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, 1997
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. 66,484,875 shares,
without par value, as of July 31, 1997.
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 Six Months
Ended Ended
June 30, June 30,
1997 1996 1997 1996
REVENUES:
Energy marketing and trading $522,515 $575,160 $1,580,966 $1,218,714
Electric utility 145,919 151,857 274,746 287,676
Gas utility 34,191 29,362 130,929 120,418
Other 44,636 4,534 63,863 9,534
Total revenues 747,261 760,913 2,050,504 1,636,342
COST OF REVENUES:
Energy marketing and trading 507,933 563,605 1,554,329 1,178,266
Fuel and power purchased 38,407 41,863 73,426 80,879
Gas supply expenses 21,144 18,652 88,969 76,884
Other 26,199 3,248 37,593 6,947
Total cost of revenues 593,683 627,368 1,754,317 1,342,976
Gross profit 153,578 133,545 296,187 293,366
OPERATING EXPENSES:
Operation and maintenance:
Utility 55,965 51,773 109,396 110,492
Energy marketing and trading
and other 23,927 11,517 43,699 32,431
Depreciation and amortization 28,875 25,764 56,762 51,492
Nonrecurring charges (Note 5) (592) - (592) -
Total operating expenses 108,175 89,054 209,265 194,415
Equity in earnings
of joint ventures 5,557 4,201 8,941 8,801
OPERATING INCOME 50,960 48,692 95,863 107,752
Other income and (deductions) 2,710 1,555 6,077 1,541
Interest charges, minority inter-
est and preferred dividends 19,468 13,834 34,458 27,879
Income before income taxes 34,202 36,413 67,482 81,414
Income taxes 12,585 12,591 24,626 30,497
NET INCOME $ 21,617 $ 23,822 $ 42,856 $ 50,917
Average common shares
outstanding 66,492 66,294 66,433 66,263
Earnings per share $ .33 $ .36 $ .65 $ .77
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,
1997 1996
CURRENT ASSETS:
Cash and temporary cash investments $ 132,210 $ 114,669
Marketable securities 10,996 5,815
Accounts receivable - less reserve 376,327 545,729
Materials and supplies - primarily at average cost:
Fuel (predominantly coal) 15,651 14,576
Gas stored underground 16,174 43,258
Other 31,802 32,426
Price risk management assets (Note 3) 62,782 86,844
Prepayments and other 3,472 14,255
Total current assets 649,414 857,572
OTHER PROPERTY AND INVESTMENTS - less reserve:
Investment in affiliates (Note 2) 171,384 126,099
Non-utility property and plant, net (Note 2) 408,058 171,338
Price risk management assets (Note 3) 49,924 36,623
Other 25,261 21,465
Total other property and investments 654,627 355,525
UTILITY PLANT:
At original cost 2,721,261 2,685,209
Less: reserve for depreciation 1,037,437 999,987
Net utility plant 1,683,824 1,685,222
DEFERRED DEBITS AND OTHER ASSETS 121,389 113,573
Total assets $3,109,254 $3,011,892
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,
1997 1996
CURRENT LIABILITIES:
Long-term debt due within one year $ 20,000 $ -
Notes payable (Note 6) 298,000 158,000
Accounts payable 322,749 528,556
Trimble County settlement 15,072 17,511
Accrued taxes 5,532 -
Price risk management liabilities (Note 3) 77,637 108,402
Other 76,006 63,366
Total current liabilities 814,996 875,835
Long-term debt (Note 2) 664,284 646,835
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 312,326 288,107
Investment tax credit, in
process of amortization 77,869 80,040
Regulatory liability 75,600 77,287
Price risk management liabilities (Note 3) 23,824 27,482
Other 123,939 109,760
Total deferred credits and other liabilities 613,558 582,676
Minority interests (Note 2) 102,594 -
Cumulative preferred stock 95,328 95,328
COMMON EQUITY:
Common stock, without par value -
Outstanding 66,484,875 shares
and 66,341,444 shares 469,249 466,329
Other (1,380) (1,105)
Retained earnings 350,625 345,994
Total common equity 818,494 811,218
Total capital and liabilities $3,109,254 $3,011,892
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,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,856 $ 50,917
Items not requiring cash currently:
Depreciation and amortization 56,762 51,492
Deferred income taxes - net 6,820 21,903
Change in net price risk management assets (23,662) (9,568)
Other 4,151 (549)
Change in net current assets 12,193 6,266
Other (5,787) (29,141)
Net cash flows from operating activities 93,333 91,320
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (8,876) (13,357)
Proceeds from sales of securities 3,317 33,856
Construction expenditures (48,112) (50,723)
Investment in affiliates (985) (3)
Acquisition of interests in
Argentine natural gas distribution
companies, net of cash and temporary
cash investments acquired (Note 2) (125,852) -
Net cash flows from investing activities (180,508) (30,227)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,900 1,499
Retirement of bonds and
other long-term debt - (16,000)
Repayment of short-term borrowings (61,000) (69,000)
Short-term borrowings 201,000 64,800
Payment of common dividends (38,184) (36,764)
Net cash flows from financing activities $ 104,716 $ (55,465)
LG&E Energy Corp. and Subsidiaries
Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Six Months
Ended
June 30,
1997 1996
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS $ 17,541 $ 5,628
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 114,669 80,144
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 132,210 $ 85,772
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 25,702 $ 13,413
Interest on borrowed money 24,445 25,232
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 Six Months
Ended Ended
June 30, June 30,
1997 1996 1997 1996
Balance at beginning
of period $348,121 $325,630 $345,994 $316,930
Net income 21,617 23,822 42,856 50,917
Cash dividends declared on
common stock ($.2875, $.2775,
$.575 and $.555 per share) 19,113 18,398 38,225 36,793
Balance at end of period $350,625 $331,054 $350,625 $331,054
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. The adjustments consist of those
of a normal recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading.
In the fourth quarter of 1996, the Company adopted the mark-to-market
method of accounting for its energy trading and price risk management
activities. The Company made the change effective January 1, 1996, and
restated its 1996 quarterly results. The change increased net income
for the three months ended June 30, 1996, by $26,000, with no effect on
reported earnings per share. The change increased net income for the
six months ended June 30, 1996, by $5,586,000, or $.08 per share.
These financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for 1996.
2. On February 13, 1997, the Company acquired interests in two Argentine
natural gas distribution companies for $140 million, plus transaction-
related costs and expenses. The Company acquired a controlling interest
in Distribuidora de Gas del Centro (Centro), and a combined 14.4%
interest in Distribuidora de Gas del Cuyana (Cuyana). The Company
accounted for both acquisitions using the purchase method. The Company
allocated substantially all of the excess of the purchase price over
the underlying equity of Centro and Cuyana to property and equipment.
The Company recognized no goodwill on the acquisition.
The fair values of the net assets acquired are shown below (in
thousands of dollars):
Assets $333,580
Liabilities 89,820
Minority interests 103,916
Cash paid, excluding transaction costs 139,844
Cash and cash equivalents acquired 16,453
Net cash paid, excluding transaction costs 123,391
Transaction costs 2,461
Net cash paid $125,852
The Company has classified Centro's revenues, cost of revenues, and
operating expenses since the date of acquisition as other in its income
statement for the three- and six-month periods ended June 30, 1997.
The Company included its share of the earnings of Cuyana in equity in
earnings of joint ventures for this same period. Centro's property and
equipment is included in non-utility property and plant, net, in the
accompanying balance sheet as of June 30, 1997, while the Company's
investment in Cuyana is included in investments in affiliates.
The carrying amount of the Company's investment in Cuyana exceeded its
share of the underlying equity of Cuyana by approximately $11 million
at June 30, 1997. This difference reflects fair-value adjustments
recorded at the time of purchase.
Liabilities assumed in the purchase included negotiable obligations
issued by Centro with a face amount of $38 million. The obligations
mature in August 2001 and pay interest at 11.44% of face value. The
Company classified the negotiable obligations as long-term debt in its
balance sheet as of June 30, 1997.
