SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
November 14, 1994
8:30 am
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1 - 10568
LG&E ENERGY CORP.
(Exact name of registrant as specified in its charter)
Kentucky 61 - 1174555
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 West Main Street 40232
P.O. Box 32030 (Zip Code)
Louisville, KY
(Address of principal executive offices)
(502) 627-2000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 33,013,149 shares, without
par value, as of October 31, 1994.
Part I. Financial Information - Item 1. Financial Statements
LG&E Energy Corp. and Subsidiaries
Statements of Income
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1994 1993 1994 1993
REVENUES:
Electric . . . . . . . . . . . . .$169,718 $181,114 $436,504 $443,393
Gas. . . . . . . . . . . . . . . . 20,500 19,380 146,631 133,891
Non-utility. . . . . . . . . . . . 12,352 20,456 56,251 82,430
Total revenues. . . . . . . . . . 202,570 220,950 639,386 659,714
COST OF REVENUES:
Fuel and power purchased . . . . . 41,460 47,668 118,564 125,311
Gas supply expenses. . . . . . . . 12,374 11,560 98,220 88,409
Development and construc-
tion costs. . . . . . . . . . . . 11,045 19,764 47,173 73,403
Total cost of revenues. . . . . 64,879 78,992 263,957 287,123
Gross profit. . . . . . . . . . . . 137,691 141,958 375,429 372,591
OPERATING EXPENSES:
Operation and maintenance. . . . . 52,394 55,499 170,475 164,681
Depreciation and amortization. . . 21,047 20,376 63,121 61,246
Non-recurring charges (Note 3) . . - - 48,743 -
Total operating expenses. . . . . 73,441 75,875 282,339 225,927
Equity in earnings of
joint ventures . . . . . . . . . . 5,777 2,797 11,457 6,269
OPERATING INCOME. . . . . . . . . . 70,027 68,880 104,547 152,933
Other income (deductions) (Note 9) 3,378 319 9,702 (871)
Contribution to charitable
foundation (Note 4). . . . . . . . - - 15,000 -
Interest charges. . . . . . . . . . 10,755 11,660 32,066 35,921
Income from continuing oper-
ations before income taxes . . . . 62,650 57,539 67,183 116,141
Income taxes. . . . . . . . . . . . 24,071 22,931 23,717 44,330
Income from continuing oper-
ations before preferred
dividends. . . . . . . . . . . . .$ 38,579 $ 34,608 $ 43,466 $ 71,811
LG&E Energy Corp. and Subsidiaries
Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1994 1993 1994 1993
Income from continuing oper-
ations before preferred
dividends. . . . . . . . . . . . .$ 38,579 $ 34,608 $ 43,466 $ 71,811
Preferred dividends . . . . . . . . 1,503 1,348 4,261 4,603
INCOME FROM CONTINUING
OPERATIONS . . . . . . . . . . . . 37,076 33,260 39,205 67,208
Income from discontinued operations,
net of income taxes of $1,182
and $3,609 (Note 5). . . . . . . . - 1,841 - 5,598
Gain on sale of discontinued
operations, net of income
taxes of $35,048 (Note 5). . . . . - - 51,805 -
Income before cumulative effect of
change in accounting principle . . 37,076 35,101 91,010 72,806
Cumulative effect of change
in accounting principle, net of
income taxes of $2,280 (Note 6). . - - (3,369) -
NET INCOME. . . . . . . . . . . . .$ 37,076 $ 35,101 $ 87,641 $ 72,806
Average common shares
outstanding. . . . . . . . . . . . 32,994 32,769 32,983 32,612
EARNINGS PER SHARE:
Continuing operations. . . . . . .$ 1.12 $ 1.02 $ 1.19 $ 2.06
Income from discontinued
operations. . . . . . . . . . . . - .05 - .17
Gain on sale of discontinued
operations. . . . . . . . . . . . - - 1.57 -
Cumulative effect of accounting
change. . . . . . . . . . . . . . - - (.10) -
Total earnings per share. . . .$ 1.12 $ 1.07 $ 2.66 $ 2.23
LG&E Energy Corp. and Subsidiaries
Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
Sept. 30, Dec. 31,
1994 1993
UTILITY PLANT:
At original cost . . . . . . . . . . . . . . . . . .$2,515,768 $2,464,101
Less: reserve for depreciation. . . . . . . . . . . 877,876 823,141
Net utility plant . . . . . . . . . . . . . . . . . 1,637,892 1,640,960
OTHER PROPERTY AND INVESTMENTS - less reserve:
Investments in affiliates. . . . . . . . . . . . . . 90,339 63,241
Other (Note 8) . . . . . . . . . . . . . . . . . . . 53,564 24,949
Investment in discontinued operations (Note 5) . . . - 84,284
Total other property and investments. . . . . . . . 143,903 172,474
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . 64,392 67,377
Marketable securities (Note 8) . . . . . . . . . . . 93,437 -
Accounts receivable - less reserve . . . . . . . . . 88,033 124,504
Materials and supplies - at average cost:
Fuel (predominantly coal) . . . . . . . . . . . . . 13,374 12,075
Gas stored underground. . . . . . . . . . . . . . . 33,809 33,370
Other . . . . . . . . . . . . . . . . . . . . . . . 38,150 40,357
Prepayments and other. . . . . . . . . . . . . . . . 5,256 1,600
Total current assets. . . . . . . . . . . . . . . . 336,451 279,283
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense . . . . . . . . . . . . . . 23,785 24,698
Accumulated deferred income taxes. . . . . . . . . . 79,879 58,675
Regulatory asset - income taxes. . . . . . . . . . . 38,860 39,651
Other. . . . . . . . . . . . . . . . . . . . . . . . 40,095 69,053
Total deferred debits and other assets. . . . . . . 182,619 192,077
Total assets. . . . . . . . . . . . . . . . . . .$2,300,865 $2,284,794
LG&E Energy Corp. and Subsidiaries
Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITAL AND LIABILITIES
Sept. 30, Dec. 31,
1994 1993
CAPITALIZATION:
Common stock, without par value -
Authorized 75,000,000 shares;
outstanding 33,013,149 shares
and 32,956,148 shares (Note 2). . . . . . . . . . .$ 460,887 $ 458,940
Common stock expense . . . . . . . . . . . . . . . . (899) (899)
Unrealized loss on marketable
securities, net of income
taxes of $1,780 (Note 8). . . . . . . . . . . . . . (3,064) -
Retained earnings. . . . . . . . . . . . . . . . . . 307,194 271,606
Total common equity . . . . . . . . . . . . . . . . 764,118 729,647
Cumulative preferred stock . . . . . . . . . . . . . 116,716 116,716
Long-term debt . . . . . . . . . . . . . . . . . . . 662,866 662,879
Total capitalization. . . . . . . . . . . . . . . . 1,543,700 1,509,242
CURRENT LIABILITIES:
Notes payable. . . . . . . . . . . . . . . . . . . . - 20,000
Accounts payable . . . . . . . . . . . . . . . . . . 72,741 111,192
Common dividends declared. . . . . . . . . . . . . . 17,745 17,137
Accrued taxes. . . . . . . . . . . . . . . . . . . . 27,645 11,267
Accrued interest . . . . . . . . . . . . . . . . . . 11,718 12,864
Other. . . . . . . . . . . . . . . . . . . . . . . . 29,315 38,394
Total current liabilities . . . . . . . . . . . . . 159,164 210,854
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes . . . . . . . . . . . . . . . . . . . . . . . 345,387 345,630
Investment tax credit, in
process of amortization . . . . . . . . . . . . . . 88,004 91,572
Customers' advances for construction . . . . . . . . 8,258 7,384
Regulatory liability - income taxes. . . . . . . . . 47,998 46,528
Other. . . . . . . . . . . . . . . . . . . . . . . . 108,354 73,584
Total deferred credits and other liabilities. . . . 598,001 564,698
Total capital and liabilities . . . . . . . . . .$2,300,865 $2,284,794
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows
(Unaudited - Thousands of $)
Nine Months Ended
Sept. 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . .$ 87,641 $ 72,806
Items not requiring cash currently:
Cumulative effect of change
in accounting principle . . . . . . . . . . . . . 3,369 -
Non-recurring charges . . . . . . . . . . . . . . . 48,743 -
Depreciation and amortization . . . . . . . . . . . 63,121 61,246
Deferred income taxes - net . . . . . . . . . . . . (14,083) 2,614
Investment tax credit - net . . . . . . . . . . . . (3,568) (11,856)
Undistributed earnings of joint ventures. . . . . . (6,698) (3,566)
Income from discontinued operations . . . . . . . . - (5,598)
Gain on sale of discontinued operations . . . . . . (90,878) -
Other . . . . . . . . . . . . . . . . . . . . . . . 13,871 23,178
(Increases) decreases in net current assets:
Accounts receivable . . . . . . . . . . . . . . . . 36,471 (7,513)
Materials and supplies. . . . . . . . . . . . . . . 469 2,194
Accounts payable. . . . . . . . . . . . . . . . . . (38,451) (10,834)
Accrued taxes . . . . . . . . . . . . . . . . . . . 16,378 18,498
Accrued interest. . . . . . . . . . . . . . . . . . (1,146) (2,213)
Prepayments and other . . . . . . . . . . . . . . . (12,735) (5,214)
Other. . . . . . . . . . . . . . . . . . . . . . . . 892 1,558
Net cash provided by operating activities . . . . . 103,396 135,300
