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 September 30, 1995
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. 33,072,191 shares, without
par value, as of October 31, 1995.
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,
1995 1994 1995 1994
REVENUES:
Electric utility . . . . . . . . .$178,896 $169,718 $444,997 $436,504
Gas utility. . . . . . . . . . . . 17,566 20,500 119,021 146,631
Non-utility. . . . . . . . . . . . 213,699 12,352 303,301 56,251
Total revenues. . . . . . . . . . 410,161 202,570 867,319 639,386
COST OF REVENUES:
Fuel and power purchased . . . . . 50,362 41,460 119,857 118,564
Gas supply expenses. . . . . . . . 8,791 12,374 70,752 98,220
Non-utility. . . . . . . . . . . . 205,669 11,326 291,249 48,763
Total cost of revenues. . . . . 264,822 65,160 481,858 265,547
Gross profit . . . . . . . . . . . 145,339 137,410 385,461 373,839
OPERATING EXPENSES:
Operation and maintenance. . . . . 51,513 52,113 170,142 168,885
Depreciation and amortization. . . 24,587 21,047 69,699 63,121
Non-recurring charges (Note 5) . . - - - 48,743
Total operating expenses. . . . . 76,100 73,160 239,841 280,749
Equity in earnings of
joint ventures (Note 12) . . . . . 4,718 5,777 25,249 11,457
OPERATING INCOME. . . . . . . . . . 73,957 70,027 170,869 104,547
Other income and (deduc-
tions) (Note 10) . . . . . . . . . 2,031 3,378 4,358 9,702
Contribution to charitable
foundation (Note 5). . . . . . . . - - - 15,000
Interest charges. . . . . . . . . . 11,117 10,755 34,783 32,066
Income from continuing oper-
ations before income taxes . . . . 64,871 62,650 140,444 67,183
Income taxes. . . . . . . . . . . . 24,214 24,071 52,201 23,717
Income from continuing oper-
ations before preferred
dividends. . . . . . . . . . . . .$ 40,657 $ 38,579 $ 88,243 $ 43,466
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,
1995 1994 1995 1994
Income from continuing oper-
ations before preferred
dividends. . . . . . . . . . . . .$ 40,657 $ 38,579 $ 88,243 $ 43,466
Preferred dividends . . . . . . . . 1,566 1,503 4,810 4,261
INCOME FROM CONTINUING
OPERATIONS . . . . . . . . . . . . 39,091 37,076 83,433 39,205
Gain on sale of discontinued
operations, net of income
taxes of $35,048 (Note 11) . . . . - - - 51,805
Income before cumulative effect of
change in accounting principle . . 39,091 37,076 83,433 91,010
Cumulative effect of change
in accounting principle, net of
income taxes of $2,280 (Note 6). . - - - (3,369)
NET INCOME. . . . . . . . . . . . .$ 39,091 $ 37,076 $ 83,433 $ 87,641
Average common shares
outstanding. . . . . . . . . . . . 33,054 32,994 33,044 32,983
EARNINGS PER SHARE:
Continuing operations. . . . . . .$ 1.18 $ 1.12 $ 2.52 $ 1.19
Gain on sale of discontinued
operations. . . . . . . . . . . . - - - 1.57
Cumulative effect of accounting
change. . . . . . . . . . . . . . - - - (.10)
Total earnings per share. . . .$ 1.18 $ 1.12 $ 2.52 $ 2.66
LG&E Energy Corp. and Subsidiaries
Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
Sept. 30, Dec. 31,
1995 1994
UTILITY PLANT:
At original cost . . . . . . . . . . . . . . . . . .$2,585,633 $2,537,895
Less: reserve for depreciation. . . . . . . . . . . 937,093 881,861
Net utility plant . . . . . . . . . . . . . . . . . 1,648,540 1,656,034
OTHER PROPERTY AND INVESTMENTS - less reserve:
Investments in affiliates. . . . . . . . . . . . . . 117,560 115,420
Non-utility property and plant, net. . . . . . . . . 172,022 2,802
Other. . . . . . . . . . . . . . . . . . . . . . . . 24,113 50,681
Total other property and investments. . . . . . . . 313,695 168,903
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . 70,271 49,407
Marketable securities. . . . . . . . . . . . . . . . 62,165 89,431
Accounts receivable - less reserve . . . . . . . . . 212,065 97,927
Materials and supplies - at average cost:
Fuel (predominantly coal) . . . . . . . . . . . . . 12,892 13,869
Gas stored underground. . . . . . . . . . . . . . . 50,696 31,354
Other . . . . . . . . . . . . . . . . . . . . . . . 35,317 37,299
Prepayments and other. . . . . . . . . . . . . . . . 8,136 4,020
Total current assets. . . . . . . . . . . . . . . . 451,542 323,307
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense . . . . . . . . . . . . . . 7,770 7,776
Regulatory assets. . . . . . . . . . . . . . . . . . 30,868 31,726
Goodwill, net. . . . . . . . . . . . . . . . . . . . 47,162 14,881
Other. . . . . . . . . . . . . . . . . . . . . . . . 12,513 14,837
Total deferred debits and other assets. . . . . . . 98,313 69,220
Total assets. . . . . . . . . . . . . . . . . . .$2,512,090 $2,217,464
LG&E Energy Corp. and Subsidiaries
Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITAL AND LIABILITIES
Sept. 30, Dec. 31,
1995 1994
CAPITALIZATION:
Common stock, without par value -
Authorized 75,000,000 shares;
outstanding 33,072,191 shares
and 33,015,951 shares . . . . . . . . . . . . . . .$ 462,927 $ 460,980
Common stock expense . . . . . . . . . . . . . . . . (927) (914)
Unrealized loss on marketable
securities, net of income
taxes of $395 and $2,980. . . . . . . . . . . . . . (627) (4,623)
Retained earnings. . . . . . . . . . . . . . . . . . 336,621 307,072
Total common equity . . . . . . . . . . . . . . . . 797,994 762,515
Cumulative preferred stock . . . . . . . . . . . . . 116,716 116,716
Long-term debt . . . . . . . . . . . . . . . . . . . 646,850 662,862
Total capitalization. . . . . . . . . . . . . . . . 1,561,560 1,542,093
