SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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. 66,300,862 shares, without
par value, as of July 31, 1996.
Part I. Financial Information - Item 1. Financial Statements
LG&E Energy Corp. and Subsidiaries
Statements of Income
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
REVENUES:
Electric utility . . . . . . . . .$151,857 $142,454 $ 287,676 $266,101
Gas utility. . . . . . . . . . . . 29,362 25,480 120,418 101,455
Non-utility. . . . . . . . . . . . 579,658 81,123 1,218,680 89,602
Total revenues. . . . . . . . . . 760,877 249,057 1,626,774 457,158
COST OF REVENUES:
Fuel and power purchased . . . . . 41,863 36,837 80,879 69,495
Gas supply expenses. . . . . . . . 18,652 13,594 76,884 61,961
Non-utility. . . . . . . . . . . . 566,853 77,599 1,185,213 85,580
Total cost of revenues. . . . . . 627,368 128,030 1,342,976 217,036
Gross profit. . . . . . . . . . . . 133,509 121,027 283,798 240,122
OPERATING EXPENSES:
Operation and maintenance:
Utility . . . . . . . . . . . . . 51,773 52,921 110,492 104,336
Non-utility . . . . . . . . . . . 11,517 8,777 32,431 14,293
Depreciation and amortization. . . 25,764 23,283 51,492 45,112
Total operating expenses. . . . . 89,054 84,981 194,415 163,741
Equity in earnings
of joint ventures. . . . . . . . . 4,201 16,422 8,801 20,531
OPERATING INCOME. . . . . . . . . . 48,656 52,468 98,184 96,912
Other income and (deductions) . . . 1,555 1,503 1,541 2,327
Interest charges and
preferred dividends. . . . . . . . 13,834 13,812 27,879 26,910
Income before income taxes. . . . . 36,377 40,159 71,846 72,329
Income taxes. . . . . . . . . . . . 12,581 15,509 26,515 27,987
NET INCOME. . . . . . . . . . . . .$ 23,796 $ 24,650 $ 45,331 $ 44,342
Average common shares
outstanding. . . . . . . . . . . . 66,294 66,102 66,263 66,079
Earnings per share. . . . . . . . .$ .36 $ .37$ .68 $ .67
The accompanying notes are an integral part of these financial statements.
LG&E Energy Corp. and Subsidiaries
Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
June 30, Dec. 31,
1996 1995
UTILITY PLANT:
At original cost . . . . . . . . . . . . . . . . . .$2,637,011 $2,598,860
Less: reserve for depreciation. . . . . . . . . . . 967,982 934,942
Net utility plant . . . . . . . . . . . . . . . . . 1,669,029 1,663,918
OTHER PROPERTY AND INVESTMENTS - less reserve:
Investment in affiliates . . . . . . . . . . . . . . 124,843 123,338
Other. . . . . . . . . . . . . . . . . . . . . . . . 193,922 197,130
Total other property and investments. . . . . . . . 318,765 320,468
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . 85,772 80,144
Marketable securities. . . . . . . . . . . . . . . . 8,874 29,060
Accounts receivable - less reserve . . . . . . . . . 354,192 314,153
Materials and supplies - primarily at average cost:
Fuel (predominantly coal) . . . . . . . . . . . . . 6,477 14,996
Gas stored underground. . . . . . . . . . . . . . . 16,374 47,530
Other . . . . . . . . . . . . . . . . . . . . . . . 33,356 34,384
Prepayments and other. . . . . . . . . . . . . . . . 47,846 27,245
Total current assets. . . . . . . . . . . . . . . . 552,891 547,512
DEFERRED DEBITS AND OTHER ASSETS. . . . . . . . . . . 115,177 97,022
Total assets. . . . . . . . . . . . . . . . . . . .$2,655,862 $2,628,920
The accompanying notes are an integral part of these financial statements.
LG&E Energy Corp. and Subsidiaries
Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITAL AND LIABILITIES
June 30, Dec. 31,
1996 1995
CAPITALIZATION:
Common stock, without par value -
Outstanding 66,300,862 shares
and 66,194,766 shares (notes 2 and 7) . . . . . . .$ 465,531 $ 463,705
Other. . . . . . . . . . . . . . . . . . . . . . . . (1,404) (1,501)
Retained earnings. . . . . . . . . . . . . . . . . . 325,468 316,930
Total common equity . . . . . . . . . . . . . . . . 789,595 779,134
Cumulative preferred stock . . . . . . . . . . . . . 95,328 95,328
Long-term debt . . . . . . . . . . . . . . . . . . . 646,838 646,845
Total capitalization. . . . . . . . . . . . . . . . 1,531,761 1,521,307
CURRENT LIABILITIES:
Long-term debt due within one year . . . . . . . . . - 16,000
Notes payable. . . . . . . . . . . . . . . . . . . . 168,800 173,000
Accounts payable . . . . . . . . . . . . . . . . . . 308,919 287,457
Trimble County settlement. . . . . . . . . . . . . . 20,078 29,800
Accrued taxes. . . . . . . . . . . . . . . . . . . . 14,274 9,812
Other. . . . . . . . . . . . . . . . . . . . . . . . 82,406 72,376
Total current liabilities . . . . . . . . . . . . . 594,477 588,445
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes . . . . . . . . . . . . . . . . . . . . . . . 244,343 233,481
Investment tax credit, in
process of amortization . . . . . . . . . . . . . . 81,834 84,037
Regulatory liability . . . . . . . . . . . . . . . . 86,753 88,242
Other. . . . . . . . . . . . . . . . . . . . . . . . 116,694 113,408
Total deferred credits and other liabilities. . . . 529,624 519,168
Total capital and liabilities . . . . . . . . . . .$2,655,862 $2,628,920
The accompanying notes are an integral part of these financial statements.