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of capital asset. . . . . . . . . . . . . . . . - 91,076
Purchases of securities. . . . . . . . . . . . . . . (231,122) (18,303)
Proceeds from sales of securities. . . . . . . . . . 102,867 7,530
Construction expenditures. . . . . . . . . . . . . . (58,228) (63,892)
Investment in affiliates . . . . . . . . . . . . . . (20,400) -
Proceeds from sale of discontinued operations. . . . 170,000 -
Net cash (used for) provided by
investing activities. . . . . . . . . . . . . . .$ (36,883) $ 16,411
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Nine Months Ended
Sept. 30,
1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . .$ 1,947 $ 18,642
Issuance of preferred stock. . . . . . . . . . . . . - 24,716
Issuance of bonds. . . . . . . . . . . . . . . . . . - 175,433
Redemption of preferred stock. . . . . . . . . . . . - (25,558)
Retirement of bonds. . . . . . . . . . . . . . . . . - (205,872)
Payment of notes payable . . . . . . . . . . . . . . (20,000) (8,000)
Payment of common dividends. . . . . . . . . . . . . (51,445) (49,004)
Net cash used for financing activities. . . . . . . (69,498) (69,643)
NET (DECREASE) INCREASE IN CASH AND
TEMPORARY CASH INVESTMENTS . . . . . . . . . . . . . (2,985) 82,068
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 67,377 21,997
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . .$ 64,392 $ 104,065
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes. . . . . . . . . . . . . . . . . . .$ 66,815 $ 40,858
Interest on borrowed money. . . . . . . . . . . . 32,235 38,222
For the purposes of this statement, all temporary cash investments purchased
with a maturity of three months or less are considered cash equivalents.
LG&E Energy Corp. and Subsidiaries
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1994 1993 1994 1993
Balance at beginning of period. . . $287,863 $255,257 $271,606 $251,121
Net income. . . . . . . . . . . . . 37,076 35,101 87,641 72,806
Subtotal. . . . . . . . . . . . . . 324,939 290,358 359,247 323,927
Cash dividends declared on
common stock ($.5375, $.52,
$1.5775 and $1.525 per share). . . 17,745 17,069 52,053 49,820
Preferred stock redemption
expense. . . . . . . . . . . . . . - - - 818
Balance at end of period. . . . . . $307,194 $273,289 $307,194 $273,289
LG&E Energy Corp. and Subsidiaries
Notes to Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements include the accounts of
LG&E Energy Corp. and its wholly-owned subsidiaries - Louisville Gas and
Electric Company (LG&E) and LG&E Energy Systems Inc. (Energy Systems),
collectively referred to as the "Company."
In the opinion of management, all adjustments have been made to present
fairly the consolidated financial position, results of operations and cash
flows for the periods indicated. Certain information and footnote disclo-
sures normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations, although the Company believes that
the disclosures contained herein are adequate to make the information
presented not misleading. Certain amounts in the statements of income and
cash flows for the three- and nine-month periods ended September 30, 1993,
have been restated to be consistent with the presentation for the three- and
nine-month periods ended September 30, 1994, with no impact on previously
reported net income or earnings per share.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year 1993.
2. Changes in common stock outstanding during the nine months ended September
30, 1994, were:
Shares $000's
Outstanding January 1 32,956,148 $458,940
Issued under the Employee
Common Stock Purchase Plan 41,436 1,377
Issued under the Omnibus Long-Term
Incentive Plan 15,565 570
Outstanding September 30 33,013,149 $460,887
Under the Company's nonqualified stock option plan, there were 184,201
options outstanding as of September 30, 1994, of which 131,571 were exer-
cisable.
3. Effective January 1, 1994, the Company realigned its business to reflect
its outlook for rapidly emerging competition in all segments of the energy
services industry. Under the realignment, a national business unit, LG&E
Energy Services, was formed to develop and manage all of its utility and
non-utility electric power generation and concentrate on the marketing and
brokering of wholesale electric power on a regional and national basis.
LG&E, an electric and gas utility that is the Company's principal subsid-
iary, will increase its focus on customer service and develop more customer
options as the utility industry becomes more competitive in the future.
In addition to the realignment, LG&E reevaluated its regulatory strategy
which previously had been to seek full recovery of certain costs deferred
in accordance with prior precedents established by the Public Service
Commission of Kentucky. LG&E completed its study in the first quarter of
1994 and decided to write off several non-recurring items amounting to
approximately $38.6 million before tax. While LG&E continues to believe
that it could have reasonably expected to recover these costs in future
rate proceedings before the Public Service Commission of Kentucky, LG&E
decided to deduct these expenses currently and not seek recovery for such
expenses in future rates due to increasing competitive pressures and the
existing and anticipated future economic conditions. The items written off
include costs incurred in connection with early retirements and work force
reductions that occurred in 1992 and 1993 which consist primarily of
separation payments, enhanced early retirement benefits, and health care
benefits; costs associated with property damage claims pertaining to
particulate emission from its Mill Creek electric generating plant which
primarily consist of spotting on automobile finish and aluminum siding; and
certain costs previously deferred resulting from adoption in January 1993
of Statement of Financial Accounting Standards No. 106, Employers' Account-
ing for Post-Retirement Benefits Other Than Pensions.
LG&E Power Inc. (LPI) set up a reserve for $10.1 million, before tax, for
the costs related to vacating leased office space. This cost and the costs
mentioned above that were incurred by LG&E have been classified as non-
recurring charges in the accompanying statements of income.
4. In the first quarter of 1994, the Board of Directors of the Company ap-
proved the formation of a tax-exempt charitable foundation which will make
charitable contributions to qualified persons and entities. The Board
authorized an initial contribution to the foundation of up to $15 million.
Accordingly, the Company recorded a pretax charge against income and
accrued $15 million to fund the contribution. On June 6, 1994, the Inter-
nal Revenue Service issued a letter stating that it had determined the
foundation was exempt from Federal income tax under the Internal Revenue
Code. Funding of the initial contribution is expected to be completed by
year end. Contributions made from this foundation will not be charged
against income and, therefore, will not affect the Company's net income in
the future.
5. The Company sold its 36.5% equity interest in Natural Gas Clearinghouse
(NGC) to NOVA Corporation in January 1994 for $170 million. The sale
resulted in a pretax gain of $87 million, and the tax on the gain totaled
$35 million. All of these amounts were in line with previously-disclosed
estimates.
The Company's gain on the sale, investment balance, and equity in the
earnings of NGC have been classified as discontinued operations in the
accompanying financial statements.
6. The Company adopted SFAS No. 112 (Statement of Financial Accounting Stan-
dards No. 112, Employers' Accounting for Post-Employment Benefits) in the
first quarter of 1994. SFAS No. 112 requires the accrual of the expected
cost of benefits to former or inactive employees after employment but
before retirement. The cumulative effect of the accounting change was
recorded in the first quarter of 1994 and decreased net income by $3.4
million.
7. In connection with the financing of various power projects, Energy Systems
and LPI provide equity funding commitments and guarantee the construction
and performance of the projects. Ascertainable equity funding commitments
were $54 million at September 30, 1994, and $36 million at December 31,
1993. Contingent construction and project performance guarantees totaled
$221 million at September 30, 1994, and $198 million at December 31, 1993.