CURRENT LIABILITIES:
Long-term debt due within one year . . . . . . . . . 16,000 -
Notes payable. . . . . . . . . . . . . . . . . . . . 159,900 32,000
Accounts payable . . . . . . . . . . . . . . . . . . 162,681 78,254
Common dividends declared. . . . . . . . . . . . . . 18,355 17,746
Accrued taxes. . . . . . . . . . . . . . . . . . . . 34,411 15,747
Accrued interest . . . . . . . . . . . . . . . . . . 11,095 13,428
Other. . . . . . . . . . . . . . . . . . . . . . . . 24,990 34,218
Total current liabilities . . . . . . . . . . . . . 427,432 191,393
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes (Note 7). . . . . . . . . . . . . . . . . . . 255,005 269,828
Investment tax credit, in
process of amortization . . . . . . . . . . . . . . 85,188 88,779
Accumulated provision for pensions
and related benefits. . . . . . . . . . . . . . . . 40,813 48,126
Customers' advances for construction . . . . . . . . 9,254 8,621
Regulatory liability (Note 7). . . . . . . . . . . . 60,755 8,914
Other. . . . . . . . . . . . . . . . . . . . . . . . 72,083 59,710
Total deferred credits and other liabilities. . . . 523,098 483,978
Total capital and liabilities . . . . . . . . . .$2,512,090 $2,217,464
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows
(Unaudited - Thousands of $)
Nine Months Ended
Sept. 30,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . .$ 83,433 $ 87,641
Items not requiring cash currently:
Cumulative effect of change
in accounting principle . . . . . . . . . . . . . - 3,369
Non-recurring charges . . . . . . . . . . . . . . . - 48,743
Depreciation and amortization . . . . . . . . . . . 69,699 63,121
Deferred income taxes - net . . . . . . . . . . . . 10,788 (14,083)
Investment tax credit - net . . . . . . . . . . . . (3,591) (3,568)
Undistributed earnings of joint ventures. . . . . . 16,119 (6,698)
Gain on sale of discontinued operations . . . . . . - (90,878)
Other . . . . . . . . . . . . . . . . . . . . . . . 3,360 13,871
(Increases) decreases in net current assets:
Accounts receivable . . . . . . . . . . . . . . . . (59,561) 36,471
Materials and supplies. . . . . . . . . . . . . . . (10,751) 469
Accounts payable. . . . . . . . . . . . . . . . . . 15,215 (38,451)
Accrued taxes . . . . . . . . . . . . . . . . . . . 18,664 16,378
Accrued interest. . . . . . . . . . . . . . . . . . (2,333) (1,146)
Prepayments and other . . . . . . . . . . . . . . . (20,957) (12,735)
Other. . . . . . . . . . . . . . . . . . . . . . . . (388) 892
Net cash provided by operating activities . . . . . 119,697 103,396
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities. . . . . . . . . . . . . . . (174,593) (267,102)
Proceeds from sales of securities. . . . . . . . . . 255,751 138,847
Construction expenditures. . . . . . . . . . . . . . (63,259) (58,228)
Investment in affiliates . . . . . . . . . . . . . . (28,234) (20,400)
Acquisition of Hadson Gas Services Inc.,
net of cash and temporary cash
investments acquired (Note 9). . . . . . . . . . . (146,104) -
Proceeds from sale of discontinued operations. . . . - 170,000
Net cash used for investing activities. . . . . . .$(156,439) $ (36,883)
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Nine Months Ended
Sept. 30,
1995 1994
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . .$ 1,934 $ 1,947
Issuance of pollution control bonds. . . . . . . . . 39,943 -
Retirement of pollution control bonds
and other long-term debt. . . . . . . . . . . . . . (43,579) -
Repayment of short-term borrowings . . . . . . . . . (81,282) (20,000)
Short-term borrowings. . . . . . . . . . . . . . . . 193,865 -
Payment of common dividends. . . . . . . . . . . . . (53,275) (51,445)
Net cash provided by (used for)
financing activities . . . . . . . . . . . . . . . 57,606 (69,498)
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS . . . . . . . . . . . . . 20,864 (2,985)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 49,407 67,377
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . .$ 70,271 $ 64,392
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes. . . . . . . . . . . . . . . . . . .$ 29,173 $ 66,815
Interest on borrowed money. . . . . . . . . . . . 36,533 32,235
For the purposes of these statements, 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,
1995 1994 1995 1994
Balance at beginning of period. . . $315,885 $287,863 $307,072 $271,606
Net income. . . . . . . . . . . . . 39,091 37,076 83,433 87,641
Subtotal . . . . . . . . . . . . . 354,976 324,939 390,505 359,247
Cash dividends declared on
common stock ($.555, $.5375,
$1.63 and $1.5775 per share) . . . 18,355 17,745 53,884 52,053
Balance at end of period. . . . . . $336,621 $307,194 $336,621 $307,194
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), LG&E Energy Systems Inc. (Energy Systems) and
LG&E Gas Systems Inc. (Gas 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 Securities and Exchange Commission rules and regula-
tions, 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, 1994, have been reclassified to be
consistent with the presentation for the three- and nine-month periods
ended September 30, 1995, with no impact on previously reported net income
or earnings per share. Also, certain amounts in the balance sheet as of
December 31, 1994, have been reclassified to be consistent with the
balance sheet presentation as of September 30, 1995.
