SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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. 32,988,441 shares, without
par value, as of July 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 Six Months Ended
June 30, June 30,
1994 1993 1994 1993
REVENUES:
Electric . . . . . . . . . . . . .$143,368 $137,254 $266,786 $262,279
Gas. . . . . . . . . . . . . . . . 29,769 29,730 126,131 114,511
Non-utility. . . . . . . . . . . . 19,217 33,384 43,899 61,974
Total revenues. . . . . . . . . . 192,354 200,368 436,816 438,764
COST OF REVENUES:
Fuel and power purchased . . . . . 40,484 39,770 77,104 77,643
Gas supply expenses. . . . . . . . 18,447 19,487 85,846 76,849
Development and construc-
tion costs. . . . . . . . . . . . 15,370 28,470 36,128 53,639
Total cost of revenues. . . . . 74,301 87,727 199,078 208,131
Gross profit. . . . . . . . . . . . 118,053 112,641 237,738 230,633
OPERATING EXPENSES:
Operation and maintenance. . . . . 60,229 55,181 119,281 109,182
Depreciation and amortization. . . 21,109 20,332 42,074 40,870
Non-recurring charges (Note 3) . . - - 48,743 -
Total operating expenses. . . . . 81,338 75,513 210,098 150,052
Equity in earnings of
joint ventures . . . . . . . . . . 4,336 2,139 6,880 3,472
OPERATING INCOME. . . . . . . . . . 41,051 39,267 34,520 84,053
Other income and
(deductions) (Note 4). . . . . . . 7,165 (753) (8,676) (1,190)
Interest charges. . . . . . . . . . 10,714 11,907 21,311 24,261
Income from continuing oper-
ations before income taxes . . . . 37,502 26,607 4,533 58,602
Income taxes. . . . . . . . . . . . 14,029 9,564 (354) 21,399
Income from continuing oper-
ations before preferred
dividends. . . . . . . . . . . . .$ 23,473 $ 17,043 $ 4,887 $ 37,203
LG&E Energy Corp. and Subsidiaries
Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
Income from continuing oper-
ations before preferred
dividends. . . . . . . . . . . . .$ 23,473 $ 17,043 $ 4,887 $ 37,203
Preferred dividends . . . . . . . . 1,380 1,668 2,758 3,255
INCOME FROM CONTINUING
OPERATIONS . . . . . . . . . . . . 22,093 15,375 2,129 33,948
Income from discontinued operations,
net of income taxes of $1,443
and $2,427 (Note 5). . . . . . . . - 2,233 - 3,757
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 . . 22,093 17,608 53,934 37,705
Cumulative effect of change
in accounting principle, net of
income taxes of $2,280 (Note 6). . - - (3,369) -
NET INCOME. . . . . . . . . . . . .$ 22,093 $ 17,608 $ 50,565 $ 37,705
Average common shares
outstanding. . . . . . . . . . . . 32,988 32,619 32,978 32,532
EARNINGS PER SHARE:
Continuing operations. . . . . . .$ .67 $ .47 $ .06 $ 1.04
Income from discontinued
operations. . . . . . . . . . . . - .07 - .12
Gain on sale of discontinued
operations. . . . . . . . . . . . - - 1.57 -
Cumulative effect of accounting
change. . . . . . . . . . . . . . - - (.10) -
Total earnings per share. . . .$ .67 $ .54 $ 1.53 $ 1.16
LG&E Energy Corp. and Subsidiaries
Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
June 30, Dec. 31,
1994 1993
UTILITY PLANT:
At original cost . . . . . . . . . . . . . . . . . .$2,497,341 $2,464,101
Less: reserve for depreciation. . . . . . . . . . . 859,387 823,141
Net utility plant . . . . . . . . . . . . . . . . . 1,637,954 1,640,960
OTHER PROPERTY AND INVESTMENTS - less reserve:
Investments in affiliates (Note 9) . . . . . . . . . 87,021 63,241
Other (Note 8) . . . . . . . . . . . . . . . . . . . 38,164 24,949
Investment in discontinued operations (Note 5) . . . - 84,284
Total other property and investments. . . . . . . . 125,185 172,474
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . 56,499 67,377
Marketable securities (Note 8) . . . . . . . . . . . 112,358 -
Accounts receivable - less reserve . . . . . . . . . 102,617 124,504
Materials and supplies - at average cost:
Fuel (predominantly coal) . . . . . . . . . . . . . 15,071 12,075