Westmoreland Energy Inc. (WEI) is a partner along with LPI in six
cogeneration projects in operation or under construction. Under an agree-
ment signed on April 15, 1993, Energy Systems has guaranteed (in exchange
for fees and other consideration) the equity funding commitment of WEI in
connection with the following three projects: Roanoke Valley I, Roanoke
Valley II, and Rensselaer. The additional commitments resulting from this
agreement total $36 million.
During December 1993, the Company signed an agreement with Greyrock Capital
Group, Inc. (Greyrock, formerly known as Nations Financial Capital Corpora-
tion) under which Greyrock agreed, in exchange for fees, to assume $26.9
million of the Company's contingent equity funding commitment for Roanoke
Valley I and II resulting from its April 15, 1993, agreement with WEI.
Reference is also made to Part II - Item 5, Other Information herein for a
discussion of the bankruptcy filing of Westmoreland Coal Company, parent of
WEI, and its possible ramifications for the Company.
In November 1994, the Company announced that one of its subsidiaries, LG&E
International Inc., had formed a joint venture that will build and operate
a natural-gas-fired power plant in north central Argentina. The plant is
scheduled to be built and operational by July 1995. The other partners in
the project are Sideco Americana, S.A., an Argentine engineering and
construction company, and Charter Oak Energy, Inc., a non-utility subsid-
iary of Northeast Utilities. Additional equity funding commitments of LG&E
International resulting from the joint-venture agreement total approximate-
ly $18 million.
8. The Company adopted the provisions of SFAS No. 115 (Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities) effective January 1, 1994. Accordingly, investments
in marketable securities have been determined to be "available-for-sale"
and are stated at market value in the accompanying September 30, 1994,
balance sheet. Available-for-sale securities at September 30, 1994,
consisted of $93 million classified as marketable securities and $50
million classified as other property and investments in the accompanying
balance sheet.
9. Other income and deductions consisted of the following:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1994 1993 1994 1993
Fee income . . . . . . . . . . . $1,188 $ - $4,750 $ -
Gains (losses) on securities . . (831) 83 (2,571) 42
Interest and dividend income . . 3,322 971 8,330 2,550
Gains (losses) on fixed asset
disposals . . . . . . . . . . . 28 (418) 1,069 (1,238)
Donations. . . . . . . . . . . . (106) (222) (1,053) (847)
Other. . . . . . . . . . . . . . (223) (95) (823) (1,378)
Total. . . . . . . . . . . . . . $3,378 $ 319 $ 9,702 $ (871)
10. Reference is made to Part II herein - Item 1, Legal Proceedings and Item
5, Other Information.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
The Company's principal subsidiary is LG&E, an electric and gas utility.
Accordingly, LG&E's results of operations and liquidity and capital resources
are the primary factors affecting the Company's consolidated results of
operations and capital resources and liquidity.
Results of Operations
LG&E's results of operations are significantly affected by seasonal fluctua-
tions in temperature and other weather-related factors. Additionally, results
of the Company's non-utility operations are dependent, among other things, upon
the timing and magnitude of development and construction activities associated
with LPI's various electric generation projects. Because of these and other
factors, the results of one interim period are not necessarily indicative of
results or trends to be expected for the full year.
Three Months Ended September 30, 1994, Compared with
Three Months Ended September 30, 1993
The increase in net income was due primarily to increased equity in the
earnings of joint ventures at LPI and increases in fee income and interest
income, partially offset by decreased earnings at LG&E. The increase in LPI's
earnings resulted from the start-up of two new power plants, and the decrease
in LG&E's earnings reflects a 10% decrease in electric sales to residential
customers attributable to the cooler summer weather and decreased off-system
sales.
A comparison of utility operating revenues for the quarter ended September 30,
1994, with the quarter ended September 30, 1993, reflects increases and
decreases which have been segregated by the following principal causes:
Increase or (Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $ 904 $ 1,231
Variation in sales volume, etc. (7,086) (710)
Total (6,182) 521
Sales for resale (5,237) -
Gas transportation - net - 635
Other 23 (36)
Total $(11,396) $ 1,120
The decrease in non-utility revenues resulted from lower levels of construction
activity on LPI's Roanoke Valley I and Rensselaer projects. The lower activity
was due to the projects nearing completion in 1994. Partially offsetting this
decrease was an increase in revenues resulting from construction activity on
LPI's Roanoke Valley II project in 1994.
Fuel for electric generation and gas supply expenses comprise a large segment
of LG&E's total operating expenses. LG&E's electric and gas rates contain a
fuel adjustment clause and a gas supply clause, respectively, whereby increases
or decreases in the cost of fuel and gas supply may be reflected in LG&E's
rates, subject to the approval of the Public Service Commission of Kentucky.
Fuel and power purchased decreased 13% for the quarter. Fuel expenses de-
creased $2.1 million (5%) for the quarter primarily because of a decrease in
the cost of coal burned ($1.2 million) and decreased generation of 3%. Power
purchased decreased $4.1 million primarily because less power was wheeled for
other utilities as a result of the milder weather in the region.
Gas supply expenses increased $.8 million (7%) due mainly to an increase in net
gas supply cost ($1.8 million), partially offset by a 9% decrease in the volume
of gas delivered to the distribution system.
Development and construction costs decreased due mainly to the lower level of
construction activity on LPI's Roanoke Valley I and Rensselaer projects,
partially offset by an increase resulting from construction activity on LPI's
Roanoke Valley II project.
Operation and maintenance expenses decreased $3.1 million (6%) due to a lower
level of repairs at LG&E's power plants related to sulfur dioxide removal
equipment and lower general and administrative expenses at LPI ($.8 million).
Depreciation and amortization increased because of increased depreciable plant
in service.
The increase in equity in earnings of joint ventures was due to the start-up of
operations at LPI's Rensselaer and Roanoke Valley I cogeneration projects and
at its Windpower projects in California and Minnesota. With the start of
commercial operations, each of the joint ventures receives revenues related to
available capacity and electricity sold pursuant to a power purchase agreement
with a neighboring utility. See Item 1, Legal Proceedings of Part II of this
Report for a discussion of the lawsuit against Virginia Power relating to
Virginia Power's failure to pay amounts alleged to be owed under the power
purchase agreement for the electricity sold from the ROVA I project. Revenues,
expenses and earnings from other joint ventures of LPI remained substantially
unchanged during the three months ended September 30, 1994, as compared to the
three months ended September 30, 1993. See Item 5 in Part II of this Report
for a discussion of the filing of a bankruptcy petition by Westmoreland Coal
Company, which is the parent company of several subsidiaries that are partners
with LPI at several cogeneration projects.
Other income and deductions increased as a credit to income due to an increase
in interest income resulting from investing the proceeds from the sale of the
Company's interest in NGC. Also contributing to the increase were fees
received from Westmoreland Energy Inc. (WEI) for Energy Systems' guarantee of
WEI's equity funding commitments on various cogeneration projects (see Notes 7
and 9).
Interest charges decreased because of a lower composite interest rate on
outstanding debt and a reduction in notes payable. A component of interest
expense was the cost associated with $30 million of interest rate swaps that
LG&E entered into as a standard hedging device in connection with the issuance
of Pollution Control Bonds Series S due September 1, 2017, in 1992. The swaps
are designed to reduce the Company's exposure to interest rate risk. During
the three months ended September 30, 1994, LG&E received interest at a compos-
ite rate of 2.89% and paid interest at a composite rate of 4.55% pursuant to
the swaps.
The provision for income taxes increased due to an increase in pretax income,
partially offset by the effect of an adjustment recorded in 1993 to reflect the
increase in the federal statutory rate from 34% to 35%.
Income from discontinued operations reflects the sale of the Company's invest-
ment in NGC in January 1994. See Note 5 of Notes to Financial Statements.
Nine Months Ended September 30, 1994, Compared with
Nine Months Ended September 30, 1993
The increase in net income was due primarily to the recognition of a gain on
the sale of the Company's interest in NGC (see Note 5) and higher earnings
(before non-recurring charges) at LG&E and LPI. The LG&E increase resulted
mainly from increased sales of electricity and natural gas to retail customers,
and the LPI increase resulted from increased equity in the earnings of joint
ventures. Increases in fee and interest income also contributed to the
increase in net income. Partially offsetting these increases in net income
were decreases resulting from recording non-recurring charges (see Note 3), the
expense associated with the initial contribution to a tax-exempt charitable
foundation (see Note 4), the cumulative effect of a change in accounting
principle (see Note 6), and from the absence of income from discontinued
operations.