These financial statements should be read in conjunction with the finan-
cial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year 1994.
2. On July 19, 1995, the Public Service Commission of Kentucky (Commission)
issued an order that requires LG&E to refund $23.9 million to its electric
customers, plus interest (through June 1995, interest totaled $9.9
million), for a total as of the date of the order of $33.8 million,
arising from the Commission's disallowance of 25% of the Trimble County
power plant. The Commission's order required LG&E to submit a proposed
refund methodology for approval within 30 days from the date of the order.
The Commission later extended the date of filing refund plans to November
8, 1995. On November 8, 1995, the Commission granted a joint motion to
extend the date for filing refund plans to January 3, 1996.
On August 4, 1995, the Kentucky Attorney General (KAG) filed a complaint
in the Franklin (Kentucky) Circuit Court (Court) for review of the
Commission's orders of July 8, 1994, April 25, 1995, and July 19, 1995.
The KAG asked that the Court vacate those orders and remand the proceeding
back to the Commission with instructions that the Commission consider, in
determining a refund, the revenues paid by LG&E's customers as a result of
the inclusion of Trimble County-related construction work in progress in
LG&E's rate base prior to May 20, 1988. On September 12, 1995, the Court
dismissed without prejudice KAG's complaint.
On August 8, 1995, LG&E filed a request for rehearing of the July 19 order
of the Commission, and on August 28, 1995, the Commission issued an order
in which it granted rehearing only on the issue of whether compound or
simple interest should be applied to the amount the Commission has ordered
LG&E to refund. The total of $33.8 million contained in the Commission's
July 19, 1995, order was calculated using compound interest. LG&E
believes that the use of simple interest would reduce the amount the
Commission ordered be refunded through June 1995 by approximately $1.6
million. The Commission has requested that the parties to the case submit
argument on this issue during the second phase of the case dealing with
refund plans.
LG&E intends to appeal the Commission's July 19 order to seek to overturn
the decision. If LG&E is unsuccessful in overturning the decision and a
refund of previously collected revenues in the amount of $33.8 million is
required to be paid, the after-tax charge to net income would amount to
approximately $20.2 million. However, the outcome of this matter is
uncertain, and LG&E is unable to predict the exact amount of refunds, if
any, that ultimately may be due.
3. LG&E filed an application with the Public Service Commission of Kentucky
on October 7, 1994, in which it requested approval of an environmental
cost recovery surcharge to recover certain costs required to comply with
the Federal Clean Air Act, as amended, and those federal, state, and local
environmental requirements which apply to coal combustion wastes and
by-products from facilities utilized for the production of energy from
coal. On April 6, 1995, the Commission approved, with modifications, an
environmental cost recovery surcharge estimated to increase electric
revenues by approximately $3.8 million in 1995 and $7.2 million in 1996.
The surcharge became effective on May 1, 1995. LG&E, the Kentucky
Attorney General and the Kentucky Industrial Utility Customers (KIUC)
filed applications for rehearing on certain issues in the April 6 order.
Among other things, the KAG and KIUC requested a reduction of the amounts
recoverable by LG&E. The Commission denied all motions for rehearing, and
appeals have subsequently been filed in Franklin Circuit Court, which are
pending. LG&E is unable to predict the outcome of these proceedings.
4. In the second quarter of 1995, the Company received cash proceeds of $8
million in connection with the settlement of a commercial dispute. The
effect on earnings was deferred pending completion of a study to determine
the proper amount of income to be recognized. The study was completed
during the third quarter. Accordingly, LG&E recognized $6 million as a
reduction to operation and maintenance expenses. The remaining $2 million
is recorded as a reserve for future payments in connection with the
dispute.
5. As part of a study of LG&E Energy Corp.'s business strategy and realign-
ment during 1994, LG&E re-evaluated its regulatory strategy which previ-
ously had been to seek full recovery of certain costs deferred in accor-
dance with prior precedents established by the Commission. As a result of
this re-evaluation, in the first quarter of 1994, LG&E wrote off certain
expenses that had previously been deferred amounting to approximately
$38.6 million before taxes. While LG&E continues to believe that it could
have reasonably expected to recover these costs in future rate proceedings
before the Commission, LG&E decided to deduct these expenses currently and
not seek recovery for such expenses in future rates due to increasing
competitive pressures and the existing and anticipated future economic
conditions. The items written off include costs incurred in connection
with early retirements and workforce 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 emissions 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' Accounting for Post-Retirement
Benefits Other Than Pensions. LG&E Power Inc. (LPI), a wholly-owned
subsidiary of Energy Systems, recorded a reserve for $10.1 million, before
taxes, for the costs related to vacating leased office space.
In the first quarter of 1994, the Board of Directors of the Company
approved the formation of a tax-exempt charitable foundation (Foundation)
which will make charitable contributions to qualified persons and enti-
ties. In 1994, the Company recorded a pretax charge against income and
made an irrevocable payment of $15 million to fund the Foundation. On
June 6, 1994, the Internal Revenue Service issued a letter stating that it
had determined the Foundation was exempt from Federal income tax under the
Internal Revenue Code.
