFM14A
Joint Proxy Statement of LG&E Energy Corp.
and KU Energy Corporation dated August 22,
1997). Incorporated by reference x x
10.29 KU Energy Stock Option Agreement, dated as
of May 20, 1997, by and between KU Energy
and LG&E Energy Corp. (Exhibit 99.1 to
Form 8-K Current Report dated May 30, 1997).
Incorporated by reference. x
10.30 LG&E Energy Corp. Stock Option Agreement,
dated as of May 20, 1997, by and between
LG&E Energy Corp. and KU Energy
(Exhibit 99.2 to Form 8-K Current Report
dated May 30, 1997). Incorporated by x
reference.
12 Computation of Ratio of Earnings to Fixed
Charges x 60
13 Portions of 1997 KU Energy Annual Report to
Shareholders x x* 61-88
21 List of Subsidiaries x x 89
23 Consent of Independent Public Accountants -
KU Energy and KU x x 90
27.01 Financial Data Schedule of KU Energy x **
27.02 Financial Data Schedule of KU x **
99.01 Description of Common Stock - KU Energy x 91-93
99.02 Description of Common Stock - KU x 94-95
99.03 Director and Officer Information x 96-107
-47-
<PAGE>
Applicable to Form
10-K of
KU
No. Description Energy KU Page(s)
99.04 Cautionary Statements - KU Energy and KU x x 108-109
Note - Exhibit numbers 10.01 through 10.28 are management contracts or
compensatory plans or arrangements required to be filed as exhibits to this
Form 10-K.
* Only the Management's Discussion and Analysis of Financial Condition and
Results of Operations is included or incorporated in the Annual Report on
Form 10-K of Kentucky Utilities.
** Included in electronic filing only.
-48-
<PAGE>
The following instruments defining the rights of holders of certain long-
term debt of KU have not been filed with the Securities and Exchange
Commission but will be furnished to the Commission upon request.
1. Loan Agreement dated as of May 1, 1990 between KU and the County of
Mercer, Kentucky, in connection with $12,900,000 County of Mercer,
Kentucky, Collateralized Solid Waste Disposal Facility Revenue Bonds
(KU Project) 1990 Series A, due May 1, 2010 and May 1, 2020.
2. Loan Agreement dated as of May 1, 1991 between KU and the County of
Carroll, Kentucky, in connection with $96,000,000 County of Carroll,
Kentucky, Collateralized Pollution Control Revenue Bonds (KU
Project) 1992 Series A, due September 15, 2016.
3. Loan Agreement dated as of August 1, 1992 between KU and the County
of Carroll, Kentucky, in connection with $2,400,000 County of
Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds
(KU Project) 1992 Series C, due February 1, 2018.
4. Loan Agreement dated as of August 1, 1992 between KU and the County
of Muhlenberg, Kentucky, in connection with $7,200,000 County of
Muhlenberg, Kentucky, Collateralized Pollution Control Revenue Bonds
(KU Project) 1992 Series A, due February 1, 2018.
5. Loan Agreement dated as of August 1, 1992 between KU and the County
of Mercer, Kentucky, in connection with $7,400,000 County of Mercer,
Kentucky, Collateralized Pollution Control Revenue Bonds (KU
Project) 1992 Series A, due February 1, 2018.
6. Loan Agreement dated as of August 1, 1992 between KU and the County
of Carroll, Kentucky, in connection with $20,930,000 County of
Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds
(KU Project) 1992 Series B, due February 1, 2018.
7. Loan Agreement dated as of December 1, 1993, between KU and the
County of Carroll, Kentucky, in connection with $50,000,000 County
of Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities
Revenue Bonds (KU Project) 1993 Series A, due December 1, 2023.
8. Loan Agreement dated as of November 1, 1994, between KU and the
County of Carroll, Kentucky, in connection with $54,000,000 County
of Carroll, Kentucky, Collateralized Solid Waste Disposal
Facilities Revenue Bonds (KU Project) 1994 Series A, due November 1,
2024.
(B) No reports on Form 8-K were filed by KU Energy or KU during the last
quarter of 1997.
-49-
<PAGE>
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
December 31, 1997 gives effect to the Merger as if it had occurred at
December 31, 1997. The unaudited pro forma combined condensed statements
of income for all periods give effect to the Merger as if it had occurred
at the beginning of the periods presented. 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. 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.
-50-
<PAGE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
At December 31,1997
(Thousands of Dollars)
<TABLE>
<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 $ 104,366 $ 21,726 $ - $ 126,092
Marketable securities 22,300 - - 22,300
Accounts receivable - less reserve 521,166 74,937 (156) 595,947
Materials and supplies - primarily
at average cost:
Fuel (predominately coal) 17,651 27,799 - 45,450
Gas stored underground 49,396 - - 49,396
Other 31,866 23,648 - 55,514
Price risk management assets 120,341 - - 120,341
Prepayments and other 10,599 5,769 - 16,368
Total current assets 877,685 153,879 (156) 1,031,408
Utility plant:
At original cost 2,779,234 2,611,634 - 5,390,868
Less: reserve for depreciation 1,072,842 1,128,282 - 2,201,124
Net utility plant 1,706,392 1,483,352 - 3,189,744
Other property and investments
- less reserve:
Investments in affiliates 168,276 2,157 - 170,433
Non-utility property and plant, net 421,486 2,666 - 424,152
Price risk management assets 44,240 - - 44,240
Other 24,743 42,409 - 67,152
Total other property and
investments 658,745 47,232 - 705,977
Deferred debits and other assets 123,569 52,799 (5,012) 171,356
Total assets $ 3,366,391 $ 1,737,262 $ (5,168) $ 5,098,485
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-51-
<PAGE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
At December 31, 1997
(Thousands of Dollars)
<TABLE>
<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 360,184 33,600 - 393,784
Accounts payable 449,230 29,561 3,082 481,873
Trimble County settlement 13,248 - - 13,248
Price risk management liabilities 131,107 - - 131,107
Other 84,966 42,733 (3,330) 124,369
Total current liabilities 1,058,735 105,915 (248) 1,164,402
Long-term debt 664,339 546,351 - 1,210,690
Deferred credits and other liabilities:
Accumulated deferred income taxes 327,343 252,492 - 579,835
Investment tax credit, in process
of amortization 75,800 26,131 - 101,931
Accumulated provision for pensions
and related benefits 43,883 35,664 - 79,547
Regulatory liability 65,502 51,577 - 117,079
Price risk management liabilities 23,803 - - 23,803
Other 67,576 15,010 - 82,586
Total deferred credits and
other liabilities 603,907 380,874 - 984,781
Minority interests 105,985 - - 105,985
Cumulative preferred stock 98,353 40,000 - 138,353
Common equity 835,072 664,122 (4,920) 1,494,274
Total capital and liabilities $ 3,366,391 $ 1,737,262 $ (5,168) $ 5,098,485
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-52-
<PAGE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 1997
(Thousands of Dollars Except Per Share Data)
<TABLE>
<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 $ 3,266,811 $ - $ (4) $ 3,266,807
Electric utility 615,159 716,410 (305) 1,331,264
Gas utility 231,011 - - 231,011
Argentine gas distribution and
other 150,839 5,899 - 156,738
Total revenues 4,263,820 722,309 (309) 4,985,820
COST OF REVENUES
Energy marketing and trading 3,245,234 - (14) 3,245,220
Fuel and power purchased 166,692 260,981 (295) 427,378
Gas supply expenses 158,929 - - 158,929
Argentine gas distribution and
other 84,873 - - 84,873
Total cost of revenues 3,655,728 260,981 (309) 3,916,400
Gross profit 608,092 461,328 - 1,069,420
OPERATING EXPENSES
Operation and maintenance:
Energy marketing and trading 40,012 - - 40,012
Utility 214,635 201,247 - 415,882
Argentine gas distribution and
other 49,562 3,661 - 53,223
Depreciation and amortization 115,736 84,297 - 200,033
Non-recurring charges (1,342) - - (1,342)
Total operating expenses 418,603 289,205 - 707,808
Equity in earnings of joint ventures 21,014 - - 21,014
OPERATING INCOME 210,503 172,123 - 382,626
Other income and (deductions) 15,476 3,960 - 19,436
Interest charges and
preferred dividends 63,865 41,959 - 105,824
Minority interest 9,035 - - 9,035
Income before income taxes 153,079 134,124 - 287,203
Income taxes 55,262 48,945 - 104,207
NET INCOME (Note 5) $ 97,817 $ 85,179 $ - $ 182,996
Average common shares outstanding
(Note 4) 66,471 37,818 25,338 129,627
Earnings per share of common
stock - basic and diluted $ 1.47 $ 2.25 $ - $ 1.41
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
-53-
<PAGE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 1996
(Thousands of Dollars Except Per Share Data)
<TABLE>
<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
<S> <C> <C> <C> <C>
trading (Note 6) $ 2,748,873 $ - $ - $ 2,748,873
Electric utility 607,160 711,686 (760) 1,318,086
Gas utility 214,419 - - 214,419
Argentine gas distribution and
other 19,013 4,522 - 23,535
Total revenues 3,589,465 716,208 (760) 4,304,913
COST OF REVENUES
Energy marketing and trading 2,664,399 - (257) 2,664,142
Fuel and power purchased 166,323 260,688 (503) 426,508
Gas supply expenses 140,482 - - 140,482
Argentine gas distribution and
other 13,059 - - 13,059
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:
Energy marketing and trading 41,916 - - 41,916
Utility 214,786 201,811 - 416,597
Argentine gas distribution and
other 25,991 2,759 - 28,750
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 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 - basic and diluted $ 1.57 $ 2.17 $ - $ 1.44
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
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<PAGE>
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 1995
(Thousands of Dollars Except Per Share Data)
<TABLE>
<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
settlement (Note 9) (28,300) - - (28,300)
Gas utility 181,126 - - 181,126
Argentine gas distribution and
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
Argentine gas distribution and
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:
Energy marketing and trading 18,177 - - 18,177
Utility 203,284 198,712 - 401,996
Argentine gas distribution and
other 21,697 2,969 - 24,666
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 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 - basic and diluted $ 1.25 $ 2.01 $ - $ 1.23
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
</TABLE>
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<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). LG&E
Energy and KU Energy have incurred transaction costs of $13.3 million
through December 31, 1997, which are included in deferred debits and
other assets in the pro forma combined condensed balance sheet. None
of the estimated cost savings resulting from the Merger or costs to
achieve such savings have 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) as a pro forma
adjustment to retained earnings and a credit of $5.0 million
($8.25 million less $13.3 million actual charges incurred through
December 31, 1997) as a pro forma adjustment to deferred debits and
other assets have been made in the pro forma combined condensed
balance sheet to recognize such estimated transaction costs and the
proposed treatment following the consummation of the Merger.
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 non-recurring charges for the year ended December 31,
1997, included a net insurance settlement of $7.6 million related to
losses incurred in its Canadian office during 1996, partially offset
by a charge of $6.3 million to reflect the costs of consolidating
the trading, risk management and administrative operations of its
power and gas marketing divisions into a single energy marketing
unit, located in its Louisville headquarters.
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. The impact on
prior period financial results was immaterial.
7. LG&E Energy's net income for the year ended December 31, 1996,
includes a non-recurring after-tax charge of $17.1 million for losses
in its natural gas marketing business resulting from unauthorized
transactions entered into by a marketer in its Calgary, Alberta,
office. This charge is reflected in non-recurring charges on the
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<PAGE>
respective statements of income.
8. KU Energy's net income for the year ended December 31, 1996, includes
a non-recurring write-off of nonutility investments of $5.5 million
which is reflected in non-recurring charges.
9. LG&E Energy's 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 25, 1998.
KU ENERGY CORPORATION AND
KENTUCKY UTILITIES COMPANY
(Registrants)
/s/Michael R. Whitley
Michael R. Whitley
Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrants in the capacities and on the date indicated.
Signature Title
/s/Michael R. Whitley
Michael R. Whitley Chairman and President (Principal Executive
Officer) and Director of KU Energy and KU
/s/O.M. Goodlett
O. M. Goodlett Senior Vice-President (Principal Financial
Officer) of KU Energy and KU
/s/Michael D. Robinson
Michael D. Robinson Controller (Principal Accounting Officer) of
KU Energy and KU
/s/Mira S. Ball
Mira S. Ball Director of KU Energy and KU
/s/Carol M. Gatton
Carol M. Gatton Director of KU Energy and KU
/s/Harry M. Hoe
Harry M. Hoe Director of KU Energy and KU
/s/Milton W. Hudson
Milton W. Hudson Director of KU Energy and KU
/s/John T. Newton
John T. Newton Director of KU Energy and KU
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<PAGE>
Signature Title
/s/Frank V. Ramsey, Jr.
Frank V. Ramsey, Jr. Director of KU Energy and KU
/s/William L. Rouse, Jr.
William L. Rouse, Jr. Director of KU Energy and KU
/s/Charles L. Shearer
Charles L. Shearer Director of KU Energy and KU
/s/Lee T. Todd, Jr.
Lee T. Todd, Jr. Director of KU Energy and KU
March 25, 1998
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EXHIBIT 12
KENTUCKY UTILITIES COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
(in thousands except ratios)
Earnings
<S> <C> <C> <C> <C> <C>
Net Income $ 85,713 $ 86,163 $ 76,842 $ 77,512 $ 81,286
Adjustments
Fixed charges 39,729 39,688 40,116 34,558 32,899
Income taxes
Current Federal 39,353 35,656 23,597 37,058 35,893
Current State 8,964 7,387 5,134 8,812 9,484
Deferred Federal--Net 1,996 5,510 12,165 (1,114) 2,837
Deferred State--Net 1,377 2,899 3,845 13 71
Deferred investment
tax credit--Net - - (71) (86) (107)
Income taxes included
in Other Income
and Deductions
Current Fed and State (1,099) 4,426 1,044 1,881 (2,616)
Deferred Fed and State 1,233 (4,659) (508) (458) 2,817
Amortization of
investment credit (4,036) (4,013) (4,024) (4,024) (4,024)
Undistributed income of
Electric Energy, Inc. (37) 24 99 (39) (38)
Total Earnings $ 173,193 $ 173,081 $ 158,239 $ 154,113 $ 158,502
Fixed Charges
Int. on long-term debt $ 37,405 $ 37,584 $ 36,095 $ 32,147 $ 31,650
Other interest charges 2,324 2,104 4,021 2,411 1,249
Total Fixed Charges $ 39,729 $ 39,688 $ 40,116 $ 34,558 $ 32,899
Ratio of Earnings
to Fixed Charges 4.36 4.36 3.94 4.46 4.82
</TABLE>
____________
Note--Rentals are not material and have not been included in fixed charges.
-60-
EXHIBIT 13
Management's Discussion and Analysis of Financial Condition and Results of
Operation
COMPANY DESCRIPTION
KU Energy Corporation (KU Energy or the Company) is an investor-owned
utility holding company with two wholly owned subsidiaries. Kentucky
Utilities Company (KU), the principal subsidiary of KU Energy, is an
electric utility, and KU Capital Corporation (KU Capital) is a nonutility
subsidiary. Material changes in the consolidated financial condition and
results of operations of the Company are primarily attributable to the
operations of KU.
THE MERGER
On May 20, 1997, KU Energy and LG&E Energy Corp. (LG&E Energy) entered into
an Agreement and Plan of Merger (Merger) providing for a tax-free, stock
for stock merger of KU Energy and LG&E Energy. As a result of the Merger,
LG&E Energy, the surviving corporation, will become the parent company of
KU and will continue as parent of Louisville Gas & Electric Company (LG&E).
When the Merger is completed, shareholders of KU Energy common stock will
receive 1.67 shares of LG&E Energy common stock for each share of KU Energy
common stock held.