A comparison of utility operating revenues for the nine months ended September
30, 1994, with the nine months ended September 30, 1993, reflects increases and
decreases which have been segregated by the following principal causes:
Increase or (Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $ 436 $ 3,430
Variation in sales volume, etc. 3,656 9,565
Total 4,092 12,995
Sales for resale (10,064) -
Gas transportation - net - (226)
Other (917) (29)
Total $ (6,889) $12,740
The decrease in non-utility revenues resulted from lower levels of construction
activity on LPI's Roanoke Valley I and Rensselaer projects. The lower activity
was due to the projects' nearing completion in 1994. Partially offsetting this
decrease was an increase resulting from construction activity on LPI's Roanoke
Valley II project in 1994.
Fuel and power purchased decreased 5% for the nine months. Fuel expenses
decreased $1.5 million (1%) for the nine months primarily because of a decrease
in the cost of coal burned. Power purchased declined $5.3 million largely
because less power was wheeled for other utilities as a result of the milder
weather in the region.
Gas supply expenses increased $9.8 million (11%) because of an increase in the
volume of gas delivered to the distribution system ($5.5 million) and the
higher cost of gas supply.
Development and construction costs decreased because of the lower level of
construction activity on LPI's Roanoke Valley I and Rensselaer projects,
partially offset by an increase resulting from construction activity on LPI's
Roanoke Valley II project.
Operation and maintenance expenses increased $5.8 million (4%) primarily as a
result of increased costs to operate LG&E's electric power plants and gas and
electric distribution systems ($1.4 million), an increase in various adminis-
trative expenses at LG&E ($.7 million), an increase in LG&E's provision for
uncollectible accounts ($.6 million), and an increase in LG&E's storm damage
expenses caused by the severe winter weather during the first quarter ($3
million). Also contributing to the increase was a $1.5 million increase in
corporate expenses. Partially offsetting these increases was a decrease
resulting from fewer repairs of a routine nature at LG&E.
Depreciation and amortization increased because of increased depreciable plant
in service.
Non-recurring charges include LG&E's write off of costs in connection with
early retirements and work force reductions that occurred in 1992 and 1993,
costs in connection with property damage claims pertaining to particulate
emissions from the Mill Creek electric generating plant, and certain costs
previously deferred resulting from adoption of Statement of Financial Account-
ing Standards No. 106, Employers' Accounting for Post-Retirement Benefits Other
Than Pensions. Non-recurring charges also include a reserve to record costs
related to LPI's vacating leased office space. See Note 3 of Notes to Finan-
cial Statements.
The increase in equity in earnings of joint ventures was due to the start-up of
operations at LPI's Rensselaer and Roanoke Valley I cogeneration projects and
at its Windpower projects in California and Minnesota. With the start of
commercial operations, each of the joint ventures receives revenues related to
available capacity and electricity sold pursuant to a power purchase agreement
with a neighboring utility. See Item 1, Legal Proceedings of Part II of this
Report for a discussion of the lawsuit against Virginia Power relating to
Virginia Power's failure to pay amounts alleged to be owed under the power
purchase agreement for the electricity sold from the ROVA I project, which
failure adversely impacts the economics of the project. Revenues, expenses and
earnings from other joint ventures of LPI remained substantially unchanged
during the three months ended September 30, 1994, as compared to the three
months ended September 30, 1993. See Item 5 in Part II of this Report for a
discussion of the filing of a bankruptcy petition by Westmoreland Coal Company,
which is the parent company of several subsidiaries that are partners with LPI
at several cogeneration projects.
Other income and deductions increased because of fees received from
Westmoreland Energy Inc. (WEI) for Energy Systems' guarantee of WEI's equity
funding commitments on various cogeneration projects (see Note 7), and an
increase in interest income resulting from investing the proceeds from the sale
of the Company's interest in NGC. Also contributing to the increase was LG&E's
recognition of a gain on the sale of fully-depreciated heavy equipment. See
Note 9.
The contribution to charitable foundation represents the initial contribution
to a tax-exempt charitable foundation. See Note 4 of Notes to Financial
Statements.
Interest charges decreased because of a lower composite interest rate on
outstanding debt and a reduction in notes payable. A component of interest
expense was the cost associated with $30 million of interest rate swaps that
LG&E entered into as a standard hedging device in connection with the issuance
of Pollution Control Bonds Series S due September 1, 2017, in 1992. The swaps
are designed to reduce the Company's exposure to interest rate risk. During
the nine months ended September 30, 1994, LG&E received interest at a composite
rate of 2.6% and paid interest at a composite rate of 4.55% pursuant to the
swaps.
Variations in income tax expense are largely attributable to changes in pretax
income.
Income from discontinued operations and gain on sale of discontinued operations
reflect the sale of the Company's investment in NGC in January 1994. See Note
5 of Notes to Financial Statements.
Cumulative effect of change in accounting principle reflects the adoption of
Statement of Financial Standards No. 112, Employers' Accounting for Post-
Employment Benefits. See Note 6 of Notes to Financial Statements.
Liquidity and Capital Resources
The Company's capital structure and cash flow remained strong throughout the
reported periods. This is evidenced primarily by the Company's ability to meet
its capital needs through internal cash generation, the lack of any short-term
borrowings and the significant investment in marketable securities at September
30, 1994.
The Company's need for capital funds is primarily related to the construction
of plant and equipment necessary to meet LG&E's electric and gas customers'
needs and protect the environment. Capital funds are also needed for partner-
ship equity contributions in connection with independent power production
projects in the non-utility business. During the nine months ended September
30, 1994, utility construction expenditures of $57 million and equity commit-
ments of $20.4 million for non-utility projects were financed with internally-
generated funds. The additional equity investment consisted primarily of LPI's
investment in a partnership that owns and manages wind power projects. LPI's
share of the earnings of affiliates, net of distributions received, also
contributed to the increase.
During 1994, the Company invested $128 million in marketable securities. At
September 30, 1994, such securities amounted to $143 million; $93 million
classified as marketable securities and $50 million classified as other
property and investments.
At September 30, 1994, loan agreements and lines of credit were in place
totaling $320 million ($25 million for LG&E Energy Corp., $145 million for
LG&E, and $150 million for Energy Systems) for which the companies pay commit-
ment or facility fees. There were not any outstanding borrowings under these
credit lines at September 30, 1994. These credit lines are scheduled to expire
at various times between 1994 and 1996, and management intends to renegotiate
them when they expire.
Variations in accounts receivable and accounts payable are not generally
significant indicators of the Company's liquidity, as such variations are
primarily attributable to seasonal fluctuations in weather in LG&E's service
territory, which has a direct effect on sales of electricity and gas.
The Company's capitalization ratios at September 30, 1994, and December 31,
1993, were:
Sept. 30, Dec. 31,
1994 1993
Long-term debt 42.9% 43.4%
Notes payable - 1.3
Preferred stock 7.6 7.6
Common equity 49.5 47.7
Total 100.0% 100.0%
For a description of new commitments subsequent to September 30, 1994, refer-
ence is made to Part II - Item 5, Other Information. For a description of
significant contingencies that may affect the Company, reference is made to
Part II herein - Item 1, Legal Proceedings.
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving the Company,
reference is made to: (i) Item 1 Business, Item 3 Legal Proceedings, Item 7
Management's Discussion and Analysis of Results of Operations and Financial
Condition, and Notes 10 and 11 of the Notes to Financial Statements under Item
8 Financial Statements and Supplementary Data in the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, (ii) Part II, Item 1 Legal
Proceedings, Financial Statements and Supplementary Data in the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1994 and June
30, 1994; and (iii) the Company's Current Reports on Form 8-K dated July 1,
1994 and September 30, 1994. Except as noted below, there have been no
material changes in these proceedings as reported in the Company's 1993 Form
10-K, March 1994 Form 10-Q, June 1994 Form 10-Q, July 1, 1994 Form 8-K and
September 30, 1994 Form 8-K.