Gas stored underground. . . . . . . . . . . . . . . 12,471 33,370
Other . . . . . . . . . . . . . . . . . . . . . . . 38,721 40,357
Prepayments and other. . . . . . . . . . . . . . . . 4,893 1,600
Total current assets. . . . . . . . . . . . . . . . 342,630 279,283
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense . . . . . . . . . . . . . . 24,105 24,698
Accumulated deferred income taxes. . . . . . . . . . 78,636 58,675
Regulatory asset - income taxes. . . . . . . . . . . 39,124 39,651
Other. . . . . . . . . . . . . . . . . . . . . . . . 40,393 69,053
Total deferred debits and other assets. . . . . . . 182,258 192,077
Total assets. . . . . . . . . . . . . . . . . . .$2,288,027 $2,284,794
LG&E Energy Corp. and Subsidiaries
Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITAL AND LIABILITIES
June 30, Dec. 31,
1994 1993
CAPITALIZATION:
Common stock, without par value -
Authorized 75,000,000 shares;
outstanding 32,988,441 shares
and 32,956,148 shares (Note 2). . . . . . . . . . .$ 460,089 $ 458,940
Common stock expense . . . . . . . . . . . . . . . . (899) (899)
Unrealized loss on marketable
securities, net of income
taxes of $1,538 (Note 8). . . . . . . . . . . . . . (2,626) -
Retained earnings. . . . . . . . . . . . . . . . . . 287,863 271,606
Total common equity . . . . . . . . . . . . . . . . 744,427 729,647
Cumulative preferred stock . . . . . . . . . . . . . 116,716 116,716
Long-term debt . . . . . . . . . . . . . . . . . . . 662,870 662,879
Total capitalization. . . . . . . . . . . . . . . . 1,524,013 1,509,242
CURRENT LIABILITIES:
Notes payable. . . . . . . . . . . . . . . . . . . . - 20,000
Accounts payable . . . . . . . . . . . . . . . . . . 89,415 111,192
Common dividends declared. . . . . . . . . . . . . . 17,154 17,137
Accrued taxes. . . . . . . . . . . . . . . . . . . . 25,624 11,267
Accrued interest . . . . . . . . . . . . . . . . . . 13,189 12,864
Other. . . . . . . . . . . . . . . . . . . . . . . . 31,675 38,394
Total current liabilities . . . . . . . . . . . . . 177,057 210,854
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes . . . . . . . . . . . . . . . . . . . . . . . 338,852 345,630
Investment tax credit, in
process of amortization . . . . . . . . . . . . . . 89,194 91,572
Customers' advances for construction . . . . . . . . 7,788 7,384
Regulatory liability - income taxes. . . . . . . . . 47,582 46,528
Other. . . . . . . . . . . . . . . . . . . . . . . . 103,541 73,584
Total deferred credits and other liabilities. . . . 586,957 564,698
Total capital and liabilities . . . . . . . . . .$2,288,027 $2,284,794
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows
(Unaudited - Thousands of $)
Six Months Ended
June 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . .$ 50,565 $ 37,705
Items not requiring cash currently:
Cumulative effect of change
in accounting principle . . . . . . . . . . . . . 3,369 -
Non-recurring charges . . . . . . . . . . . . . . . 48,743 -
Depreciation and amortization . . . . . . . . . . . 42,074 40,870
Deferred income taxes - net . . . . . . . . . . . . (19,277) (2,739)
Investment tax credit - net . . . . . . . . . . . . (2,378) (10,659)
Undistributed earnings of joint ventures. . . . . . (3,380) (1,242)
Income from discontinued operations . . . . . . . . - (3,757)
Gain on sale of discontinued operations . . . . . . (90,878) -
Other . . . . . . . . . . . . . . . . . . . . . . . 13,299 9,814
(Increases) decreases in net current assets:
Accounts receivable . . . . . . . . . . . . . . . . 21,887 (7,587)
Materials and supplies. . . . . . . . . . . . . . . 19,539 27,669
Accounts payable. . . . . . . . . . . . . . . . . . (21,777) (13,011)
Accrued taxes . . . . . . . . . . . . . . . . . . . 14,357 7,953
Accrued interest. . . . . . . . . . . . . . . . . . 325 (324)