Shareholders of both companies approved the Merger on October 14, 1997.
The Merger also has been approved by the Virginia State Corporation
Commission (SCC) and the Kentucky Public Service Commission (PSC).
The PSC order approves a surcredit mechanism which passes one-half of the
potential non-fuel merger savings (net of costs to achieve) to customers
over the first five years following the consummation of the Merger. The
credit will be nearly 2% of customers bills in the five-year period and
will amount to approximately $63 million in net non-fuel savings to KU
customers. Similar methods for passing net non-fuel merger savings have
been approved for Virginia customers by the SCC and agreed to by KU's
municipal wholesale customers.
The PSC order also approves recovery from ratepayers of one-half of merger-
related expenses (not to exceed $77 million) over a five-year period. The
remaining merger-related expenses will be expensed as incurred after the
effective date of the Merger. The Company's share of merger-related
expenses is expected to be approximately $38 million. Through December 31,
1997, the Company has deferred approximately $7.9 million pending
consummation of the Merger. Of that amount, $4.1 million is included in
regulatory assets to be recovered following the consummation of the Merger
as described above. Refer to Note 1 of the Notes to Consolidated Financial
Statements, Summary of Significant Accounting Policies.
As part of their application, KU and LG&E have proposed a base rate cap for
five years after consummation of the Merger, except in the event of
extraordinary circumstances such as a significant increase in the federal
corporate tax rate. The PSC order notes that the PSC has the statutory
jurisdiction to regulate utility rates including the authority to
investigate and review KU's and LG&E's earnings at any time.
The PSC order also requires KU and LG&E to file by September 14, 1998, or
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<PAGE>
the consummation of the Merger, whichever is later, detailed plans to
address any future rate regulation that may be adopted in the state. The
PSC order further provides that the PSC will at that time determine on the
basis of the described filings and other information whether changes should
be made to the existing regulation of KU and LG&E.
The Merger must still be approved by the Federal Energy Regulatory
Commission and the Securities and Exchange Commission and reviewed by the
Federal Trade Commission. Following receipt of the remaining regulatory
approvals, the Merger is expected to be effective as early as the first
half of 1998.
RESULTS OF OPERATIONS
Earnings and Dividends
The Company's 1997 earnings were $2.25 per share compared to $2.17 per
share earned in 1996, an increase of 4%. Earnings in 1997 were positively
impacted by increased kilowatt-hour (kWh) sales to industrial customers and
higher market prices on sales for resale offset somewhat by overall milder
weather in 1997.
Earnings per share for 1996 of $2.17 were 8% above earnings of $2.01 per
share for 1995. The increase in 1996 earnings was largely due to kWh sales
growth which was attributable to increased sales to neighboring utilities,
continued economic growth in KU's service area and the impact of KU's
successful marketing efforts.
Common stock dividends were increased 2.3% to $1.76 per share in 1997. In
January 1998, KU Energy's Board increased the common dividend again to an
indicated annual rate of $1.80 per share. This marked the 17th consecutive
year in which dividends have increased.
1997 kWh Sales by Classification
Year Ended December 31, 1997
Residential 27%
Commercial 19%
Industrial 24%
Mine Power 5%
Public Authorities 7%
Sales for Resale 18%
Total 100%
Sales and Revenues
1997 1996
kWh Revenue kWh Revenue
Change Variance Change Variance
(%) (000's) (%) (000's)
Residential (2) $(4,405) 3 $ 3,469
Commercial - 154 - (1,138)
Industrial 9 9,945 7 6,790
Mine Power 4 527 (4) (2,062)
Public Authorities - 220 4 1,862
Total Retail Sales 2 6,441 3 8,921
Sales for Resale (9) (1,878) 27 13,268
Miscellaneous Revenues and Other - 161 - 3,097
Total - $ 4,724 7 $25,286
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<PAGE>
Total sales for 1997 were flat as compared to 1996. Residential sales
decreased 2% for the year due to milder weather in 1997 compared to 1996.
Industrial sales increased 9% reflecting continued growth in the
manufacturing sector of the service area economy. Sales for resale, which
include wholesale and opportunity sales, declined 9% in 1997; however,
revenues did not decline by a comparable amount due to higher market prices
per megawatt-hour on opportunity sales.
Operating revenues of $716.4 million for 1997 were fairly flat, increasing
$4.7 million (1%) from 1996 due primarily to kWh sales remaining almost
unchanged as discussed above.
Sales for 1996 were 7% above 1995. Sales for resale rose 27% in 1996.
Industrial sales increased 7% while residential sales increased 3%. These
increases were the result of the Company's successful marketing efforts and
continued economic growth in KU s service area.
Operating revenues for 1996 were $711.7 million, up 4% from 1995. The
increase in 1996 revenues was largely due to the growth in kWh sales as
described above.
Operating Expenses
Fuel expense totaled $188.4 million in 1997, a $9.8 million (5%) decrease
from 1996. The decline was primarily due to a 4% decrease in MBTU (million
British thermal units) consumed which resulted from an increase in kWh
purchases.
Purchased power expense increased $10.1 million (16%) in 1997 due to a 19%
increase in kWh purchases associated with increased availability of
surplus power on favorable pricing terms and to a one-time reduction in
demand costs in 1996 of about $4 million under a contract with a
neighboring utility.
Fuel expense for 1996 was $198.2 million, an $8.4 million (4%) increase
from 1995. This increase was due to increased generation for kWh sales,
partially offset by a 3% decrease in the cost per MBTU of coal consumed.
Purchased power expense decreased $7.1 million (10%) in 1996. The decline
was due to a reduction in kWh purchases and to a one-time reduction in
demand costs as discussed above.
Depreciation expense increased $3.7 million (5%) and $5.3 million (7%) in
1997 and 1996, respectively. The increases were primarily due to increased
utility plant in service including a combustion turbine peaking unit placed
into service in May 1996.
Federal and state income taxes increased $.3 million (1%) in 1997 primarily
due to the increase in pre-tax income.
Federal and state income taxes increased $6.8 million (16%) in 1996. The
increase was primarily due to the increase in pre-tax income.
Other Income and Deductions
Other income and deductions of $10.5 million in 1997 were up $2.2 million
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<PAGE>
(27%) compared to 1996. Other income and deductions for 1996 include a
$5.5 million pre-tax write-off associated with nonutility investments.
Other income and deductions of $8.3 million in 1996 were down 29% from 1995
primarily due to the $5.5 million pre-tax write-off mentioned above. (For
additional information, refer to page 21 Nonutility Activities. )
COMPETITION
Wholesale
The electric utility industry's move to competition formally began with
passage of The National Energy Policy Act of 1992 (NEPA). NEPA gave the
Federal Energy Regulatory Commission (FERC) authority to order electric
utilities to provide wholesale transmission services to independent power
producers and other utilities. NEPA also increased competition in the
wholesale generation market by reducing restrictions on the ownership and
operation of independent power producers.
In 1996, under authority granted by NEPA, the FERC issued rules (FERC
Order 888 and Order 889) requiring electric utilities to open their
transmission systems to other wholesale buyers and sellers. In addition,
the rules require electric utilities to separate their merchant and
transmission functions. These rules create greater competition in the
industry by increasing the availability of transmission services.
In March 1997, FERC issued its Final Rule (Order 888-A) affirming
Orders 888 and 889. In July 1997, KU filed a conforming open access
transmission tariff (TS) with the FERC. The Company's TS has been accepted
by the FERC.
Retail
Proposals to bring competition to the retail level of the electric utility
industry are being considered in numerous states and at the federal level.
In Kentucky, the PSC has held a series of informal meetings with electric
utilities and other interested parties to discuss the potential impact of
industry restructuring. Based upon these meetings, the PSC issued in
December 1997 a set of principles and guidelines on the restructuring of
the electric utility industry. The principles and guidelines focus on the
fundamental issues relating to consumer protection and benefits, system
reliability, environmental responsibility and other related matters.
The Company continues to advocate nationwide competition in the electric
utility industry and believes customer choice should be extended to the
retail level. With low-cost generation and rates that are among the lowest
in the nation, the Company is well-positioned for the challenges and
opportunities of a competitive marketplace. The Company believes its
merger with LG&E Energy will strengthen its competitive position. The
larger size of the combined company will provide greater opportunities for
growth while expected cost savings will help ensure that KU's rates remain
among the lowest in the nation.
Stranded Costs
KU believes that it will have very little, if any, stranded costs as a
result of wholesale or retail competition.
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<PAGE>
Midwest Independent System Operator
In 1998, KU announced that it will join the Midwest Independent System
Operator (MISO). KU is among nine transmission system owners, including
LG&E, which filed a proposal with the FERC in January 1998 seeking approval
to form the MISO. The MISO is a regional entity that would manage and
operate the transmission owners collective transmission systems in an
eight-state region. The primary objectives of the MISO are to advance
wholesale competition by ensuring nondiscriminatory open transmission
access to all wholesale customers and to enhance transmission reliability.
ENVIRONMENTAL MATTERS
Clean Air Act
KU met Phase I requirements of the Clean Air Act Amendments of 1990 (which
were effective January 1, 1995) primarily through the addition of a flue
gas desulfurization system (scrubber) on Unit 1 of the KU's Ghent
Generating Station. The scrubber began commercial operation in December
1994.
The Company's current strategy for Phase II requirements (which will be
effective January 1, 2000) is to use accumulated emission allowances to
delay additional capital expenditures and may also include fuel switching
or the installation of additional scrubbers.
The Company's future compliance plans are contingent upon many factors,
including developments in the emission allowance market and fuel markets as
well as regulatory and legislative actions and advances in clean air
technology. The Company will continue to review and revise its compliance
plans accordingly to ensure that its environmental obligations are met in
the most efficient and cost-effective manner.
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 in July 1994, 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 PSC's order approving the surcharge and the constitutionality of the
surcharge were challenged in a Franklin County (Kentucky) Circuit Court
(Circuit Court) action brought against KU and the PSC by the Attorney
General of Kentucky and representatives of consumer groups. In July 1995,
the Circuit Court entered a judgment upholding the constitutionality of the
surcharge statute but vacating that part of the PSC's order which the
Circuit Court's judgment described as retroactively applying the surcharge
statute. All parties (including KU and the PSC) appealed the Circuit
Court's judgment to the Kentucky Court of Appeals (Court of Appeals). The
PSC has ordered 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 December 31, 1997 were
approximately $56 million.
In December 1997, the Court of Appeals rendered an opinion upholding the
portion of the Circuit Court's judgment regarding the constitutionality of
the surcharge statute but reversing that portion of the Circuit Court's
judgment concerning the claim of retroactive application of the statute.
The Kentucky Attorney General and other consumer representatives have filed
motions for discretionary review with the Kentucky Supreme Court (Supreme
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<PAGE>
Court). The Supreme Court has the discretion to grant or deny the motions.
KU and the PSC have asked the Supreme Court to deny the motions. KU cannot
predict whether the Supreme Court will grant review of the case or when it
will act on the matter.
KU continues to believe that the constitutionality of the surcharge statute
will be upheld. Although KU cannot predict the outcome of the claim of
retroactive application of the statute, it is the position of KU and the
PSC that the July 1994 PSC order did not retroactively apply the statute.
If the Court of Appeals opinion reversing the Circuit Court's judgment on
the claim of retroactivity is overturned and the Circuit Court's judgment,
as entered, is upheld, KU estimates that the amount it could be required to
refund for surcharge collections through December 31, 1997, from the
implementation of the surcharge would be approximately $15 million, and
from February 1, 1995, would be approximately $13 million. At this time,
KU has not recorded any reserve for refund. Refer to Note 9 of the Notes
to Consolidated Financial Statements, Environmental Cost Recovery.
Nitrogen Oxide Emissions Reductions
The Environmental Protection Agency (EPA) issued final rules revising the
National Ambient Air Quality Standards for ozone and particulate matter in
July 1997. 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) beginning in 2004. Certain
implementation proposals, which are not yet final, would target coal-fired
utilities in the Midwest and South, including Kentucky, for more
substantial reductions than other areas and other sources of emissions.
Final implementation methods will be set 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 costs, are likely to be substantial and are
dependent upon the ultimate control program agreed to by the targeted
states and EPA. Such costs are expected to be incurred in the 2004-2007
time period. KU further believes that such capital and operating costs are
the type of costs that are eligible for recovery from customers under its
environmental surcharge mechanism. However, approval from the PSC is
required. Refer to Note 9 of the Notes to Consolidated Financial
Statements, Environmental Cost Recovery. The exact nature of the impact
of the new standards on KU's operations will not likely be known for some
time.
INFLATION
KU's rates are designed to recover operating and historical plant
investment costs. Financial statements, which are prepared in accordance
with generally accepted accounting principles, report operating results in
terms of historic costs and do not evaluate the impact of inflation.
Inflation affects KU's construction costs, operating expenses and interest
charges. Inflation can also impact KU's financial performance if rate
relief is not granted on a timely basis for increased operating costs.
(Refer to page 16, The Merger, regarding a proposed rate cap.)
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong in 1997. At the end of
the year, common stock equity represented 53% of total capitalization while
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long-term debt was 44%, and preferred stock was 3%. Current ratings on
KU's senior debt securities are as follows: Duff & Phelps AA, Moody's Aa2
and Standard & Poor's AA.
<TABLE>
<CAPTION>
As of December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Capitalization (in millions) $1,250 $1,232 $1,215 $1,152 $1,085
Long-Term Debt 43.7% 44.4% 44.9% 43.0% 40.8%
Preferred Stock 3.2% 3.2% 3.3% 3.5% 3.7%
Common Stock Equity 53.1% 52.4% 51.8% 53.5% 55.5%
</TABLE>
Cash from operations accounted for 106% of cash requirements in 1997 as
compared to 99% in 1996 and 78% in 1995. For calculation purposes, cash
requirements exclude optional debt refinancings and redemptions and
optional preferred stock redemptions.
At the end of 1997, KU's short-term borrowings were $34 million compared to
$54 million at December 31, 1996. The Company has used short-term
borrowings to temporarily finance ongoing construction expenditures and
general corporate requirements. The decrease is due primarily to cash
provided by operations exceeding cash required for investing and financing
activities (exclusive of short-term borrowings).
Taking advantage of lower interest rates, KU issued $36 million of Series S
First Mortgage Bonds, maturing 2006, at a rate of 5.99% in January 1996 and
used the proceeds to redeem $35.5 million of Series K First Mortgage Bonds
which carried a rate of 7 3/8%.
In June 1995, KU issued $50 million of Series R First Mortgage Bonds which
will mature in 2025 and bear interest at 7.55%. The proceeds were used
primarily to pay short-term indebtedness incurred to finance ongoing
construction expenditures and general corporate requirements.
The Company's financial strength is enhanced by its low cost of capital.
Shown below are the Company's embedded costs of long-term debt and
preferred stock at year-end:
Embedded Costs 1997 1996 1995
Long-Term Debt 6.98% 6.98% 7.15%
Preferred Stock 5.64% 5.64% 5.64%
Capital Requirements
Construction Expenditures - 1997 Actual, 1998-2002 Estimated
Actual Estimated
(In millions of dollars) 1997 1998 1999 2000 2001 2002
Construction Expenditures $94 $ 97 $ 103 $120 $116 $113
During 1997, construction expenditures were $94 million. Construction
expenditures are expected to be approximately $97 million in 1998. For the
five-year period 1998-2002, construction expenditures are projected to be
$549 million. Included in the projection is $105 million for additional
peaking units. Construction expenditures for the five-year period ending
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in 1997 were $695 million.
In addition to construction expenditures, projected capital requirements
for 1998-2002 include $61.5 million for scheduled debt retirements.