6. The Company adopted Statement of Financial Accounting Standards No. 112,
Employers' Accounting for Post-Employment Benefits (SFAS 112) on January
1, 1994, as required. SFAS 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. The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, effective January 1, 1993. Regulatory assets
and liabilities were established to recognize the future revenue require-
ment impact from the deferred income taxes which were not immediately
recognized in operating results because of ratemaking treatment. The
increase in Regulatory Liability in the accompanying balance sheet
reflects the accrual for the nine months ended September 30, 1995, and
certain reclassifications between Accumulated Deferred Income Taxes and
Regulatory Liability applicable to prior periods.
8. The Company, through subsidiaries, 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 Electric and Power Company
(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 Virginia Power based on
availability. From May 1994 through October 1995, Virginia Power withheld
approximately $7.9 million of these capacity payments for periods of
forced outages. To date, the Company has not recognized any income on its
50% portion of the capacity payments being withheld by Virginia Power. 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. The parties are currently
conducting discovery. The trial is set for the week of March 23, 1996.
In the Company's opinion, WLP is entitled to recover the capacity payments
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 matter, or the amount of
capacity payments, if any, which Virginia Power may be ordered to pay to
WLP.
9. On May 15, 1995, Gas Systems acquired all of the outstanding common stock
of Hadson Corporation, now known as Hadson Gas Services Inc. (Hadson), a
Dallas-based natural gas marketing, gathering and processing company, for
$143 million, plus transaction-related costs and expenses. The Company
accounted for the acquisition as a purchase, and the purchase price was
allocated to the assets and liabilities acquired based on their estimated
fair values. Approximately $33.4 million of goodwill was recorded and has
been allocated to Hadson's lines of business. Accordingly, the goodwill
is being amortized using the straight-line method over periods ranging
from seven to 24 years.
Hadson's results of operations have been included in the Company's results
of operations since the date of acquisition. Non-utility revenues in the
Company's statements of income for the three- and nine-month periods ended
September 30, 1995, include Hadson's revenues since the date of acquisi-
tion of $188.4 million and $261.8 million, respectively. Hadson's
operations did not have a material impact on consolidated operating income
for the three- and nine-month periods ended September 30, 1995.
Hadson enters into hedging activities including futures contracts, swap
agreements and options (discussed below) primarily for the purpose of
hedging price risks of natural gas associated with certain firm purchase
and sales commitments. Gains and losses on hedges of existing assets or
liabilities are included in the carrying amounts of those assets or
liabilities and ultimately recognized in income as part of those carrying
amounts. Gains and losses related to qualifying hedges of firm commit-
ments or anticipated transactions are also deferred and are recognized in
income or as adjustments of carrying amounts when the hedged transaction
occurs. Speculative futures trading was an immaterial activity in the
periods presented in the accompanying financial statements.
At September 30, 1995, Hadson had exchange-traded futures contracts with
maturities of October 1995 through October 1996, covering 86,880,000 MMBtu
of natural gas. Such contracts are typically settled in cash. Deferred
losses related to exchange-traded futures contracts were immaterial at
September 30, 1995.
Hadson also has swap agreements in place with maturities of October 1995
through December 1998 on 134,233,000 MMBtu of natural gas. The swaps will
be settled through cash payments. Management expects profits on the
physical sales of gas relating to these agreements to exceed the unreal-
ized losses on all swap agreements. Deferred losses related to closed
swap agreements were immaterial at September 30, 1995.
At September 30, 1995, Hadson had exchange-traded and over-the-counter
options that it can convert to futures or swaps covering 70,380,000 MMBtu
of natural gas with maturities ranging from October 1995 through December
1996.
Hadson remains at risk for possible changes in the market value of hedging
instruments; however, such risk should be mitigated by price changes in
the underlying hedged item. Hadson is also exposed to credit-related
losses in the event of nonperformance by counterparties to the commodity
swap agreements. The creditworthiness of counterparties is subject to
continuing review.
10. Other income and deductions consisted of the following (in thousands of
dollars):
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1995 1994 1995 1994
Fee income . . . . . . . . . .$ - $ 1,188 $ - $ 4,750
Gains (losses) on securities . 220 (831) (3,199) (2,571)
Interest and dividend income . 2,116 3,295 8,203 8,359
Gains on fixed asset
disposals. . . . . . . . . . 101 28 1,075 1,069
Donations. . . . . . . . . . . (79) (106) (248) (1,108)
Other. . . . . . . . . . . . . (327) (196) (1,473) (797)
Total. . . . . . . . . . . . . $ 2,031 $ 3,378 $ 4,358 $ 9,702
11. In January 1994, the Company sold its 36.5% partnership interest in
Natural Gas Clearinghouse (NGC) for $170 million. The Company's interest
was acquired in 1992 at a cost of approximately $70 million and was
accounted for as a purchase. The transaction resulted in an after-tax
gain of $52 million, which has been classified as gain on sale of discon-
tinued operations in the accompanying income statement for the nine months
ended September 30, 1994.
12. In June 1995, Babcock-Ultrapower West Enfield and Babcock-Ultrapower
Jonesboro, two partnerships which are 17%-owned by LPI, sold two power-
purchase contracts back to the purchasing utility, Bangor Hydro-Electric
Company. Equity in earnings of joint ventures in the Company's statement
of income for the nine months ended September 30, 1995, include $9.7
million representing LPI's interest in the gains on the sales.