Prepayments and other . . . . . . . . . . . . . . . (10,012) 44,261
Other. . . . . . . . . . . . . . . . . . . . . . . . (4,606) (23,096)
Net cash provided by operating activities . . . . . 61,850 105,857
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of capital asset. . . . . . . . . . . . . . . . - 91,076
Investment in marketable securities. . . . . . . . . (116,481) -
Long-term investments in securities. . . . . . . . . (14,841) (363)
Construction expenditures. . . . . . . . . . . . . . (37,864) (44,268)
Investment in affiliates . . . . . . . . . . . . . . (20,400) -
Proceeds from sale of discontinued operations. . . . 170,000 -
Net cash (used for) provided by
investing activities. . . . . . . . . . . . . . .$ (19,586) $ 46,445
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Six Months Ended
June 30,
1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . .$ 1,149 $ 12,406
Issuance of preferred stock. . . . . . . . . . . . . - 24,741
Redemption of preferred stock. . . . . . . . . . . . - (25,557)
Retirement of pollution control bonds. . . . . . . . - (27,427)
Decrease in notes payable. . . . . . . . . . . . . . (20,000) (8,000)
Payment of common dividends. . . . . . . . . . . . . (34,291) (32,588)
Net cash used for financing activities. . . . . . . (53,142) (56,425)
NET (DECREASE) INCREASE IN CASH AND
TEMPORARY CASH INVESTMENTS . . . . . . . . . . . . . (10,878) 95,877
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 67,377 21,997
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . .$ 56,499 $ 117,874
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes. . . . . . . . . . . . . . . . . . .$ 47,908 $ 29,679
Interest on borrowed money. . . . . . . . . . . . 20,381 24,418
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 Six Months Ended
June 30, June 30,
1994 1993 1994 1993
Balance at beginning of period. . . $282,924 $254,883 $271,606 $251,121
Net income. . . . . . . . . . . . . 22,093 17,608 50,565 37,705
Subtotal. . . . . . . . . . . . . . 305,017 272,491 322,171 288,826
Cash dividends declared on
common stock ($.52, $.5025,
$1.04 and $1.005 per share). . . . 17,154 16,416 34,308 32,751
Preferred stock redemption
expense. . . . . . . . . . . . . . - 818 - 818
Balance at end of period. . . . . . $287,863 $255,257 $287,863 $255,257
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 are adequate to make the information presented not mislead-
ing. Certain amounts in the statements of income and cash flows for the
three- and six-month periods ended June 30, 1993, have been restated to be
consistent with the presentation for the three- and six-month periods ended
June 30, 1994.
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 six months ended June 30,
1994, were:
Shares $000's
Outstanding January 1 32,956,148 $458,940
Issued under the Employee
Common Stock Purchase Plan 21,640 718
Issued under the Omnibus Long-Term
Incentive Plan 10,653 431
Outstanding June 30 32,988,441 $460,089
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 local utility industry becomes more competitive in the
future.
In addition to the realignment, LG&E has reevaluated its regulatory strate-
gy which previously had been to seek full recovery of certain costs de-
ferred 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 terminating a contract to lease 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 pretax income by $5.6
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 $36 million at June 30, 1994, and at December 31, 1993. Contingent
construction and project performance guarantees totaled $220 million at
June 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, LPI and Energy Systems have 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 Nations Finan-
cial Capital Corporation (Nations Financial) under which Nations Financial
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.