Capital requirements for the five-year period 1998-2002 are expected to be
met primarily through internal sources of funds. External financing to fund
scheduled debt retirements will be required.
KU forecasts annual growth in sales and peak demand of 2.5% and 2.7%,
respectively, over the next 5 years. KU plans to provide for the future
power needs of its customers primarily through purchased power and the
addition of combustion turbine peaking units. There are no plans for
additional baseload capacity before 2010.
YEAR 2000 SOFTWARE MODIFICATIONS
The Company, like most owners of computer software, is required to modify
significant portions of its software so that it will function properly in
the year 2000. The Company has developed a plan to be year 2000 compliant
no later than the second quarter of 1999. Maintenance or modification
costs will be expensed as incurred. The Company does not expect that the
amounts required to be expensed over the next two years will have a
material effect on its financial position or results of operations. The
amount expensed through 1997 was immaterial.
If the Company's year 2000 plans are not successful, there could be
significant disruption of the Company's ability to bill customers and pay
suppliers, as well as a possible slowdown of certain computer-dependent
processes.
NONUTILITY ACTIVITIES
KU Capital, KU Energy's nonutility subsidiary, has an investment of about
$28 million in equity interests in eight combustion turbine generating
units (all of which are leased to investment grade utility companies). In
addition, KU Capital has an investment of $8.7 million in limited
partnership interests in three operating independent power projects through
agreements with Tenaska, Inc. (Tenaska), a developer of domestic gas-fired
cogeneration and independent power generation projects, and its affiliates.
KU Capital also has a limited partnership interest in a gas-fired
generation project which is the subject of a breach of contract claim filed
by Tenaska against the Bonneville Power Administration (BPA). Construction
of the project was suspended in 1995 after BPA notified Tenaska of its
intent to cancel a power purchase agreement under which BPA committed to
buy electricity to be produced by the project. Tenaska has a $650 million
claim for damages against BPA in the United States Court of Federal Claims
(Court of Claims). Arbitration ordered by the Court of Claims began in
February 1997. An initial decision is expected in the second half of 1998.
Although it is not possible at this time to determine the outcome of such
arbitration, the Company believes the possibility of any material adverse
impact on the results of operations or the financial position of the
Company as a result of this matter is remote.
Under its agreements with Tenaska, KU Capital has been funding a portion
of the costs associated with identifying and pursuing potential independent
power projects in North America. Such funding, which was expensed as
incurred, totaled about $1 million in 1997. In 1996, KU Capital wrote-off
-68-
<PAGE>
$5.5 million of costs funded during 1994-1996 that was associated with
unsuccessful projects. KU Capital's remaining funding commitment over the
next several years totals $3.6 million.
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 (i) amounts of future construction expenditures, sources of
funds to meet capital requirements and financing requirements,
(ii) forecasts of annual growth in sales and peak demand and anticipated
sources of additional power supply to meet customer demand, (iii) the
anticipated level of stranded costs, (iv) the anticipated strategy to
comply with the Clean Air Act Amendments of 1990, (v) the anticipated
results of proceedings related to the environmental surcharge, (vi) the
anticipated results of the arbitration relating to the Tenaska claim
against BPA, (vii) the impact of the revisions to the National Ambient Air
Quality Standards and recovery of related costs, (viii) with respect to the
Merger, the expected timing of consummation, the Company's share of merger-
related expenses, the anticipated amount of customer savings and the
anticipated strengthened competitive position and (ix) the expected costs
associated with year 2000 software modifications. 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 (i) the speed and
nature of increased competition and deregulation in the electric and gas
utility industry, (ii) economic or weather conditions affecting future
sales and margins, (iii) changing energy prices, (iv) legislative and
regulatory changes including revised environmental requirements,
(v) availability and cost of capital, (vi) unanticipated or adverse
decisions in regulatory proceedings or litigation and (vii) other matters
detailed from time to time in the Company's or KU's reports filed with the
Securities and Exchange Commission.
-69-
<PAGE>
Consolidated Statements
of Income and
Retained Earnings
<TABLE>
<CAPTION>
KU Energy Corporation
& Subsidiaries
Year Ended December 31, 1997 1996 1995
(in thousands, except for per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES $ 716,410 $ 711,686 $686,400
OPERATING EXPENSES:
Fuel, principally coal, used in generation 188,439 198,198 189,845
Electric power purchased 72,542 62,490 69,579
Other operating expenses 123,537 125,351 124,044
Maintenance 65,004 64,170 62,599
Depreciation 84,297 80,612 75,268
Federal and state income taxes 50,501 50,247 43,426
Other taxes 15,459 15,049 15,038
Total Operating Expenses 599,779 596,117 579,799
NET OPERATING INCOME 116,631 115,569 106,601
OTHER INCOME AND DEDUCTIONS:
Interest and dividend income 2,507 2,800 4,115
Other income and deductions - net 8,000 5,469 7,610
Total Other Income and Deductions 10,507 8,269 11,725
INCOME BEFORE INTEREST AND OTHER CHARGES 127,138 123,838 118,326
INTEREST AND OTHER CHARGES:
Interest on long-term debt 37,405 37,584 36,095
Preferred stock dividend requirements of Subsidiary 2,256 2,256 2,256
Other interest charges 2,298 2,049 3,922
Total Interest and Other Charges 41,959 41,889 42,273
NET INCOME $ 85,179 $ 81,949 $ 76,053
BASIC EARNINGS PER AVERAGE COMMON SHARE,
based on average shares outstanding of 37,818 $ 2.25 $ 2.17 $ 2.01
RETAINED EARNINGS BEGINNING OF YEAR $ 337,968 $ 321,066 $308,547
ADD NET INCOME 85,179 81,949 76,053
423,147 403,015 384,600
DEDUCT:
Dividends on common stock, $1.76, $1.72 and $1.68
per share during 1997, 1996 and 1995, respectively 66,559 65,047 63,534
Other 8 - -
RETAINED EARNINGS END OF YEAR $ 356,580 $337,968 $321,066
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
-70-
<PAGE>
Consolidated Statements
of Cash Flows
KU Energy Corporation
& Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 85,179 $ 81,949 $ 76,053
Items not requiring (providing) cash currently:
Depreciation 84,297 80,612 75,268
Deferred income taxes 7,815 5,891 16,919
Investment tax credit deferred (4,036) (4,013) (4,095)
Deferred merger-related costs (7,851) - -
Changes in current assets and liabilities:
Change in accounts receivable 5,229 (969) (7,945)
Change in accounts payable 1,308 (9,682) (10,774)
Change in other current assets and liabilities 3,451 5,778 (431)
Other - net (5,254) 10,181 1,868
Net Cash Provided by Operating Activities 170,138 169,747 146,863
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures - utility (94,006) (106,503) (124,515)
Investment in independent power projects (4,805) (1,310) (3,204)
Proceeds from insurance reimbursements 4,270 257 152
Proceeds from independent power projects 2,567 1,388 943
Other 472 393 193
Net Cash Used by Investing Activities (91,502) (105,775) (126,431)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings - net (20,600) (1,400) (20,700)
Issuance of long-term debt - 35,666 49,288
Funds deposited with trustee - net - 3,779 15,100
Retirement of long-term debt, including premiums (21) (36,192) (21)
Payment of common stock dividends (66,559) (65,047) (63,534)
Net Cash Used by Financing Activities (87,180) (63,194) (19,867)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,544) 778 565
Cash and Cash Equivalents Beginning of Year 30,270 29,492 28,927
Cash and Cash Equivalents End of Year $ 21,726 $ 30,270 $ 29,492
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 37,053 $ 36,729 $ 37,961
Income Taxes $ 41,398 $ 45,775 $ 31,507
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
-71-
<PAGE>
Consolidated
Balance Sheets
KU Energy Corporation
& Subsidiaries
<TABLE>
<CAPTION>
As of December 31, (in thousands of dollars) 1997 1996
ASSETS
UTILITY PLANT:
<S> <C> <C>
Plant in service, at cost $2,552,695 $2,482,812
Less: Accumulated depreciation 1,128,282 1,067,911
1,424,413 1,414,901
Construction work in progress 58,939 63,435
Total Utility Plant 1,483,352 1,478,336
CURRENT ASSETS:
Cash and cash equivalents 21,726 30,270
Accounts receivable, net of allowance for doubtful accounts 45,269 50,498
Accrued utility revenues 29,668 24,239
Fuel, principally coal, at average cost 27,799 30,895
Plant materials and operating supplies, at average cost 23,648 21,656
Other 5,769 7,486
Total Current Assets 153,879 165,044
OTHER ASSETS:
Investment in leveraged leases 28,152 24,650
Investment in independent power projects 8,730 4,745
Regulatory assets 14,773 11,531
Other 48,376 42,642
Total Other Assets 100,031 83,568
Total Assets $1,737,262 $1,726,948
CAPITALIZATION AND LIABILITIES
CAPITALIZATION: (SEE CONSOLIDATED STATEMENTS OF CAPITALIZATION)
Common stock equity $ 664,122 $ 645,513
Preferred stock 40,000 40,000
Long-term debt 546,351 546,373
Total Capitalization 1,250,473 1,231,886
CURRENT LIABILITIES:
Long-term debt due within one year 21 21
Short-term borrowings 33,600 54,200
Accounts payable 29,561 28,253
Accrued interest 8,283 8,048
Accrued taxes 7,710 4,005
Customer deposits 9,841 8,746
Accrued payroll and vacations 10,407 9,921
Other 6,492 5,954
Total Current Liabilities 105,915 119,148
OTHER LIABILITIES:
Accumulated deferred income taxes 252,492 242,674
Accumulated deferred investment tax credits 26,131 30,167
Regulatory tax liability - net 50,904 54,388
Other 51,347 48,685
Total Other Liabilities 380,874 375,914
Total Capitalization and Liabilities $1,737,262 $1,726,948
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
-72-
<PAGE>
Consolidated
Statements of
Capitalization KU Energy Corporation
& Subsidiaries
<TABLE>
<CAPTION>
As of December 31, (in thousands of dollars) 1997 1996
COMMON STOCK EQUITY:
Common stock, without par value, authorized 160,000,000
shares, outstanding 37,817,517 shares in 1997 and
<S> <C> <C>
37,817,878 shares in 1996 $ 308,137 $ 308,140
Capital stock expense and other (595) (595)
Retained earnings 356,580 337,968
Total Common Stock Equity 664,122 645,513
PREFERRED STOCK:
Kentucky Utilities cumulative, without par value,
$100 stated value
4 3/4%, outstanding 200,000 shares 20,000 20,000
6.53%, outstanding 200,000 shares 20,000 20,000
Total Preferred Stock 40,000 40,000
LONG-TERM DEBT:
First Mortgage Bonds:
5.95% Series Q, due June 15, 2000 61,500 61,500
6.32% Series Q, due June 15, 2003 62,000 62,000
5.99% Series S, due January 15, 2006 36,000 36,000
7.92% Series P, due May 15, 2007 53,000 53,000
7.55% Series R, due June 1, 2025 50,000 50,000
8.55% Series P, due May 15, 2027 33,000 33,000
295,500 295,500
First Mortgage Bonds, Pollution Control Series:
7 3/8% Pollution Control Series 7, due May 1, 2010 4,000 4,000
7.45% Pollution Control Series 8, due September 15, 2016 96,000 96,000
6 1/4% Pollution Control Series 1B, due February 1, 2018 20,930 20,930
6 1/4% Pollution Control Series 2B, due February 1, 2018 2,400 2,400
6 1/4% Pollution Control Series 3B, due February 1, 2018 7,200 7,200
6 1/4% Pollution Control Series 4B, due February 1, 2018 7,400 7,400
7.60% Pollution Control Series 7, due May 1, 2020 8,900 8,900
5 3/4% Pollution Control Series 9, due December 1, 2023 50,000 50,000
Variable Rate Pollution Control Series 10,
due November 1, 2024 54,000 54,000
250,830 250,830
Total First Mortgage Bonds 546,330 546,330
8% secured note, due January 5, 1999 (net of current maturity) 21 43
Total Long-Term Debt 546,351 546,373
Total Capitalization $1,250,473 $1,231,886
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
-73-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The consolidated financial statements include the accounts of KU Energy
Corporation (KU Energy or the Company), a holding company, and its wholly
owned subsidiaries, Kentucky Utilities Company (KU) and KU Capital
Corporation (KU Capital). The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. All significant intercompany
balances and transactions have been eliminated from the consolidated
financial statements. Certain amounts from prior periods have been
reclassified to conform with the current year presentation.
KU is a public utility engaged in producing, transmitting and selling
electric energy. KU provides electric service to about 441,200 customers
in over 600 communities and adjacent suburban and rural areas in 77
counties in central, southeastern and western Kentucky and to about
29,000 customers in 5 counties in southwestern Virginia.
KU Capital continues to pursue a core energy strategy for its nonutility
business activities. Under this strategy, targeted opportunities are
energy-related activities that build on the Company's knowledge and
expertise and have the appropriate risk/reward profile.
Regulation
The Company is exempt from regulation as a registered holding company
under the Public Utility Holding Company Act of 1935. KU is subject to
regulation by the Kentucky Public Service Commission (PSC), the Virginia
State Corporation Commission (SCC) and the Federal Energy Regulatory
Commission (FERC). With respect to accounting matters, KU maintains its
accounts in accordance with the Uniform System of Accounts as defined by
these agencies. KU's accounting policies conform to generally accepted
accounting principles applicable to rate regulated enterprises and
reflect the effects of the ratemaking process.
The following is a summary of the components of regulatory assets:
As of December 31, (in thousands of dollars) 1997 1996
Unamortized loss on reacquired debt $ 9,756 $ 10,838
Merger costs 4,062 -
Other 955 693
Regulatory Assets $ 14,773 $ 11,531
KU is currently not earning a return on these regulatory assets.
-74-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Utility Plant
Utility plant is stated at the original cost of construction. The cost
of repairs of property units and replacements of minor items is charged
to maintenance expense as incurred. Property unit replacements are
capitalized and the depreciation reserve is charged with the cost, less
net salvage, of units retired.
Depreciation
Provision for depreciation of utility plant is based on straight-line
composite rates applied to the cost of depreciable property. The rates
approximated 3.5% in 1997, 1996 and 1995.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers highly liquid
investments with a maturity of three months or less from the date of
purchase to be cash equivalents.
Unamortized Loss on Reacquired Debt
KU defers costs (primarily call premiums) arising from the reacquisition
or retirement of long-term debt. Costs related to refinanced debt are
amortized over the lives of the new debt issues. Costs related to
retired debt not refinanced are amortized over the period to the
scheduled maturity of the retired debt.
Operating Revenues and Fuel Costs
Revenues are recorded based on services rendered to customers. KU
accrues an estimate of revenues for electric service furnished from the
meter reading dates to the end of each accounting period. Cost of fuel
used in electric generation is charged to expense as the fuel is
consumed. Fuel adjustment clauses adjust operating revenues for changes
in the level of fuel costs charged to expense. An environmental
surcharge for Kentucky retail customers, implemented in August 1994,
permits the utility to recover certain ongoing 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. See Note 9 of the Notes
to Consolidated Financial Statements, "Environmental Cost Recovery," for
information about environmental surcharge legal proceedings.
Income Taxes
The Company establishes deferred tax assets and liabilities, as
appropriate, for all temporary differences, and adjusts deferred tax
balances to reflect changes in tax rates expected to be in effect during
the periods the temporary differences reverse. Investment tax credits
resulted from provisions of the tax law which permitted a reduction of
the Company's tax liability based on certain construction expenditures.
-75-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Such credits have been deferred in the accounts and are being amortized
as reductions in income tax expense over the life of the related
property. Because of rate regulation, changes in tax rates are deferred
and amortized as the temporary differences reverse.