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows
(Unaudited - Thousands of $)
Six Months Ended
June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . .$ 45,331 $ 44,342
Items not requiring cash currently:
Depreciation and amortization . . . . . . . . . . . 51,492 45,112
Deferred income taxes - net . . . . . . . . . . . . 17,921 8,567
Other . . . . . . . . . . . . . . . . . . . . . . . (549) 14,273
Decrease (increase) in net current assets. . . . . . 6,266 (3,691)
Other. . . . . . . . . . . . . . . . . . . . . . . . (29,141) (8,498)
Net cash provided by operations . . . . . . . . . . 91,320 100,105
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities. . . . . . . . . . . . . . . (13,357) (136,779)
Proceeds from sales of securities. . . . . . . . . . 33,856 215,994
Construction expenditures. . . . . . . . . . . . . . (50,723) (39,008)
Investment in affiliates . . . . . . . . . . . . . . (3) (12,475)
Acquisition of LG&E Natural Inc.,
net of cash and temporary cash
investments acquired. . . . . . . . . . . . . . . . - (146,104)
Net cash used for investing activities. . . . . . (30,227) (118,372)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . . 1,499 1,243
Issuance of bonds. . . . . . . . . . . . . . . . . . - 39,959
Retirement of bonds and
other long-term debt. . . . . . . . . . . . . . . . (16,000) (43,600)
Repayment of short-term borrowings . . . . . . . . . (69,000) (35,292)
Short-term borrowings. . . . . . . . . . . . . . . . 64,800 126,975
Payment of common dividends. . . . . . . . . . . . . (36,764) (35,510)
Net cash (used for) provided by
financing activities. . . . . . . . . . . . . . .$ (55,465) $ 53,775
The accompanying notes are an integral part of these financial statements.
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Six Months Ended
June 30,
1996 1995
NET INCREASE IN CASH AND
TEMPORARY CASH INVESTMENTS . . . . . . . . . . . . .$ 5,628 $ 35,508
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 80,144 49,407
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . .$ 85,772 $ 84,915
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes. . . . . . . . . . . . . . . . . . .$ 13,413 $ 20,521
Interest on borrowed money. . . . . . . . . . . . 25,232 24,107
For the purposes of these statements, all temporary cash investments purchased
with a maturity of three months or less are considered cash equivalents.
The accompanying notes are an integral part of these financial statements.
LG&E Energy Corp. and Subsidiaries
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Balance at beginning of period. . . $320,070 $309,000 $316,930 $307,072
Net income. . . . . . . . . . . . . 23,796 24,650 45,331 44,342
Cash dividends declared on
common stock ($.2775, $.26875,
$.555 and $.5375 per share). . . . 18,398 17,765 36,793 35,529
Balance at end of period. . . . . . $325,468 $315,885 $325,468 $315,885
The accompanying notes are an integral part of these financial statements.
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
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 for
the three and six months ended June 30, 1995, have been reclassified to be
consistent with the presentation for the three and six months ended June
30, 1996, 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 1995, and the Report on Form 10-Q for the
quarter ended March 31, 1996.
2. On March 6, 1996, the Company announced that its Board of Directors
approved a two-for-one split of its common stock, without par value,
effective April 15, 1996. In addition, authorized shares were increased
from 75,000,000 to 125,000,000 on April 23, 1996. All references in the
accompanying financial statements to numbers of shares outstanding and per
share amounts have been restated to reflect the split.
3. The Company entered into four over-the-counter interest-rate swap con-
tracts at various times in the first quarter of 1996. The notional
amounts on these swaps totaled $75 million. Management has designated the
swaps as hedges of some of its notes payable, and as such they reduce the
Company's exposure to changes in interest rates by converting the variable
rates paid on the notes to an average fixed rate of 4.935 percent. The
average variable rates received on the swaps during the three- and six-
month periods ended June 30, 1996, were 5.461 percent and 5.488 percent.