13. Reference is made to Part II herein - Item 1, Legal Proceedings.
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. To a lesser degree,
Hadson's results are also affected by seasonal fluctuations in temperature and
other weather-related factors. Additionally, results of LPI's operations are
dependent upon the timing and magnitude of development and construction
activities associated with various electric generation projects, and upon the
development of its electric power-marketing business, which it entered in 1994
through a subsidiary, LG&E Power Marketing Inc. 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, 1995, Compared with
Three Months Ended September 30, 1994
Earnings per share increased to $1.18 in the third quarter of 1995 from $1.12
in the third quarter of 1994 primarily due to higher earnings at LG&E and LPI,
partially offset by an increase in interest expense resulting from the Com-
pany's borrowing to finance the Hadson acquisition. LG&E's earnings increased
due to an increase in retail electric sales resulting from the hot summer
weather and continued cost containment efforts. Another positive factor
affecting LG&E's earnings was the recognition of a $6 million credit to expense
as the result of the settlement of a commercial dispute as discussed in Note 4
of Notes to Financial Statements. These factors were partially offset by an
increase in electric power purchases required at LG&E because of unplanned
power-plant outages. LPI's earnings increased mainly due to lower operating
expenses and higher power-marketing sales volumes.
A comparison of utility operating revenues for the quarter ended September 30,
1995, with the quarter ended September 30, 1994, reflects increases and
decreases which have been segregated by the following principal causes (see
next page):
Increase or (Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $(3,008) $(2,146)
Demand side management/revenue
decoupling (5,651) 529
Environmental cost recovery 1,513 -
Variation in sales volume, etc. 18,258 (1,452)
Total 11,112 (3,069)
Sales for resale (2,697) -
Gas transportation - net - 89
Other 763 46
Total $ 9,178 $(2,934)
Non-utility revenues and cost of revenues increased $201.3 million and $194.3
million, respectively, due to acquiring Hadson on May 15, 1995, and to an
increase in power-marketing volumes. Partially offsetting these increases were
decreases in LPI's revenues and cost of revenues resulting from completing
construction on the Roanoke Valley II plant in mid-1995.
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 $8.9 million (21%) for the quarter. Fuel
expenses decreased $3.4 million (9%) for the quarter because of a decrease in
the cost of coal burned ($1.6 million) and decreased generation ($1.8 million).
Power purchased increased $12.3 million due to increased purchases required
because of unplanned outages at the electric generating plants during the
warmer-than-normal third quarter.
Gas supply expenses decreased $3.6 million (29%) due to a decrease in net gas
supply cost ($3.2 million) and a 5% decrease in the volume of gas delivered to
the distribution system.
LG&E implemented a Commission-approved demand side management (DSM) program in
January 1994. The agreement contains a rate mechanism that allows LG&E
concurrent recovery of DSM costs; provides LG&E an incentive for implementing
DSM programs; and allows LG&E to recover revenues due to lost sales associated
with the DSM programs.
On May 1, 1995, LG&E implemented a Commission-approved environmental cost
recovery surcharge to recover certain costs required to comply with the Federal
Clean Air Act and other governmental pollution control requirements. See Note
3 of Notes to Financial Statements.
Operation and maintenance expenses decreased $.6 million (1%) mainly due to a
$3.8 million decrease (11%) in other operation expenses at LG&E resulting from
recognizing a credit to expense of $6 million in settlement proceeds received
related to a commercial dispute (see Note 4 of Notes to Financial Statements).
Also contributing to the decrease were the reversal of $2 million of a reserve
previously established at LPI for the costs of vacating leased office space and
a reduction in corporate expenses. The partial reversal of the lease reserve
resulted from LPI's subleasing a portion of the space (see Note 5 of Notes to
Financial Statements). These decreases were partially offset by an increase in
various administrative expenses at LG&E, and a $2 million (19%) increase in
maintenance expenses at LG&E primarily related to repairs due to unplanned
outages at the electric generating plants.
Depreciation and amortization increased due to acquiring Hadson and because of
increased depreciable plant in service at LG&E.
Other income and deductions decreased as fees received from Westmoreland Energy
Inc. (WEI) for Energy Systems' guarantee of WEI's equity funding commitment on
various cogeneration projects in the third quarter of 1994 did not recur. Also
contributing to the decrease was a reduction in interest and dividend income.
Partially offsetting these decreases was a reduction in realized losses on
sales of available-for-sale securities. See Note 10 of Notes to Financial
Statements.
Interest charges increased because of an increase in notes payable associated
with the acquisition of Hadson, partially offset by a decrease at LG&E due to a
$1 million reduction in accrued interest resulting from a favorable ruling on
certain income tax matters.
Variations in income tax expense are largely attributable to changes in pretax
income.
Nine Months Ended September 30, 1995, Compared with
Nine Months Ended September 30, 1994
Earnings per share decreased from $2.66 for the nine months ended September 30,
1994, to $2.52 for the nine months ended September 30, 1995. Last year's
earnings per share included a gain of $1.57 on the sale of the Company's
interest in Natural Gas Clearinghouse, a write-off of certain non-recurring
charges of $.91, a $.27 contribution to fund a charitable foundation, and a
$.10 charge resulting from adopting the new standard of accounting for post-
employment benefits. Excluding these items, the Company's earnings per share
increased by $.15 from $2.37 for the nine months ended September 30, 1994, to
$2.52 for the nine months ended September 30, 1995. This increase resulted
primarily from an increase in the earnings of LPI's joint ventures and higher
earnings at LG&E, partially offset by a decrease in gross profits at LPI, lower
fee income, and an increase in interest expense resulting from the Company's
borrowing to finance the Hadson acquisition. LG&E's earnings increase was
primarily due to higher retail electric commercial and industrial sales during
the nine-month period of 1995 and positive cost containment efforts. Another
positive factor affecting LG&E's earnings was the recognition of a $6 million
credit to expense as the result of the settlement of a commercial dispute as
discussed in Note 4 of Notes to Financial Statements. These factors were
partially offset by increased purchased power expenses at LG&E due mainly to
unplanned power plant outages this summer.