Environmental. As discussed in Note 10 of the Notes to Financial Statements
under Item 8 of the 1993 Form 10-K and in Part II, Item 1, of the June 1994
Form 10-Q, in June 1992, the U.S. Environmental Protection Agency (USEPA)
identified LG&E as a potentially responsible party (PRP) allegedly liable under
the Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA) for $1.6 million in costs allegedly incurred by USEPA in cleanup of
the Sonora site and Carlie Middleton Burn site located in Hardin County,
Kentucky. The USEPA has since increased the amount of its demand to $1.8
million to reflect additional cleanup costs. In September 1994, USEPA filed a
CERCLA cost recovery action in the U.S. District Court for the Western District
of Kentucky against LG&E and six other parties. In LG&E's opinion, the
resolution of this issue will not have a material adverse impact on its
financial position or results of operations.
As discussed in Note 10 of the Notes to Financial Statements under Item 8 of
the Company's 1993 Form 10-K and in Part II, Item 1, of the June 1994 Form
10-Q, in August 1993, 34 persons filed a complaint in Jefferson Circuit Court
against LG&E seeking certification of a class consisting of all persons within
2.5 miles of its Mill Creek generating plant. The plaintiffs seek compensation
for alleged personal injury and property damage attributable to emissions from
the Mill Creek plant, injunctive relief, a fund to finance medical monitoring
of area residents, and other relief. In June 1994, the court denied the
plaintiffs' motion for certification of the class and thus limited the scope of
the litigation to the claims of the individual plaintiffs. In a related
matter, LG&E has made extensive efforts to settle property damage claims of
certain Mill Creek area residents who are not parties to the pending litiga-
tion. LG&E has recorded an accrual of $15 million for settlement of these
individual property damage claims.
As previously reported, in 1992, LG&E entered two agreed orders with the Air
Pollution Control District (APCD) of Jefferson County in which LG&E committed
to undertake remedial measures to address certain particulate emissions and
excess sulfur dioxide emissions from its Mill Creek generating plant. In May
1994, LG&E completed all specified remedial measures in accordance with the
terms of the Agreed Orders. LG&E incurred total capital expenditures of
approximately $33 million on the project, with an additional $2 million
expected to be incurred through 1996 on related modifications. LG&E has agreed
to commence a joint field sampling program with the APCD to demonstrate the
effectiveness of the remedial measures.
In March 1994, the APCD adopted a regulation requiring a 15% reduction from
1990 levels in volatile organic compound (VOC) emissions from industrial
sources. There are currently no demonstrated technologies for control of VOC
emissions from coal-fired utility boilers. Consequently, compliance with the
regulation could require limits on generation at the Mill Creek and Cane Run
plants, unless the APCD adopts a provision for compliance through utilization
of banked emission allowances. LG&E is currently negotiating with the APCD in
an effort to demonstrate its eligibility for an exclusion from the VOC reduc-
tion requirements or identify alternatives to the current regulation. LG&E is
currently unable to predict the outcome or exact impact of this matter.
Trimble County Generating Plant. As discussed in Note 11 of the Notes to
Financial Statements under Item 8 of the Company's 1993 Form 10-K and in Part
II, Item 1, of the March 1994 Form 10-Q and the June 1994 Form 10-Q, on
January 7, 1994, LG&E filed testimony with the Kentucky Public Service Commis-
sion (Commission) in which it recommended that the Commission allow it to
recover the approximately $11.1 million it refunded to customers under the 1989
settlement agreement. Testimony was filed by intervenors, including the
Kentucky Attorney General, the Jefferson County Attorney, the Metro Human Needs
Alliance, and the Kentucky Industrial Utility Customers. Their testimony
recommended that the Commission order LG&E to refund approximately $183
million, based upon their argument that LG&E should refund 25% of the revenue
requirements associated with Trimble County's construction-work-in-progress
(CWIP) collected through rates over the course of the Trimble County construc-
tion project.
On March 25, 1994, the Kentucky Attorney General and the Jefferson County
Attorney (Intervenors) filed a motion with the Commission in which they
requested that two of the three members of the Commission and certain unspeci-
fied Commission staff employees be recused from further participation in the
case. The intervenors supported the motion by arguing that past statements and
orders of the Commission in this and other proceedings showed that the Commis-
sioners had prejudged the issues relevant to the current proceeding. The
issues referred to in the motion centered on the Intervenors' claims that LG&E
should refund 25% of all revenues associated with Trimble County CWIP collected
through rates during the course of the plant's construction.
On July 8, 1994, the Commission entered an order which denied the motion. In
the order, the Commission stated that it had not prejudged any issues but
rather had decided a number of issues in past proceedings which are binding on
it and the parties. The Commission also stated that it had never implied in
prior orders that the amounts of Trimble County CWIP included in rate base
prior to the issuance of its July 1, 1988, order in Case No. 10064, a general
rate case, would be subject to later review. The Commission concluded that the
scope of the present case had been limited since at least 1985 when the
Commission issued an order that put LG&E on notice that in future rate cases
the continuation of allowing a return on further additions to Trimble County
CWIP would be an issue.
The Commission made its July 8, 1994, order final and appealable. The order
also stated that the Commission would not take any further action in this case
pending the passage of the statutory amount of time to file an appeal. On July
27, the Intervenors filed with the Commission a Petition for Rehearing of the
July 8 order, and the Kentucky Industrial Utility Customers (KIUC) filed an
Application for Rehearing with the Commission as well. On July 29, 1994, the
City of Louisville filed a pleading with the Commission in which it indicated
its support for and joinder in KIUC's Application.
On August 16, 1994, the Commission entered an Order which denied the request
for rehearing. On August 24, 1994, the Kentucky Attorney General, Jefferson
County Attorney, and the Metro Human Needs Alliance filed a joint Motion to
Admit Evidence, which requested the Commission to indicate whether the
intervenors' previously filed testimony on retroactive ratemaking and refund of
revenues collected prior to 1988 will be admitted into evidence. The Commis-
sion has not ruled on this Motion.
On September 7, 1994, the Intervenors filed a Complaint with the Franklin
Circuit Court in which they requested that the court prohibit Commissioners
Overbey and Davis from participating in the case, and appoint two special
Commissioners to hear the underlying case. The Complaint also requested the
Court to require the Commission to consider the issue of refunds based upon
pre-1988 CWIP, and to consider all evidence and testimony offered by them. On
September 30, 1994, the Commission filed a Motion to Dismiss the Complaint on
the grounds that the Intervenors had failed to serve their Complaint on all
parties to the underlying proceedings as required by law, and had failed to
designate the Commission record to the court in a timely manner. LG&E, on
October 10, 1994, filed its response in support of the Commission's motion. On
November 7, 1994, the Court dismissed the Complaint, ruling that the
Commission's orders of July 8 and August 16 were interlocutory in nature and
could not be appealed until the Commission had entered a final order in the
proceeding.
LG&E believes that the Commission's July 8 order makes it unlikely that the
Commission will entertain the position that the Intervenors have taken in their
previously-filed testimony that LG&E refund approximately $183 million to its
customers. LG&E believes that remaining at issue is what amount, if any, of
the approximately $30 million it collected subject to refund under a rate case
order issued in 1988 should be returned to ratepayers. Of this amount, LG&E
has already returned to ratepayers under the 1989 settlement agreement approxi-
mately $11.1 million through refunds and rate reductions. However, LG&E is
unable to predict the outcome of the Commission proceedings, or the amount of
additional refunds or recoveries, if any, that may be ordered.
Environmental Cost Recovery. On October 7, 1994, LG&E filed an application
with the Kentucky Public Service Commission in which it requested approval of
an environmental cost recovery surcharge to recover the costs LG&E has and will
incur to comply with federal, state, and local environmental requirements that
apply to coal combustion wastes and by-products from its generating facilities.
Under state law, the Commission has until April 7, 1995, to rule on the
application. If approved, LG&E estimates that the surcharge will increase
electric revenues by $5.5 million in 1995 and $8.3 million in 1996.
Southampton. As reported in the Form 8-K dated July 1, 1994, and the Form 10-Q
for the quarter ended June 30, 1994, LG&E Westmoreland Southampton (the
Partnership) has been seeking a reversal of the Federal Energy Regulatory
Commission's (FERC) order of July 7, 1994, denying the Partnership's request
for a limited waiver of certain technical qualifying facility operating
standard requirements at its Southampton plant in 1992.
On August 24, 1994, Virginia Power filed a motion for leave to respond to the
Partnership's request for rehearing and response to request for rehearing, and
a response to the Partnership's show cause order. On September 6, 1994, the
Partnership filed with the FERC its answer to Virginia Power's motion for leave
to respond and response to request for rehearing, and response to motions
concerning request for rehearing.