The average interest rates paid on the underlying notes during the three-
and six-month periods ended June 30, 1996, were 5.636 percent and 5.73
percent. The variable rates received on the swaps change every three
months, and they are based on the three-month London Interbank Offered
Rate. The swaps mature at various times from February 1997 through April
1997. The fair values of the swaps were immaterial at June 30, 1996.
Information summarizing the Company's open positions on natural gas
financial instruments used for trading purposes at June 30, 1996, is
presented below. Dollar amounts represent net premiums paid or (received)
for natural gas options (in millions).
Short/sell positions:
532 BCF notional amount, delivery
dates from July 1996 to December 1999 $(18.2)
Long/buy positions:
519 BCF notional amount, delivery
dates from July 1996 to December 1999 17.9
Total $ (.3)
For the three- and six-month periods ended June 30, 1996, the Company
recorded net gains of $4.9 million and $13.8 million, respectively, from
natural gas trading activities. These amounts are included in non-utility
revenues in the accompanying income statements. The average fair values
of the Company's natural gas financial instruments used for trading
purposes during the three months ended June 30, 1996, included assets of
$66.1 million and liabilities of $63.9 million. The comparable average
fair values for the six months ended June 30, 1996, included assets of
$69.7 million and liabilities of $67.6 million. The fair values of the
Company's natural gas options and swaps used for trading purposes as of
June 30, 1996, included assets of $77.7 million and liabilities of $55.2
million.
The fair values of and net premiums paid for natural gas options and swaps
used for hedging purposes were immaterial at June 30, 1996. Deferred
gains and losses on closed natural gas financial instruments used for
hedging purposes also were immaterial at June 30, 1996.
The notional amounts, costs and fair values at June 30, 1996, of the
Company's other financial instruments were not materially different from
comparable amounts at December 31, 1995.
4. 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, with
modifications, an environmental cost recovery surcharge that increased
electric revenues by $3.2 million in 1995, and is expected to increase
1996 revenues by approximately $5.7 million. The surcharge became
effective on May 1, 1995.
An appeal of the Commission's April 6, 1995, order by various intervenors
in the proceeding (including the Kentucky Attorney General) is currently
pending in the Franklin Circuit Court of Kentucky. The intervenors are
contesting the validity of the order on several grounds, including the
constitutionality of the Kentucky statute that authorizes the surcharge.
In an order dated April 10, 1996, associated with the first six-month
review of the operation of the surcharge, the Commission stated that all
environmental surcharge revenues collected from the date of the April 10
order will be subject to refund, pending the final determination of the
April 6, 1995, order. LG&E is vigorously contesting the legal challenges
to the surcharge, but cannot predict the outcome of the appeal. The
amount of refunds that may be ordered, if any, are not expected to have a
material adverse effect on the Company's financial position or results of
operations.
5. On June 1, 1996, LG&E's First Mortgage Bonds, 5.625% Series of $16 million
matured and were retired.
6. Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). The
new standard requires that long-lived assets and certain identified
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing such impairment reviews, companies are
required to estimate the sum of future cash flows from an asset and
compare such amount to the asset's carrying amount. Any excess of
carrying amount over expected cash flows will result in a possible
write-down of an asset to its fair value. Adopting SFAS No. 121 had no
impact on the Company's financial position or results of operations.
7. Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, and elected the option to disclose the effects that recog-
nizing compensation expense in accordance with the new standard would have
had on net income and earnings per share. If the Company had recognized
compensation expense for awards under its various stock-based compensation
plans according to the new standard, net income and earnings per share for
the three- and six-month periods ended June 30, 1996, and June 30, 1995,
would not have been materially different from reported amounts.
8. See Item 1, Legal Proceedings, under Part II for a discussion of the
request for rehearing filed with FERC by LG&E-Westmoreland Southampton,
the partnership that owns the Southampton facility, regarding the partner-
ship's request for an order from FERC stating that the Southampton
facility remains a qualifying facility for 1992 and the subsequent order
issued by FERC dated July 31, 1996.
9. See Item 1, Legal Proceedings, under Part II for a discussion of a filing
by Kenetech Windpower, Inc., for protection under Chapter 11 of the United
States Bankruptcy Code. The filing seeks to restructure contracts that
exist between Kenetech and certain partnerships in which the Company has
investments.
10. Reference is made to Part II herein - Item 1, Legal Proceedings, and Note
16 of the Notes to Financial Statements of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
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.
Some of the matters discussed in Part I or Part II of this Form 10-Q may
contain forward looking statements that are subject to certain risks, uncer-
tainties and assumptions. Actual results may vary materially. Factors that
could cause actual results to differ materially include, but are not limited
to: general economic conditions; business and competitive conditions in the
energy industry; unusual weather; regulatory decisions; and the other factors
described in the Company's Form 10-K for the year ended December 31, 1995, or
listed in Exhibit 99.01 to the Company's Form 8-K dated June 10, 1996.