A comparison of utility operating revenues for the nine months ended September
30, 1995, with the nine months ended September 30, 1994, reflects increases and
decreases which have been segregated by the following principal causes (see
next page):
Increase or (Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $(9,257) $(11,779)
Demand side management/revenue
decoupling (2,582) 3,132
Environmental cost recovery 1,968 -
Variation in sales volume, etc. 21,004 (21,408)
Total 11,133 (30,055)
Sales for resale (3,576) -
Gas transportation - net - 2,694
Other 936 (249)
Total $ 8,493 $(27,610)
Non-utility revenues and cost of revenues increased $247.1 million and $242.5
million, respectively, due to acquiring Hadson on May 15, 1995, and to an
increase in power-marketing volumes. Partially offsetting these increases were
decreases in LPI's revenues and cost of revenues resulting from completing
construction on the Rensselaer, Roanoke Valley I, and Roanoke Valley II
projects.
Fuel and power purchased increased $1.3 million (1%) for the nine months.
Power purchased increased $6.9 million primarily because of increased purchases
required due to unplanned outages at the electric power plants during the
warmer-than-normal third quarter. Fuel expenses decreased $5.6 million (5%)
primarily because of a lower cost of coal burned ($7.4 million), partially
offset by increased generation ($1.8 million).
Gas supply expenses decreased $27.5 million (28%) because of a decrease in gas
delivered to the distribution system ($16.8 million) and the lower cost of net
gas supply ($10.7 million).
Operation and maintenance expenses increased $1.3 million (1%) primarily due to
acquiring Hadson on May 15, 1995. Partially offsetting this increase were a
decrease at LG&E resulting from crediting $6 million to expense representing
the settlement proceeds received related to a commercial dispute (see Note 4 of
Notes to Financial Statements), and a decrease in property and other taxes at
LG&E resulting from payroll taxes associated with severance payments in
connection with work force reductions recorded in the first quarter of 1994
(see Note 5 of Notes to Financial Statements). Also offsetting the Hadson-
related increase were an increase in various administrative expenses at LG&E,
the reversal of $2 million of a reserve previously established at LPI for the
costs of vacating leased office space, and a reduction in corporate expenses.
The partial reversal of the lease reserve resulted from LPI's subleasing some
of the space (see Note 5 of Notes to Financial Statements).
Depreciation and amortization increased due to acquiring Hadson and because of
increased depreciable plant in service at LG&E.
Non-recurring charges recognized in 1994 include LG&E's write off of previously
deferred 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 Accounting Standards No. 106, Employers' Accounting for
Post-Retirement Benefits Other Than Pensions. Non-recurring charges also
includes a reserve to record costs related to LPI's vacating leased office
space. See Note 5 of Notes to Financial Statements.
Equity in earnings of joint ventures increased mainly due to two of LPI's
partnerships' recording gains of $9.7 million on the sales of power purchase
contracts to Bangor Hydro-Electric Company in June 1995 (see Note 12 of Notes
to Financial Statements). Also contributing to the increase was the start-up
of commercial operations in the second quarter of 1994 at LPI's Roanoke Valley
I, Rensselaer, and Windpower Partners 1993 projects, and in the second quarter
of 1995 at LPI's Roanoke Valley II project.
Other income and deductions decreased as fees received from Westmoreland Energy
Inc. (WEI) for Energy Systems' guarantee of WEI's equity funding commitment on
various cogeneration projects in 1994 did not recur. See Note 10 of Notes to
Financial Statements.
The contribution to charitable foundation represents the expense associated
with the formation of a tax-exempt charitable foundation in the first quarter
of 1994. See Note 5 of Notes to Financial Statements.
Interest charges increased because of an increase in notes payable and a higher
composite interest rate on outstanding debt. Partially offsetting this
increase was a decrease at LG&E due to a $1 million reduction in accrued
interest resulting from a favorable ruling on certain income tax matters.
Variations in income tax expense are largely attributable to changes in pretax
income.
Gain on sale of discontinued operations reflects the sale of the Company's
investment in NGC in January 1994. See Note 11 of Notes to Financial State-
ments.
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 remained solid throughout the reported periods.
This is evidenced primarily by the Company's strong cash flow from operations,
large unused borrowing capacity, and its significant investment in marketable
securities at September 30, 1995.
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. Needs for capital funds also arise
from partnership equity contributions in connection with independent power
production projects in the non-utility business and other business development
opportunities. LG&E construction expenditures for the nine months ended
September 30, 1995, of $57 million were financed with internally generated
funds.
The Company acquired Hadson Corporation, now known as Hadson Gas Services Inc.
(Hadson), on May 15, 1995, for $143 million, plus acquisition-related fees and
expenses. Hadson is involved in the marketing, gathering, processing, storage
and transportation of natural gas and natural gas liquids. Also, the Company
provided Hadson with additional cash to meet working capital needs. The
Company used cash and drew against credit lines to finance the acquisition and
cash infusion. With the acquisition, Hadson's credit capacity has been
expanded, enabling it to more easily secure trade credit for gas purchases.
The enhanced ability to secure trade credit has allowed Hadson to sell signifi-
cantly more gas than before the acquisition. See Note 9 of Notes to Financial
Statements.
The Company's combined cash and marketable securities balance decreased $6.4
million during the first nine months of 1995. The decrease reflects the Hadson
acquisition, capital expenditures, additional investments in affiliates, and
dividends, partially offset by cash flows from operations, an increase in
borrowings, and an increase resulting from reclassifying investments in certain
available-for-sale securities from noncurrent to current.