New Accounting Pronouncements
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. The
Company adopted the statements for year-end 1997 and adoption of the
statements did not have any dilutive impact on the basic current earnings
per share calculation or disclosures.
In June 1997, FASB issued Statements of Financial Accounting Standards
No. 130, Reporting Comprehensive Income, and No. 131, Disclosures
about Segments of an Enterprise and Related Information, effective for
periods beginning after December 15, 1997. These statements do not
affect the accounting recognition or measurement of transactions, but
rather require expanded disclosures regarding financial results. The
Company will adopt these standards in 1998 as required by the FASB.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, in 1996 by continuing to
account for stock compensation in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. If the
Company had recognized compensation expense for awards under its stock-
based compensation plan according to the new standard, net income and
basic earnings per share for the years ended 1997, 1996 and 1995 would
not have been materially different from amounts recorded.
-76-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
2. INCOME TAXES
The accumulated deferred income taxes as set forth in the Consolidated
Balance Sheets arise from the following temporary differences:
<TABLE>
<CAPTION>
As of December 31, (in thousands of dollars) 1997 1996
DEFERRED TAX ASSETS:
Unamortized investment tax credit and other property
<S> <C> <C>
related differences $ 48,364 $ 50,629
Other 21,691 21,627
Less: Amounts included in current assets 3,242 4,723
66,813 67,533
DEFERRED TAX LIABILITIES:
Accelerated depreciation and other property
related differences 305,468 299,379
Other 13,837 10,828
319,305 310,207
NET ACCUMULATED DEFERRED INCOME TAX LIABILITY $ 252,492 $ 242,674
The components of income tax expense are as follows:
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
INCOME TAXES CHARGED TO OPERATING INCOME:
Current - federal $ 38,472 $ 34,255 $ 22,011
- state 8,757 6,585 4,734
47,229 40,840 26,745
Deferred - federal 1,917 5,949 12,809
- state 1,355 3,458 3,943
3,272 9,407 16,752
Deferred investment tax credit - - (71)
50,501 50,247 43,426
INCOME TAXES CHARGED TO OTHER INCOME
AND DEDUCTIONS:
Current - federal (1,609) 2,716 1,868
- state (454) 900 384
(2,063) 3,616 2,252
Deferred - federal 3,426 (3,138) 176
- state 1,117 (378) (9)
4,543 (3,516) 167
Amortization of deferred investment tax credit (4,036) (4,013) (4,024)
(1,556) (3,913) (1,605)
TOTAL INCOME TAX EXPENSE $ 48,945 $ 46,334 $ 41,821
</TABLE>
-77-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
The Company's effective income tax rate, determined by dividing income
taxes by the sum of such taxes and net income, was 36.5% in 1997, 36.1% in
1996 and 35.5% in 1995. The difference between the effective rate and the
statutory federal income tax rate is attributable to the following factors:
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
<S> <C> <C> <C>
FEDERAL INCOME TAX COMPUTED AT 35% $ 46,943 $ 44,899 $ 41,256
Add (Deduct):
State income taxes, net of federal income tax benefit 7,004 6,867 5,884
Amortization of deferred investment tax credit (4,036) (4,013) (4,095)
Other, net (966) (1,419) (1,224)
TOTAL INCOME TAX EXPENSE $ 48,945 $ 46,334 $ 41,821
</TABLE>
3. RETIREMENT BENEFITS
Pensions
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. Benefits under this plan are based
on years of service, final average base pay and age at retirement. The
Company's funding policy is to make such contributions as are necessary
to finance the benefits provided under the plan. The Company's
contributions meet the funding standards set forth in the Employee
Retirement Income Security Act of 1974. The plan assets consist
primarily of common stocks, corporate bonds and U.S. Government
Securities.
The Company also has a Supplemental Security Plan for certain management
personnel. Retirement benefits under this plan are based on years of
service, earnings and age at retirement. The plan has no advance
funding. Benefit payments are made to retired employees or their
beneficiaries from the general assets of the Company.
On May 20, 1997, KU Energy and LG&E Energy Corp. (LG&E Energy) entered
into a Merger Agreement. For information concerning the agreement, see
Management's Discussion and Analysis - The Merger. Under the provisions
of the Supplemental Security Plan, the Merger Agreement constituted a
change-in-control which required that a lump sum present value payment be
made to retired employees entitled to retirement benefits on the date of
the Merger Agreement. On May 30, 1997, lump sum payments totalling
$4.7 million were made to retired employees.
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<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
The reconciliation of the funded status of the retirement plans and the
pension liability recorded by the Company is as follows:
<TABLE>
<CAPTION>
As of December 31, (in thousands of dollars) 1997 1996
<S> <C> <C>
Fair value of plan assets $ 217,424 $ 191,778
Projected benefit obligation (214,657) (194,874)
Plan assets more (less) than projected benefit obligation 2,767 (3,096)
Unrecognized net (gain)/loss from past
experience different than that assumed (19,775) (12,448)
Unrecognized prior service cost 3,635 3,990
Unrecognized net asset (1,350) (1,500)
Regulatory effect recorded 462 201
Pension liability $ (14,261) $ (12,853)
Accumulated benefit obligation (including vested benefits
of $164,498 and $147,103, respectively) $ 168,810 $ 149,814
Components of Net Pension Cost:
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
Service cost (benefits earned during the period) $ 6,728 $ 6,399 $ 6,060
Interest cost on projected benefit obligation 14,680 13,856 13,560
Actual return on plan assets (34,211) (20,798) (27,064)
Net amortization and deferral 19,320 6,568 14,608
Regulatory effect recorded (261) (1,835) (1,595)
Net pension cost $ 6,256 $ 4,190 $ 5,569
Assumptions Used in Determining Actuarial Valuations:
1997 1996 1995
Weighted average discount rate used to
determine the projected benefit obligation 7.00% 7.75% 7.75%
Rate of increase for compensation levels 4.00% 4.75% 4.75%
Weighted average expected long-term rate
of return on assets 8.25% 8.25% 8.25%
</TABLE>
Other Postretirement Benefits
The Company provides certain health care and life insurance benefits to
eligible retired employees and their dependents. The Company accrues,
during the years that employees render service, the expected cost of
providing these benefits upon retirement to such employees, their
beneficiaries and covered dependents. The postretirement health care
plan is contributory for employees who retired after December 31, 1992,
with retiree contributions indexed annually based upon the experience of
retiree medical expenses for the preceding year. Pre-1993 retirees are
not required to contribute to the plan. The Company's employees become
eligible for retiree medical benefits after 15 years of service and
-79-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
attainment of age 55. The life insurance plan is noncontributory and is
based on compensation levels prior to retirement.
In 1993, the Company began funding, in addition to current requirements
for benefit payments, the maximum tax-favored amount allowed through
certain tax deductible funding vehicles. The Company anticipates making
similar funding decisions in future years, but will consider and make
such funding decisions on the basis of tax, regulatory and other relevant
conditions in effect at such times. The plan assets consist primarily of
equity investments.
The reconciliation of the funded status of the plans and the
postretirement benefit liability recorded by the Company is as follows:
<TABLE>
<CAPTION>
As of December 31, (in thousands of dollars) 1997 1996
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees $ (30,777) $(29,313)
Fully eligible active plan participants (9,777) (8,678)
Other active plan participants (31,585) (28,528)
(72,139) (66,519)
Plan assets at fair value 17,763 13,322
Accumulated postretirement benefit obligation
in excess of plan assets (54,376) (53,197)
Unrecognized net (gain)/loss from past
experience different from that assumed (19,697) (20,029)
Unrecognized transition obligation 50,118 53,460
Accrued postretirement benefit liability $ (23,955) $(19,766)
Components of the net periodic postretirement benefit cost are as follows:
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
Service cost (benefits attributed to
service during the period) $ 1,853 $ 1,859 $ 1,918
Interest cost on accumulated postretirement
benefit obligation 4,895 4,751 4,926
Actual return on plan assets (3,569) (1,633) (1,722)
Net amortization and deferral 1,706 103 792
Amortization of transition obligation 3,341 3,341 3,341
Net periodic postretirement benefit cost $ 8,226 $ 8,421 $ 9,255
</TABLE>
-80-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
<TABLE>
<CAPTION>
Assumptions Used in Determining Actuarial Valuations: 1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rate used to
determine the projected benefit obligation 7.00% 7.75% 7.75%
Rate of increase for compensation levels 4.00% 4.75% 4.75%
Weighted average expected long-term rate of
return on assets 7.90% 8.00% 8.00%
</TABLE>
For measurement purposes, a 7.0% annual rate of increase in the per
capita cost of covered health care benefits is assumed for 1998. The
health care cost trend rate is assumed to decrease gradually to 4.25%
through 2004 and remain at that level thereafter over the projected
payout period of the benefits. Increasing the assumed health care cost
trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997, by
$11.5 million (16%) and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for the year
by $1.2 million (18%).
4. COMMITMENTS AND CONTINGENCIES
The effects of certain commitments made by the Company are estimated
below:
<TABLE>
<CAPTION>
(in thousands of dollars) 1998 1999 2000 2001 2002 1998-2002
ESTIMATED CONSTRUCTION
<S> <C> <C> <C> <C> <C> <C>
EXPENDITURES $ 97,200 $ 103,200 $ 120,000 $ 115,600 $ 112,700 $ 548,700
ESTIMATED CONTRACT
OBLIGATIONS:
Fuel 157,800 50,400 9,000 - - 217,200
Purchased power 31,300 30,200 29,500 32,300 32,300 155,600
Operating leases 2,900 2,800 2,800 2,800 2,700 14,000
INDEPENDENT POWER PROJECT
COMMITMENTS 1,000 1,000 1,000 600 - 3,600
FIRST MORTGAGE BOND
MATURITIES:
Series Q $ - $ - $ 61,500 $ - $ - $ 61,500
</TABLE>
Construction Program
KU frequently reviews its construction program and may revise its
projections of related expenditures based on revisions to its estimated
load growth and projections of its future load.
See Management's Discussion and Analysis - Capital Requirements for a
discussion of future construction expenditures including those relating
to construction of peaking units.
Coal Supply
Obligations under KU's coal purchase contracts are stated at prices
-81-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
effective January 1, 1998, and are subject to changes as defined by the
terms of the contracts.
Purchased Power
KU has purchase power arrangements with Owensboro Municipal Utilities
(OMU), Electric Energy, Inc. (EEI), and other parties. Under the OMU
agreement, which expires on January 1, 2020, KU purchases all of the
output of a 400-MW generating station not required by OMU. The amount of
purchased power available to KU during 1998-2002, which is expected to be
approximately 8% of KU's total kWh requirements, is dependent upon a
number of factors including the units' availability, maintenance
schedules, fuel costs and OMU requirements. Payments are based on the
total costs of the station allocated per terms of the OMU agreement,
which generally follows delivered kWh. Included in the total costs is
KU's proportionate share of debt service requirements on $186.6 million
of OMU bonds outstanding at December 31, 1997. The debt service is
allocated to KU based on its annual allocated share of capacity, which
averaged approximately 50% in 1997.
KU has a 20% equity ownership in EEI, which is accounted for on the
equity method of accounting. KU's entitlement is 20% of the available
capacity of a 1,000-MW station. Payments are based on the total costs of
the station allocated per terms of an agreement among the owners, which
generally follows delivered kWh.
KU has several other contracts for purchased power during 1998-2002 of
various MW capacities and for varying periods with a maximum entitlement
at any time of 282 MW.
Independent Power Projects
The Company has agreements with Tenaska, Inc. (a developer of gas-fired
cogeneration and independent power generation projects), and its
affiliates to purchase limited partnership interests in the
identification, development and ownership of certain independent power
projects in North America. Under the agreements, the Company (through
its wholly owned subsidiaries) is a limited partner in three operating
cogeneration projects. The Company also has agreed to participate in
funding the costs associated with identifying and pursuing potential
independent power projects in North America. The remaining funding
commitment over the next several years totals $3.6 million.
Credit Arrangements
KU has aggregate bank lines of credit of $60 million, all of which
remained unused at December 31, 1997. All of these credit lines expire
in December 1999. In support of these lines of credit, KU compensates
the banks by paying a commitment fee.
5. COMMON STOCK
KU Energy is subject to restrictions applicable to all corporations under
-82-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Kentucky law on the use of retained earnings for cash dividends on common
stock. KU is subject to the same restrictions as well as those contained
in Virginia law, its Mortgage Indenture and Articles of Incorporation.
At December 31, 1997, there were no restricted retained earnings.
The Company has a shareholder rights plan designed to provide protection
to shareholders in the event of an unsolicited attempt to acquire the
Company. Under the shareholder rights plan, in certain circumstances,
KU Energy shareholders will receive as a dividend one right for each
share of KU Energy common stock. Should certain events occur (for
instance, an acquirer becomes the beneficial owner of 20 percent or more
of the Company's outstanding voting stock without approval by the
Company, or certain transactions occur following an acquirer becoming the
beneficial owner of 10 percent or more of such voting stock without
Company approval), each right would entitle the holder, other than the
acquirer, to purchase common shares of KU Energy or shares of any company
that acquires KU Energy at a discount from the market value. In certain
circumstances, the Company may redeem the rights at a price of $.01 per
right. The rights expire in February 2002. The rights have been amended
to provide that the Merger will not result in the rights becoming
exercisable.
6. PREFERRED AND PREFERENCE STOCK
KU Energy
As of December 31, 1997, there were 20 million shares of KU Energy
preferred stock, without par value, authorized for issuance.
Kentucky Utilities
Each series of preferred stock is redeemable at the option of KU upon 30
days' written notice as follows:
Redemption Price per Share
Series (plus accrued and unpaid dividends, if any)
4 3/4% $101.00
6.53% (Not redeemable prior to December 1, 2003.)
$103.265 through November 30, 2004, decreasing
approximately $.33 each twelve months thereafter
to $100 on or after December 1, 2013.
As of December 31, 1997, there were 5.3 million shares of KU preferred
stock, having a maximum aggregate stated value of $200 million,
authorized for issuance, of which 400,000 shares were outstanding.
As of December 31, 1997, there were 2 million shares of KU preference
stock, without par value, authorized for issuance.
-83-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
7. SHORT-TERM AND LONG-TERM DEBT
KU's short-term financing requirements are satisfied through the sale of
commercial paper. The weighted average interest rate on the year-end
balance was 6.79% for 1997 and 6.17% for 1996.
Under the provisions for the variable rate Pollution Control Series 10
Bonds, KU can choose between various interest rate options. Currently,
the daily interest rate option is being utilized. The average annual
interest rate on the bonds during 1997 and 1996 was 3.77% and 3.53%,
respectively. The variable rate bonds are subject to tender for purchase
at the option of the holder and to mandatory tender for purchase upon the
occurrence of certain events. If tendered bonds are not remarketed, the
Company has available lines of credit which may be used to repurchase the
bonds.
In January 1996, KU issued $36 million of Series S First Mortgage Bonds
which bear interest at 5.99% and will mature January 15, 2006. The
proceeds were used to redeem $35.5 million of Series K First Mortgage
Bonds which carried a rate of 7 3/8%.
Substantially all of KU's utility plant is pledged as security for the
first mortgage bonds.
8. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
The carrying values of cash and cash equivalents, escrow funds, short-
term borrowings, commercial paper and customer deposits approximate fair
value because of the short maturity of these amounts. The Company's
temporary cash investments are classified as held-to-maturity and are
reported under the caption Cash and Cash Equivalents on the
Consolidated Balance Sheet.