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,
LG&E Natural Inc.'s (LG&E Natural, formerly Hadson Gas Services Inc., and a
wholly-owned subsidiary of Gas Systems) results are also affected by seasonal
fluctuations in temperature and other weather-related factors. Additionally,
results of LG&E Power Inc.'s (LPI, a wholly-owned subsidiary of Energy Systems)
operations are dependent upon the development of its electric power marketing
business. Because of these and other factors, the results of one interim
period are not necessarily indicative of results or trends to be expected for
the full year.
Three Months Ended June 30, 1996, Compared with
Three Months Ended June 30, 1995
Earnings per share decreased 2.7 percent to $.36 in 1996 from $.37 in 1995
mainly due to two of LPI's partnerships' recording gains totaling $.08 per
share on sales of purchase power contracts in June 1995. This decrease was
partially offset by higher earnings at LG&E in 1996, lower corporate expenses,
and higher earnings at LG&E Natural, which the Company acquired in May 1995.
LG&E's earnings increased due primarily to higher weather-related electric and
natural gas sales and a decrease in operating expenses caused principally by a
one-time reduction of certain employee fringe benefits. This improvement in
LG&E's net income was achieved despite the costs associated with numerous
severe storms that occurred this quarter.
Utility Results:
LG&E's electric and gas revenues increased $9.4 million (6.6 percent) and $3.9
million (15.2 percent), respectively, in the second quarter primarily because
of weather conditions. Electric sales for resale increased over the second
quarter of 1995 due to aggressive efforts in marketing off-system sales.
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 $5.0 million (14 percent) for the quarter.
Fuel for electric generation increased $.9 million (2 percent) for the quarter
because of an increase in generation ($2.3 million), partially offset by a
decrease in the cost of coal burned ($1.4 million). Power purchased increased
$4.1 million due to increased purchases required to meet native load and other
power commitments.
Gas supply expenses increased $5.1 million (37 percent) due to an increase in
net gas supply cost ($2.7 million) and a higher volume of gas delivered to the
distribution system ($2.4 million).
Utility operation and maintenance expenses decreased $1.1 million (2 percent)
primarily due to a one-time reduction of certain employee fringe benefits in
connection with a change in the collective bargaining agreement ($3.6 million).
See Item 7, Management's Discussion and Analysis of Results of Operation and
Financial Condition, in the Company's 1995 Form 10-K. Partially offsetting
these decreases was an increase in maintenance expenses related to scheduled
turbine overhauls ($2 million) and storm damage ($1.5 million).
Non-Utility Results:
Non-utility revenues and cost of revenues increased $498.5 million and $489.3
million, respectively, in 1996 mainly due to acquiring LG&E Natural on May 15,
1995. Also contributing to the increases were higher revenues and cost of
revenues at LG&E Natural during the May 15-to-June 30 period, and an increase
in electric power marketing volumes. The increases at LG&E Natural during the
May 15-to-June 30 period resulted from higher volumes and higher natural gas
prices.
Operation and maintenance expense increased 31 percent to $11.5 million in 1996
from $8.8 million in 1995 mainly due to acquiring LG&E Natural ($1.8 million)
and to increases related to the higher electric power marketing volumes. Lower
corporate expenses partially offset these increases.
Non-utility equity in earnings of joint ventures decreased 74 percent to $4.2
million in 1996 from $16.4 million in 1995 mainly due to two of LPI's partner-
ships' recording gains totaling $9.7 million on sales of purchase power
contracts in June 1995.
Non-utility depreciation and amortization increased $1.7 million primarily due
to acquiring LG&E Natural.
The consolidated effective tax rate decreased to 34.6% in 1996 from 38.6% in
1995 mainly due to changes in the provision for state income taxes.
Six Months Ended June 30, 1996, Compared with
Six Months Ended June 30, 1995
Earnings per share increased 1.5 percent to $.68 in 1996 from $.67 in 1995
mainly due to higher earnings at LG&E and LG&E Natural, which the Company
acquired in May 1995. These increases were partially offset by gains totaling
$.08 per share recorded on sales of purchase power contracts by two of LPI's
partnerships in June 1995. The increase in LG&E's earnings was primarily due
to an increase in sales of natural gas and electricity, partially offset by
increased maintenance expense at the power plants and increased storm-related
expenses.
Utility Results:
LG&E's electric and gas revenues increased $21.6 million (8 percent) and $19.0
million (19 percent), respectively, primarily because of weather conditions.
Electric sales for resale increased due to aggressive efforts in marketing off-
system sales.
Fuel and power purchased increased $11.4 million (16 percent) for the six
months ended June 30, 1996. Fuel for electric generation increased $5 million
(7 percent) for the six months primarily because of increased generation ($7.4
million), partially offset by a lower cost of coal burned ($2.4 million).
Power purchased increased $6.4 million due to increased purchases required to
meet native load and other power commitments.
Gas supply expenses increased $14.9 million (24 percent) primarily because of
an increase in gas delivered to the distribution system ($13.1 million) and the
higher cost of net gas supply ($1.8 million).