The significant increases during the first nine months of 1995 in non-utility
property and plant, accounts receivable, goodwill, and accounts payable
resulted from acquiring Hadson. Variations in accounts receivable and accounts
payable are not generally significant indicators of the Company's liquidity,
because such variations are primarily attributable to fluctuations in weather
in LG&E's service territory, which has a direct effect on sales of electricity
and natural gas.
In April 1995, LG&E issued $40 million of Jefferson County, Kentucky, Pollution
Control Revenue Bonds, 5.90% Series, due April 15, 2023. The proceeds of the
bonds were used to redeem the outstanding 9.25% Series of Pollution Control
Bonds due July 1, 2015.
In December 1995, LG&E plans to redeem the outstanding shares of its 7.45%
Cumulative Preferred Stock with a par value of $25 per share at a redemption
price of $25.75 per share. LG&E will fund the $22 million redemption with cash
generated internally.
At September 30, 1995, lines of credit were in place totaling $535 million
($145 million for LG&E, $150 million for Energy Systems, $215 million for Gas
Systems, and $25 million for LG&E Energy Corp.), for which the companies pay
commitment or facility fees. $160 million of notes payable were outstanding
under these lines at September 30, 1995 ($57 million for Energy Systems and
$103 million for Gas Systems). The credit lines are scheduled to expire at
various times between 1995 and 2000, and management intends to renegotiate them
when they expire.
The Company's capitalization ratios at September 30, 1995, and December 31,
1994, were:
Sept. 30, Dec. 31,
1995 1994
Long-term debt (including current portion) 38.2% 42.2%
Notes payable 9.2 2.0
Preferred stock 6.7 7.4
Common equity 45.9 48.4
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: (i) the information under the following items and
captions of the Company's Annual Report on Form 10-K for the year ended
December 31, 1994: Item 1, Business; Item 3, Legal Proceedings; Item 7,
Management's Discussion and Analysis of Results of Operations and Financial
Condition; and Notes 2, 13 and 14 of the Notes to Financial Statements under
Item 8, ii) the information under Part II, Item 1, Legal Proceedings, of the
Company's Form 10-Q for the quarter ended March 31, 1995, (iii) the Company's
current report on Form 8-K dated July 21, 1995, and (iv) the information under
Part II, Item 1, Legal Proceedings, of the Company's Form 10-Q for the quarter
ended June 30, 1995. Except as noted below, there have been no material
changes in these proceedings as reported in the Company's 1994 Form 10-K, Form
10-Q for the quarter ended March 31, 1995, Form 8-K dated July 21, 1995, and
Form 10-Q for the quarter ended June 30, 1995.
Trimble County. Reference is made to Note 14 of the Notes to Financial
Statements under Item 8 of the Company's 1994 Form 10-K, to Part II, Item 1,
Legal Proceedings, of the Company's Form 10-Q for the quarter ended March 31,
1995, to the Company's current report on Form 8-K, dated July 21, 1995, to the
Company's Form 10-Q for the quarter ended June 30, 1995, and to Note 2 of Notes
to Financial Statements under Part I, Item 1, of this filing, regarding
proceedings before the Kentucky Public Service Commission (Commission) to
determine the proper ratemaking treatment to exclude 25% of the Trimble County
electric generating facility from customer rates for the period May 1988
through December 1990.
On July 19, 1995, the Commission issued an order that requires LG&E to refund
$23.9 million to its electric customers, plus interest (through June 1995,
interest totaled $9.9 million), for a total as of the date of the order of
$33.8 million, arising from the Commission's disallowance of 25% of the Trimble
County power plant. The Commission's order required LG&E to submit a proposed
refund methodology for approval within 30 days from the date of the order. The
Commission later extended the date of filing refund plans to November 8, 1995.
On November 8, 1995, the Commission granted a joint motion to extend the date
for filing refund plans to January 3, 1996.
On August 4, 1995, the Kentucky Attorney General (KAG) filed a complaint in the
Franklin (Kentucky) Circuit Court (Court) for review of the Commission's orders
of July 8, 1994, April 25, 1995, and July 19, 1995. The KAG asked that the
Court vacate those orders and remand the proceeding back to the Commission with
instructions that the Commission consider, in determining a refund, the
revenues paid by LG&E's customers as a result of the inclusion of Trimble
County-related construction work in progress in LG&E's rate base prior to May
20, 1988. On September 12, 1995, the Court dismissed without prejudice KAG's
complaint.
On August 8, 1995, LG&E filed a request for rehearing of the July 19 order of
the Commission, and on August 28, 1995, the Commission issued an order in which
it granted rehearing only on the issue of whether compound or simple interest
should be applied to the amount the Commission has ordered LG&E to refund. The
total of $33.8 million contained in the Commission's July 19, 1995, order was
calculated using compound interest. LG&E believes that the use of simple
interest would reduce the amount the Commission ordered be refunded through
June 1995 by approximately $1.6 million. The Commission has requested that the
parties to the case submit argument on this issue during the second phase of
the case dealing with refund plans.
The outcome of this matter is uncertain, and LG&E is unable to predict the
exact amount of refunds, if any, that ultimately may be due.
