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 March 31, 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. 33,050,794 shares, without
par value, as of April 30, 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
March 31,
1995 1994
REVENUES:
Electric . . . . . . . . . . . . . . . . . . . . . . $123,647 $123,418
Gas. . . . . . . . . . . . . . . . . . . . . . . . . 75,975 96,362
Non-utility. . . . . . . . . . . . . . . . . . . . . 8,479 24,682
Total revenues. . . . . . . . . . . . . . . . . . . 208,101 244,462
COST OF REVENUES:
Fuel and power purchased . . . . . . . . . . . . . . 32,658 36,620
Gas supply expenses. . . . . . . . . . . . . . . . . 48,367 67,399
Development and construction costs . . . . . . . . . 7,981 20,758
Total cost of revenues. . . . . . . . . . . . . . . 89,006 124,777
Gross profit. . . . . . . . . . . . . . . . . . . . . 119,095 119,685
OPERATING EXPENSES:
Operation and maintenance. . . . . . . . . . . . . . 56,931 59,052
Depreciation and amortization. . . . . . . . . . . . 21,829 20,965
Non-recurring charges (Note 3) . . . . . . . . . . . - 48,743
Total operating expenses. . . . . . . . . . . . . . 78,760 128,760
Equity in earnings of joint ventures. . . . . . . . . 4,109 2,544
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . 44,444 (6,531)
Other income and (deductions) . . . . . . . . . . . . 824 (841)
Contribution to charitable foundation (Note 3). . . . - 15,000
Interest charges. . . . . . . . . . . . . . . . . . . 11,481 10,597
Income (loss) from continuing operations
before income taxes. . . . . . . . . . . . . . . . . 33,787 (32,969)
Income taxes. . . . . . . . . . . . . . . . . . . . . 12,478 (14,383)
Income (loss) from continuing operations
before preferred dividends . . . . . . . . . . . . . 21,309 (18,586)
Preferred dividends . . . . . . . . . . . . . . . . . 1,617 1,378
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . . . $ 19,692 $(19,964)
LG&E Energy Corp. and Subsidiaries
Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Ended
March 31,
1995 1994
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . . . $ 19,692 $(19,964)
Gain on sale of discontinued operations,
net of income taxes of $35,048 (Note 9). . . . . . . - 51,805
Income before cumulative effect of
change in accounting principle . . . . . . . . . . . 19,692 31,841
Cumulative effect of change
in accounting principle, net of
income taxes of $2,280 (Note 4). . . . . . . . . . . - (3,369)
NET INCOME. . . . . . . . . . . . . . . . . . . . . . $ 19,692 $ 28,472
Average common shares outstanding . . . . . . . . . . 33,028 32,967
EARNINGS PER SHARE:
Continuing operations. . . . . . . . . . . . . . . .$ .60 $ (.61)
Gain on sale of discontinued operations. . . . . . . - 1.57
Cumulative effect of accounting change . . . . . . . - (.10)
Total earnings per share. . . . . . . . . . . . . .$ .60 $ .86
LG&E Energy Corp. and Subsidiaries
Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
March 31, Dec. 31,
1995 1994
UTILITY PLANT:
At original cost . . . . . . . . . . . . . . . . . .$2,555,953 $2,537,895
Less: reserve for depreciation. . . . . . . . . . . 900,626 881,861
Net utility plant . . . . . . . . . . . . . . . . . 1,655,327 1,656,034
OTHER PROPERTY AND INVESTMENTS - less reserve:
Investments in affiliates. . . . . . . . . . . . . . 112,527 115,420
Other. . . . . . . . . . . . . . . . . . . . . . . . 48,831 53,483
Total other property and investments. . . . . . . . 161,358 168,903
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . 124,754 49,407
Marketable securities. . . . . . . . . . . . . . . . 44,729 89,431
Accounts receivable - less reserve . . . . . . . . . 90,752 97,927
Materials and supplies - at average cost:
Fuel (predominantly coal) . . . . . . . . . . . . . 12,690 13,869
Gas stored underground. . . . . . . . . . . . . . . 10,512 31,354
Other . . . . . . . . . . . . . . . . . . . . . . . 36,957 37,299
Prepayments and other. . . . . . . . . . . . . . . . 7,784 4,020
Total current assets. . . . . . . . . . . . . . . . 328,178 323,307
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense . . . . . . . . . . . . . . 7,687 7,776
Regulatory assets. . . . . . . . . . . . . . . . . . 31,020 31,726
Other. . . . . . . . . . . . . . . . . . . . . . . . 27,082 29,718