Utility operation and maintenance expenses increased $6.2 million (6 percent)
primarily due to an increase in scheduled turbine overhauls ($4.1 million) and
expenses related to storm damage ($1.7 million), partially offset by the one-
time reduction of certain employee fringe benefits in connection with the
collective bargaining agreement ($3.6 million). See Item 7, Management's
Discussion and Analysis of Results of Operations and Financial Condition, of
the Company's 1995 Form 10-K..
Non-Utility Results:
Non-utility revenues and cost of revenues each increased by $1.1 billion in
1996 mainly due to acquiring LG&E Natural on May 15, 1995. Also contributing
to the increases were higher revenues and cost of revenues at LG&E Natural
during the May 15-to-June 30 period, and an increase in electric power market-
ing volumes. The increases at LG&E Natural during the May 15-to-June 30 period
resulted from higher volumes and higher natural gas prices.
Operation and maintenance expense increased to $32.4 million in 1996 from $14.3
million in 1995 mainly due to acquiring LG&E Natural and to increases related
to the higher electric power marketing volumes.
Non-utility depreciation and amortization increased $4.8 million primarily due
to acquiring LG&E Natural.
Non-utility equity in earnings of joint ventures decreased 57 percent to $8.8
million in 1996 from $20.5 million in 1995 mainly due to two of LPI's partner-
ships' recording gains totaling $9.7 million on sales of purchase power
contracts in June 1995.
Non-utility interest charges increased $2.7 million due to an increase in notes
payable related to the acquisition of LG&E Natural.
The consolidated effective tax rate decreased to 36.9% in 1996 from 38.7% in
1995 mainly due to changes in the provision for state income taxes.
Liquidity and Capital Resources
The Company's capital structure and cash flow remained strong throughout the
reported periods. This was evidenced primarily by the Company's ability to
fulfill its investing requirements with internally-generated cash.
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, LG&E Natural's efforts to
expand and improve its gas gathering and processing facilities, and other
business development opportunities. Utility construction expenditures for the
six months ended June 30, 1996, of $48 million were financed with internally-
generated funds.
Margin calls are generally required on certain of the Company's hedge and
trading financial instruments to address changes in the market prices of
natural gas and electric power. The Company had approximately $40.1 million of
net margin deposits as of June 30, 1996.
The Company's combined cash and marketable securities balance decreased $14.6
million (13.3 percent) during the six months ended June 30, 1996. The decrease
reflects capital expenditures, the retirement of bonds, a net decrease in notes
payable, and the payment of dividends, partially offset by cash flows from
operations.
The increase in accounts receivable resulted from seasonal fluctuations in LG&E
Natural's business and from higher electric power marketing volumes. These
factors also contributed to the increase in accounts payable, but were partial-
ly offset by a seasonal decrease at LG&E. The significant decrease in gas
stored underground resulted from seasonal fluctuations at LG&E and LG&E
Natural. Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of the Company's liquidity.
Such variations are primarily attributable to fluctuations in weather, which
have a direct effect on sales of electricity and natural gas.
Other cash flows from operating activities for the first six months of 1996
included $20 million in increased gas supply costs. LG&E will recover these
costs through its gas supply clause mechanism subject to the approval of the
Public Service Commission of Kentucky. The higher gas prices were due to
unusually cold weather that resulted in increased demand.
LG&E's First Mortgage Bonds, 5.625 percent Series of $16 million matured on
June 1, 1996. LG&E used internally-generated cash to retire the bonds.
At June 30, 1996, lines of credit were in place totaling $568 million ($160
million for LG&E, $150 million for Energy Systems, $233 million for Gas
Systems, and $25 million for LG&E Energy Corp.) for which the companies pay
commitment or facility fees. $169 million of notes payable were outstanding
under these lines at June 30, 1996 ($87 million for Energy Systems and $82
million for Gas Systems). The credit lines are scheduled to expire at various
times between 1996 and 2001, and management expects to renegotiate them when
they expire.
The Company's capitalization ratios at June 30, 1996, and December 31, 1995,
were:
June 30, Dec. 31,
1996 1995
Long-term debt (including current portion) 38.1% 38.7%
Notes payable 9.9 10.1
Preferred stock 5.6 5.6
Common equity 46.4 45.6
Total 100.0% 100.0%
For a description of significant contingencies that may affect the Company,
reference is made to Part II herein - Item 1, Legal Proceedings.
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving the Company,
reference is made to the information under the following items and captions of
the Company's Annual Report on Form 10-K for the year ended December 31, 1995:
Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's Discussion
and Analysis of Results of Operations and Financial Condition; and Notes 3 and
16 of the Notes to Financial Statements under Item 8. Except as noted below,
there have been no material changes in these proceedings as reported in the
Company's 1995 Form 10-K and Form 10-Q for the quarter ended March 31, 1996.