On September 6, 1994, the FERC granted itself an extension of time to act on
the Partnership's request for rehearing, tolling the 30 day period in which
the FERC was to have acted on the Partnership's rehearing request. The parties
have fully briefed and submitted to the FERC their respective motions with
respect to the request for rehearing and are awaiting the FERC's decision. The
Company believes that the FERC should grant the Partnership the relief that it
is seeking and, accordingly, believes the ultimate resolution of the matter
will not have a material adverse effect on its consolidated results from
operations or its financial condition. Nevertheless, in light of the FERC's
July 7, 1994 order, and the arguable lateness of the filing of the request for
rehearing one day out of time, the Company cannot predict what action the FERC
ultimately will take. Possible consequences from an adverse decision include
refunds and potential regulatory and other problems under PUHCA, Virginia
utility law and the Federal Power Act, the scope and amount of which cannot be
determined at this time.
Rensselaer. The Rensselaer plant, a 79 megawatt, natural-gas-fired facility in
Rensselaer, New York, produces steam and electricity from a combined-cycle gas
and steam turbine-generator system as a QF under the Public Utility Regulatory
Policies Act (PURPA). The project is jointly owned by LPI and Westmoreland
Energy, Inc. through a general partnership - LG&E-Westmoreland Rensselaer. The
facility supplies process steam to BASF Corporation and bulk electric power
under contract to Niagara Mohawk Power Corporation (Niagara Mohawk).
As a result of problems encountered during the start-up and testing of the
facility, the facility's commercial operation date was pushed back from
February, 1994 to April, 1994, and the Rensselaer facility did not meet the
FERC's operating or efficiency standard for 1993 and may not meet the efficien-
cy standard for 1994. LG&E-Westmoreland Rensselaer filed a waiver request with
the FERC on October 17, 1994, requesting a temporary waiver of the operating
and efficiency standards for 1993 and, if necessary, the efficiency standard
for 1994.
The Company, which indirectly owns a 50 percent interest in the project,
believes that the FERC should grant the waiver based upon past precedent and,
accordingly, believes that the ultimate resolution of this matter will not have
a material adverse effect on its consolidated results from operations or its
financial condition. The problems which occurred at the Rensselaer facility
during start-up and testing were not caused, and could not have been avoided,
by LG&E-Westmoreland Rensselaer. However, the Company cannot predict what
action the FERC may take. Possible consequences could include potential
regulatory and other problems under PUHCA, New York utility law and the Federal
Power Act, the scope and amount of which cannot be determined at this time.
Roanoke Valley I Facility. The Company owns a 50% interest in Westmoreland-
LG&E Partners (WLP), the sole owner of Roanoke Valley I, a cogeneration
facility selling electric power to Virginia Power and steam energy to Patch
Rubber Company. Under the Power Purchase Agreement (PPA) between WLP and
Virginia Power, WLP is entitled to receive capacity payments. From May 1994
through October 1994, Virginia Power withheld approximately $5.7 million of
these capacity payments during periods of forced outages, which were billed and
recorded as revenue by WLP. The Company has recorded 50% of the earnings of
WLP under the equity method of accounting. On October 31, 1994, WLP filed a
complaint against Virginia Power seeking damages of at least $5.7 million,
contending that Virginia Power has breached the PPA in withholding such
payments and has breached the implied covenant of good faith and fair dealing.
The Company believes WLP should be entitled to recover the capacity payments
during the forced outages that were withheld by Virginia Power and should
prevail in this matter, ensuring receipt of future capacity payments during
forced outages billable to Virginia Power during the remaining 25 years of the
PPA. However, the Company is unable to predict the outcome of this proceeding,
or the amount of capacity payments, if any, which Virginia Power may be ordered
to pay to WLP.
Other. As discussed in Items 1 and 3 of the Company's 1993 Form 10-K and Item
1 Legal Proceedings in Part II of the Company's Form 10-Q for the quarter ended
June 30, 1994, LPI announced a preliminary agreement with DuPont to form a
partnership that would own, improve and operate energy production facilities at
nine DuPont manufacturing sites. Virginia Power filed a request with the
Virginia's State Corporation Commission (SCC) for declaratory judgment deter-
mining that the proposed partnership is unlawful.
As reported in the Company's Current Report on Form 8-K, dated September 30,
1994, LPI announced that it ended negotiations with DuPont without reaching
final agreement on a plan to form the above-mentioned power partnership, which
has caused the proceedings before the SCC to become moot.
Item 5. Other Information.
LG&E has entered into an agreement with East Kentucky Power Cooperative, Inc.,
to provide about 40 megawatts of electricity to Gallatin Steel Company's new
steel mill in north central Kentucky. The agreement, which takes effect on
February 1, 1995, will continue for 10 years and is expected to result in
approximately $6 million of revenues annually. Gallatin makes steel for
manufacturing plants in Kentucky. LG&E will supply the electricity from its
power plants in the Louisville area. This transaction was negotiated by LG&E
Power Marketing, Inc., an affiliate of the Company, and the terms of the
transaction were approved by the Public Service Commission of Kentucky.
In November 1994, the Company announced that one of its subsidiaries, LG&E
International Inc., had formed a joint venture that will build and operate a
natural-gas-fired power plant in north central Argentina. The plant is
scheduled to be built and operational by July 1995. The other partners in the
project are Sideco Americana, S.A., an Argentine engineering and construction
company, and Charter Oak Energy, Inc., a non-utility subsidiary of Northeast
Utilities. The Company expects that LG&E International's equity investment in
the joint venture will total $18 million.
The Company owns or is developing six independent power projects with
Westmoreland Energy, Inc. (WEI) -- Roanoke Valley I, Roanoke Valley II,
Rensselaer, Hopewell, Altavista and Southampton. On November 8, 1994,
Westmoreland Coal Company (Westmoreland), the parent of WEI, together with
certain of Westmoreland's subsidiaries other than WEI, filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. According to Westmoreland, this
filing was made in order to facilitate the sale of its Kentucky Criterion Coal
unit, and will leave unaffected all of Westmoreland's existing debt obligations
and stockholder interests. The Company is currently reviewing the various
agreements and commitments relative to those six power projects, and it appears
that technical defaults may have resulted with certain of the project lenders
by reason of the bankruptcy filing.
Remedies available to those lenders by reason of a default would include, among
other things, the imposition of higher interest rates on their outstanding
loans, the suspension of further construction funding (if any) under their
loans, the imposition of restrictions on project partner distributions, the
acceleration of the principal loan balances and foreclosure on the projects,
and the acceleration of the equity contributions to be made by the relevant
project partners.
As indicated in Note 7, WEI and the Company have certain equity funding
commitments relative to the Roanoke Valley I, Roanoke Valley II and Rensselaer
projects, and a portion of WEI's commitments have been guaranteed by Energy
Systems and assumed by Greyrock. The Roanoke Valley I, Rensselaer, Hopewell,
Altavista and Southampton projects are in commercial operation, and are
generating sufficient cash flows to meet the scheduled debt service require-
ments under the project loans.
Based upon discussions with the projects' lenders and other factors, the
Company has no information that causes it to anticipate that the project
lenders or others will take action as a result of the technical defaults that
would adversely affect the projects or the Company's interests, or that would
require changes in the operation of the projects.
Item 6(a). Exhibits.
Exhibit
Number Description
27 Financial Data Schedule.
99.01 Description of Common Stock.
Item 6(b). Reports on Form 8-K.
Current Report on Form 8-K dated July 1, 1994, stating that the LG&E-
Westmoreland Southampton partnership will seek rehearing on FERC QF ruling.
Current Report on Form 8-K dated September 30, 1994, stating that LPI announced
that it ended negotiations with DuPont without reaching final agreement on a
plan to form a partnership that would own, improve and operate energy produc-
tion facilities at nine DuPont manufacturing sites.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LG&E ENERGY CORP.
Registrant
Date: November 14, 1994 /s/ Charles A. Markel
Charles A. Markel
Corporate Vice President, Finance
and Treasurer
(On behalf of the registrant in his capac-
ity as Principal Accounting Officer)
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<OPERATING-INCOME-LOSS> 80,830
<OTHER-INCOME-NET> 43,138 <F4>
<INCOME-BEFORE-INTEREST-EXPEN> 123,968
<TOTAL-INTEREST-EXPENSE> 32,066
<NET-INCOME> 91,902
4,261
<EARNINGS-AVAILABLE-FOR-COMM> 87,641
<COMMON-STOCK-DIVIDENDS> 52,053
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 103,396
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.66
<FN>
<F1>Includes common stock expense of $899.