Total deferred debits and other assets. . . . . . . 65,789 69,220
Total assets. . . . . . . . . . . . . . . . . . .$2,210,652 $2,217,464
LG&E Energy Corp. and Subsidiaries
Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITAL AND LIABILITIES
March 31, Dec. 31,
1995 1994
CAPITALIZATION:
Common stock, without par value -
Authorized 75,000,000 shares;
outstanding 33,049,047 shares
and 33,015,951 shares . . . . . . . . . . . . . . .$ 462,136 $ 460,980
Common stock expense . . . . . . . . . . . . . . . . (914) (914)
Unrealized loss on marketable
securities, net of income
taxes of $1,311 and $2,980. . . . . . . . . . . . . (1,787) (4,623)
Retained earnings. . . . . . . . . . . . . . . . . . 309,000 307,072
Total common equity . . . . . . . . . . . . . . . . 768,435 762,515
Cumulative preferred stock . . . . . . . . . . . . . 116,716 116,716
Long-term debt . . . . . . . . . . . . . . . . . . . 662,858 662,862
Total capitalization. . . . . . . . . . . . . . . . 1,548,009 1,542,093
CURRENT LIABILITIES:
Notes payable. . . . . . . . . . . . . . . . . . . . 32,000 32,000
Accounts payable . . . . . . . . . . . . . . . . . . 60,337 78,254
Common dividends declared. . . . . . . . . . . . . . 17,764 17,746
Accrued taxes. . . . . . . . . . . . . . . . . . . . 25,279 15,747
Accrued interest . . . . . . . . . . . . . . . . . . 11,709 13,428
Other. . . . . . . . . . . . . . . . . . . . . . . . 27,686 34,218
Total current liabilities . . . . . . . . . . . . . 174,775 191,393
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes . . . . . . . . . . . . . . . . . . . . . . . 273,746 269,828
Investment tax credit, in
process of amortization . . . . . . . . . . . . . . 87,627 88,779
Accumulated provision for pensions
and related benefits. . . . . . . . . . . . . . . . 48,055 48,126
Customers' advances for construction . . . . . . . . 8,778 8,621
Regulatory liability . . . . . . . . . . . . . . . . 8,914 8,914
Other. . . . . . . . . . . . . . . . . . . . . . . . 60,748 59,710
Total deferred credits and other liabilities. . . . 487,868 483,978
Total capital and liabilities . . . . . . . . . .$2,210,652 $2,217,464
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows
(Unaudited - Thousands of $)
Three Months Ended
March 31,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . .$ 19,692 $ 28,472
Items not requiring cash currently:
Cumulative effect of change
in accounting principle . . . . . . . . . . . . . - 3,369
Non-recurring charges . . . . . . . . . . . . . . . - 48,743
Depreciation and amortization . . . . . . . . . . . 21,829 20,965
Deferred income taxes - net . . . . . . . . . . . . 3,223 (20,531)
Investment tax credit - net . . . . . . . . . . . . (1,152) (1,189)
Change in undistributed earnings
of joint ventures. . . . . . . . . . . . . . . . 11,167 (1,552)
Gain on sale of discontinued operations . . . . . . - (90,878)
Other . . . . . . . . . . . . . . . . . . . . . . . 1,184 7,493
(Increases) decreases in net current assets:
Accounts receivable . . . . . . . . . . . . . . . . 7,175 7,243
Materials and supplies. . . . . . . . . . . . . . . 22,363 21,930
Accounts payable. . . . . . . . . . . . . . . . . . (17,917) (7,626)
Accrued taxes . . . . . . . . . . . . . . . . . . . 9,532 40,557
Accrued interest. . . . . . . . . . . . . . . . . . (1,719) (1,375)
Prepayments and other . . . . . . . . . . . . . . . (10,296) (5,589)
Other. . . . . . . . . . . . . . . . . . . . . . . . 2,281 (3,502)
Net cash provided by operating activities . . . . . 67,362 46,530
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities . . . . . . . . . . . . . . (80,108) (124,692)
Proceeds from sales of securities. . . . . . . . . . 132,709 15,139
Construction expenditures. . . . . . . . . . . . . . (19,751) (14,433)
Investments in affiliates. . . . . . . . . . . . . . (8,275) (2,013)
Proceeds from sale of discontinued operations. . . . - 170,000
Net cash provided by investing activities . . . . . 24,575 44,001
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . . 1,156 1,149
Repayment of short-term borrowings . . . . . . . . . - (20,000)
Payment of common dividends. . . . . . . . . . . . . (17,746) (17,137)
Net cash used for financing activities. . . . . . .$ (16,590) $ (35,988)
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Three Months Ended