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 June 30, 1994, balance
sheet. Realized investment gains and losses are calculated on the specific
identification basis and were immaterial during the three- and six-month
periods ended June 30, 1994. Proceeds from sales of available-for-sale
securities for the three- and six-month periods ended June 30, 1994, were
$77.6 million and $202 million, respectively. The amount reflected in
common equity as unrealized loss includes gross unrealized holding losses
of approximately $4.6 million and gross unrealized holding gains of approx-
imately $.4 million.
Available-for-sale securities at June 30, 1994, consisted of $112.4 million
classified as marketable securities and $34.8 million classified as other
property and investments in the accompanying balance sheet. The total of
$147.2 million is composed of approximately $111.2 million debt securities
and $36 million equity securities. The difference between the amortized
and unamortized cost bases of the Company's available-for-sale securities
at June 30, 1994, was immaterial. The approximate fair values of debt
securities by contractual-maturity category were as follows: between one
and five years, $63.5 million; between five and ten years, $29.2 million;
not due at a single maturity date, $18.5 million.
9. The Company formed a partnership with Kenetech Corporation in the first
half of 1994. The partnership owns and manages two wind energy projects
located in Palm Springs, California, and Buffalo Ridge, Minnesota. The
Company invested approximately $20.4 million in the partnership in the
first half of 1994 representing a 50% ownership.
10. On July 7, 1994, the Federal Energy Regulatory Commission (FERC) issued a
ruling denying the request of LG&E-Westmoreland Southampton (the Partner-
ship) for a limited waiver of certain technical qualifying facility (QF)
operating standard requirements at its Southampton plant in 1992 and
directing the Partnership to show cause why it should not file rate
schedules reflecting 1992 electric sales to Virginia Electric and Power
Co. (Virginia Power) as a utility, rather than as a QF. The Company owns
an indirect 50% interest in the Partnership. On August 9, 1994, the
Partnership filed with FERC its request for rehearing, along with a motion
to consider its request for rehearing as timely filed or, in the alterna-
tive, to treat its request for rehearing as a motion for reconsideration.
The Company cannot predict what action FERC ultimately will take on this
matter. See Part II - Item 1, Legal Proceedings, for a further discussion
of this matter.
Virginia Power has made an administrative filing with the Virginia State
Corporation Commission (SCC) requesting that the SCC, among other things,
enter a declaratory order determining that the activities of the partner-
ship proposed to be formed by the DuPont Company (DuPont) and LPI are
unlawful and violate Virginia Power's rights under its certificate of
public convenience and necessity. On July 1, 1994, DuPont filed a motion
with the SCC, in which LPI joined, to dismiss the proceedings, stating that
the SCC has no jurisdiction over the case.
Reference is made to Part II herein - Item 1, Legal Proceedings, for a
further discussion of this legal proceeding, as well as others involving
the Company.
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 June 30, 1994, Compared with
Three Months Ended June 30, 1993
The increase in net income was due primarily to increased earnings at LG&E and
to increases in fee income and interest income. The increase in LG&E's
earnings was primarily due to an increase in electric sales to retail customers
as a result of warmer weather partially offset by increased operation expenses.
A comparison of utility operating revenues for the quarter ended June 30, 1994,
with the quarter ended June 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 $ 518 $ 1,387
Variation in sales volume, etc. 6,846 (1,802)
Total 7,364 (415)
Sales to other utilities (1,278) -
Gas transportation - net - 534
Other 28 (80)
Total $ 6,114 $ 39
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.
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 increased 2% for the quarter. Fuel expenses increased
for the quarter primarily because of increased generation partially offset by a
decrease in the cost of coal burned.
Gas supply expenses decreased 5% due mainly to a decrease in the volume of gas
delivered to the distribution system and a slight decrease in the cost of gas
purchased.
Development and construction costs decreased due mainly to the lower level of
construction activity on LPI's Roanoke Valley I and Rensselaer projects.