Environmental. As reported in Note 16 of Notes to Financial Statements under
Item 8 of the Company's 1995 Form 10-K, the Clean Air Act Amendments of 1990
(the Act) impose stringent limits on emissions of sulfur dioxide and nitrogen
oxides by electric utility generating plants. LG&E is well-positioned in the
market to be a "clean" power provider without the large capital expenditures
that are expected to be incurred by many other utilities. All of LG&E's
coal-fired boilers are equipped with sulfur dioxide "scrubbers" and already
achieve the final sulfur dioxide emission rates required by the year 2000 under
the legislation. However, as part of its ongoing capital construction program,
LG&E has spent $27 million to date and, based on engineering estimates from
contractors, anticipates incurring additional capital expenditures of approxi-
mately $3 million for remedial measures necessary to meet the Act's require-
ments for nitrogen oxides. The overall financial impact of the legislation on
the Company is expected to be minimal.
LG&E, along with a number of other companies, has been identified as a poten-
tially responsible party (PRP) allegedly liable for cleanup under the Compre-
hensive Environmental Response Compensation and Liability Act as amended at
four off-site waste treatment or disposal sites. Under the law, each PRP
potentially could be held jointly and severally liable for the cost of cleanup,
but would have the right to seek contribution from other PRPs. The sites
targeted for cleanup in which LG&E has been identified as a PRP include: the
Smith's Farm site located in Bullitt County, Kentucky, the Sonora and Carlie
Middleton Burn sites located in Hardin County, Kentucky, and the M.T. Richards
site located in Crossville, Illinois. With respect to the Smith's Farm site,
the United States Environmental Protection Agency (USEPA) has identified LG&E
as a de minimis PRP and is currently pursuing other parties for the vast
majority of the $42 million in cleanup costs as estimated by USEPA. USEPA
recently revised its estimate for cleanup costs downward from $60 million to
$42 million. LG&E is participating in settlement discussions in an effort to
resolve any alleged liability which it may have. With respect to the Sonora
Site and Carlie Middleton Burn Site, LG&E is now involved in litigation with
USEPA and approximately 50 companies in an effort to resolve liability for
approximately $1.8 million in cleanup costs incurred by USEPA. With respect to
the M.T. Richards site, LG&E has been identified as a de minimis party and has
reached a tentative settlement for $7,500, subject to approval by the govern-
ment and entry by the court. While it is not possible at this time to predict
the exact outcome or precise impact of these matters, management believes that
these matters should not have a material adverse impact on the financial
position or results of operations of the Company.
Open Access. As reported in Item 7, Management's Discussion and Analysis of
Results of Operations and Financial Condition, of the Company's 1995 Form 10-K,
in March 1995, the Federal Energy Regulatory Commission (FERC) issued a Notice
of Proposed Rulemaking on Open Access Non-discriminatory Transmission Services
and a Supplemental Notice of Proposed Rulemaking on Stranded Investment
(collectively, the Mega-NOPR). On April 24, 1996, the FERC adopted final
rules, which are similar in many respects to the Mega-NOPR (Orders 888 and
889). The final rules are intended, among other things, to create a vigorous
wholesale electric market by requiring transmission providers to functionally
unbundle transmission from generation and distribution businesses, and to offer
open access to their transmission systems. While the Company is still review-
ing the provisions of the final rules and is unable at this time to determine
its precise effect on operations, the Company generally is supportive of
proposals to increase competition at all levels of the electric power market
and intends to pursue opportunities created by a more competitive market.
TVA/LPM Interchange Agreement. As discussed in Item 3, Legal Proceedings, of
the Company's 1995 Form 10-K, on January 12, 1996, the Alabama Power Company,
Georgia Power Company and Mississippi Power Company (the Plaintiffs) filed a
Complaint for Declaratory Judgment and Injunctive Relief against the Tennessee
Valley Authority (TVA) and LG&E Power Marketing Inc. (LPM), a wholly-owned
subsidiary of the Company, in the United States District Court for the Northern
District of Alabama. The Plaintiffs claim that TVA has violated the Tennessee
Valley Authority Act (TVA Act) by entering into an interchange agreement with
LPM (Interchange Agreement) and that TVA is prohibited from selling or deliver-
ing any power to LPM, to any other broker or marketer of power, or to any other
unauthorized recipient or from otherwise engaging in unlawful power supply
arrangements. The Complaint as drafted seeks no direct remedy from LPM. On
March 15, 1996, TVA filed a Motion to Dismiss, or, in the Alternative, for
Summary Judgment, and on April 15, 1996, the Plaintiffs filed a Motion for
Summary Judgment, and a response in opposition to TVA's original motion. LPM
filed its motion for Summary Judgment on April 30, 1996.