3. Price Risk Management.
The notional amounts and terms of the Company's price risk management
contracts in which the Company pays or receives a fixed price for the
underlying commodity at June 30, 1997, are shown below:
Fixed Fixed Maximum
Unit of Price Price Term in
Product Measure Payor Receiver Years
Electricity Thousands of Mwh 123,432 148,417 11
Natural gas Thousands of MMBtu 861,290 851,138 8
Canadian dollars C$000s 23,750 - 2
The weighted average terms of the Company's price risk management
contracts at June 30, 1997, follow:
Product Term
Electricity 4 months
Natural gas 13 months
Canadian dollars 8 months
The fair values of the Company's price risk management assets and
liabilities at June 30, 1997, follow:
Liabil-
Counterparty Assets ities
Marketers $ 41,812 $ 22,498
Energy producers 54,339 33,944
Financial institutions 8,655 4,819
Industrial and commercial
users 3,978 30,365
Gas transmission companies 223 551
Other 3,699 1,641
Totals 112,706 93,818
Reserves - 7,643
Net values $112,706 $101,461
The average fair values of the Company's price risk management assets
and liabilities for the three- and six-month periods ended June 30,
1997, follow:
Three Months Six Months
Liabil- Liabil-
Counterparty Assets ities Assets ities
Marketers $ 43,397 $25,453 $ 45,653 $46,976
Energy producers 67,718 24,843 57,088 15,918
Financial institutions 6,546 6,322 7,549 11,320
Industrial and commercial
users 2,544 19,493 1,658 11,070
Gas transmission companies 361 878 264 1,320
Other 7,358 1,633 10,155 7,836
Totals $127,924 $78,622 $122,367 $94,440
Commitments with 31 customers represented approximately 78% of the
Company's price risk management assets at June 30, 1997.
A 3% change in the market prices of electricity and natural gas at June
30, 1997, would have changed the Company's net income by approximately
$2.9 million.
Other Financial Instruments.
The Company entered into an additional interest-rate swap in the second
quarter of 1997 to hedge some of its notes payable. The swap has a
notional amount of $50 million, and it matures in June 2002. The swap
agreement calls for the Company to pay a fixed rate of 6.49%, and to
receive a variable rate based on the three-month London Interbank
Offered Rate. The rate received will change every three months. For
the three- and six-month periods ended June 30, 1997, the rate received
equaled 5.813%.
None of the other information concerning other financial instruments
disclosed by the Company in its Annual Report on Form 10-K for the year
ended December 31, 1996, changed materially during the six months ended
June 30, 1997.
4. On May 20, 1997, the Company and KU Energy Corporation, a Kentucky
corporation ("KU"), entered into an Agreement and Plan of Merger (the
"Merger Agreement") providing for a merger of LG&E Energy and KU.
Pursuant to the Merger Agreement, among other things, KU will be merged
with and into LG&E Energy, with LG&E Energy as the surviving
corporation (the "Merger"). The Merger, which was unanimously approved
by the Boards of Directors of LG&E Energy and KU, is expected to close
shortly after all of the conditions to consummation of the Merger,
including the receipt of all applicable regulatory approvals, are met
or waived.
As a result of the Merger, the Company, which is the parent of LG&E,
will become the parent company of KU's principal operating subsidiary,
Kentucky Utilities Company ("Kentucky Utilities"). The operating
utility subsidiaries (LG&E and Kentucky Utilities) will maintain their
separate corporate identities and will continue to serve customers in
Kentucky and Virginia under their present names. LG&E Energy and KU
expect more than $760 million in gross non-fuel savings over a ten-year
period following the Merger. Costs to achieve these synergies are
estimated to be $77 million. In regulatory filings associated with
approval of the Merger, LG&E and Kentucky Utilities will commit not to
seek increases in base rates and are proposing reductions in their
retail customers' bills in amounts based on 50% of the currently
estimated cost savings to be achieved as a result of the Merger, less
50% of the costs to achieve such savings, in each of the five years
following effectiveness of the Merger. The preferred stock and debt
securities of the operating utility subsidiaries will not be affected
by the Merger. Present nonutility operations of KU will be unaffected.
The nonutility subsidiaries of KU will become subsidiaries of LG&E
Energy.
Under the terms of the Merger Agreement, each outstanding share of the
common stock, without par value, of KU ("KU Common Stock") (other than
shares with respect to which dissenters' rights are perfected under
applicable state law), together with the associated KU stock purchase
rights, will be converted into the right to receive 1.67 shares of
common stock, without par value, of the Company ("LG&E Energy Common
Stock"), together with the associated LG&E Energy stock purchase
rights. A holder of KU Common Stock who would otherwise have been
entitled to a fractional share of LG&E Energy Common Stock will be
entitled to receive a cash payment in lieu of such fractional share.
The outstanding shares of LG&E Energy Common Stock will remain
unchanged and outstanding. As of May 16, 1997, there were 66,484,875
shares of LG&E Energy common stock outstanding, and 37,817,878 shares
of KU common stock outstanding. Based on such capitalization, upon
consummation of the Merger 51.3% of the outstanding LG&E Energy common
stock will be owned by the shareholders of LG&E Energy prior to the
Merger and 48.7% will be owned by former KU shareholders.
The Merger is subject to customary closing conditions, including,
without limitation, the approval of the holders of a majority of the
outstanding shares of common stock of each of LG&E Energy and KU, the
receipt of all necessary governmental approvals and the making of all
necessary governmental filings, including approvals of various
regulators in Kentucky and Virginia under state utility laws, the
approval of the Federal Energy Regulatory Commission under the Federal
Power Act, the approval of the Securities and Exchange Commission (the
"SEC") under the Public Utility Holding Company Act of 1935, and the
filing of requisite notifications with the Federal Trade Commission and
the Department of Justice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the expiration of all
applicable waiting periods thereunder. The Merger is also subject to
the receipt of opinions of counsel that the Merger will qualify as a
tax-free reorganization and assurances from the parties' independent
accountants that the Merger will qualify as a pooling of interests for
accounting purposes. In addition, the Merger is conditioned upon the
effectiveness of a registration statement to be filed with the SEC with
respect to the LG&E Energy Common Stock to be issued in the Merger and
the approval for listing of such shares on the New York Stock Exchange.
It is anticipated that LG&E Energy, as parent of LG&E and Kentucky
Utilities, will continue to be an exempt holding company under the
Public Utility Holding Company Act of 1935. Shareholder meetings to
vote upon approval of the Merger will be convened as soon as
practicable and are expected to be held later in 1997.
The foregoing description of the Merger does not purport to be complete
and is qualified in its entirety by reference to the Company's current
reports on Form 8-K, filed May 22, 1997, and May 30, 1997, (SEC File
No. 1-10568) with the SEC.
5. In the fourth quarter of 1996, LG&E Natural Inc. (LG&E Natural)
discovered that a marketer in its Calgary, Alberta, office had engaged
in unauthorized transactions, resulting in significant losses in the
Company's Canadian natural gas marketing business. The Company
recorded an expense of $17.1 million (U.S.) after income taxes to
reflect the losses. In the second quarter of 1997, the Company
received an insurance settlement of $7.6 million (net of expenses)
related to the losses. The Company included this amount in non-
recurring charges in its income statements for the three- and six-month
periods ended June 30, 1997. See Item 1, Legal Proceedings, under Part
II.
The Company reported in its Form 8-K dated April 28, 1997, that it
intended to consolidate the trading, risk management and administrative
operations of its power marketing and gas marketing divisions into a
single energy marketing unit, located in its Louisville headquarters.
This represented a step in the Company's plan to integrate its two
marketing companies, LG&E Power Marketing Inc. (LG&E Power Marketing)
and LG&E Natural, into a new division, LG&E Energy Marketing, to
capitalize on the convergence of the electric and gas marketing
industries. The consolidated division will expand the variety of
commodities it will offer to include coal, emission allowances and
other energy-related products.
Under the integration plan, the Company moved LG&E Natural's trading,
risk management, accounting, legal, credit management and other support
operations from Dallas to Louisville, consolidating them with the
Company's power marketing group already located there. The Company
will maintain sales and marketing offices in Dallas as well as in
Fairfax, Virginia; Chicago; Denver; and Costa Mesa, California.