Long-term debt fair values are based on quoted market prices for KU's
first mortgage bonds and on current rates available to KU for debt of the
same remaining maturities for KU's pollution control bonds and promissory
note. The carrying value of long-term debt on December 31, 1997 and 1996
was $546 million, and the estimated fair value was $579 million and
$587 million, respectively.
If the difference between fair value and carrying value of KU's long-term
debt were settled at amounts approximating those above, the anticipated
regulatory treatment (based on the current regulatory environment) would
allow recovery of these amounts in rates over a prescribed amortization
period. Accordingly, any settlement would not have a material impact on
the Company's financial position or results of operations.
-84-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
9. 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 December 31, 1997
were approximately $60 million.
The PSC's order approving the surcharge and the constitutionality of the
surcharge statute were challenged in the Franklin County (Kentucky)
Circuit Court (Circuit Court) in an action brought against KU and the PSC
by the Attorney General of Kentucky and joined by representatives of
consumer groups. In July 1995, the Circuit Court entered a judgment
upholding the constitutionality of the surcharge statute, but vacating
that part of the PSC's July 1994 order which the Circuit Court's judgment
described as retroactively applying the surcharge statute. The Circuit
Court further ordered the case remanded to the PSC for a determination in
accordance with the judgment. KU and the PSC argued that the PSC's July
1994 order did not retroactively apply the statute.
The Kentucky Attorney General and other consumer representatives appealed
to the Kentucky Court of Appeals (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 concerning
the retroactive application of the surcharge statute. 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 December 31, 1997
were approximately $56 million.
In December 1997, the Court of Appeals rendered an opinion upholding the
portion of the Circuit Court's judgment regarding the constitutionality
of the surcharge statute but reversing that portion of the Circuit
Court's judgment concerning the claim of retroactive application of the
statute.
The Kentucky Attorney General and other consumer representatives have
filed motions for discretionary review with the Kentucky Supreme Court
(Supreme Court). The Supreme Court has the discretion to grant or deny
the motions. KU and the PSC have asked the Supreme Court to deny the
motions. KU cannot predict whether the Supreme Court will grant review
of the case or when it will act on the matter.
KU continues to believe that the constitutionality of the surcharge
statute will be upheld. Although KU cannot predict the outcome of the
claim of retroactive application of the statute, it is the position of KU
and the PSC that the July 1994 PSC order did not retroactively apply the
statute. If the Court of Appeals opinion reversing the Circuit Court's
-85-
<PAGE>
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
judgment on the claim of retroactivity is overturned and the Circuit
Court's judgment, as entered, is upheld, KU estimates that the amount it
could be required to refund for surcharge collections through
December 31, 1997, from the implementation of the surcharge would be
approximately $15 million, and from February 1, 1995, would be
approximately $13 million. At this time, KU has not recorded any reserve
for refund.
10. MERGER AGREEMENT WITH LG&E ENERGY
KU Energy and LG&E Energy entered into a Merger Agreement dated May 20,
1997. For information concerning the agreement, see Management's
Discussion and Analysis - The Merger.
11. LEVERAGED LEASES
KU Capital owns equity interests in several leveraged leases for
combustion turbine units leased to utility companies. The leases expire
in 1999. KU Capital's equity investment represents 75% of the aggregate
purchase price of the leases. The remaining 25% represents the
nonrecourse debt provided by lenders at the inception of the leases in
1974. The lenders have been granted, as their sole remedy in the event
of default by the lessees, an assignment of rentals due under the leases
and a security interest in the leased properties.
<TABLE>
<CAPTION>
The following is a summary of the components of KU Capital's net
investment in leveraged leases:
As of December 31, (in thousands of dollars) 1997 1996
<S> <C> <C>
Rentals receivable (net of nonrecourse debt) $ 3,039 $ 3,511
Estimated residual value of leased property 32,707 32,707
Less: Unearned and deferred income 7,594 11,568
Investment in leveraged leases 28,152 24,650
Less: Accumulated deferred income taxes 5,750 4,219
Net investment in leveraged leases $ 22,402 $ 20,431
The following is a summary of the components of income from leveraged
leases:
Year Ended December 31, (in thousands of dollars) 1997 1996 1995
Income before income taxes $ 3,974 $ 3,613 $ 3,306
Income tax expense 1,751 1,890 1,286
Income from leveraged leases $ 2,223 $ 1,723 $ 2,020
</TABLE>
-86-
<PAGE>
Financial
Information
(Unaudited)
KU Energy Corporation
& Subsidiaries
Quarterly financial results for 1997 and 1996 are summarized below.
Generally, quarterly results may fluctuate due to seasonal variations,
changes in fuel costs and other factors.
Net Income and Earnings per Average Common Share for the fourth
quarter of 1996 were reduced by $2.4 million and $.06, respectively,
for the write-off associated with nonutility investments. (For
additional information refer to Management's Discussion and Analysis -
Nonutility Activities.)
<TABLE>
<CAPTION>
Quarter 4th 3rd 2nd 1st
(in thousands of dollars, except for per share amounts)
1997
<S> <C> <C> <C> <C>
Operating Revenues $ 182,546 $ 192,095 $ 162,861 $ 178,908
Net Operating Income 29,543 34,630 19,322 33,136
Net Income 21,713 26,553 12,050 24,863
Earnings per Average
Common Share .57 .70 .32 .66
1996
Operating Revenues $ 174,917 $ 178,269 $ 167,510 $ 190,990
Net Operating Income 27,796 29,820 22,825 35,128
Net Income 17,064 22,493 16,073 26,319
Earnings per Average
Common Share .45 .60 .42 .70
</TABLE>
These quarterly amounts reflect, in the Company's opinion, all adjustments
(including only normal recurring adjustments) necessary for a fair
presentation.
-87-
<PAGE>
Report of
Independent
Public
Accountants
KU Energy Corporation
& Subsidiaries
To the Shareholders of
KU Energy Corporation:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of KU Energy Corporation (a Kentucky
corporation) and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and retained earnings, and cash
flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of KU Energy
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
January 26, 1998
-88-
EXHIBIT 21
SUBSIDIARIES OF KU ENERGY AND KU
State or Jurisdiction
Name of Incorporation
KU Energy Corporation Kentucky
KU Capital Corporation* Kentucky
Kentucky Utilities Company* Kentucky and Virginia
Electric Energy, Inc.** Illinois
* KU Energy Corporation owns 100% of the common stock of KU Capital
Corporation and Kentucky Utilities Company.
** Kentucky Utilities Company owns 20% of the Common Stock of Electric
Energy, Inc.
-89-
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated January 26, 1998, on the financial
statements of KU Energy Corporation incorporated in this Form 10-K and our
report dated January 26, 1998, on the financial statements of Kentucky
Utilities Company included in this Form 10-K into the previously filed Form
S-8 Registration Statement of KU Energy Corporation and Kentucky Utilities
Company (File No. 33-57087).
/s/Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
March 25, 1998
-90-
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR
THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-K ANNUAL REPORT.
</LEGEND>
<CIK> 0000835715
<NAME> KU ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,483,352
<OTHER-PROPERTY-AND-INVEST> 49,713
<TOTAL-CURRENT-ASSETS> 153,879
<TOTAL-DEFERRED-CHARGES> 50,318
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,737,262
<COMMON> 308,137
<CAPITAL-SURPLUS-PAID-IN> (595)
<RETAINED-EARNINGS> 356,580
<TOTAL-COMMON-STOCKHOLDERS-EQ> 664,122
0
40,000
<LONG-TERM-DEBT-NET> 546,351
<SHORT-TERM-NOTES> 33,600
<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> 453,168
<TOT-CAPITALIZATION-AND-LIAB> 1,737,262
<GROSS-OPERATING-REVENUE> 716,410
<INCOME-TAX-EXPENSE> 50,501
<OTHER-OPERATING-EXPENSES> 549,278
<TOTAL-OPERATING-EXPENSES> 599,779
<OPERATING-INCOME-LOSS> 116,631
<OTHER-INCOME-NET> 10,507
<INCOME-BEFORE-INTEREST-EXPEN> 127,138
<TOTAL-INTEREST-EXPENSE> 41,959
<NET-INCOME> 85,179
0
<EARNINGS-AVAILABLE-FOR-COMM> 85,179
<COMMON-STOCK-DIVIDENDS> 66,559
<TOTAL-INTEREST-ON-BONDS> 37,405
<CASH-FLOW-OPERATIONS> 170,138
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMER 31, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE
PERIOD ENDED DECEMBER 31,1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-K ANNUAL REPORT.
</LEGEND>
<CIK> 0000055387
<NAME> KENTUCKY UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,483,352
<OTHER-PROPERTY-AND-INVEST> 12,807
<TOTAL-CURRENT-ASSETS> 137,193
<TOTAL-DEFERRED-CHARGES> 46,528
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,679,880
<COMMON> 308,140
<CAPITAL-SURPLUS-PAID-IN> (595)
<RETAINED-EARNINGS> 304,750
<TOTAL-COMMON-STOCKHOLDERS-EQ> 612,295
0
40,000
<LONG-TERM-DEBT-NET> 546,351
<SHORT-TERM-NOTES> 33,600
<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> 447,613
<TOT-CAPITALIZATION-AND-LIAB> 1,679,880
<GROSS-OPERATING-REVENUE> 716,437
<INCOME-TAX-EXPENSE> 51,690
<OTHER-OPERATING-EXPENSES> 546,339
<TOTAL-OPERATING-EXPENSES> 598,029
<OPERATING-INCOME-LOSS> 118,408
<OTHER-INCOME-NET> 7,003
<INCOME-BEFORE-INTEREST-EXPEN> 125,411
<TOTAL-INTEREST-EXPENSE> 39,698
<NET-INCOME> 85,713
2,256
<EARNINGS-AVAILABLE-FOR-COMM> 83,457
<COMMON-STOCK-DIVIDENDS> 66,559
<TOTAL-INTEREST-ON-BONDS> 37,405
<CASH-FLOW-OPERATIONS> 178,906
<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>
EXHIBIT 99.01
DESCRIPTION OF COMMON STOCK - KU ENERGY
General. The authorized capital stock of KU Energy consists of 20,000,000
shares of preferred stock, without par value, issuable in series of which
none is outstanding, and 160,000,000 shares of common stock, without par
value, of which 37,817,517 were outstanding at December 31, 1997. Kentucky
Utilities, KU Energy's subsidiary, has authorized capital stock of 5,300,000
shares of Cumulative Preferred Stock, without par value, issuable in series,
of which 400,000 shares, $100 per share stated value, were outstanding at
December 31, 1997; 2,000,000 shares of Preference Stock, without par value,
issuable in series, of which no shares are outstanding; and 80,000,000
shares of common stock, of which 37,817,878 shares, all owned by KU Energy,
were outstanding at December 31, 1997. Kentucky Utilities has issued and
outstanding $546,330,000 in aggregate principal amount of First Mortgage
Bonds of various series under its First Mortgage Indenture (Kentucky
Utilities' Mortgage Indenture).
The following statements, unless the context otherwise indicates, are brief
summaries of the substance or general effect of certain provisions of KU
Energy's Amended and Restated Articles of Incorporation, as amended, (KU
Energy's Articles) or the Amended and Restated Articles of Incorporation, as
amended, of Kentucky Utilities' and the resolutions or amendments
establishing series of Kentucky Utilities Preferred Stock and Preference
Stock (collectively, Kentucky Utilities' Articles), and of Kentucky
Utilities' Mortgage Indenture securing its outstanding First Mortgage Bonds.
Such statements make use of defined terms and are not complete; they are
subject to all the provisions of KU Energy's Articles, Kentucky Utilities'
Articles or Kentucky Utilities' Mortgage Indenture, as the case may be.
Dividend Rights. Dividends on Common Stock of KU Energy will depend in the
foreseeable future primarily upon the earnings, financial condition and
capital requirements of Kentucky Utilities. The ability of KU Energy to pay
dividends on its Common Stock would be limited to the extent Kentucky
Utilities is limited in its right to pay dividends on or acquire Kentucky
Utilities Common Stock.
Whenever dividends on all outstanding shares of Kentucky Utilities Preferred
and Preference Stock of all series for all previous quarter-yearly dividend
periods and the current quarter-yearly dividend period shall have been paid
or declared and set apart for payment, and whenever all amounts required to
be set aside for any sinking fund for the redemption or purchase of shares
of the Kentucky Utilities Preferred or Preference Stock for all previous
periods or dates shall have been paid or set aside, and subject to the
limitations summarized below, the Kentucky Utilities Board of Directors may
declare dividends on Kentucky Utilities Common Stock out of any surplus or
net profits of Kentucky Utilities legally available for that purpose.
Kentucky Utilities' Mortgage Indenture provides, in effect, that, so long as
certain currently outstanding series of First Mortgage Bonds are
outstanding, Kentucky Utilities will not declare or pay any dividends (other
than in stock) on Kentucky Utilities Common Stock, or make any other
distribution on or purchase any Kentucky Utilities Common Stock, unless the
total amount charged or provided for maintenance, repairs and depreciation
of the mortgaged properties subsequent to May 1, 1947, plus the surplus
earned during the period and remaining after any such dividend, distribution
or purchase, shall equal at least 15% of Kentucky Utilities' total utility
operating revenues for the period, after deducting from such revenues the
cost of electricity purchased for resale. Kentucky Utilities' Articles
-91-
<PAGE>
provide in effect that, so long as any Kentucky Utilities Preferred Stock is
outstanding, the total amount of all dividends or other distributions on
Kentucky Utilities Common Stock (other than in stock) that may be paid, and
purchases of Kentucky Utilities Common Stock that may be made, during any
12-month period shall not exceed (a) 5% of Kentucky Utilities' net income
(as defined) for the 12-month period next preceding each such dividend,
distribution or purchase, if the ratio of "common stock equity" to "total
capital" (as defined) is 20% to 25%, or (b) 50% of such net income if such
ratio is less than 20%. If such ratio is in excess of 25%, no such
dividends may be paid or distributions or purchases made that would reduce
such ratio to less than 25% except to the extent permitted by clauses (a)
and (b). At December 31, 1997, no amount of retained earnings was
restricted as to the payment of dividends on Kentucky Utilities Common Stock
under the foregoing provisions of Kentucky Utilities' Mortgage Indenture or
Kentucky Utilities' Articles.
Voting Rights. The shares of KU Energy's Common Stock entitle the holders
thereof to one vote for each share upon all matters upon which shareholders
have the right to vote, subject to any special voting rights, if any, which
may vest in the holders of KU Energy's preferred stock. KU Energy's
preferred stock may be issued in series, each of which will be identical
except for such relative rights and preferences with respect to the matters
listed in the next sentence as may be determined by the Board of Directors
of KU Energy. The Board of Directors of KU Energy may determine, for each
series of preferred stock, the number of shares and the rate of dividend (or
method of determining dividends) to be borne by the shares of each such
series, the voting rights, if any, the stated value, if any, and the
preferences with respect to distributions including dividends and
distributions upon dissolution of shares of such series, the price or prices
at which, and other terms and conditions on which, shares of each series may
be redeemed, and the sinking fund provisions, if any, for the redemption or
purchase of shares of each such series, the conversion privileges, if any,
and may change redeemed or re-acquired shares of any such series into shares
of another series, subject, however, to such restrictions and limitations as
are or may be, from time to time provided by law or contained in KU Energy's
Articles. If a quorum consisting of a majority of the shares outstanding
and entitled to vote on the matter is present (either in person or by proxy)
at a shareholders' meeting, action on a matter (other than the election of
directors) by a voting group shall be approved if the votes cast within the
voting group favoring the action exceed the votes cast opposing the action,
(i) except as described under "Board of Directors" below, (ii) except that
directors are elected by cumulative voting and (iii) unless a greater vote
is required by law.