<F2>Represents unrealized loss on marketable securities,
net of taxes.
<F3>Includes equity in earnings of affiliates of
$11,457.
<F4>Includes gain on sale of discontinued operations
of $51,805 (net of taxes) and cumulative effect
of accounting change of $3,369 (net of taxes).
</FN>
</TABLE>
DESCRIPTION OF COMMON STOCK
The information under this caption is a succinct summary of certain provisions
and is subject to the detailed provisions of the Company's Articles of
Incorporation, as amended, and of its By-Laws, which have been filed (or
incorporated by reference) as exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1993 and which are incorporated herein by
this reference.
Authorized Stock
Under the Company's Articles of Incorporation, the Company is authorized to
issue 75,000,000 shares of Common Stock, without par value (the "Common
Stock"), of which approximately 33,013,149 shares were outstanding on September
30, 1994.
The Company is also authorized to issue 5,000,000 shares of preferred stock,
without par value (the "Preferred Stock"). As discussed below under the
caption "Rights to Purchase Series A Preferred Stock," the Company has created
a series of Preferred Stock designated as "Series A Preferred Stock," and the
number of shares constituting such series is 750,000. No shares of such Series
A Preferred Stock and no shares of any other Preferred Stock are currently
outstanding. Preferred Stock may be issued in the future in such series as may
be designated by the Company's Board of Directors. In creating any such
series, the Company's Board of Directors has the authority to fix the rights
and preferences of each series with respect to, among other things, the
dividend rate, redemption provisions, liquidation preferences, and sinking fund
provisions.
Dividend Rights
Subject to the prior payment in full of all accrued and unpaid dividends on the
Series A Preferred Stock and possible prior rights of holders of other
Preferred Stock that may be issued in the future, holders of the Company's
Common Stock are entitled to receive such dividends as may be declared from
time to time by the Board of Directors of the Company out of funds legally
available therefor.
The funds required by the Company to enable it to pay dividends on its Common
Stock are expected to be derived principally from dividends paid by Louisville
Gas and Electric Company, the Company's principal subsidiary ("LG&E"), on
LG&E's Common Stock. The Company's ability to receive dividends on LG&E's
Common Stock is subject to the prior rights of the holders of LG&E's preferred
stock and the covenants of debt instruments limiting the ability of LG&E to pay
dividends.
The only existing covenant limiting LG&E's ability to pay dividends is in
LG&E's trust indenture, as supplemented, securing LG&E's first mortgage bonds.
It provides in substance that retained income of LG&E equal to the amount by
which the aggregate of (a) provisions for retirement and depreciation and (b)
expenditures for maintenance, for the period from January 1, 1989, to the end
of the last preceding month for which a balance sheet of LG&E is available, is
less than 2.25% of depreciable property, including construction work in
progress, as of the end of that period, shall not be available for the payment
of cash dividends on the Common Stock of LG&E. No portion of retained income
of LG&E is presently restricted by this provision.
Voting Rights
Every holder of Common Stock and every holder of Series A Preferred Stock that
may be issued in the future is entitled to one vote per share for the election
of directors and upon all other matters on which such holder is entitled to
vote. At all elections of directors, any eligible stockholder may vote
cumulatively. The Board of Directors of the Company has the authority to fix
conversion and voting rights for any new series of Preferred Stock (including
the right to elect directors upon a failure to pay dividends), provided that no
share of Preferred Stock can have more than one vote per share.
Notwithstanding the foregoing, if any Series A Preferred Stock is issued in the
future and if and when dividends payable on such Series A Preferred Stock that
may be issued in the future shall be in default for six full quarterly
dividends and thereafter until all defaults shall have been paid, the holders
of the Series A Preferred Stock, voting separately as one class, to the
exclusion of the holders of Common Stock, will be entitled to elect two (2)
directors of the Company.
The Company's Articles of Incorporation contain "fair price" provisions, which
require that mergers and certain other business combinations or transactions
involving the Company and any substantial (10% or more) holder of the Company's
Voting Stock (as defined below) must be approved by the holders of at least 80%
of the voting power of the Company's outstanding Voting Stock and by the
holders of at least 66-2/3% of the voting power of the Company's Voting Stock
not beneficially owned by the 10% owner unless the transaction is either
approved by a majority of the members of the Board of Directors who are
unaffiliated with the substantial holder or certain minimum price and
procedural requirements are met. Any amendment to the foregoing provisions
must be approved by the holders of at least 80% of the voting power of the
Company's outstanding Voting Stock and by the holders of at least 66-2/3% of
the voting power of the Company's Voting Stock not beneficially owned by any
10% owner. The Company's Voting Stock consists of all outstanding shares of
the Company generally entitled to vote in the election of directors and
currently consists of the Company's Common Stock.
Subject to the rights of the Series A Preferred Stock (if any are issued) to
elect directors under certain circumstances described above and any voting
rights of the holders of the Company's Preferred Stock that may be issued in
the future, the Company's Articles and By-Laws contain provisions stating that:
(a) the Board of Directors shall be divided into three classes, as nearly equal
in number as possible, each of which, after an interim arrangement, will serve
for three years, with one class being elected each year, (b) directors may be
removed only with the approval of the holders of at least 80% of the voting
power of the shares of the Company generally entitled to vote, except that so
long as cumulative voting applies no director may be removed if the votes cast
against removal would be sufficient to elect the director if cumulatively voted
at an election of the class of directors of which such director is a part, (c)
any vacancy on the Board of Directors shall be filled by the remaining
directors then in office, though less than a quorum, (d) advance notice of
introduction by stockholders of business at annual stockholders' meetings and
of stockholder nominations for the election of directors shall be given and
that certain information be provided with respect to such matters, (e)
stockholder action may be taken only by unanimous written consent or at an
annual meeting of stockholders or a special meeting of stockholders called by
the President, the Board of Directors or, to the extent required by Kentucky
law, stockholders, and (f) the foregoing provisions may be amended only by the
approval of the holders of at least 80% of the voting power of the shares of
the Company generally entitled to vote. These provisions along with the "fair
price" provisions and cumulative voting provisions discussed above and the
Rights described below, may deter attempts to change control of the Company (by
proxy contest, tender offer or otherwise) and will make more difficult a change
in control of the Company that is opposed by the Company's Board of Directors.
Liquidation Rights
Subject to the prior rights of the holders of the Series A Preferred Stock that
may be issued in the future and the possible prior rights of holders of other
Preferred Stock that may be issued in the future, in the event of liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, the
holders of the Common Stock are entitled to the remaining assets.
Other Provisions
No holder of Common Stock or any future holder of Preferred Stock has the
preemptive right to subscribe for and purchase any part of any new or
additional issue of stock or securities convertible into stock. The Common
Stock is not subject to redemption and does not have any conversion or sinking
fund provisions. The issued and outstanding shares of Common Stock are fully
paid and nonassessable shares of Common Stock of the Company.
Under the Company's Articles of Incorporation, the Board of Directors may issue
additional shares of authorized but unissued Common Stock for such
consideration as it may from time to time determine.
Rights to Purchase Series A Preferred Stock
On December 5, 1990, the Board of Directors of the Company: (i) declared a
dividend distribution of one Preferred Stock purchase right (a "Right" or
"Rights") for each outstanding share of Common Stock to shareholders of record
on December 19, 1990, and issuable as of such Record Date and (ii) further
authorized the issuance of one Right with respect to each share of Common Stock
of the Company that becomes outstanding after such Record Date and before the
Distribution Date (as defined below).
The Company declared a three-for-two split of the Common Stock to stockholders
of record on April 30, 1992. As a result of the stock split and in accordance
with the terms of the Rights, the number of Rights associated with a share of
Common Stock was reduced, effective May 15, 1992, from one Right per share to
two-thirds of a Right per share.
Each whole Right entitles the holder of record to purchase from the Company one
one-hundredth of a share of Series A Preferred Stock, without par value, of the
Company ("Series A Preferred Stock") at a price of $110 per one one-hundredth
of a share (the "Purchase Price"). The description and terms of the Rights are
set forth in a Rights Agreement (the "Rights Agreement").