The Company recorded a charge of $7.0 million in the second quarter of
1997 to reflect the costs of the consolidation. The Company included
this amount in non-recurring charges in its income statements for the
three- and six-month periods ended June 30, 1997. This charge covered
employee severance, facilities, information systems and other related
costs. The Company expects future savings resulting from the
integration to more than offset these costs.
6. Energy Systems had notes payable of $187 million at June 30, 1997, at
weighted average interest rate of 5.97%. Gas Systems had notes payable
of $111 million at a weighted average interest rate of 6.01% at June
30, 1997. LG&E Energy Corp. and LG&E had no notes payable at June 30,
1997.
At June 30, 1997, the Company had lines of credit in place totaling
$690 million ($200 million for LG&E, $250 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. Unused
capacity under these lines totaled $353.0 million after consideration
of the above borrowings and approximately $39.0 million in letters of
credit securing on- and off-balance-sheet commitments. LG&E Energy
Corp.'s line of credit and $15 million of Gas Systems' lines of credit
expired on July 31, 1997. The remaining credit lines are scheduled to
expire at various times from 1998 through 2001. Management expects to
renegotiate these remaining lines when they expire.
7. In April 1995, in response to an application filed by LG&E, the
Kentucky Public Service Commission (Commission) approved, with
modifications, an environmental cost recovery surcharge that increased
electric revenues by $3.2 million in 1995, $2.4 million in 1996 and is
expected to increase 1997 revenues an additional $.5 million.
An appeal of the Commission's April 1995 order by various intervenors
in the proceeding is currently pending in the Franklin Circuit Court of
Kentucky. LG&E is 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.
8. Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS No. 125).
This new standard is effective for all transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996. Adopting SFAS No. 125 had no impact on the
Company's financial position or results of operations.
9. The Company adopted the provisions of Statement of Position (SOP) 96-1,
Environmental Remediation Liabilities, effective January 1, 1997. This
statement provides authoritative guidance for recognition, measurement,
and disclosure of environmental remediation liabilities in financial
statements. Due to the Company's previous recognition of this type of
liability, adoption did not have a material impact on the Company's
financial position or results of operation.
10.In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per
Share, effective for periods ending after December 15, 1997. The
Company does not expect this statement to have a material effect on its
earnings per share.
11.See Item 1, Legal Proceedings, under Part II for a discussion of the
reversal of a lower court's adverse ruling affecting Westmoreland-LG&E
Partners' (WLP) efforts to recover capacity payments withheld by
Virginia Electric and Power Company. The Company has a 50% interest in
WLP, and WLP owns the Roanoke Valley I and II facilities.
12.See Item 1, Legal Proceedings, under Part II for a discussion of LG&E
Westmoreland - Rensselaer's (LWR) obligation to negotiate towards a
restructuring of its power-purchase agreement with Niagara Mohawk Power
Corporation. The Company has a 50% interest in LWR, and LWR owns the
Rensselaer facility.
13.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, 1996.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
On May 20, 1997, the Company entered into an Agreement and Plan of Merger
with KU Energy Corporation ("KU Energy"), which is the parent company of
Kentucky Utilities Company ("Kentucky Utilities"). Further information
concerning this agreement and pro forma financial information relating
thereto is included in Note 4 and Part II of the Form 10-Q. The following
discussion and analysis is based in the financial condition and operations
of the Company and does not reflect the potential effects of the
combination between the Company and KU Energy.
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,
uncertainties 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,
including decisions regarding the proposed combination of the Company and
KU Energy; the factors described in Exhibit 99.02 of the Company's Form 8-K
filed May 22, 1997, and other factors described from time to time in the
Company's reports to the Securities and Exchange Commission.
Results of Operations
The Company's results of operations are significantly affected by seasonal
fluctuations in temperature and other weather-related factors. 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.
The Company restated its quarterly results for the three- and six-month
periods ended June 30, 1996, to reflect adopting the mark-to-market method
of accounting for its energy marketing and trading activities. See Note 1
of Notes to Financial Statements under Item 1.
Three Months Ended June 30, 1997, Compared to
Three Months Ended June 30, 1996
Earnings per share decreased to $.33 in 1997 from $.36 in 1996 due to lower
earnings at LG&E and higher corporate expenses, partially offset by higher
energy marketing earnings and by increases resulting from acquiring
interests in Centro and Cuyana in February 1997. The LG&E decrease
resulted from lower electric volumes caused by unseasonably mild weather
and from a one-time reduction of certain employee benefits recorded in
operation expenses in the second quarter of 1996. The increase in energy
marketing earnings resulted from higher power-marketing margins, partially
offset by lower gas-marketing margins resulting from milder weather and
reduced price volatility in the gas markets.
Utility Results:
LG&E's electric revenues decreased $5.9 million (4%) due to lower retail
volumes resulting from unseasonably mild weather, partially offset by
higher adjustments for demand side management and revenue decoupling. Gas
revenues increased $4.8 million (16%) due to increased gas supply costs.
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 retail rates, subject to the approval of the Public
Service Commission of Kentucky. Fuel and power purchased decreased $3.5
million (8%) for the quarter. Fuel for electric generation decreased $1.3
million (3%) for the quarter because of a decrease in generation ($1.6
million), partially offset by a higher cost of coal burned ($.3 million).
Power purchased decreased $2.2 million (43%) because of fewer outages at
the electric generating plants as compared to the same period in 1996.
Gas supply expenses increased $2.5 million (13%) due to an increase in net
gas supply costs ($2.9 million), partially offset by a decrease in the
volume of gas delivered to the distribution system ($.4 million).
Utility operation and maintenance expenses increased $4.2 million (8%).
Operation expenses increased $5.6 million (18%) mainly due to recording a
credit to expense in the second quarter of 1996 for a one-time reduction of
certain employee fringe benefits in connection with a change in the
collective bargaining agreement ($3.6 million) and a portion of settlement
proceeds related to a commercial dispute ($1.0 million). Also contributing
to the increase were higher costs to operate LG&E's electric power plants
and distribution systems ($1.3 million). Maintenance expenses decreased
$1.4 million (9%) because of a decrease in storm damage expenses.
Utility depreciation and amortization increased $.7 million because of
additional depreciable plant in service.
Utility other income increased $.9 million primarily because of increased
interest income from investments.
Utility interest charges and preferred dividends decreased $.5 million (5%)
primarily because of a decrease in outstanding debt. LG&E's First Mortgage
Bonds, 5.625% series of $16 million were retired at maturity on June 1,
1996, and $50 million in other debt was refinanced at more favorable rates
in 1996.
Energy Marketing and Trading and Other Results:
See Note 5 of Notes to Financial Statements under Item 1, Part I, and Item
5, Other Information, under Part II of this report for a discussion of the
Company's decision to consolidate the trading, risk management and
administrative operations of its power marketing and gas marketing division
into a single energy marketing unit at its Louisville headquarters.
Energy marketing and trading revenues and cost of revenues decreased $52.6
million (9%) and $55.7 million (10%), respectively, due to lower gas-
marketing volumes and prices, partially offset by higher power-marketing
volumes. The increase in gross margins reflects higher power-marketing
margins, partially offset by lower gas-marketing margins. The decrease in
gas-marketing margins resulted from milder weather and reduced price
volatility in the gas markets. An agreement signed in the fourth quarter
of 1996 with Oglethorpe Power Corporation contributed to the increase in
power-marketing revenues and cost of revenues.
Other revenues and cost of revenues increased $40.1 million and $23.0
million, respectively, due to acquiring an interest in Centro in February
1997.
Operation and maintenance expense increased $12.4 million (108%) due to
increases resulting from the Centro acquisition and higher energy-marketing
and corporate expenses. The increase in energy-marketing expenses reflects
the increase in power-marketing volumes.
Equity in earnings of joint ventures increased $1.4 million in 1997 due to
no forced-outage days occurring at the Roanoke Valley I project during the
quarter.
Non-utility depreciation and amortization increased $2.4 million mainly due
to acquiring Centro.