Shareholder Rights. KU Energy has a shareholder rights plan designed to
provide protection to shareholders in the event of an unsolicited attempt to
acquire KU Energy. Under the shareholder rights plan, in certain
circumstances, KU Energy shareholders will receive as a dividend one right
for each share of KU Energy common stock. Should certain events occur (for
instance, an acquirer becomes the beneficial owner of 20 percent or more of
KU Energy's outstanding voting stock without approval by KU Energy or
certain transactions occur following an acquirer becoming the beneficial
owner of 10 percent or more of such voting stock without KU Energy
approval), each right would entitle the holder, other than the acquirer, to
purchase common shares of KU Energy or shares of any company that acquires
KU Energy at a discount from the market value. In certain circumstances, KU
Energy may redeem the rights at a price of $.01 per right. The rights
expire in February 2002. The rights have been amended to provide that the
Merger will not result in the rights becoming exercisable.
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Preemptive Rights. Holders of KU Energy's securities have no preemptive
subscription rights.
Liquidation Rights. In the event of any liquidation or dissolution of KU
Energy, holders of Common Stock are entitled to receive the net assets of KU
Energy except to the extent of the preferential rights, if any, of the
holders of KU Energy's preferred stock as may be established from time to
time in accordance with KU Energy's Articles.
Board of Directors. KU Energy's Bylaws provide for a Board of Directors
comprised of from nine to eleven members as determined from time to time by
the Board. The Board currently has ten members. KU Energy's Articles
provide for the classification of the Board of Directors into groups with
directors being elected for three-year terms. Under KU Energy's Articles,
the article providing for the classification of the Board of Directors may
not be altered, amended or repealed and no provision inconsistent with such
article may be adopted without the vote of 80 percent of the shares entitled
to vote generally, voting as a class.
Cumulative Voting. KU Energy's Articles provide for the election of
directors by cumulative voting.
Amendments to the Registrant's Articles. Except as set forth under "Board
of Directors" above, KU Energy's Articles may be amended or repealed, if the
number of shares voted in favor of such amendment exceeded the number of
shares voted against such amendment by each voting group or, if such
amendment would give rise to dissenters' rights, by the affirmative vote of
the holders of a majority of the outstanding shares of KU Energy entitled to
vote on such amendment (which would include the Common Stock and any series
of preferred stock which, by its terms or applicable law, was so entitled to
vote), unless any class or series of shares is entitled to vote as a class
in respect thereof, in which event the proposed amendment must be approved
in addition by the required vote of each class or series of shares entitled
to vote as a class in respect thereof.
Call of Special Meetings. KU Energy's Articles provide that no meeting of
shareholders may be called by shareholders unless called by the holders of
at least 51 percent of all the votes entitled to be cast on each issue
proposed to be considered at the special meeting.
Miscellaneous. The Transfer Agents for the Common Stock are Illinois Stock
Transfer Company, Chicago, Illinois, and Harris Trust and Savings Bank,
Chicago, Illinois; and the Registrar is Harris Trust and Savings Bank,
Chicago, Illinois.
The outstanding shares of Common Stock of KU Energy are fully paid and
nonassessable.
KU Energy reserves the right to increase, decrease or reclassify its
authorized capital stock or any class or series thereof, and to amend or
repeal any provisions of KU Energy's Articles, in the manner prescribed by
law, subject to the limitations described in KU Energy's Articles; and all
rights conferred on shareholders in KU Energy's Articles are subject to this
reservation.
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EXHIBIT 99.02
DESCRIPTION OF COMMON STOCK - KU
General. The authorized capital stock of KU consists of 5,300,000 shares of
Preferred Stock, cumulative, without par value, issuable in series, of which
400,000 shares were outstanding at December 31, 1997, 2,000,000 shares of
Preference Stock, cumulative, without par value, issuable in series, and
80,000,000 shares of Common Stock, without par value of which 37,817,878
shares were outstanding (all of which were held by KU Energy) at
December 31, 1997. No shares of Preference Stock are issued or outstanding.
The following statements, unless the context otherwise indicates, are brief
summaries of the substance or general effect of certain provisions of KU's
Amended and Restated Articles of Incorporation and resolutions and
amendments establishing series of Preferred Stock (collectively, the
Articles) and of KU's Mortgage Indenture, as amended, securing its first
mortgage bonds (Indenture). The statements make use of defined terms, are
not complete and do not give effect to statutory or common law.
Dividend Rights. The Board of Directors of KU may declare dividends on the
Common Stock out of any surplus or net profits of KU legally available for
the purpose, provided full cumulative dividends on the Preferred Stock and
the Preference Stock for the current and all past quarterly dividend periods
shall have been paid or declared and set apart for payment and KU is not in
arrears in its sinking fund obligations in respect of any shares of
Preferred Stock or Preference Stock.
Limitations on Dividends on Common Stock. The Indenture provides that, so
long as certain currently outstanding series of First Mortgage Bonds are
outstanding, KU will not declare or pay any dividends on its Common Stock or
make any other distribution on or purchase any of its Common Stock unless
the amounts expended by KU for maintenance and repairs and provided for
depreciation subsequent to April 30, 1947, plus KU's earned surplus
(retained earnings) for such period and remaining after any such payment,
distribution or purchase, shall aggregate not less than 15% of the gross
operating revenues of KU for the period. The Articles provide, in effect,
that, so long as any of the Preferred Stock is outstanding, the total amount
of all dividends or other distributions on Common Stock and purchases of
such stock that may be paid or made during any 12-month period shall not
exceed (a) 75% of the "net income available for dividends on common stock"
if the ratio of "common stock equity" to "total capital" (each as defined)
of KU shall be 20% to 25%, or (b) 50% of such net income if such ratio shall
be less than 20%. When such ratio is 25% or more, no such dividends,
distributions or purchases may be paid or made which would reduce such ratio
to less than 25% except to the extent permitted by clauses (a) and (b)
above. As of December 31, 1997, no amount of retained earnings was
restricted under the Indenture or Articles.
Voting Rights. Each share of Common Stock is entitled to one vote on each
matter voted on at stockholders' meetings, except as otherwise provided in
the Articles, and to cumulative voting rights in the election of directors.
Shares of Preferred Stock and Preference Stock are not entitled to vote for
the election of directors or in respect of any other matters, except as
expressly provided in the Articles or as may be required by law. The
Articles give to holders of Preferred Stock and Preference Stock certain
special voting rights designed to protect their interest with respect to
specified corporate action. In addition, in certain events relating to
dividends in default on Preferred Stock, holders of Preferred Stock as a
class are entitled to elect a majority of the full Board of Directors; and
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in certain events relating to dividends in default on the Preference Stock,
holders of Preference Stock as a class are entitled to elect two directors.
Liquidation Rights. Upon the liquidation or dissolution of KU, the holders
of Preferred Stock and the Preference Stock are entitled to be paid
designated amounts out of the net assets of KU in preference to the Common
Stock. After such payment to holders of Preferred Stock and Preference
Stock, the remaining assets and profits shall be distributed to the holders
of Common Stock.
Board of Directors. KU's Bylaws provide for a Board of Directors comprised
of from nine to eleven members as determined from time to time by the Board.
The Board currently has ten members. KU's Articles provide for the
classification of the Board of Directors into groups with directors being
elected for three-year terms subject to certain rights of holders of
Preferred Stock and Preference Stock to elect directors.
Preemptive Rights. Holders of KU's Stock have no preemptive right to
subscribe for stock or securities of KU.
Call of Special Meetings. KU's Articles provide that no meeting of
shareholders (except for certain meetings called by holders of Preferred
Stock or Preference Stock) may be called by shareholders unless called by
the holders of at least 51 percent of all the votes entitled to be cast on
each issue proposed to be considered at the special meeting.
Miscellaneous. The outstanding shares of Common Stock of KU are fully paid
and non-assessable.
Under Kentucky and Virginia law, KU may amend the Articles to increase,
decrease or adjust its capital stock or any class thereof or otherwise amend
any provision of the Articles or any amendment thereto, in the manner
permitted by law, subject, however, to the limitations prescribed in the
Articles; and all rights conferred on stockholders in the Articles or any
amendment thereto are subject to the foregoing.
The Transfer Agents of the Common Stock are Illinois Stock Transfer Company,
Chicago, Illinois, and Harris Trust and Savings Bank, Chicago, Illinois; and
the Registrar is Harris Trust and Savings Bank, Chicago, Illinois.
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EXHIBIT 99.03
<PAGE>
instructions have been received (i.e., a ''broker non-vote''), will be counted
to determine the presence of a quorum but will not be present for other
purposes and will not be the equivalent of a ''no'' vote on a proposition.
Shares represented by a proxy with instructions to abstain on a matter will be
counted in determining whether a quorum is in attendance. An abstention is not
the equivalent of a ''no'' vote on a proposition.
Shareholders may vote either in person or by duly authorized proxy. The
giving of a proxy will not prevent a shareholder from voting in person at the
meeting. A proxy may be revoked by a shareholder at any time prior to the
voting thereof by giving written notice to the Secretary of the Company prior
to such voting. All shares entitled to vote and represented by effective
proxies on the enclosed form, received by the Company, will be voted at the
meeting (or any adjourned session thereof) in accordance with the terms of
such proxies.
Each Participant in the Company's Automatic Dividend Reinvestment and Stock
Purchase Plan (the ''Reinvestment Plan''), Kentucky Utilities' Employee Stock
Ownership Plan (the ''ESOP'') or the Kentucky Utilities Employee Savings Plan
(the ''Savings Plan'') will receive a form of proxy by which such Participant
may direct the agent or trustee under such Plans as to the manner of voting
shares credited to the Participant's accounts under such Plans. Shareholders
of record who are participants in the Reinvestment Plan will receive only one
form of proxy for their certificated shares and those shares which they may
have acquired through reinvested dividends. A Participant of any of such Plans
wishing to vote in person at the meeting may obtain a proxy for shares
credited to his account under such Plans by making a written request therefor
by April 23, 1998, as follows: for the Reinvestment Plan, to George S. Brooks
II, Secretary of the Company, at the address stated on page 1; for the ESOP,
to Banc One Kentucky, PO Box 32500, Louisville, Kentucky 40232, Attention:
Barbara J. Steele, Trust Investment Division; and for the Savings Plan, to CG
Trust Company, c/o Cigna Retirement and Investment Services, Routing Code M-
122, 350 Church Street, Hartford, Connecticut 06103, Attention: Bruce
Beckmann.
ELECTION OF DIRECTORS
General
In light of the pending Merger, which will result in the Company merging
into LG&E Energy, the Board of Directors has elected to temporarily waive its
retirement policy with respect to two directors. Mr. Harry M. Hoe, who was to
have retired from the Board in 1998, will stand for reelection. Mr. Milton W.
Hudson, who had planned to retire from the Board in 1998, will continue to
serve. It is anticipated that Mr. Hoe and Mr. Hudson will each resign from the
Board of Directors at the earlier of the consummation of the Merger or the
1999 Annual Meeting of Shareholders.
Three directors are to be elected at the meeting. Barring unforeseen
circumstances and in the absence of contrary directions, the proxies solicited
herewith will be voted for the election of Carol M. Gatton, Harry M. Hoe and
Michael R. Whitley, as directors of the Company. Except as noted above, the
nominees will hold office until the 2001 Annual Meeting of Shareholders of the
Company or until their respective successors shall have been duly elected and
qualified. The proxies may also be voted for a substitute nominee or nominees
in the event any one or more of said persons shall be unable to serve for any
reason or be withdrawn from nomination, an occurrence not now anticipated.
Except as otherwise indicated, each nominee has been engaged in his present
principal occupation for at least the past five years. All information
regarding share ownership is as of January 31, 1998.
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The following information is given with respect to the nominees for
election as directors:
LOGO
Carol M. Gatton, 65, is Chairman of Area Bancshares, Inc., a bank
holding company in Owensboro, Kentucky. He is also involved in
real estate ventures and automobile dealerships. Mr. Gatton
beneficially owns 1,000 shares of Common Stock of the Company.
LOGO
Harry M. Hoe, 72, is President and a director of J. R. Hoe & Sons,
Inc., Middlesboro, Kentucky, a foundry and casting company. He has
been a director of the Company since 1991 and a director of
Kentucky Utilities since 1979. Mr. Hoe beneficially owns 17,623
shares of Common Stock of the Company, which include 5,677 shares
held solely by his wife.
LOGO
Michael R. Whitley, 55, has been Chairman, President and Chief
Executive Officer of the Company and Kentucky Utilities since
August 1, 1995. He was President and Chief Operating Officer of
the Company and Kentucky Utilities from November 1, 1994 to August
1, 1995. He was Executive Vice President of these companies from
August 1, 1994 to November 1, 1994. Before this period, he had
been a Senior Vice President of the Company since 1988 and of
Kentucky Utilities since 1987. Mr. Whitley was Secretary of the
Company from 1988 until 1992 and of Kentucky Utilities from 1978
until 1992. He is a director of PNC Bank Kentucky, Inc., a wholly
owned subsidiary of PNC Bank Corp., Inc. Mr. Whitley has been a
director of the Company and Kentucky Utilities since 1992. He
beneficially owns 34,748 shares of Common Stock of the Company,
which include 6,300 shares held jointly with his wife and 964
shares held solely by his wife.
Information with respect to those directors whose terms are not expiring is
as follows:
LOGO
Mira S. Ball, 63, is Secretary-Treasurer and Chief Financial
Officer of Ball Homes, Inc., a single-family residential developer
and property management company. She has been a director of the
Company and Kentucky Utilities since 1992. Ms. Ball beneficially
owns 6,123 shares of Common Stock of the Company. Her term expires
in 1999.
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<PAGE>
LOGO
Milton W. Hudson, 70, has been an economic consultant (Washington,
DC) since 1991. He was Managing Director and Senior Economic
Advisor of Morgan Guaranty Trust Company of New York from January
1990 until his retirement in June 1991. He has been a director of
the Company since 1991 and a director of Kentucky Utilities since
1990. Mr. Hudson beneficially owns 1,274 shares of Common Stock of
the Company. His term expires in 2000.
LOGO
John T. Newton, 67, retired in 1995 as Chairman of the Board and
Chief Executive Officer of the Company and Kentucky Utilities,
positions he had held since 1987. He had also been President of
these companies from 1987 to November 1, 1994. Mr. Newton has been
a director of the Company since 1988 and a director of Kentucky
Utilities since 1974. He beneficially owns 32,653 shares of Common
Stock of the Company, which include 7,668 shares held jointly with
his wife and 5,000 shares held solely by his wife. His term
expires in 2000.
LOGO
Frank V. Ramsey, Jr., 66, is President and Director of Dixon Bank,
Dixon, Kentucky, and a farm owner and operator. He has been a
director of the Company since 1991 and a director of Kentucky
Utilities since 1986. Mr. Ramsey beneficially owns 1,400 shares of
Common Stock of the Company. His term expires in 1999.
LOGO
William L. Rouse, Jr., 65, was Chairman of the Board and Chief
Executive Officer and a director of First Security Corporation of
Kentucky, a multi-bank holding company, prior to his retirement in
1992. Mr. Rouse is a director of Ashland, Incorporated. He has
been a director of the Company since 1991 and a director of
Kentucky Utilities since 1989. Mr. Rouse beneficially owns 1,000
shares of Common Stock of the Company. In addition, Mr. Rouse's
account under the Directors Deferred Compensation Plan described
below has the equivalent of 7,004 shares of Common Stock. His term
expires in 2000.
LOGO
Charles L. Shearer, Ph.D., 55, is President of Transylvania
University, Lexington, Kentucky. He has been a director of the
Company since 1991 and a director of Kentucky Utilities since
1987. Dr. Shearer beneficially owns 1,527 shares of Common Stock
of the Company, which include 200 shares held solely by his wife
and 16 shares held by his children. His term expires in 1999.