Operation and maintenance expenses increased due to increased costs to operate
the power plants and a higher level of administrative and general expenses at
LG&E including an increase in LG&E's provision for uncollectible service
accounts, and increased expenses related to LPI's international business
development efforts.
Depreciation and amortization increased because of increased depreciable plant
in service.
The increase in equity in earnings of joint ventures was due mainly to in-
creased dispatch levels at LPI's Virginia projects and LPI's start up opera-
tions at its Rensselaer and Roanoke Valley I projects.
Other income and deductions increased as a credit to income due to the receipt
of fees from Westmoreland Energy Inc. (WEI) for Energy Systems' guarantee of
WEI's equity funding commitments on various cogeneration projects. Also
contributing to the increase were interest income resulting from investment of
the proceeds from the sale of the Company's interest in NGC and LG&E's recogni-
tion of a gain on the sale of fully-depreciated heavy equipment.
Interest charges decreased because of a lower composite interest rate on
outstanding debt and a reduction in notes payable.
Variations in income tax expense are largely attributable to changes in pretax
income.
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.
Six Months Ended June 30, 1994, Compared with
Six Months Ended June 30, 1993
The increase in net income was due primarily to recognizing a gain on the sale
of the Company's interest in NGC (see Note 5) and to 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 formation of a tax-exempt charitable foundation (see Note
4), the cumulative effect of a change in accounting principle (see Note 6), and
lower income from discontinued operations.
A comparison of utility operating revenues for the six months ended June 30,
1994, with the six months ended June 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 $ (469) $ 2,199
Variation in sales volume, etc. 10,743 10,274
Total 10,274 12,473
Sales to other utilities (5,928) -
Gas transportation - net - (861)
Other 161 8
Total $ 4,507 $11,620
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.
Fuel and power purchased decreased 1% for the six months. Fuel expenses
increased slightly for the six months primarily because of increased genera-
tion. Power purchased declined largely because less power was wheeled for
other utilities.
Gas supply expenses increased 12% primarily because of an increase in gas
delivered to the distribution system and the higher cost of gas purchased.
Development and construction costs decreased because of the lower level of
construction activity on LPI's Roanoke Valley I and Rensselaer projects.
Operation and maintenance expenses increased primarily as a result of increased
costs to operate and maintain LG&E's electric power plants and gas and electric
distribution systems, an increase in the provision for uncollectible service
accounts, and an increase in storm damage expenses caused by the severe winter
weather. Also contributing to the increase were expenses related to LPI's
international business development efforts.
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 terminating a contract entered into by LPI to lease office space.
See Note 3 of Notes to Financial Statements.
The increase in equity in earnings of joint ventures was due mainly to in-
creased dispatch levels at LPI's Virginia projects and LPI's start up opera-
tions at its Rensselaer and Roanoke Valley I projects.
Other income and deductions increased as a charge to income as the result of
recording expenses related to the formation of a tax-exempt charitable founda-
tion (see Note 4 of Notes to Financial Statements). Partially offsetting this
increase in expenses were increases in other income resulting from the receipt
of fees from Westmoreland Energy Inc. (WEI) for Energy Systems' guarantee of
WEI's equity funding commitments on various cogeneration projects (see Note 7)
and from LG&E's recognition of a gain on the sale of fully-depreciated heavy
equipment, and interest income resulting from investment of the proceeds from
the sale of the Company's interest in NGC.
Interest charges decreased because of a lower composite interest rate on
outstanding debt and a reduction in notes payable.
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 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 protection of the environment. Capital funds are also needed for
partnership equity contributions in connection with independent power produc-
tion projects in the non-utility business. Utility construction expenditures
for the first six months of 1994 of $38 million were financed with internally-
generated funds.
At June 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 commitment or
facility fees. These lines of credit were unused as of June 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.