Initially the Rights will not be exercisable, certificates will not be sent to
shareholders and the rights will automatically trade with the Common Stock.
The Rights will be evidenced by the Common Stock certificates until the close
of business on the earlier to occur of the tenth day following (i) a public
announcement (or, if earlier, the date a majority of the Board of Directors of
the Company becomes aware) that a person or group of affiliated or associated
persons has become an "Acquiring Person", which is defined as a person who has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding Common Stock of the Company (the "Stock Acquisition Date"),
or (ii) the commencement of, or public announcement of an intention to
commence, a tender or exchange offer the consummation of which would result in
the ownership of 20% or more of the outstanding Common Stock (the earlier of
the dates in clause (i) or (ii) being called the "Distribution Date"). Until
the Distribution Date, (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Stock outstanding will also constitute
the transfer of the Rights associated with the Common Stock represented by such
certificate.
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of
record of the Company's Common Stock as of the close of business on the
Distribution Date, and such separate certificates alone will evidence the
rights from and after the Distribution Date.
Each of the following persons (an "Exempt Person") will not be deemed to be an
Acquiring Person, even if they have acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding Common Stock of the
Company: (i) the Company, any subsidiary of the Company, any employee benefit
plan or employee stock plan of the Company or of any subsidiary of the Company;
and (ii) any person who becomes an Acquiring Person solely by virtue of a
reduction in the number of outstanding shares of Common Stock, unless and until
such person shall become the beneficial owner of, or make a tender offer for,
any additional shares of Common Stock.
The Rights are not exercisable until the Distribution Date. The Rights will
expire at the close of business on December 19, 2000, unless earlier redeemed
or exchanged by the Company as described below.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Series A Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for Series A
Preferred Stock or convertible securities at less than the current market price
of the Series A Preferred Stock or (iii) upon the distribution to holders of
the Series A Preferred Stock of evidences of indebtedness or assets (excluding
dividends payable in Series A Preferred Stock) or of subscription rights or
warrants (other than those referred to above). The number of Rights associated
with a share of the Company's Common Stock is subject to adjustment from time
to time in the event of a stock dividend on, or a subdivision or combination
of, the Common Stock.
In the event any Person (other than an Exempt Person) becomes the beneficial
owner of 20% or more of the then outstanding shares of Common Stock (except
pursuant to an offer for all outstanding shares of Common Stock that the
independent directors determine to be fair to and otherwise in the best
interest of the Company and its shareholders) or any Exempt Person who is the
beneficial owner of 20% or more of the outstanding Common Stock fails to
continue to qualify as an Exempt Person, then each holder of record of a whole
Right, other than the Acquiring Person, will thereafter have the right to
receive, upon payment of the Purchase Price, Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having a
market value at the time of the transaction equal to twice the Purchase Price.
However, Rights are not exercisable following such event until such time as the
Rights are no longer redeemable by the Company as set forth below. Any Rights
that are or were at any time, on or after the Distribution Date, beneficially
owned by an Acquiring Person shall become null and void.
For example, at an exercise price of $110 per Right, each whole Right not owned
by an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $220
worth of Common Stock (or other consideration, as noted above) for $110.
Assuming that the Common Stock had a per share value of $36 at such time, the
holder of each valid Right would be entitled to purchase 6.11 shares of Common
Stock for $110.
After the Rights have become exercisable, if the Company is acquired in a
merger or other business combination (in which any shares of the Company's
Common Stock are changed into or exchanged for other securities or assets) or
more than 50% of the assets or earning power of the Company and its
subsidiaries (taken as a whole) are sold or transferred in one or a series of
related transactions, the Rights Agreement provides that proper provision shall
be made so that each holder of record of a whole Right will have the right to
receive, upon payment of the Purchase Price, that number of shares of common
stock of the acquiring company having a market value at the time of such
transaction equal to two times the Purchase Price.
After any such event, to the extent that insufficient shares of Common Stock
are available for the exercise in full of the Rights, holders of Rights will
receive upon exercise shares of Common Stock to the extent available and then
other securities of the Company, including units of shares of Series A
Preferred Stock with rights substantially comparable to those of the Common
Stock, property, or cash, in proportions determined by the Company, so that the
aggregate value received is equal to twice the Purchase Price. The Company,
however, shall not be required to issue any cash, property or debt securities
upon exercise of the Rights to the extent their aggregate value would exceed
the amount of cash the Company would otherwise be entitled to receive upon
exercise in full of the then exercisable Rights.
No fractional shares of Series A Preferred Stock or Common Stock will be
required to be issued upon exercise of the Rights and, in lieu thereof, a
payment in cash may be made to the holder of such Rights equal to the same
fraction of the current market value of a share of Series A Preferred Stock or,
if applicable, Common Stock.
At any time until ten days after the Stock Acquisition Date (subject to
extension by the Board of Directors), the Company may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right (subject to certain anti-
dilution adjustments) (the "Redemption Price"). After such redemption period,
the Company's right of redemption may be reinstated, under certain
circumstances, if an Acquiring Person reduces his beneficial ownership of
Common Stock to below 10% and there is no other Acquiring Person. Immediately
upon the action of the Board of Directors of the Company authorizing redemption
of the Rights, the right to exercise the rights will terminate, and the only
right of the holders of Rights will be to receive the Redemption Price without
any interest thereon.
The Board of Directors may, at its option, at any time after any Person becomes
an Acquiring Person, exchange all or part of the outstanding Rights (other than
Rights held by the Acquiring Person and certain related parties) for shares of
Common Stock at an exchange ratio of 1.5 shares of Common Stock per Right
(subject to certain anti-dilution adjustments). However, the Board may not
effect such an exchange at any time any Person or group owns 50% or more of the
shares of Common Stock then outstanding. Immediately after the Board orders
such an exchange, the right to exercise the Rights shall terminate and the
holders of Rights shall thereafter only be entitled to receive shares of Common
Stock at the applicable exchange ratio.
The Board of Directors of the Company may amend the Rights Agreement. After
the Distribution Date, however, the provisions of the Rights Agreement may be
amended by the Board only to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person or an affiliate or associate of an Acquiring Person), or
to shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust the time period governing redemption shall
be made at such time as the Rights are not redeemable. In addition, no
supplement or amendment may be made which changes the Redemption Price, the
final expiration date, the Purchase Price or the number one one-hundredths of a
share of Series A Preferred Stock for which a Right is exercisable, unless at
the time of such supplement or amendment there has been no occurrence of a
Stock Acquisition Date and such supplement or amendment does not adversely
affect the interests of the holders of Rights (other than an Acquiring Person
or an associate or affiliate of an Acquiring Person).
Until a Right is exercised, the holder, as such, will have no rights as a
shareholder of the Company, including, without limitation, the right to vote or
to receive dividends.
The issuance of the Rights is not taxable to the Company or to shareholders
under presently existing federal income tax law, and will not change the way in
which shareholders can presently trade the Company's shares of Common Stock.
If the Rights should become exercisable, shareholders, depending on then
existing circumstances, may recognize taxable income.
The rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors and, accordingly, will make
more difficult a change of control that is opposed by the Company's Board of
Directors. However, the Rights should not interfere with a proposed change of
control (including a merger or other business combination) approved by a
majority of the Board of Directors since the Rights may be redeemed by the
Company at the Redemption Price at any time until ten days after the Stock
Acquisition Date (subject to extension by the Board of Directors). Thus, the
Rights are intended to encourage persons who may seek to acquire control of the
Company to initiate such an acquisition through negotiations with the Board of
Directors. Nevertheless, the Rights also may discourage a third party from
making a partial tender offer or otherwise attempting to obtain a substantial
equity position in, or seeking to obtain control of, the Company. To the
extent any potential acquirors are deterred by the Rights, the Rights may have
the effect of preserving incumbent management in office.
A copy of the Rights Agreement has been filed with the Securities and Exchange
Commission as an Exhibit to the Company's Registration Statement on Form S-8,
Registration No. 33-38557. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is incorporated in this summary description herein by
reference.
Miscellaneous
The Company's outstanding Common Stock is listed on the New York and Chicago
Stock Exchanges.
Transfer Agents and Registrar
The Transfer Agents for the Common Stock are the Company and Continental Stock
Transfer & Trust Company, New York, New York. Registrar for the Common Stock
is PNC Bank, Kentucky, Inc., Louisville, Kentucky.