Non-recurring charges included a net insurance settlement of $7.6 million
($8.5 million gross insurance recovery, less expenses) related to losses
incurred in LG&E Natural's Calgary office. Non-recurring charges also
included a charge of $7.0 million to reflect the costs of consolidating the
trading, risk management and administrative operations of the Company's
power marketing and gas marketing divisions into a single energy marketing
unit, located in its Louisville headquarters. See Note 5 of Notes to
Financial Statements.
Non-utility interest charges and minority interest increased $6.1 million
due to an increase in notes payable and to the Centro acquisition.
The consolidated effective tax rate decreased to 36.5% in 1997 from 37.5%
in 1996 mainly due to changes in the provisions for state and foreign
income taxes.
Despite a strong second quarter in our non-regulated business, the Company
expects to realize a mark-to-market loss from its energy marketing and
trading operations during July 1997 due to extraordinarily abrupt changes
in electric load demand and prices in certain regions of the country during
the month of July. The Company estimates the after-tax impact of the loss,
under the mark-to-market accounting method it adopted last year, will be
approximately $6 to $8 million.
Six Months Ended June 30, 1997, Compared to
Six Months Ended June 30, 1996
Earnings per share decreased to $.65 in 1997 from $.77 in 1996 due to lower
energy marketing earnings and lower earnings at LG&E, partially offset by
lower corporate expenses and by increases resulting from acquiring
interests in Centro and Cuyana in February 1997. The decrease in energy
marketing earnings resulted from lower gas-marketing margins, which
resulted from milder weather and reduced price volatility in the gas
markets. The LG&E decrease resulted from lower sales of electricity and
natural gas caused by unseasonably mild weather conditions.
Utility Results:
LG&E's electric revenues decreased $12.9 million (4%) due to lower retail
volumes resulting from unseasonably mild weather and to lower off-system
sales, partially offset by higher adjustments for demand side management
and revenue decoupling. Gas revenues increased $10.5 million (9%) due to
increased gas supply costs, partially offset by lower volume resulting from
unseasonably mild weather.
Fuel and power purchased decreased $7.5 million (9%) for the six months.
Fuel for electric generation decreased $6.2 million (8%) for the six months
ended June 30, 1997, primarily because of decreased generation ($6.6
million), partially offset by a higher cost of coal burned ($.4 million).
Power purchased decreased $1.3 million (16%) due mainly to less power being
purchased to meet native load and other power commitments and fewer outages
at the electric generating plants.
Gas supply expenses increased $12.1 million (16%) primarily because of an
increase in the cost of net gas supply ($25.5 million), partially offset by
a decrease in the volume of gas delivered to the distribution system ($13.4
million).
Utility operation and maintenance expenses decreased $1.1 million (1%).
Operation expenses increased $2.7 million over 1996 due to recording a
credit to expense in 1996 for a one-time reduction of certain employee
fringe benefits in connection with a change in the collective bargaining
agreement ($3.6 million) and for settlement proceeds related to a
commercial dispute ($1.0 million). In addition, expenses for the operation
of electric power plants increased $2.4 million. Maintenance expenses
decreased $3.8 million (13%) primarily due to a decrease in repairs at the
electric generating plants ($2.6 million) and expenses related to storm
damage ($1.2 million).
Utility depreciation and amortization increased $1.4 million because of
additional depreiable plant in service.
Utility other income increased $2.3 million because of interest income
recorded as a result of a favorable tax settlement and higher income from
investments.
Utility interest charges and preferred dividends decreased $1.2 million
(6%) primarily because of a decrease in outstanding debt and favorable
refinancing activities.
Energy Marketing and Trading and Other Results:
See Note 5 of Notes to Financial Statements under Item 1, Part I, and Item
5, Other Information, under Part II of this report for a discussion of the
Company's decision to consolidate the trading, risk management and
administrative operations of its power marketing and gas marketing division
into a single energy marketing unit at its Louisville headquarters.
Energy marketing and trading revenues and cost of revenues increased $362.3
million (30%) and $376.1 million (32%), respectively, due to higher
volumes. The decrease in gross margins reflects milder weather and reduced
price volatility in the gas markets. Slightly higher power-marketing gross
margins partially offset the decrease in gas margins.
Other revenues and cost of revenues increased $54.3 million and $30.6
million, respectively, due to acquiring an interest in Centro in February
1997.
Operation and maintenance expense increased $11.3 million (35%) due to
acquiring an interest in Centro and to higher energy-marketing expenses.
The increase in energy-marketing expenses reflects the increase in power-
marketing volumes.
Non-utility depreciation and amortization increased $3.9 million mainly due
to acquiring an interest in Centro.
Non-recurring charges included a net insurance settlement of $7.6 million
($8.5 million gross insurance recovery, less expenses) related to losses
incurred in LG&E Natural's Calgary office. Non-recurring charges also
included a charge of $7.0 million to reflect the costs of consolidating the
trading, risk management and administrative operations of the Company's
power marketing and gas marketing divisions into a single energy marketing
unit, located in its Louisville headquarters. See Note 5 of Notes to
Financial Statements under Item 1.
Non-utility other income increased $2.2 million due mainly to LG&E
Natural's receiving a settlement in a legal dispute.
Non-utility interest charges and minority interest increased $7.8 million
due to an increase in notes payable and to the Centro acquisition.
The consolidated effective tax rate increased to 36.8% in 1997 from 34.6%
in 1996 mainly due to changes in the provisions for state and foreign
income taxes.
Liquidity and Capital Resources
The Company's need for capital funds is primarily related to the
construction of plant and equipment necessary to meet LG&E's electric and
gas customers' needs and protection of the environment. Needs for capital
funds also arise from partnership equity contributions in connection with
independent power production projects, efforts to expand and improve gas
gathering and processing facilities, information system enhancements, and
other business development opportunities. Construction expenditures for
the six months ended June 30, 1997, of $48.1 million were financed with
internally-generated funds.
The Company recently acquired interests in two Argentine natural gas
distribution companies for $140 million (see Note 2 of Notes to Financial
Statements). The Company also recently entered into an agreement with New
Energy Ventures to provide energy-related services to retail customers
throughout the United States. On June 9, 1997, certain subsidiaries of the
Company entered into a Participation Agreement with Big Rivers Electric
Corporation (Big Rivers), setting forth the detailed parameters of the
proposed 25-year lease by Company affiliates of the generation assets of
Big Rivers. On the same date, these arrangements were approved by the
creditors of Big Rivers as part of the confirmation of Big Rivers' Plan of
Reorganization by the U.S. Bankruptcy Court. Consummation of this
transaction is subject to a number of conditions, including receipt of
federal and state regulatory approvals. The Company made initial filings
seeking certain of these regulatory approvals from the Kentucky Public
Service Commission on June 30, 1997. (See Item 1, Business, and Item 7,
Management's Discussion and Analysis of Results of Operations and Financial
Condition, of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, for background and a further discussion of this proposed
transaction.)
The Company had margin balances totaling $1.4 million on deposit with
brokers at June 30, 1997. Brokers require the deposits to address changes
in the market prices of financial instruments used in the Company's price
risk management activities.
The Company's combined cash and marketable securities balance increased
$22.7 million during the six months ended June 30, 1997. The increase
reflects cash flows from operations and a net increase in notes payable,
partially offset by construction expenditures, the acquisition of interests
in the Argentine natural gas distribution companies, and dividends paid.
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. The significant decreases in accounts receivable and accounts payable
resulted mainly from seasonal fluctuations in LG&E Natural's and LG&E's
businesses, partially offset by increases resulting from acquiring Centro
and seasonal fluctuations in LG&E Power Marketing's business. Gas stored
underground decreased due to seasonal fluctuations in LG&E's business.
The significant increases in investments in affiliates and non-utility
property and plant, net, resulted from acquiring interests in the Argentine
natural gas companies. The increase in long-term debt resulted from the
Argentine acquisition, partially offset by a decrease resulting from $20.0
million of LG&E's long-term debt becoming current. The changes in price
risk management assets and liabilities resulted from seasonal fluctuations
in LG&E Natural's and LG&E Power Marketing's businesses.