The Company's capitalization ratios at June 30, 1994, and December 31, 1993,
were:
June 30, Dec. 31,
1994 1993
Long-term debt 43.5% 43.4%
Notes payable - 1.3
Preferred stock 7.7 7.6
Common equity 48.8 47.7
Total 100.0% 100.0%
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 the information under the following items and captions of
the Company's Annual Report on Form 10-K for the year ended December 31, 1993:
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, and to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994: Part II, Item 1, Legal Proceedings. Except as
noted below, there have been no material changes in these proceedings as
reported in the Company's 1993 Form 10-K and March 1994 Form 10-Q.
Environmental. As discussed in Note 10 of the Notes to Financial Statements
under Item 8 of the Company's 1993 Form 10-K, 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 certifica-
tion of the class and thus limited the scope of the litigation to the claims of
the individual plaintiffs. LG&E intends to vigorously defend the pending
litigation.
As discussed in Note 10 of the Notes to Financial Statements under Item 8 of
the 1993 Form 10-K, 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. In November 1992, USEPA demanded immediate payment from the
PRPs. To date, USEPA has identified nine PRPs for the sites. LG&E and several
other parties have commenced discussions with USEPA. The USEPA has since
increased the amount of its demand to $1.8 million to reflect additional
cleanup costs. 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.
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, on January 7, 1994, LG&E filed
testimony with the Kentucky Public Service Commission (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. Testimo-
ny was filed by the Kentucky Attorney General, the Jefferson County Attorney,
the Metro Human Needs Alliance, and the Kentucky Industrial Utility Customers.
The testimony recommended that the Commission order LG&E to refund approximate-
ly $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) it collected over the course of the Trimble County construction
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 parties 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. The Petition requested that the Commission reconsider the
statements it made in the order regarding the scope of the case, and in the
alternative requested that the Commission schedule a hearing date on which the
Intervenors can make an offer of proof of their prefiled testimony on the issue
of refunds of revenues collected prior to the effective date of the 1988 order
in Case No. 10064.
On July 27, 1994, the Kentucky Industrial Utility Customers (KIUC) filed an
Application for Rehearing with the Commission. The Application seeks rehearing
on the issue of whether the Commission's July 8 order decides that prior
Commission orders regarding rate treatment of LG&E's investment in Trimble
County prevent the Commission in this case from ordering refunds of revenue
related to Trimble County CWIP collected from 1979 through 1990. On July 29,
1994, the City of Louisville filed a pleading with the Commission in which it
indicated its support for and joinder in the Application of KIUC.
Under statue, the Commission has until August 16, 1994 to rule on the
Intervenors' and KIUC's requests for rehearing. If the Commission fails to
rule by that date, the requests are by law deemed denied. The parties will
then have 20 days from August 16, or September 6, 1994, to file actions in the
Franklin Circuit Court for review of the Commission's July 8 order. If the
Commission issues an order by August 16, 1994 which denies the requests, then
the parties will have 23 days from the date such an order is issued to file
actions in the Franklin Circuit Court for review.
LG&E believes that the Commission's July 8 order forecloses the possibility
that the Commission will entertain the position that the Intervenors have taken
in their previously-filed testimony that LG&E should refund approximately $183
million to its customers. LG&E believes that remaining at issue in the
proceeding is what amount, if any, of the approximately $30 million it collect-
ed 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 approximately $11.1 million through refunds and
rate reductions. LG&E has submitted testimony to the Commission which recom-
mends that it be allowed to recover this amount. 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.
Southampton. As reported in the Form 8-K dated July 1, 1994, the Federal
Energy Regulatory Commission (FERC) issued a ruling denying the request of
LG&E-Westmoreland Southampton (the Partnership) for a limited waiver of certain
technical qualifying facility (QF) operating standard requirements at its
Southampton plant in 1992.