March 31,
1995 1994
NET INCREASE IN CASH AND
TEMPORARY CASH INVESTMENTS . . . . . . . . . . . . .$ 75,347 $ 54,543
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 49,407 67,377
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . .$ 124,754 $ 121,920
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Income taxes. . . . . . . . . . . . . . . . . . .$ (52) $ 6,240
Interest on borrowed money. . . . . . . . . . . . 12,765 11,781
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
March 31,
1995 1994
Balance at beginning of period. . . . . . . . . . . . $307,072 $271,606
Net income. . . . . . . . . . . . . . . . . . . . . . 19,692 28,472
Subtotal . . . . . . . . . . . . . . . . . . . . . . 326,764 300,078
Cash dividends declared on
common stock ($.5375 and $.52 per share) . . . . . . 17,764 17,154
Balance at end of period. . . . . . . . . . . . . . . $309,000 $282,924
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
disclosures normally included in financial statements prepared in accor-
dance 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 misleading. Certain amounts in the statements of income and
cash flows for the three months ended March 31, 1994, have been reclassi-
fied to be consistent with the presentation for the three months ended
March 31, 1995, with no impact on previously-reported net income or
earnings per share.
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. LG&E filed an application with the Public Service Commission of Kentucky
(Commission) 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 an environ-
mental cost recovery surcharge that will increase electric revenues by
approximately $3.8 million in 1995 and $7.2 million in 1996. The sur-
charge became effective on May 1, 1995. LG&E and the Kentucky Attorney
General have filed applications for rehearing on certain issues in the
April 6 order. Among other things, the Kentucky Attorney General is
requesting a reduction of the amounts recoverable by LG&E. LG&E cannot
predict what action, if any, the Commission may take in this matter.
3. 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.
4. 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.
5. In April 1995, the Company announced that one of its subsidiaries, LG&E
International Inc., had formed a joint venture that will build and operate
a wind-power plant in Tarifa, Spain. The plant is scheduled to be built
and operational by June 1995. Additional funding commitments of the
Company resulting from the joint-venture agreement total approximately
$4.5 million.
6. 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 based on availability. From May
1994 through April 1995, Virginia Power withheld approximately $6.7
million of these capacity payments during 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. Virginia Power filed a demurrer (i.e., motion
to dismiss), in which it denied that its actions were in breach of the
PPA. On March 17, 1995, the Circuit Court of the City of Richmond,
Virginia, granted the demurrer and dismissed WLP's complaint. On April
17, 1995, WLP filed an amended motion for judgment alleging breach of
contract and constructive fraud. On April 27, 1995, Virginia Power filed
a demurrer on the breach of contract and constructive fraud claims. WLP
is also considering further action to protect its interests. 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.
7. On February 10, 1995, the Company signed definitive agreements to purchase
Hadson Corporation (Hadson) for $143 million, plus acquisition-related
fees and expenses. Hadson, based in Dallas, Texas, is involved in the
marketing, gathering, processing, storage and transportation of natural
gas and natural gas liquids. The sale is subject to the satisfaction of
certain conditions. Closing is scheduled to occur during the second
quarter of 1995.
8. In May 1995, the Company, through a wholly-owned subsidiary, negotiated
two additional lines of credit with the Bank of Montreal in the aggregate
amount of $215 million for general corporate purposes, including refinanc-
ing Hadson Corporation's debt and the issuance of letters of credit.
9. 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 three
months ended March 31, 1994.