In the Company's opinion, the Interchange Agreement complies with all applica-
ble laws and regulations. LPM intends to continue to vigorously defend itself
in this matter. However, an adverse decision could have the effect of enjoin-
ing TVA from further selling or delivering any power to LPM under existing
provisions of the TVA Act. The ultimate resolution of this matter is not
expected to have a material adverse effect on the Company's results of opera-
tions or financial condition, but the Company is unable to predict the outcome
of this proceeding.
Roanoke Valley I. As reported in Item 1, Business; Item 3, Legal Proceedings;
and Note 16 of Notes to Financial Statements under Item 8 of the Company's 1995
Form 10-K, the Company owns a 50% interest in Westmoreland-LG&E Partners (WLP),
the sole owner of Roanoke Valley I, a cogeneration facility selling electric
power to Virginia Power and steam energy to Patch Rubber Company. Under the
Power Purchase Agreement (PPA) between WLP and Virginia Power, WLP is entitled
to receive capacity payments based on availability. From May 1994 through July
1996, Virginia Power withheld approximately $10.4 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
by Virginia Power. In October 1994, WLP filed a complaint against Virginia
Power seeking damages of at least $5.7 million, contending that Virginia Power
breached the PPA in withholding such payments. In June 1995, the Circuit Court
of the City of Richmond, Virginia denied Virginia Power's motion to dismiss
WLP's complaint. In early March 1996, Virginia Power filed a motion for
summary judgment, and on March 22, 1996, the court granted Virginia Power's
motion as to all counts. The Company filed a petition for appeal with the
Virginia Supreme Court on July 12, 1996. Virginia Power filed a brief in
opposition to petition for appeal on August 5, 1996.
Southampton. As reported in Item 1, Business; Item 3, Legal Proceedings; and
Note 16 of Notes to Financial Statements under Item 8 of the Company's 1995
Form 10-K, the Southampton plant, a 63 megawatt coal-fired cogeneration
facility in Franklin, Virginia, supplies process steam to a nearby chemical
manufacturer and bulk electric power under contract to Virginia Electric and
Power Company (Virginia Power) as a qualifying facility (QF) under the Public
Utility Regulatory Policies Act (PURPA). The plant began commercial operation
in 1992. On July 7, 1994, FERC denied the request of LG&E-Westmoreland
Southampton (the Partnership) for a waiver of certain QF requirements and
directed the Partnership to show cause as to why it should not be required to
file new cost-based rates for its 1992 electric sales to Virginia Power.
The Partnership filed a request for rehearing and a motion to consider its
request for rehearing as timely filed, or in the alternative, to treat its
request for rehearing as a motion for reconsideration, in August 1994, one day
out of time. This filing sought a reversal of FERC's prior order, or, in the
alternative, a clarification of FERC's order stating that, with the exception
of rates, the Partnership remains a QF for 1992 exempt from regulation as a
public utility under PUHCA, utility laws in Virginia and various portions of
the Federal Power Act.
On July 31, 1996, FERC entered an order in the Southampton case which included
a policy statement regarding all QF facilities which fail to meet QF standards.
The order turned down the Partnership's request for a settlement conference.
The order affirmed exemptions from PUHCA and state law for the Partnership when
the QF operating requirements were not met for a period in 1992, supporting the
Partnership's request that the ruling on non-compliance should have no effect
on the exemptions from regulations that would have classified the plant as a
public utility. The FERC's decision to uphold these exemptions eliminates
potential issues involving provisions of the Public Utility Holding Company
Act, Virginia utility law and the non-rate provisions of the Federal Power Act.
The FERC also concluded that the Partnership should refund a portion of the
rates it received from Virginia Power during 1992. The Company had anticipated
that the Partnership could be required to make a refund to Virginia Power in
the event the QF standards for 1992 were not waived. The order calls for a
refund with interest from the Partnership of the difference between the amount
paid by Virginia Power during the period and the amount Virginia Power would
have paid for energy if it had purchased energy at its incremental energy rate.
The Company's share of the revenues received by the Partnership in 1992 is
approximately $9.5 million. The amount of the refund is currently unknown, and
is dependent on records to be produced by Virginia Power, and further FERC
review. The Company continues to study the order and, at this time, cannot
predict what, if any, further action it may take; nor can it predict what
action Virginia Power may take.
Kenetech Bankruptcy. In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in
the United States Bankruptcy Court in the Northern District of California for
protection under Chapter 11 of the United States Bankruptcy Code seeking, among
other things, to restructure certain contractual commitments between Kenetech
and its subsidiaries, on the one hand, and various windpower projects located
in the U.S. and abroad, on the other hand. Included in these projects are the
Windpower Partners 1993 (WPP 93), Windpower Partners 1994 (WPP 94) and KW
Tarifa, S.A. (Tarifa) wind projects in which the Company has invested, collec-
tively, approximately $31 million. As a part of the bankruptcy proceeding,
Kenetech is also seeking to void certain warranty commitments made to the
owners of those projects with respect to the operation and output of the
facilities, and the repair and replacement of the windpower generation equip-
ment located there. LPI has been named to the creditors' committee in the
Kenetech bankruptcy on behalf of the three projects, and has been working with
representatives of Kenetech and other secured and unsecured creditors to ensure
that the project owners' interests are equitably treated in the bankruptcy.