The significant increase in notes payable resulted from borrowing
additional funds to finance the acquisition of interests in the Argentine
natural gas companies, and to fund working capital needs.
At June 30, 1997, loan agreements and lines of credit were in place
totaling $690 million ($200 million for LG&E, $250 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. Unused
capacity under these lines totaled $353.0 million after consideration of
outstanding borrowings and approximately $39.0 million in letters of credit
securing on- and off-balance-sheet commitments. LG&E Energy Corp.'s line
of credit and $15 million of Gas Systems' lines of credit expired on July
31, 1997. The remaining credit facilities are scheduled to expire at
various times between 1998 and 2001. Management expects to renegotiate the
remaining facilities when they expire. In May 1997, LG&E Gas Systems
amended the loan agreement with its lenders to remove the requirement that
it meet an earnings-to-interest covenant for the twelve-month periods ended
March 31, 1997, and June 30, 1997. The lenders under the credit facilities
for LG&E Energy Systems Inc. and LG&E Gas Systems Inc. are entitled to the
benefits of Support Agreements with LG&E Energy Corp.
The Company's capitalization ratios at June 30, 1997, and December 31,
1996, follow:
June 30, Dec. 31,
1997 1996
Long-term debt (including current portion) 36.1% 37.8%
Notes payable 15.7 9.2
Preferred stock 5.0 5.6
Common equity 43.2 47.4
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 following items and
captions of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996: 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, the proceedings reported in the Company's
1996 Form 10-K have not changed materially.
Roanoke Valley I. Westmoreland-LG&E Partners (WLP), the partnership that
owns the Roanoke Valley I and II facilities, is seeking the recovery of
capacity payments withheld by Virginia Electric and Power Company. In June
1997, the Virginia Supreme Court reversed an adverse lower court ruling and
remanded the case for a trial. The new trial date has not been
established. See Item 1 and Note 16 of Notes to Financial Statements under
Item 8 of the Company's Form 10-K for the year ended December 31, 1996.
Rensselaer. LG&E Westmoreland - Rensselaer (LWR), in which the Company has
a 50% interest through an indirect subsidiary, has executed a master
restructuring agreement with Niagara Mohawk Power Corporation (NIMO) and 15
other independent power companies (IPPs) effective July 9, 1997. Under
this agreement, LWR has an obligation to negotiate towards a restructuring
of its Power Purchase Agreement between NIMO and LWR. Upon completion of a
restructuring and satisfaction of conditions precedent, including all IPPs
receiving necessary approvals and NIMO successfully arranging financing,
LWR would receive consideration from NIMO. Due to the early stage of the
project restructuring at this time and the existence of numerous conditions
thereto, the Company is not able to predict the outcome of this event.
Based upon the terms of the agreement and the current status of the
restructuring, the Company does not expect the ultimate resolution of this
matter to have a material adverse effect on its results of operations or
financial condition.
Calgary. On November 22, 1996 LG&E Natural Canada Inc., a subsidiary of
LG&E Natural, initiated action in the Court of the Queens Bench of Alberta,
Calgary against a former employee. That action and an additional action,
filed on the same date in the General Division of the Ontario Court, also
named a natural gas sales and marketing company and the director, president
and secretary of that company (the "Marketing Company Defendants"). The
action against such Marketing Company Defendants was settled on June 6,
1997. An amended statement of claim was filed in the Calgary action on
December 23, 1996, naming additional parties. These lawsuits were filed as
a result of LG&E Natural's discovery in the fourth quarter of 1996 that the
former employee had engaged in unauthorized transactions. Counterclaims
have been filed seeking damages of approximately forty million dollars for,
among other things, defamation and breach of contract. In the second
quarter of 1997, the Company received an insurance settlement of $7.6
million (net of expenses) related to the losses. See Note 5 of Notes to
Financial Statements under Part I, Item 1. The Company does not expect the
ultimate resolution of this matter to have a material adverse effect on its
results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
a) The Company's Annual Meeting of Shareholders was held on May 8, 1997.
b) Not applicable.
c) The matters voted upon and the results of the voting at the Annual
Meeting are set forth below:
1. The shareholders voted to elect the Company's nominees for election to
the Board of Directors as follows:
William C. Ballard, Jr. -- 47,961,683.221 common shares cast in favor
of election and 1,865,299.688 shares withheld.
Ronald L. Bittner -- 51,867,738.784 common shares cast in favor of
election and 283,523.125 shares withheld.
S. Gordon Dabney -- 52,422,850.365 common shares cast in favor of
election and 207,527.544 shares withheld.
T. Ballard Morton, Jr. -- 52,437,617.133 common shares cast in favor
of election and 204,563.776 shares withheld.
Holders of 87,087.000 common shares abstained from voting on this
matter.
2. The shareholders voted 52,258,719.312 common shares in favor of and
156,318.966 shares against the approval of Arthur Anderson LLP as
independent auditors for 1997. Holders of 317,956.631 common shares
abstained from voting on this matter.
d) Not applicable.
Item 5. Other Information.
Unaudited Pro Forma Financial Information.
On May 20, 1997, the Company and KU Energy Corporation, a Kentucky
corporation ("KU"), entered into an Agreement and Plan of Merger (the
"Merger Agreement") providing for a merger of LG&E Energy and KU. Pursuant
to the Merger Agreement, among other things, KU will be merged with and
into LG&E Energy, with LG&E Energy as the surviving corporation (the
"Merger"). The Merger, which was unanimously approved by the Boards of
Directors of LG&E Energy and KU, is expected to close shortly after all of
the conditions to consummation of the Merger, including the receipt of all
applicable regulatory approvals, are met or waived. See Note 4 of Notes to
Financial Statements under Part I, Item 1, for more information.
The following unaudited pro forma financial information combines the
historical balance sheets and statements of income of LG&E Energy and KU
Energy, including their respective subsidiaries, after giving effect to the
Merger. The unaudited pro forma combined condensed balance sheet at June
30, 1997, gives effect to the Merger as if it had occurred at June 30,
1997. The unaudited pro forma combined condensed statements of income for
all periods give effect to the Merger as if it had occurred at January 1,
1994. These statements are prepared on the basis of accounting for the
Merger as a pooling of interests and are based on the assumptions set forth
in the notes thereto. In addition, the pro forma financial information
does not give effect to the expected synergies of the transaction.
The following pro forma financial information has been prepared from, and
should be read in conjunction with, the historical financial statements and
related notes thereto of LG&E Energy and KU Energy, incorporated herein by
reference. The following information is not necessarily indicative of the
financial position or operating results that would have occurred had the
Merger been consummated on the date as of which, or at the beginning of the
periods for which, the Merger is being given effect nor is it necessarily
indicative of future operating results or financial position. In addition,
due to the effect of seasonal fluctuations in temperature and other weather-
related factors on the operations of LG&E Energy and KU Energy, financial
results for the three- and six-month periods ended June 30, 1997, and June
30, 1996, are not necessarily indicative of trends for any twelve-month
period.
See Note 3 of Notes to Financial Statements under Part I, Item 1.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Balance Sheet
As of June 30, 1997
(Thousands of $)
ASSETS
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
CURRENT ASSETS:
Cash and temporary cash
investments $ 132,210 $ 21,418 $ - $ 153,628
Marketable securities 10,996 - - 10,996
Accounts receivable -
less reserve 376,327 66,425 (21) 442,731
Materials and supplies - pri-
marily at average cost:
Fuel (predominantly coal) 15,651 37,189 - 52,840
Gas stored underground 16,174 - - 16,174
Other 31,802 23,370 - 55,172
Price risk management
assets 62,782 - - 62,782
Prepayments and other 3,472 6,679 - 10,151
Total current assets 649,414 155,081 (21) 804,474
OTHER PROPERTY AND INVESTMENTS -
less reserve:
Investment in affiliates 171,384 2,172 - 173,556
Non-utility property and
plant, net 408,058 2,714 - 410,772
Price risk management
assets 49,924 - - 49,924
Other 25,261 41,327 - 66,588
Total other property and
investments 654,627 46,213 - 700,840
UTILITY PLANT:
At original cost 2,721,261 2,577,611 - 5,298,872
Less: reserve for
depreciation 1,037,437 1,099,749 - 2,137,186
Net utility plant 1,683,824 1,477,862 - 3,161,686
DEFERRED DEBITS AND OTHER
ASSETS 121,389 47,585 8,250 177,224
Total assets $3,109,254 $1,726,741 $ 8,229 $4,844,224
See accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Balance Sheet (cont.)