10. 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, a regulated 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 March 31, 1995, Compared with
Three Months Ended March 31, 1994
Earnings per share of common stock for the first quarter of 1995 were $.60, a
$.26 decrease from the $.86 earned for the corresponding quarter of 1994. Last
year's earnings included a gain of $1.57 per share on the sale of the Company's
interest in Natural Gas Clearinghouse (NGC), partially offset by a write-off of
certain non-recurring charges ($.91), the expense of establishing a charitable
foundation ($.27) and the adoption of a new accounting standard for post-
employment benefits ($.10). Without consideration of the gain and the charges
against income discussed above, the Company's earnings for the first quarter of
1994 would have been $.57 a share, $.03 less than first quarter 1995 earnings.
This increase in 1995 was primarily due to higher electric wholesale and retail
industrial sales to LG&E's customers, lower maintenance incurred by the utility
and higher equity in earnings of joint ventures, partially offset by lower
construction earnings at LPI. Maintenance expenses incurred by LG&E in the
first quarter of 1994 were higher because of the severe winter storm in January
1994.
A comparison of utility operating revenues for the quarter ended March 31,
1995, with the quarter ended March 31, 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 $ (2,877) $ (7,227)
Demand side management/revenue decoupling 2,445 2,073
Variation in sales volume, etc. 1,149 (16,963)
Total 717 (22,117)
Sales for resale (436) -
Gas transportation - net - 2,003
Other (52) (273)
Total $ 229 $(20,387)
Non-utility revenues decreased $16 million due to the completion of construc-
tion activity at LPI's Roanoke Valley I and Rensselaer projects, and decreased
construction activity at its Roanoke Valley II project.
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 expenses decreased $1.4 million (4%) for the quarter primarily because of
a decrease in the cost of coal burned ($2.8 million) partially offset by
increased generation of 4%. Power purchased decreased $2.6 million due mainly
to less power wheeled for other utilities as a result of milder weather in the
region.
Gas supply expenses decreased $19 million (28%) mainly due to a lower volume of
gas delivered to the distribution system ($14.1 million) and a decrease in net
gas supply cost ($4.9 million).
LG&E implemented a Commission-approved demand side management (DSM) program in
January 1994. The agreement contains a rate mechanism that will allow LG&E
concurrent recovery of DSM costs; provide LG&E an incentive for implementing
DSM programs; and allow LG&E to recover revenues due to lost sales associated
with the DSM programs.
Development and construction costs decreased $12.8 million (62%) due to the
completion of construction activity at LPI's Roanoke Valley I and Rensselaer
projects, and decreased construction activity at its Roanoke Valley II project.
Operation and maintenance expenses decreased $2.1 million (4%) primarily due to
storm damage expenses at LG&E related to the severe winter weather during the
first quarter of 1994, and due to payroll taxes associated with severance
payments in connection with work force reductions recorded at LG&E in the first
quarter of 1994. See Note 3 of Notes to Financial Statements.
Depreciation and amortization increased because of additional depreciable plant
in service.
Non-recurring charges written off during the first quarter of 1994 include
LG&E's 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 3 of Notes to Financial Statements.
Equity in earnings of joint ventures increased mainly due to starting commer-
cial operations in the second quarter of 1994 at the Roanoke Valley I, Rens-
selaer, and Windpower Partners 1993 projects.
Other income and deductions increased primarily due to an increase in dividend
and interest income from investments.
The contribution to charitable foundation reflects the expense associated with
the formation of a tax-exempt charitable foundation recorded in the first
quarter of 1994. See Note 3 of Notes to Financial Statements.
Interest charges increased because of a higher composite interest rate on
outstanding debt and an increase in notes payable. A component of interest
expense was the cost associated with $30 million of interest rate swaps that
LG&E entered into as a standard hedging device in connection with the issuance
of Pollution Control Bonds Series S due September 1, 2017, in 1992. The swaps
are designed to reduce LG&E's exposure to interest rate risk. During the three
months ended March 31, 1995, LG&E received interest at a composite rate of 3.7%
and paid interest at a composite rate of 4.55% pursuant to the swaps.
Variations in income tax expense are largely attributable to changes in pretax
income.
Gain on sale of discontinued operations reflects the sale of the Company's
investment in NGC in January 1994. See Note 9 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, during the first quarter of 1994. See Note 4 of Notes to
Financial Statements.