Environmental. As reported in Note 13 of Notes to Financial Statements under
Item 8 of the Company's 1994 Form 10-K, and in Part II, Item 1, Legal Proceed-
ings, of the Company's Form 10-Q for the quarter ended June 30, 1995, 34
persons filed a complaint in Jefferson Circuit Court against the Company
seeking certification of a class consisting of all persons within 2.5 miles of
the Mill Creek plant who have allegedly suffered personal injury or property
damage as a result of emissions from the plant. 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 August
1995, the court granted the plaintiff's motion for leave to file an amended
complaint to bring a total of 537 individual plaintiffs into the pending
litigation. The plaintiffs continue to seek compensation for alleged personal
injury and property damage, injunctive relief, a fund to finance future medical
monitoring of area residents and other relief. The plaintiffs seek certifica-
tion of a class consisting of all persons within 3.5 miles of the plant who
have allegedly suffered property damage. LG&E intends to vigorously defend
itself in the pending litigation.
As reported in Note 13 of the Notes to Financial Statement under Item 8 of the
Company's 1994 Form 10-K, in 1987, the United States Environmental Protection
Agency (USEPA) identified LG&E as one of the numerous potentially responsible
parties (PRPs) allegedly liable under the Comprehensive Environmental Response,
Compensation, and Liability Act as amended for the Smith's Farm site in Bullitt
County, Kentucky. Previously reported estimated cleanup costs of approximately
$70 million have recently been revised to approximately $60 million. The
Company and several other parties have shared certain cleanup costs until a
voluntary allocation of liability can be reached among the parties. It is not
possible at this time to predict the outcome or precise impact of the matter.
However, management believes that this matter should not have a material
adverse impact on the financial position or results of operation of LG&E, as
other financially viable PRPs appear to have primary responsibility for any
environmental liability at the site.
As reported in Note 13, of the Notes to Financial Statement under Item 8 of the
Company's 1994 Form 10-K, in March 1994, the Air Pollution Control District of
Jefferson County, Kentucky (APCD) adopted a regulation requiring a 15% reduc-
tion from 1990 volatile organic compound (VOC) emissions from industrial
sources. There are currently no demonstrated technologies for control of VOC
emissions from coal-fired boilers. Consequently, compliance with the regula-
tion 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 participating in negotiations between
the APCD and industry groups in an effort to obtain an exemption from the VOC
reduction requirements.
Roanoke Valley I. As discussed in Item 3, Legal Proceedings of the Company's
1994 Form 10-K, Note 13 of the Notes to Financial Statements under Item 8 of
the Company's 1994 Form 10-K, Part II, Item 1, Legal Proceedings, of the
Company's Form 10-Q for the quarter ended March 31, 1995, Part II, Item 1,
Legal Proceedings, of the Company's Form 10-Q for the quarter ended June 30,
1995, and Note 8 of Notes to Financial Statements under Part I, Item 1, of this
filing, Westmoreland-LG&E Partners, the partnership that owns the Roanoke
Valley I and II facilities (WLP), filed a complaint against Virginia Electric
and Power Company (Virginia Power) seeking the recovery of $5.7 million in
capacity payments withheld by Virginia Power during portions of 1994. Under a
power purchase agreement (PPA), WLP is entitled to receive capacity payments
from Virginia Power based on availability. From May 1994 through October 1995,
Virginia Power withheld approximately $7.9 million of these capacity payments
during periods of forced outages. To date the Company has not realized any
income on its 50% portion of the capacity payments being withheld. The parties
are currently conducting discovery. The trial is set for the week of March 23,
1996.
In the Company's opinion, WLP is entitled to recover the capacity payments
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 matter, or the amount of capacity payments, if any,
which Virginia Power may be ordered to pay to WLP.
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 21, 1995, stating that on July 19, the
Public Service Commission of Kentucky ordered LG&E to issue to its electric
customers a refund of $33.8 million, arising from the disallowance of 25% of
LG&E's Trimble County plant.
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 10, 1995 /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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<TOTAL-OPERATING-EXPENSES> 748,651
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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 33,072,191 shares were outstanding on September
30, 1995.
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 shareholder 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 shareholders of business at annual shareholders' meetings and
of shareholder nominations for the election of directors shall be given and
that certain information be provided with respect to such matters, (e)
shareholder action may be taken only by unanimous written consent or at an
annual meeting of shareholders or a special meeting of shareholders called by
the President, the Board of Directors or, to the extent required by Kentucky
law, shareholders, 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 shareholders
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.
On June 7, 1995, the Board of Directors approved the First Amendment to Rights
Agreement, whereby the definition of "Acquiring Person" (see below) was
modified to provide that an "Acquiring Person" shall be any person who has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Stock of the Company. The previous ownership
threshold was 20%.
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 the Rights Agreement, as amended (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, as stated above, is defined as
a person who has acquired, or obtained the right to acquire, beneficial
ownership of 15% 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 15% 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 15% 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.
In addition, if the Board of Directors of the Company determines in good faith
that a Person who would otherwise be an "Acquiring Person" has become such
inadvertently and without any intention of changing or influencing control of
the Company, and such Person, as promptly as practicable after being advised of
such determination, divests itself of beneficial ownership of a sufficient
number of shares of Common Stock so that such Person would no longer be an
"Acquiring Person," then such Person will not be deemed an Acquiring Person for
any purposes of the Rights Agreement.
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 or a Person determined not
to be an Acquiring Person in accordance with the provisions of the third
preceding paragraph) becomes the beneficial owner of 15% 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 15% 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, dated December 5, 1990, has been filed with the
Securities and Exchange Commission (SEC) as an Exhibit to the Company's
Registration Statement on Form S-8, Registration No. 33-38557. A copy of the
First Amendment to Rights Agreement has been filed with the SEC as an Exhibit
to the Company's Registration Statement on Form 8-A/A, Registration No.
1-10568, filed on June 20, 1995. 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 Norwest Bank
Minnesota, N.A., Minneapolis, Minnesota. Registrar for the Common Stock is PNC
Bank, Kentucky, Inc., Louisville, Kentucky.