As of June 30, 1997
(Thousands of $)
CAPITAL AND LIABILITIES
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
CURRENT LIABILITIES:
Long-term debt due within
one year $ 20,000 $ 21 $ - $ 20,021
Notes payable 298,000 51,800 - 349,800
Accounts payable 322,749 26,937 16,479 366,165
Trimble County settlement 15,072 - - 15,072
Accrued taxes 5,532 2,849 (3,330) 5,051
Price risk management
liabilities 77,637 - - 77,637
Other 76,006 35,306 - 111,312
Total current liabilities 814,996 116,913 13,149 945,058
Long-term debt 664,284 546,351 - 1,210,635
DEFERRED CREDITS AND OTHER
LIABILITIES:
Accumulated deferred income
taxes 312,326 249,208 - 561,534
Investment tax credit, in
process of amortization 77,869 28,123 - 105,992
Regulatory liability 75,600 53,305 - 128,905
Price risk management
liabilities 23,824 - - 23,824
Other 123,939 43,706 - 167,645
Total deferred credits and
other liabilities 613,558 374,342 - 987,900
Minority interests 102,594 - - 102,594
Cumulative preferred stock 95,328 40,000 - 135,328
Common equity 818,494 649,135 (4,920) 1,462,709
Total capital and liabilities $3,109,254 $1,726,741 $ 8,229 $4,844,224
See accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Three Months Ended June 30, 1997
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
REVENUES:
Energy marketing and trading $522,515 $ - $ - $522,515
Electric utility 145,919 162,861 (35) 308,745
Gas utility 34,191 - - 34,191
Other 44,636 1,550 - 46,186
Total revenues 747,261 164,411 (35) 911,637
COST OF REVENUES:
Energy marketing and trading 507,933 - - 507,933
Fuel and power purchased 38,407 61,212 (35) 99,584
Gas supply expenses 21,144 - - 21,144
Other 26,199 - - 26,199
Total cost of revenues 593,683 61,212 (35) 654,860
Gross profit 153,578 103,199 - 256,777
OPERATING EXPENSES:
Operation and maintenance:
Utility 55,965 54,787 - 110,752
Energy marketing and trading
and other 23,927 844 - 24,771
Depreciation and amortization 28,875 20,957 - 49,832
Non-recurring charges (592) - - (592)
Total operating expenses 108,175 76,588 - 184,763
Equity in earnings
of joint ventures 5,557 - - 5,557
OPERATING INCOME 50,960 26,611 - 77,571
Other income and (deductions) 2,710 1,833 - 4,543
Interest charges, minority inter-
est and preferred dividends 19,468 10,464 - 29,932
Income before income taxes 34,202 17,980 - 52,182
Income taxes 12,585 5,930 - 18,515
NET INCOME $ 21,617 $ 12,050 $ - $ 33,667
Average common shares
outstanding 66,492 37,818 25,338 129,648
Earnings per share $ .33 $ .32 $ - $ .26
See accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Three Months Ended June 30, 1996
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
REVENUES:
Energy marketing and trading $575,160 $ - $ - $575,160
Electric utility 151,857 167,510 (250) 319,117
Gas utility 29,362 - - 29,362
Other 4,534 1,091 - 5,625
Total revenues 760,913 168,601 (250) 929,264
COST OF REVENUES:
Energy marketing and trading 563,605 - (45) 563,560
Fuel and power purchased 41,863 62,668 (205) 104,326
Gas supply expenses 18,652 - - 18,652
Other 3,248 - - 3,248
Total cost of revenues 627,368 62,668 (250) 689,786
Gross profit 133,545 105,933 - 239,478
OPERATING EXPENSES:
Operation and maintenance:
Utility 51,773 51,664 - 103,437
Energy marketing and trading
and other 11,517 563 - 12,080
Depreciation and amortization 25,764 20,154 - 45,918
Total operating expenses 89,054 72,381 - 161,435
Equity in earnings
of joint ventures 4,201 - - 4,201
OPERATING INCOME 48,692 33,552 - 82,244
Other income and (deductions) 1,555 1,456 - 3,011
Interest charges and
preferred dividends 13,834 10,345 - 24,179
Income before income taxes 36,413 24,663 - 61,076
Income taxes 12,591 8,590 - 21,181
NET INCOME $ 23,822 $ 16,073 $ - $ 39,895
Average common shares
outstanding 66,294 37,818 25,338 129,450
Earnings per share $ .36 $ .42 $ - $ .31
See accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Six Months Ended June 30, 1997
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
REVENUES:
Energy marketing and trading $1,580,966 $ - $ (4)$1,580,962
Electric utility 274,746 341,769 (240) 616,275
Gas utility 130,929 - - 130,929
Other 63,863 2,727 - 66,590
Total revenues 2,050,504 344,496 (244) 2,394,756
COST OF REVENUES:
Energy marketing and trading 1,554,329 - (15) 1,554,314
Fuel and power purchased 73,426 123,528 (229) 196,725
Gas supply expenses 88,969 - - 88,969
Other 37,593 - - 37,593
Total cost of revenues 1,754,317 123,528 (244) 1,877,601
Gross profit 296,187 220,968 - 517,155
OPERATING EXPENSES:
Operation and maintenance:
Utility 109,396 101,599 - 210,995
Energy marketing and trading
and other 43,699 1,463 - 45,162
Depreciation and amortization 56,762 41,839 - 98,601
Non-recurring charges (592) - - (592)
Total operating expenses 209,265 144,901 - 354,166
Equity in earnings
of joint ventures 8,941 - - 8,941
OPERATING INCOME 95,863 76,067 - 171,930
Other income and (deductions) 6,077 2,361 - 8,438
Interest charges, minority inter-
est and preferred dividends 34,458 20,904 - 55,362
Income before income taxes 67,482 57,524 - 125,006
Income taxes 24,626 20,611 - 45,237
NET INCOME $ 42,856 $ 36,913 $ - $ 79,769
Average common shares
outstanding 66,433 37,818 25,338 129,589
Earnings per share $ .65 $ .98 $ - $ .62
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Six Months Ended June 30, 1996
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
REVENUES:
Energy marketing and trading $1,218,714 $ - $ - $1,218,714
Electric utility 287,676 358,500 (575) 645,601
Gas utility 120,418 - - 120,418
Other 9,534 2,210 - 11,744
Total revenues 1,636,342 360,710 (575) 1,996,477
COST OF REVENUES:
Energy marketing and trading 1,178,266 - (186) 1,178,080
Fuel and power purchased 80,879 134,197 (389) 214,687
Gas supply expenses 76,884 - - 76,884
Other 6,947 - - 6,947
Total cost of revenues 1,342,976 134,197 (575) 1,476,598
Gross profit 293,366 226,513 - 519,879
OPERATING EXPENSES:
Operation and maintenance:
Utility 110,492 99,788 - 210,280
Energy marketing and trading
and other 32,431 1,007 - 33,438
Depreciation and amortization 51,492 40,219 - 91,711
Non-recurring charges - 1,480 - 1,480
Total operating expenses 194,415 142,494 - 336,909
Equity in earnings
of joint ventures 8,801 - - 8,801
OPERATING INCOME 107,752 84,019 - 191,771
Other income and (deductions) 1,541 3,502 - 5,043
Interest charges and
preferred dividends 27,879 21,107 - 48,986
Income before income taxes 81,414 66,414 - 147,828
Income taxes 30,497 24,022 - 54,519
NET INCOME $ 50,917 $ 42,392 $ - $ 93,309
Average common shares
outstanding 66,263 37,818 25,338 129,419
Earnings per share $ .77 $ 1.12 $ - $ .72
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Twelve Months Ended June 30, 1997
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
REVENUES:
Energy marketing and trading $3,099,192 $ - $ (4)$3,099,188
Electric utility 594,230 694,955 (425) 1,288,760