Liquidity and Capital Resources
The Company's capital structure and cash flow remained strong throughout the
reported periods. This is evidenced primarily by the Company's ability to meet
its capital needs through internal cash generation and the significant invest-
ment in available-for-sale securities at March 31, 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. Utility construction expenditures for the first three months of
1995 of $20 million and investments in affiliates of $8 million were financed
with internally-generated funds. Investments in affiliates consisted of
additional investments in the Roanoke Valley I and San Miguel projects.
On February 10, 1995, the Company signed definitive agreements to acquire
Hadson Corporation (Hadson) 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
expects to provide Hadson with additional working capital at the time the
acquisition takes place. The Company expects to draw against its credit lines
to finance part of the acquisition and working-capital infusion, and to use
cash to finance the balance. The sale is subject to the satisfaction of
certain conditions. Closing is scheduled to occur in the second quarter of
1995. See Notes 7 and 8 of Notes to Financial Statements.
In April 1995, the Company announced that one of its subsidiaries, LG&E
International Inc., had formed a joint venture that will build and operate a
wind-power plant in Tarifa, Spain. The plant is scheduled to be built and
operational by June 1995. Additional funding commitments of the Company
resulting from the joint-venture agreement total approximately $4.5 million.
The Company's combined cash and marketable securities balance increased $31
million in the first quarter of 1995. The increase reflects the Company's cash
flow from operations, less capital expenditures, investments in affiliates and
dividends.
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 defease, in April 1995, the outstanding 9.25% Series of
Pollution Control Bonds due July 1, 2015.
At March 31, 1995, lines of credit were in place totaling $320 million ($145
million for LG&E, $150 million for Energy Systems, and $25 million for LG&E
Energy Corp.) for which the companies pay commitment or facility fees. These
lines of credit were unused as of March 31, 1995, except for $32 million of
Energy Systems' notes payable. The credit lines are scheduled to expire at
various periods in 1995 and 1996, and management intends to renegotiate them
when they expire. In May 1995, the Company negotiated two additional lines of
credit in the aggregate amount of $215 million for general corporate purposes,
including refinancing Hadson Corporation's debt and the issuance of letters of
credit. See Notes 7 and 8 of Notes to Financial Statements.
Variations in accounts receivable and accounts payable are not generally
significant indicators of the Company's liquidity, as such variations are
primarily attributable to seasonal fluctuations in weather in LG&E's service
territory, which has a direct effect on sales of electricity and natural gas.
The Company's capitalization ratios at March 31, 1995, and December 31, 1994,
were:
March 31, Dec. 31,
1995 1994
Long-term debt 42.0% 42.2%
Notes payable 2.0 2.0
Preferred stock 7.4 7.4
Common equity 48.6 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: the information under the 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, Financial Statements
and Supplementary Data. Except as noted below, there have been no material
changes in these proceedings as reported in the Company's 1994 Form 10-K.
Trimble County. As reported in Note 14 of the Notes to Financial Statements
under Item 8 of the Company's 1994 Form 10-K, LG&E expressed the opinion that
the Public Service Commission of Kentucky's (Commission) July 8, 1994, order
made it unlikely that the Commission would entertain the position taken by the
intervenors in their previously-filed testimony that LG&E refund approximately
$183 million to its customers. On April 21, 1995, the Commission issued an
order granting LG&E's motion to strike certain testimony submitted by certain
intervenors in the Commission's proceeding to determine what refunds, if any,
are necessary to fully put into effect the Commission's prior decision to
disallow 25% of Trimble County's costs from rates. The stricken testimony
recommended that LG&E be ordered to refund 25% of the revenue requirements LG&E
collected on Construction Work in Progress (CWIP) for Trimble County included
in rates from June 1979 through December 1990 (approximately $183 million).