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LOGO
Lee T. Todd, Jr., Ph.D., 51, is President and Chief Executive
Officer of DataBeam Corporation, a Kentucky-based, high-technology
firm. He was elected a director of the Company and Kentucky
Utilities in 1995. Dr. Todd beneficially owns 500 shares of Common
Stock of the Company. His term expires in 1999.
Voting Securities Beneficially Owned by Directors, Nominees and Executive
Officers
The directors, nominees and executive officers of the Company and Kentucky
Utilities owned beneficially at January 31, 1998 an aggregate of 219,869
shares of Common Stock of the Company, representing in the aggregate 0.6% of
such stock.
Meetings and Committees of the Board of Directors
All members of the Company's Board of Directors are currently members of
Kentucky Utilities' Board of Directors. The Board of Directors of the Company
and the Board of Directors of Kentucky Utilities have each established the
following six committees: the Executive Committee, the Audit Committee, the
Compensation Committee, the Finance Committee, the Long-Range Planning
Committee and the Nominating and Corporate Governance Committee. Committee
members are the same for committees of the Company and committees of Kentucky
Utilities.
During 1997, the Board of Directors of the Company held 20 meetings
(including Committee meetings), and the Board of Directors of Kentucky
Utilities held 21 meetings (including Committee meetings).
During 1997, each current director attended 100% of the meetings of the
Company's and Kentucky Utilities' Board of Directors and applicable Committee
meetings.
The members of the Executive Committee are Messrs. Hoe, Ramsey, Rouse,
Shearer and Whitley. Neither the Company's nor Kentucky Utilities' Executive
Committee met during 1997. The Executive Committee has the full power of the
Board between meetings of the Board, except as provided by law.
The members of the Audit Committee are Ms. Ball and Messrs. Gatton, Hoe,
Shearer and Todd. The Company's Audit Committee met two times in 1997, as did
Kentucky Utilities' Audit Committee. The Audit Committee selects and engages
(and may discharge) the Company's independent auditors; approves or
disapproves each professional service or type of service to be provided by the
auditors; meets with the auditors regarding the scope and results of the
annual audit and of internal accounting procedures and practices; reviews any
recommendations which may be made by the independent auditors; and generally
exercises supervision over all matters relating to audit functions, making
periodic reports to the Board.
The members of the Compensation Committee are Messrs. Gatton, Hudson,
Ramsey, and Rouse. The Company's Compensation Committee met four times in
1997, and Kentucky Utilities' Compensation Committee met five times. The
Compensation Committee reviews compensation for all officers, directors' fees
and fees paid to directors for membership on the various committees of the
Board; makes recommendations to the Board at least annually with respect to
appropriate levels of compensation and fees; and administers certain benefit
plans.
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Equity Ownership Guidelines
Effective January 1, 1998, under the Company's Equity Ownership Guidelines
adopted by the Board of Directors of the Company, directors and executives of
the Company and Kentucky Utilities are encouraged to make a minimum personal
investment in Company Common Stock. The minimum guidelines may be satisfied in
various ways including through plans maintained by the Company or a
subsidiary. A director's or executive's compliance with the guidelines will be
taken into account by the Compensation Committee in the grant or payment of
awards to the director or executive under incentive or other plans maintained
by the Company. The Board of Directors of the Company may amend or terminate
the Equity Ownership Guidelines at any time or from time to time.
Directors' Compensation
Each director of the Company is also a director of its principal
subsidiary, Kentucky Utilities. Each director who is not an employee of the
Company or Kentucky Utilities is paid an annual retainer of $20,000. This
retainer is reduced by any retainer paid from a Company subsidiary. Kentucky
Utilities pays non-employee directors an annual retainer of $15,000. Thus, the
net annual Company retainer paid to such directors is $5,000 but the aggregate
paid for serving on both Boards is $20,000. An additional annual retainer of
$1,200 is paid to each non-employee director who is a chairperson of a
committee of either Board. However, if a non-employee director is a
chairperson of the same Board committee of the Company and Kentucky Utilities,
only one such additional annual retainer is paid.
In addition to an annual retainer, the Company and Kentucky Utilities pay
each non-employee director a $1,000 fee for each meeting of a Board or a
particular committee attended; provided that if the Boards of the Company and
Kentucky Utilities meet on the same day, only one $1,000 fee is paid for both
meetings. Similarly, if the same committee of the Boards of the Company and
Kentucky Utilities meets on the same day, only one $1,000 fee is paid for both
meetings. Out-of-pocket travel expenses are paid to directors for all meetings
attended.
The Compensation Committees have recommended that the total compensation to
Directors for service on the Board of the Company and Kentucky Utilities be
revised, effective March 1, 1998, to be as follows: the annual retainer,
$28,000 (of which $21,000 would relate to Kentucky Utilities as described
above); the committee chairperson fee, $2,000; the Board meeting fee, $1,100;
and the committee meeting fee, unchanged. The Boards may not act on such
proposal or may modify the proposal upon adoption.
All eligible directors of the Company and Kentucky Utilities are entitled
to participate in the Director Retirement Retainer Programs (the ''Director
Retirement Plans'') of the Company and Kentucky Utilities. Directors who are
not, and have not previously been, an officer of Kentucky Utilities, the
Company, or their affiliated companies (''outside directors'') are eligible to
participate. An outside director who is 65 years of age or older and has
completed at least five consecutive years of service on the Company's and/or
Kentucky Utilities' Board will receive, upon termination of service from a
Board for any reason other than death, an annual retirement benefit equal to
the annual retainer paid to such Board's directors in effect as of such
termination, payable monthly over a period of years equal to the number of
full years such director served on the Board, but not in excess of 10 years.
Such payments cease, however, if the director dies before all such payments
are made. The annual retainer in effect upon the director's termination from a
Board will generally be calculated as described in the first paragraph under
this caption (excluding the additional annual retainer for chairpersons). In
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the event of a change in control of the Company or Kentucky Utilities, any
person then receiving a retirement benefit would be paid, within 30 days of
the change in control, a lump-sum payment equal to the discounted present
value of all then unpaid installments of the director's retirement benefit. In
the event of a change in control, each outside director in office immediately
prior to such change in control will be eligible to receive an accelerated
retirement benefit if the director terminates service from a Board for any
reason other than death within three years of the date of the change in
control. Such accelerated retirement benefit would be paid in a lump sum
within 30 days of such termination and would be equal to the discounted
present value of the retirement benefit which such director would have
received if the director had retired from the Board at age 70 (or for certain
directors, 72) and lived to collect the full benefit otherwise payable under
the applicable Director Retirement Plan. Such benefit would be based on the
higher of the annual retainer in effect immediately prior to the change in
control or immediately prior to such director's termination of service. Change
in control has the meaning set out under ''Change In Control Arrangements''
below. The consummation of the Merger will constitute a ''change in control''
under the Director Retirement Plans.
Directors may elect to have all or a specified portion of their directors'
fees deferred under the Director Deferred Compensation Plans (the ''Director
Deferred Compensation Plans'') of the Company and Kentucky Utilities, such
elections to be made in accordance with and subject to the terms of the
Director Deferred Compensation Plans. Amounts deferred will be maintained in
unfunded accounts for each participant, which, based on a choice made by the
director, either: (1) bear interest at a floating rate based upon the average
prime rate charged by banks as reported in the Federal Reserve Bulletin; or
( 2 ) experience appreciation (depreciation) and earnings based on a
hypothetical investment in the Company's Common Stock. Amounts deferred under
the Director Deferred Compensation Plans will be paid to the participant upon
termination as a director for any reason other than death based on a choice
made by the Director as permitted by the Director Deferred Compensation Plans
in a single payment or, with interest, quarterly over a period of not to
exceed 40 calendar quarters, or, with interest, annually over a period of not
to exceed 10 years. In the event of a participant's death, payment of any
remaining balance of credited amounts will be made in a single payment to a
designated beneficiary. In certain cases, directors may receive a distribution
of deferred amounts in the event of substantial financial hardship. In the
event of a change in control of the Company or Kentucky Utilities, any
director who terminated prior to the change in control whose deferred amounts
have not been distributed would receive, within 15 days of the change in
control, a lump sum payment of the undistributed amounts. In the event of a
change in control, each director who terminates thereafter within three years
of the date of the change in control would be paid, within 15 days after
termination, a lump sum payment of the director's deferred amounts. The
consummation of the Merger will also constitute a ''change in control'' under
the Director Deferred Compensation Plans.
The Compensation Committees have recommended a proposal to eliminate the
Director Retirement Plans for current and future directors. Under this
proposal, current participating directors would be entitled to a lump sum
benefit based on the present value of the Director's retirement benefits
calculated as if a ''change in control'' had occurred and the Director had
terminated service immediately thereafter. Such lump sum amount would be
credited to the Director Deferred Compensation Plans in the hypothetical
Company Common Stock account (except for certain retiring directors who may
make the election described in the preceding paragraph). The Boards may not
act on such proposal or may modify the proposal upon adoption.
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Executive Compensation
General. The following table contains information with respect to the
compensation paid by (or earned from) the Company and Kentucky Utilities, for
all services rendered during 1995 through 1997 in all capacities, to the Chief
Executive Officer and the other four most highly compensated executive
officers of the Company and Kentucky Utilities:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Other Annual Compensation All Other
Salary Bonus Compensation Payouts Compensation
<S> <C> <C> <C> <C> <C>
Name and Principal Position Year ($) ($)(1) ($)(2) ($)(3) ($)(4)
Michael R. Whitley; 1997 444,427 186,173 2,477 50,967 4,750
Chairman of the Board, President 1996 387,737 99,741 2,164 79,798 6,242
& Chief Executive Officer & 1995 318,467 73,476 116 0 4,686
Director of the Company &
Kentucky Utilities
O. M. Goodlett; 1997 239,153 69,828 1,738 58,406 4,750
Senior Vice President of the 1996 231,840 51,994 0 52,560 5,181
Company & Kentucky Utilities 1995 210,195 44,550 0 0 4,500
James W. Tipton; 1997 237,340 83,166 2,854 64,829 4,750
Senior Vice President 1996 230,750 38,304 2,004 77,882 5,670
of the Company 1995 227,591 39,942 1,445 0 4,667
Wayne T. Lucas; 1997 215,792 69,555 1,271 29,576 4,750
Senior Vice President 1996 208,137 49,043 749 33,124 6,361
of Kentucky Utilities 1995 194,553 42,160 711 0 4,692
Robert M. Hewett; 1997 183,727 45,033 1,768 29,576 4,750
Senior Vice President 1996 164,681 32,052 363 33,124 4,500
of Kentucky Utilities 1995 157,396 28,054 15 0 4,500
</TABLE>
(1) Bonuses are paid under the Incentive Plans. Any bonus earned but
deferred under the Executive Deferred Compensation Plans is included in
the Table.
(2) Other annual compensation consists of amounts for group term life
insurance and related taxes and above-market-rate interest earned on
deferred compensation during 1997 and paid in 1997.
(3) Reflects payouts under the Performance Share Plans described
under "Report of Compensation Committee on Executive Compensation"
above. Performance goals were not met, and thus no payouts were made for
the Performance Cycle that relates to 1995 in the table above. Amounts
shown for 1996 and 1997 reflect a payout, in the form of restricted shares
of the Company's Common Stock, of a percentage of the contingent grant
for the applicable Performance Cycle as follows: 1996, 100%; 1997,
100% for the Kentucky Utilities Performance Share Plan and 75% for
the KUE Performance Share Plan. Such restricted stock was subject to
forfeiture if the officer terminated employment prior to January 2, 2003
(for amounts shown for 1996) and January 2, 2000 (for amounts shown
for 1997) for any reason other than retirement, disability or death.
In the event of a change in control, however, the restrictions lapse
immediately. The execution of the Merger
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Agreement constituted a "change in control" for this purpose and all
restrictions on these shares lapsed in 1997.
(4) All other compensation for 1995 and 1996 includes: (a) above-
market-rate interest earned on deferred compensation; and (b) the
employer matching contribution made to the officer's account in the
401(k) Employee Savings Plan. Such amounts for 1997 relate only to employer
matching contributions to 401(k) Employee Savings Plan.
Long-Term Incentive Awards. Performance Shares contingently awarded
under the Long-Term Incentive Plan in 1997 are reported in the
Long-Term Incentive Plan awards table below. A description of how awards
are determined is presented under "Report of Compensation Committee
on Executive Compensation." A description of the scale by which
performance targets are set follows the table.
LONG-TERM INCENTIVE PLAN-AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Performance of
Shares, Other Period
Units or Until Estimated Future Payouts Under
Other Rights Maturation Non-Stock Price-Based Plans(2)
<S> <C> <C> <C> <C> <C>
Name (#) or Payout(1) Threshold($) Target ($) Maximum ($)
Michael R. Whitley 6,835 3 0 214,619-268,274 321,929
James W. Tipton . . 2,350 3 0 73,790-92,238 110,685
O.M. Goodlett . . . 2,270 3 0 71,278-89,098 106,917
Wayne T. Lucas 2,030 3 0 63,742-79,678 95,613
Robert M. Hewett . 1,075 3 0 33,755-42,194 50,633
(1)Number of years in Performance Cycle.
(2)See description below for the scale that determines which amount may be applicable.
Amounts are calculated based on the price of the Company's Common Stock on December 31,
1997.
</TABLE>
For the Performance Cycle commencing in 1997, payouts of contingent
grants shown in the table above will be determined by calculating the
average total shareholder return of the Company for the Performance Cycle
and comparing it to the average total shareholder return of the EEI Index
for the Performance Cycle, with adjustment to payouts in certain cases
based on the Company's average total shareholder return relative to the
S&P 500 Index. For the 1997-1999 Performance Cycle, the scale that
determines if contingent grants are earned is as follows: if the Company's
average total shareholder return is at or above 75th percentile of the EEI
Index, 100% of the contingent grant will be earned (the second figure shown
as Target in the table); if it is at the 50th percentile level, 60% will
be earned (the first figure shown as Target in the table); and if the
average is between the 50th and 75th percentile levels, the earned
grants will be between 60% and 100% determined by straight line
interpolation. If the average is below the 50th percentile, no shares
contingently granted will be earned (shown as the Threshold in the
table) for that Performance Cycle. Any performance shares earned under the
foregoing scale will be increased by 20% if the Company's average total
shareholder return for the Performance Cycle is at or above the 75th
percentile of the S&P 500 Index for the Performance Cycle (the Maximum
shown in the table) and reduced by 20% if the average is below the 25th
percentile.
Retirement Plan. Each of the officers of the Company and Kentucky
Utilities is entitled to participate in the Kentucky Utilities employee
retirement plans described below. Executive officers, like other employees,
are
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eligible to participate in Kentucky Utilities' Retirement Plan, and
all eligible persons whose compensation is reported in the Summary
Compensation Table participated in the Retirement Plan. Contributions to
the Retirement Plan are determined actuarially and cannot be readily
calculated as applied to any individual participant or small group
of participants. Generally, compensation for Retirement Plan purposes
means base compensation while a participant, excluding overtime pay,
commissions, performance incentive compensation or other extraordinary
compensation. The compensation for Retirement Plan purposes of the
individuals named in the foregoing table is substantially equivalent
to the base salary reported in the Summary Compensation Table. The
credited years of service under the Retirement Plan for such persons
were as follows: Mr. Whitley, 33 years; Mr. Tipton, 30 years; Mr. Goodlett,
27 years; Mr. Lucas, 28 years; and Mr. Hewett, 29 years. All of the
credited years of service were computed as of December 31, 1997.
Retirement Plan benefits depend upon length of service, age at retirement
and amount of compensation (determined in accordance with the Retirement
Plan).