Gas utility 224,930 - - 224,930
Other 85,275 5,039 - 90,314
Total revenues 4,003,627 699,994 (429) 4,703,192
COST OF REVENUES:
Energy marketing and trading 3,039,965 - (85) 3,039,880
Fuel and power purchased 158,870 250,020 (344) 408,546
Gas supply expenses 152,567 - - 152,567
Other 44,202 - - 44,202
Total cost of revenues 3,395,604 250,020 (429) 3,645,195
Gross profit 608,023 449,974 - 1,057,997
OPERATING EXPENSES:
Operation and maintenance:
Utility 213,690 203,622 - 417,312
Energy marketing and trading
and other 79,175 3,215 - 82,390
Depreciation and amortization 108,826 82,232 - 191,058
Non-recurring charges 25,738 4,012 - 29,750
Total operating expenses 427,429 293,081 - 720,510
Equity in earnings
of joint ventures 18,958 - - 18,958
OPERATING INCOME 199,552 156,893 - 356,445
Other income and (deductions) 8,344 4,186 - 12,530
Interest charges, minority inter-
est and preferred dividends 60,466 41,687 - 102,153
Income before income taxes 147,430 119,392 - 266,822
Income taxes 51,488 42,923 - 94,411
NET INCOME $ 95,942 $ 76,469 $ - $ 172,411
Average common shares
outstanding 66,378 37,818 25,338 129,534
Earnings per share $ 1.45 $ 2.02 $ - $ 1.33
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Twelve Months Ended December 31, 1996
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
REVENUES:
Energy marketing and trading $2,736,940 $ - $ - $2,736,940
Electric utility 607,160 711,686 (760) 1,318,086
Gas utility 214,419 - - 214,419
Other 30,946 4,522 - 35,468
Total revenues 3,589,465 716,208 (760) 4,304,913
COST OF REVENUES:
Energy marketing and trading 2,663,902 - (257) 2,663,645
Fuel and power purchased 166,323 260,688 (503) 426,508
Gas supply expenses 140,482 - - 140,482
Other 13,556 - - 13,556
Total cost of revenues 2,984,263 260,688 (760) 3,244,191
Gross profit 605,202 455,520 - 1,060,722
OPERATING EXPENSES:
Operation and maintenance:
Utility 214,786 201,811 - 416,597
Energy marketing and trading
and other 67,907 2,759 - 70,666
Depreciation and amortization 103,556 80,612 - 184,168
Non-recurring charges 26,330 5,493 - 31,823
Total operating expenses 412,579 290,675 - 703,254
Equity in earnings
of joint ventures 18,818 - - 18,818
OPERATING INCOME 211,441 164,845 - 376,286
Other income and (deductions) 3,808 5,327 - 9,135
Interest charges and
preferred dividends 53,887 41,889 - 95,776
Income before income taxes 161,362 128,283 - 289,645
Income taxes 57,359 46,334 - 103,693
NET INCOME $ 104,003 $ 81,949 $ - $ 185,952
Average common shares
outstanding 66,294 37,818 25,338 129,450
Earnings per share $ 1.57 $ 2.17 $ - $ 1.44
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Twelve Months Ended December 31, 1995
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
REVENUES:
Energy marketing and trading $ 630,249 $ - $ (1,616)$ 628,633
Electric utility 571,086 686,400 (2,212) 1,255,274
Refund - Trimble County (28,300) - - (28,300)
Gas utility 181,126 - - 181,126
Other 20,519 4,028 - 24,547
Total revenues 1,374,680 690,428 (3,828) 2,061,280
COST OF REVENUES:
Energy marketing and trading 604,302 - - 604,302
Fuel and power purchased 154,832 259,424 (3,828) 410,428
Gas supply expenses 110,738 - - 110,738
Other 19,858 - - 19,858
Total cost of revenues 889,730 259,424 (3,828) 1,145,326
Gross profit 484,950 431,004 - 915,954
OPERATING EXPENSES:
Operation and maintenance:
Utility 203,284 198,712 - 401,996
Energy marketing and trading
and other 39,874 2,969 - 42,843
Depreciation and amortization 94,393 75,268 - 169,661
Total operating expenses 337,551 276,949 - 614,500
Equity in earnings
of joint ventures 28,158 - - 28,158
OPERATING INCOME 175,557 154,055 - 329,612
Other income and (deductions) 5,389 6,092 - 11,481
Interest charges and
preferred dividends 53,822 42,273 - 96,095
Income before income taxes 127,124 117,874 - 244,998
Income taxes 44,294 41,821 - 86,115
NET INCOME $ 82,830 $ 76,053 $ - $ 158,883
Average common shares
outstanding 66,105 37,818 25,338 129,261
Earnings per share $ 1.25 $ 2.01 $ - $ 1.23
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Twelve Months Ended December 31, 1994
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
REVENUES:
Energy marketing and trading $ 1,289 $ - $ - $ 1,289
Electric utility 559,327 636,628 (328) 1,195,627
Gas utility 200,129 - - 200,129
Other 68,918 2,604 - 71,522
Total revenues 829,663 639,232 (328) 1,468,567
COST OF REVENUES:
Energy marketing and trading 1,222 - - 1,222
Fuel and power purchased 153,356 232,096 (328) 385,124
Gas supply expenses 131,561 - - 131,561
Other 56,395 - - 56,395
Total cost of revenues 342,534 232,096 (328) 574,302
Gross profit 487,129 407,136 - 894,265
OPERATING EXPENSES:
Operation and maintenance:
Utility 202,123 193,428 - 395,551
Energy marketing and trading
and other 24,629 2,053 - 26,682
Depreciation and amortization 84,173 65,441 - 149,614
Non-recurring charges 48,743 - - 48,743
Total operating expenses 359,668 260,922 - 620,590
Equity in earnings
of joint ventures 12,883 - - 12,883
OPERATING INCOME 140,344 146,214 - 286,558
Other income and (deductions) 13,718 8,121 - 21,839
Contribution to charitable
foundation 15,000 - - 15,000
Interest charges and
preferred dividends 48,839 36,453 - 85,292
Income from continuing
operations before
income taxes 90,223 117,882 - 208,105
Income taxes 33,394 42,006 - 75,400
Income from continuing
operations 56,829 75,876 - 132,705
LG&E Energy Corp.
Unaudited Pro Forma Combined Condensed Statements of Income
Twelve Months Ended December 31, 1994 (cont.)
(Thousands of $ Except Per Share Data)
As Reported Pro Pro For-
LG&E KU Forma ma Com-
Energy Energy Adj. bined
Gain on sale of dis-
continued operations,
net of income taxes of
$35,048 51,805 - - 51,805
Income before cumulative
effect of change in
accounting principle 108,634 75,876 - 184,510
Cumulative effect of change
in accounting principle,
net of taxes of $2,280 (3,369) - - (3,369)
NET INCOME $105,265 $ 75,876 $ - $ 181,141
Average common shares
outstanding 65,982 37,818 25,338 129,138
Earnings per share:
From continuing operations $ .86 $ 2.01 $ - $ 1.03
Gain on sale of dis-
continued operations .79 - - .40
Cumulative effect of
accounting change (.05) - - (.03)
Total $ 1.60 $ 2.01 $ - $ 1.40
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
LG&E Energy Corp.
Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
1. Reclassifications have been made to certain "as reported" account
balances reflected in KU Energy's financial statements to conform to
this reporting presentation. All other financial statement
presentation and accounting policy differences are immaterial and have
not been adjusted in the pro forma combined condensed financial
statements.
2. Intercompany transactions (power purchased and power sales
transactions) between LG&E Energy and KU Energy during the periods
presented were eliminated through pro forma adjustments.