The Commission states in the order that it is forbidden by the legal prohibi-
tion against retroactive ratemaking from expanding the issues beyond the
approximately $30 million in revenues collected subject to refund by LG&E
pursuant to the Commission's July 1, 1988, order in Case No. 10064. LG&E
refunded $11.1 million of that amount under the 1989 settlement agreement. On
April 26, 1995, certain intervenors filed a petition in Franklin Circuit Court
requesting review of the April 21, 1995, order and immediate relief. The court
denied their request for review and relief. On May 9, 1995, formal hearings
began with the Commission to determine the proper ratemaking treatment to
exclude 25% of Trimble County from customer rates for the period May 1988
through December 1990. LG&E's current rates, which became effective January 1,
1991, reflect the revenue requirements applicable to 75% of the Trimble County
plant.
Statewide Power Planning. As discussed in Item 3, Legal Proceedings, of the
Company's 1994 Form 10-K, in November 1993, LG&E filed its 1993 biennial
Integrated Resource Plan (the Plan) with the Commission. The Plan updates
LG&E's 1991 Integrated Resource Plan, and proposes to meet customers' future
demand through 2007 by adding resources in small increments, such as through
short-term power purchases (1996-1999), a customer-owned standby generation
program (1997), two combustion turbines (1999-2000), an air conditioner load
controls program storage plan (1997, 2001-2003), an upgrade to LG&E's existing
hydroelectric plant (2003), and a compressed air energy storage plan (2004).
In March 1995, the Commission Staff issued a report on its review of the Plan.
The Staff specifically found that the Plan contained some of the better
analyses among those filed by the electric utilities under the Commission's
jurisdiction, and presented several suggestions for LG&E's consideration in
developing its next Plan. By order issued on March 17, 1995, the Commission
formally closed its proceeding for the review of the Plan.
Environmental Surcharge. On April 6, 1995, the Commission approved, with
modifications, LG&E's application for an environmental cost recovery surcharge
to recover certain costs required to comply with the Federal Clean Air Act, as
amended, and other federal, state, and local environmental laws, regulations
and orders which apply to coal combustion wastes and by-products from facili-
ties utilized for the production of energy from coal. As a result of the order
approving the surcharge, LG&E estimates that its electric revenues will
increase by approximately $3.8 million in 1995 and $7.2 million in 1996. LG&E
and the Kentucky Attorney General have filed applications for rehearing on
certain issues in the April 6 order. Among other things, the Kentucky Attorney
General is requesting a reduction of the amounts recoverable by LG&E. LG&E
cannot predict what action, if any, the Commission may take in this matter.
Roanoke Valley I. As discussed in Item 3, Legal Proceedings, of the Company's
1994 Form 10-K, and Note 13 of the Notes to Financial Statements under Item 8,
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 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 April 1995, Virginia Power
withheld approximately $6.7 million of these capacity payments during periods
of forced outages. To date the Company has not recognized any income on its
50% portion of the capacity payments being withheld. In March 1995, the
Circuit Court of the City of Richmond, Virginia, granted Virginia Power's
demurrer (i.e., motion to dismiss) and dismissed WLP's complaint. On April,
17, 1995, WLP filed an amended motion for judgment alleging breach of contract
and constructive fraud. On April 27, 1995, Virginia Power filed a demurrer on
the breach of contract and constructive fraud claims. WLP is also considering
further action to protect its interests. 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.
Rensselaer. As discussed in Item 3, Legal Proceedings, of the Company's 1994
Form 10-K, and Note 13 of the Notes to Financial Statements under Item 8, as a
result of problems encountered during start-up and testing of the Rensselaer
facility, the facility's commercial operation date was delayed, and the
facility was prevented from meeting FERC's operating or efficiency standard for
the last month of 1993, and the efficiency standard for 1994. LG&E-Westmore-
land Rensselaer, the partnership 50% owned by subsidiaries of the Company and
the owner of the facility, filed a waiver request in October 1994 requesting a
temporary waiver of the operating and efficiency standards for 1993 and the
efficiency standard for 1994. On May 3, 1995, FERC granted the waiver request-
ed by LG&E-Westmoreland Rensselaer. The intervening party has 30 days from May
3, 1995, in which to appeal the ruling.
Item 6(a). Exhibits.
Exhibit
Number Description
27 Financial Data Schedule.
Item 6(b). Reports on Form 8-K.
Current Report on Form 8-K dated February 16, 1995, announcing that the Company
had signed definitive agreements to purchase Hadson Corporation, a company
involved in the marketing, gathering, processing, storage and transportation of
natural gas and natural gas liquids, for $143 million.
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: May 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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