The Southampton plant, a 63-megawatt coal-fired plant in Franklin, Virginia,
supplies process steam to a nearby chemical manufacturer and bulk electric
power under contract to Virginia Electric and Power Co. (Virginia Power) as a
QF under the Public Utility Regulatory Policies Act (PURPA). The plant began
commercial operation in 1992. Virginia Power filed a motion to intervene in
the proceedings before the FERC in May 1994, contending that the plant was not
entitled to payments of $17.4 million it received from Virginia Power during
1992. The FERC's order on July 7, 1994, denied the Partnership's request for
the waiver and directed the Partnership to show cause as to why it should not
be required to file new rate schedules reflecting sales to Virginia Power in
1992 as a utility, rather than a QF. The Partnership intended to file its
request for rehearing on August 8, 1994, which was the date it was due. On
August 9, 1994, the Partnership filed with the FERC its request for rehearing
along with a motion to consider its request for rehearing as timely filed or,
in the alternative, to treat its request for rehearing as a motion for recon-
sideration. If the FERC does not consider the Partnership's request for
rehearing as timely filed, the Partnership may have waived its right to seek
judicial review of the FERC's order of July 7, 1994. Through its request for
rehearing (or reconsideration), the Partnership is seeking a reversal of the
FERC's order of July 7, 1994, or, in the alternative, a clarification of the
FERC's order stating that, with the exception of rates, the Partnership remains
a QF for 1992 exempt from regulation as a public utility under the Public
Utility Holding Company Act (PUHCA), utility laws in Virginia and various
portions of the Federal Power Act. In the event the FERC grants the
Partnership's alternative request for relief, the Partnership will owe a refund
to Virginia Power of at least $500,000.
LG&E Energy Corp., which through various wholly-owned subsidiaries indirectly
owns a 50 percent interest in the Partnership, believes that the FERC should
grant the Partnership the relief that it is seeking and, accordingly, believes
that 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 order of July 7, 1994, 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 FERC 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.
Other. As discussed in Items 1 and 3 of the Company's 1993 Form 10-K, LPI has
announced a preliminary agreement with DuPont to form a partnership that will
own, improve and operate energy production facilities at nine DuPont manufac-
turing facilities. Virginia Power has made an administrative filing with the
SCC requesting that the SCC, among other things, enter a declaratory order
determining that the proposed arrangement is unlawful and violates Virginia
Power's rights under its certificate of public convenience and necessity. On
July 1, 1994, DuPont filed a motion with the SCC, in which LPI joined, to
dismiss the proceedings, stating that the SCC has no jurisdiction over the
case, as it is not yet ripe for adjudication. Due to the preliminary nature of
this proceeding, it is not possible to predict with any certainty its outcome
at this time. Nonetheless, LPI intends to vigorously pursue the proposed
transaction.
Item 4. Submission of Matters to a Vote of Security Holders.
a) The Company's Annual Meeting of Stockholders was held on May 24, 1994.
b) Not applicable.
c) The matters voted upon and the results of the voting at the Annual Meeting
were as follows:
1. The stockholders voted to elect the Company's nominees for election to the
Board of Directors as follows:
William C. Ballard, Jr. - 26,683,957.400 shares in favor of election and
277,812.112 shares withheld;
S. Gordon Dabney - 26,700,967.516 shares in favor of election and
260,801.996 shares withheld; and
T. Ballard Morton, Jr. - 26,706,984.986 shares in favor of election and
254,784.526 shares withheld.
2. The stockholders voted 26,548,492.972 shares of Common Stock in favor of
and 171,597.360 shares of Common Stock against the approval of Arthur
Andersen & Co. as independent auditors for the Company for 1994. Holders
of 241,679.180 shares of Common Stock abstained from voting on this
matter.
3. The stockholders voted 23,180,224.316 shares of Common Stock in favor of
and 2,659,397.400 shares of Common Stock against the adoption of the LG&E
Energy Corp. Stock Option Plan for Non-Employee Directors of the Company.
Holders of 1,122,147.796 shares of Common Stock abstained from voting on
this matter.
d) Not applicable.
Item 6(b). Reports on Form 8-K.
Current Report on Form 8-K dated July 1, 1994, stating the LG&E-Westmoreland
Southampton partnership will seek rehearing on FERC QF ruling.
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: August 12, 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)