3. The allocation between LG&E Energy and KU Energy and their customers of
the estimated cost savings resulting from the Merger, net of the
estimated costs incurred to achieve such savings, and the treatment of
transaction costs, will be subject to regulatory review and approval.
None of the estimated cost savings or costs to achieve such savings has
been reflected in the pro forma combined condensed statements of
income. A charge of $4.92 million ($8.25 million, net of income taxes
of $3.33 million) to retained earnings and $8.25 million as deferred
debits and other assets in the pro forma combined condensed balance
sheet has been made to recognize such estimated transaction costs.
Transaction costs are currently estimated to be approximately $16.5
million (including fees for financial advisors, attorneys, accountants,
consultants, filings and printing).
4. The pro forma combined condensed financial statements reflect the
conversion of each share of KU Energy Common Stock (no par value)
outstanding into 1.67 shares of LG&E Energy Common Stock (no par value)
as provided in the Merger Agreement. The pro forma combined condensed
financial statements are presented as if the companies were combined
during all periods included therein.
5. LG&E Energy's net income for the three months, six months, and twelve
months, ended June 30, 1997, includes the effect of an $8.5 million
insurance settlement related to the Calgary trading loss discussed in
Note 7 below, partially offset by a one-time restructuring charge of
$7.5 million for the consolidation of LG&E Energy's energy marketing
group.
6. LG&E Energy adopted the mark-to-market method of accounting for its
energy trading and price risk management activities during 1996. This
resulted in an increase in Energy Marketing and Trading revenues and
income from operations of $26.2 million for 1996 and $16.6 million for
the twelve months ended June 30, 1997. The impact on prior period
financial results was immaterial.
7. LG&E Energy's net income for the year ended December 31, 1996, and
twelve months ended June 30, 1997, includes a non-recurring after-tax
charge of $17.1 million for losses in its natural gas marketing
business resulting from unauthorized transactions entered into by a
marketer in its Calgary, Alberta, office. This charge is reflected in
non-recurring charges on the respective statements of income.
8. KU Energy's net income for the six months and twelve months ended June
30, 1997, and year ended 1996 include a non-recurring write-off of
nonutility investments. This charge is reflected in Non-recurring
charges on the respective statements of income.
9. 1995 operating revenues were reduced by $28.3 million related to a
settlement agreement approved by the Kentucky Commission on December 8,
1995, which resolved numerous legal and regulatory proceedings to
determine the appropriate ratemaking treatment to implement the
Kentucky Commission's 1988 decision that LG&E should not be allowed to
recover 25% of the cost of Trimble County Unit 1 (Trimble County) from
ratepayers.
10.Electric utility revenues and fuel and power purchased costs for KU
Energy for 1994 were reduced by $19.4 million and $23.1 million,
respectively, resulting from refunds made pursuant to regulatory orders
related to the resolution of a coal contract dispute. The difference
between the reduction in operating revenues and the reduction in fuel
expense is attributable to incurred litigation costs, fuel cost savings
related to opportunity sales and costs incurred to administer the
refund plan. These amounts were retained by Kentucky Utilities
pursuant to regulatory orders.
11.LG&E Energy's 1994 net income includes pre-tax non-recurring charges of
$48.7 million. As part of a study of its business strategy and
realignment during 1994, LG&E re-evaluated its regulatory strategy
which previously had been to seek full recovery of certain costs
deferred in accordance with prior precedents established by the
Kentucky Commission. As a result of this re-evaluation, 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 Kentucky 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. In addition,
a nonutility subsidiary of LG&E Energy recorded a reserve of $10.1
million before taxes for the costs related to vacating leased office
space.
12.LG&E Energy's 1994 net income includes a pre-tax charge of $15 million.
This represented an irrevocable payment made to a tax-exempt charitable
foundation formed by LG&E Energy in 1994. This charge is reflected in
the Contribution to Charitable Foundation on the Statement of Income.
13.LG&E Energy's 1994 net income includes the recognition of a gain on the
sale of its 36.5% partnership interest in Natural Gas Clearinghouse for
$170 million. The transaction resulted in an after-tax gain of
approximately $52 million. This adjustment is reflected as a gain on
sale of discontinued operations, net of income taxes.
14.LG&E Energy's 1994 net income includes an adjustment for a change in
accounting for post-employment benefits adopted pursuant to Statement
of Financial Accounting Standards No. 112, Employers' Accounting for
Post-Employment Benefits. This adjustment is reflected as a cumulative
effect of change in accounting for post-employment benefits, net of
income taxes.
Item 6(a). Exhibits.
Exhibit
Number Description
2 Agreement and Plan of Merger, dated as of May 20, 1997,
by and between LG&E Energy and KU Energy, including
certain exhibits thereto. (Filed as Exhibit 2 to the
Company's Current Report on Form 8-K filed May 30, 1997
and incorporated by reference herein.)
23.01 Consent of Independent Public Accountants.
27 Financial Data Schedule.
99.1 KU Energy Stock Option Agreement, dated as of May 20,
1997, by and between KU Energy and LG&E Energy. (Filed
as Exhibit 99.1 to the Company's Current Report on Form
8-K filed May 30, 1997 and incorporated by reference
herein.)
99.2 LG&E Energy Stock Option Agreement, dated as of May 20,
1997, by and between KU Energy and LG&E Energy. (Filed
as Exhibit 99.2 to the Company's Current Report on Form
8-K filed May 30, 1997 and incorporated by reference
herein.)
99.3 Audited Financial Statements of KU Energy Corporation
(Item 8 of Part II of KU Energy Corporation's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996, File No. 1-10944, and incorporated by
reference herein).
99.4 Unaudited Interim Financial Statements of KU Energy
Corporation (Item 1 in Part I of KU Energy
Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, File No. 1-10944, and
incorporated by reference herein).
Item 6(b). Reports on Form 8-K.
On April 28, 1997, the Company filed a report on Form 8-K announcing that,
effective May 15, it would promote Victor A. Staffieri to chief financial
officer of LG&E Energy Corp. and Louisville Gas and Electric Company, and
that it would promote Stephen R. Wood to president, Louisville Gas and
Electric Company and distribution services division. In the same report,
the Company also announced it would consolidate the trading, risk
management and administrative operations of its power marketing and gas
marketing divisions into a single energy marketing unit located in its
Louisville headquarters.
On May 22, 1997, the Company filed a report on Form 8-K announcing that on
May 20, 1997, it and KU Energy Corporation entered into an agreement
providing for a merger of the two companies, and that the two companies
also entered into reciprocal stock option agreements.
On May 30, 1997, the Company filed a report on Form 8-K with the KU merger
agreement and related stock option agreements attached as exhibits.
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 14, 1997 /s/ Victor A. Staffieri
Victor A. Staffieri
Chief Financial Officer
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Exhibit 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated January 28, 1997 (relating to the
Consolidated Financial Statements of KU Energy Corporation which are
included as Exhibit 13 to KU Energy Corporation's Form 10-K for the year
ended December 31, 1996), which is incorporated by reference in the
Quarterly Report on Form 10-Q of LG&E Energy Corp. for the quarter ended
June 30, 1997, into LG&E Energy Corp.'s previously filed Post-Effective
Amendment No. One to Registration Statement No. 33-56942 and Post-Effective
Amendment No. 1-C to Registration Statement No. 33-33687 relating to the
Automatic Dividend Reinvestment and Stock Purchase Plan of LG&E Energy
Corp., Registration Statement No. 333-05457 and Post-Effective Amendment
No. 2-C to Registration Statement No. 33-33687 relating to the Employee
Common Stock Purchase Plan of LG&E Energy Corp., Registration Statement No.
333-05459 and Post-Effective Amendment No. Two to Registration Statement
No. 33-38557 relating to the Omnibus Long-Term Incentive Plan of LG&E
Energy Corp., Post-Effective Amendment No. One to Registration Statement
No. 33-56525 relating to the Stock Option Plan for Non-Employee Directors
of LG&E Energy Corp., and Post-Effective Amendment No. One to Registration
Statement No. 33-60765 relating to the Deferred Stock Compensation Plan for
Non-Employee Directors of LG&E Energy Corp.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
August 13, 1997
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