Although higher amounts are determined under the Retirement Plan and
shown in the table below, in most cases, pension benefits under the
Retirement Plan or compensation used to measure such benefits will be
reduced to comply with maximum limitations imposed by the Internal Revenue
Code. Under such limitations, no base compensation above $150,000 ($160,000
effective for compensation in 1997) may be used to calculate a benefit,
except in the case of certain executive officers to preserve benefits
accrued under previously applicable rules. In addition, in 1997 no annual
benefit derived from employer contributions may exceed $125,000. Assuming
retirement at age 65, a Retirement Plan participant would be eligible at
retirement for a maximum annual pension benefit (without taking into
account the Internal Revenue Code limitations referred to above) set forth
in the following table. However, assuming retirement at age 65, assuming
1997 base compensation and taking into account the Internal Revenue Code
limitations, the annual pension benefit under the Retirement Plan for the
executive officers named in the Summary Compensation Table would be
as follows: Mr. Whitley, $103,607; Mr. Tipton, $95,146; Mr. Goodlett,
$90,493; Mr. Lucas, $93,011; and Mr. Hewett, $93,246.
<TABLE>
<CAPTION>
Annual Benefit After Specified Years of Service(2)
Final Average Base Pay(1) 15 20 25 30 35 40 45
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$150,000 $ 29,999 $ 39,999 $ 49,999 $ 59,999 $ 69,998 $ 79,998 $ 89,998
$200,000 $ 39,999 $ 53,332 $ 66,665 $ 79,998 $ 93,331 $106,664 $119,997
$250,000 $ 49,999 $ 66,665 $ 83,331 $ 99,998 $116,664 $133,330 $149,996
$300,000 $ 59,999 $ 79,998 $ 99,998 $119,997 $139,997 $159,996 $179,996
$350,000 $ 69,998 $ 93,331 $116,664 $139,997 $163,329 $186,662 $209,995
$400,000 $ 79,998 $106,664 $133,330 $159,996 $186,662 $213,328 $239,994
$450,000 $ 89,998 $119,997 $149,996 $179,996 $209,995 $239,994 $269,993
$500,000 $ 99,998 $133,330 $166,663 $199,995 $233,328 $266,660 $299,993
$550,000 $109,997 $146,663 $183,329 $219,995 $256,660 $293,326 $329,992
$600,000 $119,997 $159,996 $199,995 $239,994 $279,993 $319,992 $359,991
(1) "Final average base pay" generally means the average annual compensation during the 60
consecutive months of highest pay during the period of employment.
(2) Annual benefits shown are on a straight life annuity basis. Amounts shown are not
subject to any deduction for Social Security benefits or other offset amounts. Benefits
may be reduced by Internal Revenue Code limitations described above.
</TABLE>
Supplemental Security Plan. Executive officers and certain other
employees of the Company and Kentucky Utilities are eligible to
be members in Kentucky Utilities' Supplemental Security Plan which
provides retirement,
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disability and death benefits as well as a change in control retirement
benefit and a change in control severance benefit. Change in control
has the meaning set out under "Change in Control Arrangements" below.
As to executive officers, upon retirement at age 65, an eligible
member will receive 15 annual payments of an amount equal to 75%
of basic compensation, offset by benefits payable from any defined
benefit plan of the Company or an affiliate (such as Kentucky Utilities'
Retirement Plan) and Social Security benefits. Basic compensation is the
annualized base monthly salary of the member, exclusive of performance
incentive compensation or other extraordinary compensation, in effect
at termination of employment by retirement, disability or death. Upon
termination of employment by death of an eligible executive officer prior
to age 65, the member's beneficiary will receive an annual benefit equal to
50% of basic compensation until the later of the date such member would
have attained age 65 or completion of 15 annual payments. Upon
termination of employment by disability prior to age 65, the member will
receive the "retirement benefit" if the member lives to retirement age
and remains disabled or the "death benefit" if the member dies prior to
retirement age and is disabled at death. Benefits will be paid from the
general funds of the employer. The estimated annual benefits from
Kentucky Utilities' Supplemental Security Plan that would be payable upon
retirement at normal retirement age (age 65) for the individuals named in
the Summary Compensation Table (assuming 1997 base salary) are as
follows: Mr. Whitley, $216,937; Mr. Tipton, $68,654; Mr. Goodlett,
$68,279; Mr. Lucas, $47,761; and Mr. Hewett, $30,273. To assist in
providing funds to pay such benefits when they become payable, insurance
is purchased on the lives of the members of the Supplemental Security
Plan.
Change In Control Arrangements. Under the Supplemental Security Plan,
members are entitled to change in control severance benefits in the
following circumstances: (i) involuntary termination of the individual's
employment within two years following a change in control (or, if
later, prior to the consummation of the change in control transaction or
its earlier abandonment) for reasons other than cause (as defined
in the plan), death or permanent disability; (ii) resignation within two
years of a change in control (or, if later, prior to the consummation of
the change in control transaction or its earlier abandonment) for good
reason (as defined in the plan); and (iii) in respect of the Chairman
of the Board, the President, the Chief Financial Officer (or, if such
positions are filled by less than three persons, the Executive Vice
President), the Senior Vice Presidents and the Corporate Secretary,
in each case of Kentucky Utilities, termination of employment for any
reason during the 30-day period commencing on the first anniversary of the
consummation of a change in control. In such circumstances, the
employee will be entitled to a change in control severance payment equal
to a certain percentage (300% in the case of executive officers of the
Company or Kentucky Utilities) of the sum of (i) the employee's basic
compensation and (ii) the employee's target annual performance
incentive compensation. In addition, the employee will be entitled
to continuation of certain employee welfare benefits for up to three
years following termination of employment, subject to an offset
for comparable benefits. Under the Supplemental Security Plan, the
employee is entitled to receive additional payments, if necessary,
to reimburse the employee for certain excise tax liabilities payable
under federal, state or local law as a result of the payment and any
other compensation being contingent on a change in control. The
Supplemental Security Plan's change in control retirement benefit
provides that, upon termination of employment, other than for cause (as
defined in the Supplemental Security Plan) following a change in control,
an eligible member will receive a lump-sum amount equal to the
present value of the retirement benefit (described in the preceding
paragraph and assuming the member is then 65 but prorated if the member
then has less than 15 years of service, including an assumed three
additional years of service in the case of executive officers);
provided that, if the termination is more than two years from the
change in control, the calculation of years of service will not include
the assumed additional three years and the compensation upon which the
benefit is calculated will be the actual compensation in effect at
termination (rather than the compensation in effect at the change in
control which, if higher, would be used if
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<PAGE>
termination occurred within two years of the change in control).
The change in control severance benefits and change in control retirement
benefits are effective for a minimum of five years, which is automatically
extended from year to year unless Kentucky Utilities gives notice that it
does not wish to extend the period of effectiveness. The Incentive Plans,
Performance Share Plans, Executive Deferred Compensation Plans and
Long-Term Incentive Plan contain provisions relating to a change in
control. Under the Performance Share Plans and Long-Term Incentive Plan,
or the awards granted thereunder, if a participant's employment is
terminated voluntarily or involuntarily after a change in control,
such participant will have the right to an immediate payment in shares of
Company Common Stock for all Performance Cycles in which the participant
is currently participating. The amount payable to a participant in the
event of termination following a change in control will be determined
in accordance with the formula specified in the plans. In addition, the
restriction on any restricted shares then held by the participant
under these plans will lapse on the occurrence of a change in control,
whether or not the participant is terminated. Under the Executive
Deferred Compensation Plans, all amounts held under such plans will be
paid to the participant after a change in control, whether or not
the participant is terminated. Such payments were made to participants
following execution of the Merger Agreement, which constituted a change
in control. Under the Incentive Plans, after a change in control, whether
or not a participant is terminated, a participant, including a
participant who had terminated prior to the change in control by
reason of retirement, disability or death, will have a right to an
immediate cash payment based on actual base salary earned prior to the
change in control and on the assumption that established targets for the
year had been met.
For purposes of all the executive and director plans, "change in
control" includes any merger, consolidation, reorganization or sale
of substantially all of the assets of the Company or Kentucky Utilities
which results in less than 60% of the voting power of the resulting
entity being owned by the holders of the Common Stock of the Company prior
to the transaction; a change in the majority of the Board of Directors
of the Company or Kentucky Utilities over a two-year period which is
not approved by two-thirds of the incumbent directors; and the
acquisition by any person or group of persons of beneficial ownership of
10% or more of the Common Stock of the Company or Kentucky Utilities.
The execution of the Merger Agreement constituted, and the consummation
of the Merger will also constitute, a "change in control" under all
of the executive and director plans, or awards granted thereunder,
described above, other than the Incentive Plans, the Director Retirement
Plans and the Director Deferred Compensation Plans under which only the
consummation of the Merger will constitute a "change in control".
Employment Agreement. In connection with the Merger Agreement, the
Company entered into an Employment Agreement with Mr. Whitley which will
become effective only upon consummation of the Merger. The Employment
Agreement will have an initial term of five years commencing at the
effective date of the Merger with automatic renewal for additional one-year
terms at the end of the initial term or any renewal term unless Mr.
Whitley or LG&E Energy (as successor to the Company) gives at least 3
months prior notice of an intention not to renew. Under the Employment
Agreement Mr. Whitley will serve as Vice Chairman, President and Chief
Operating Officer of LG&E Energy and Vice Chairman and Chief Operating
Officer of Louisville Gas and Electric Company and Kentucky Utilities.
Under the Employment Agreement, Mr. Whitley will receive an annual base
salary of not less than $575,000 and will participate in the annual bonus
plan and long-term incentive plan of LG&E Energy, with an annual bonus
target award of not less than 55% of his base salary and long-term
incentive grants with a present value of not less than 70% of his
base salary, to be delivered 60% in the form of performance units/shares
and 40% in the form of non-qualified stock options. He is also entitled to
life insurance
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coverage in an amount of not less than $2,000,000 and certain other
welfare, retirement and fringe benefits similar to other LG&E Energy
executive officers and benefits currently offered by the Company. If LG&E
Energy terminates Mr. Whitley's employment without cause (as defined in
the Employment Agreement) or if Mr. Whitley terminates his employment for
good reason (which, as defined in the Employment Agreement includes for
any reason during the 30-day period commencing on the first anniversary
of the effective date of the Merger), Mr. Whitley will receive, in addition
to all compensation earned through the date of termination and coverage
and benefits under all benefit and incentive compensation plans, a
severance payment equal to the discounted present value of his base
salary and target bonus for the greater of (i) two years, or (ii) the
remainder of the employment term then in effect (the "Continuation
Period"). In addition, in such event Mr. Whitley will receive his
outstanding target bonus award, pro-rated through the date of his
termination. Further, he will continue to receive welfare benefits during
the Continuation Period and all stock options will become exercisable and
all restricted stock and other equity awards will vest. In addition, any
long term incentive awards (other than stock options) will be cashed
out at the discounted present value of the target payout pro-rated for Mr.
Whitley's actual period of service plus the Continuation Period.
Payments to Mr. Whitley upon termination after a change in control under
the Employment Agreement will be grossed up for any applicable excise
taxes.
GENERAL
Independent Public Accountants
The Audit Committee of the Board has selected the firm of
Arthur Andersen LLP as independent public accountants to examine the
financial statements of the Company and Kentucky Utilities for 1998.
The firm has served as the independent public accountants for the Company
and Kentucky Utilities for many years. Representatives of the firm are
not expected to be present at the annual meeting.
If the Merger is consummated prior to the end of 1998, it may be deemed
desirable at that time for the current auditors of LG&E Energy Corp.
or another auditing firm to audit the annual financial statements for
all affiliated corporations for 1998, in which case Arthur Andersen LLP
would no longer serve.
Proposals of Shareholders
Under the rules of the Securities and Exchange Commission, any
shareholder proposal intended to be presented at the 1999 Annual Meeting
of Shareholders must be received by the Company at its principal
executive offices no later than November 18, 1998 in order to be eligible
to be considered for inclusion in the Company's proxy materials relating
to that meeting. A shareholder submitting a proposal or nominating a person
to serve as director must comply with procedures set forth in the
Company's By-laws. In general, the By-laws provide that for business to
be considered at an annual meeting of shareholders, a shareholder must give
timely and proper notice of the matter to the Secretary of the Company. The
notice must specify in reasonable detail the business desired to be
brought before the meeting and contain other information required by the
By-laws. Nominations for director may be made by shareholders only if
the shareholder has given timely and proper notice thereof to the
Secretary of the Company. The notice must contain the name of the
person or persons nominated, certain information about the nominee and
other information required by the By-laws. Shareholder proposals or
nominations must be received no fewer than 60 days prior to the meeting
(or, if the date of the meeting has not been made public, within 10 days
after the publication of the date of the meeting).
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EXHIBIT 99.04
CAUTIONARY STATEMENTS - KU ENERGY AND KU
The following are cautionary statements, assumptions and other factors that
could cause the Company's or KU's actual results to differ materially from
those contemplated in any forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995.
1. Increased competition in the utility industry including effects of:
decreasing margins as a result of competitive pressures; industry
restructuring initiatives; inability to recover in rates a return on
investments made under regulation; legislation or regulatory
initiatives (such as retail wheeling, open access or customer choice)
designed to increase competition and the presence of new competitors
entering KU's service territory, including other traditional utilities,
nonutility generators, power marketers, power brokers and others.
These factors could result in lower revenues and earnings.
2. Economic conditions affecting customers businesses producing changes
in demand for their products or services or changes in their cost
structures causing fluctuations in the amount of energy purchased from
KU. These factors could have a significant impact on the economic
health of KU s service territory, which (in turn) could have an adverse
impact on revenues and earnings.
3. Increased capital and other costs of providing for increased customer
demand (through addition of peaking capacity or purchased power).
Increased costs not recovered from customers because of competitive
pressure on prices, lack of rate relief or other reasons could result
in lower earnings.
4. Financial or regulatory accounting principles or policies imposed by
the Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and applicable
state utility regulatory bodies. These could adversely affect reported
results.
5. Availability or cost of capital, which may be affected by, or may
affect, interest rates, market perceptions of the utility and energy-
related industries, the Company or any of its subsidiaries or changes
in security ratings of the Company or KU. Increases in capital costs,
without corresponding increases in revenues, would adversely affect
earnings.
6. Unusual weather conditions; catastrophic weather-related events;
unscheduled generation outages; unanticipated changes in the cost or
availability of fuel or gas supply due to higher demand, shortages or
transportation problems; or electric transmission system or gas
pipeline constraints. The foregoing could adversely affect operating
results.
7. Economic conditions including significant fluctuations in the rate of
inflation. Increased costs caused by inflation, without corresponding
increases in revenues would adversely affect earnings.
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8. Changes in monetary, fiscal, tax or environmental policies of
governments or governmental agencies, which may significantly affect
costs of capital, expense levels or costs of compliance with existing
or future environmental requirements. Such increases in costs, without
corresponding increases in revenues, would adversely affect earnings.
9. Employee workforce factors including changes in collective bargaining
agreements with union employees, or work stoppages, which may increase
costs or reduce revenues.
10. Significant changes in policies of regulatory agencies with
jurisdiction over KU's rates, which may adversely affect revenues and
earnings.
11. Costs and other effects of legal and administrative proceedings,
settlements, investigations and claims, including but not limited to
those described in Notes 4 and 9 of the Notes to Consolidated Financial
Statements in the Company's and KU's Annual Report on Form 10-K for the
year ended December 31, 1997.
12. Development of new technology such as distributed generation provided
by others which would result in lower sales. This could result in
lower revenues and earnings.
Neither the Company nor KU undertakes any obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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