The owners of WPP 93 and WPP 94 have implemented interim operations and
maintenance agreements which provide for the continued operation of the
facilities by Kenetech for fees and expense reimbursements in excess of those
originally payable to Kenetech or its affiliates under the prior operating
agreements (which, as a result of the bankruptcy filing, were voided). The
owners anticipate that the interim agreements, which are terminable by the
project owners upon 14-days notice, will be terminated, and that a new operator
of the facility will be retained, in early September of this year. The owners
of the Tarifa windpower project assumed operating control over that facility
shortly after the bankruptcy filing, and do not plan to retain Kenetech or any
other third party operator for the project in the foreseeable future.
The Company is unable to predict the outcome of the bankruptcy proceeding or
the settlement negotiations. However, the Company does not expect the ultimate
resolution of the bankruptcy to have a material adverse effect on its results
of operations or financial condition.
Item 2. Changes in Securities
On March 6, 1996, the Company announced that its Board of Directors approved a
two-for-one split of its Common Stock, without par value, to shareholders of
record on April 1, 1996. The split was effective April 15, 1996. In addition,
upon the approval of the Company's shareholders at the Annual Meeting on April
23, 1996, the Company's authorized common shares were increased from 75,000,000
to 125,000,000. As a result of the two-for-one split and in accordance with
the terms of the Company's Rights to Purchase Series A Preferred Stock
("Rights"), the number of Rights associated with a share of Common Stock was
reduced from two-thirds of a Right per common share to one-third of a Right per
common share.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company's Annual Meeting of Shareholders was held on April 23, 1996.
b) Not applicable.
c) The matters voted upon and the results of the voting at the Annual Meeting
follow:
1. The shareholders voted to elect the Company's nominees for election to
the Board of Directors as follows:
Roger W. Hale - 27,479,199 shares cast in favor of election and 313,142
shares withheld;
David B. Lewis - 27,481,696 shares cast in favor of election and 310,277
shares withheld;
Anne H. McNamara - 27,482,247 shares cast in favor of election and
309,725 shares withheld;
Donald C. Swain - 27,355,334 shares cast in favor of election and
435,674 shares withheld.
2. The shareholders voted 23,123,486 shares of Common Stock in favor of and
696,980 shares of Common Stock against the approval of an amendment to
the Employee Common Stock Purchase Plan to authorize the issuance of an
additional 1,000,000 shares of Common Stock thereunder. Holders of
616,151 shares of Common Stock abstained from voting on this matter.
3. The shareholders voted 22,056,624 shares of Common Stock in favor of and
1,595,185 shares of Common Stock against the approval of the Amended and
Restated Omnibus Long-Term Incentive Plan, including the issuance of an
additional 2,400,000 shares of Common Stock thereunder. Holders of
735,769 shares of Common Stock abstained from voting on this matter.
4. The shareholders voted 26,623,394 shares of Common Stock in favor of and
706,266 shares of Common Stock against the approval of an amendment to
the Company's articles of incorporation to increase the number of autho-
rized shares of Common Stock from 75,000,000 to 125,000,000. Holders of
460,853 shares of Common Stock abstained from voting on this matter.
5. The shareholders voted 25,122,074 shares of Common Stock in favor of and
1,642,109 shares of Common Stock against the approval of the Short-Term
Incentive Plan. Holders of 1,023,892 shares of Common Stock abstained
from voting on this matter.
6. The shareholders voted 27,329,165 shares of Common Stock in favor of and
142,180 shares of Common Stock against the approval of Arthur Andersen
LLP as independent auditors for 1996. Holders of 322,423 shares of
Common Stock abstained from voting on this matter.
d) Not applicable.
Item 6(a). Exhibits.
Exhibit
Number Description
27 Financial Data Schedule.
Item 6(b). Reports on Form 8-K.
On June 10, 1996, the Company filed a report on Form 8-K containing cautionary
statements identifying important factors that could cause its actual results to
differ materially from those projected in forward-looking statements of the
Company made by, or on behalf of, the Company. The Company filed these
statements in response to the "safe harbor" provisions of the Private Securi-
ties Litigation Reform Act of 1995.
On June 14, 1996, the Company filed a report on Form 8-K discussing a meeting
the Company's executives had with industry analysts. The meeting covered the
Company's growth plans and its expectations regarding future results. An
exhibit filed with the 8-K contained a press release which included forward-
looking and historical material non-public information disclosed to analysts at
the meeting.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LG&E ENERGY CORP.
Registrant
Date: August 13, 1996 /s/ Walter Z. Berger
Walter Z. Berger
Executive Vice President and
Chief Financial Officer
(On behalf of the registrant in his capac-
ity as Principal Accounting Officer)
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