-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, mtDkgEnTXQ57XnL4Taa6WyQlv/wjStP42NTrYqrySFq1b0r6g8Tdttn7Ia5sQ1ve 7hGXTyTEYU/YxA2teGlo/w== 0000055387-94-000023.txt : 19940315 0000055387-94-000023.hdr.sgml : 19940315 ACCESSION NUMBER: 0000055387-94-000023 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY UTILITIES CO CENTRAL INDEX KEY: 0000055387 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 610247570 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-03464 FILM NUMBER: 94515824 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 10-K 1 KENTUCKY UTILITIES COMPANY FORM 10-K FOR 1993 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1993 TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from to Commission file number 1-3464 KENTUCKY UTILITIES COMPANY (Exact name of Registrant as specified in its charter) Kentucky and Virginia 61-0247570 (State of Incorporation) (I.R.S. Employer Identification No.) One Quality Street Lexington, Kentucky 40507 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 606-255-2100 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Preferred Stock, 4 3/4% cumulative, Philadelphia Stock Exchange, Inc. stated value $100 per share Securities registered pursuant to Section 12(g) of the Act: Preferred stock, cumulative, stated value $100 per share (Title of Class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) Aggregate market value of the voting stock held by nonaffiliates of the Registrant: None Number of shares of Common Stock outstanding at March 11, 1994: 37,817,878 shares (owned by the parent - KU Energy Corporation). Documents Incorporated by Reference: None Exhibit Index appears on page 44. -1- KENTUCKY UTILITIES COMPANY Form 10-K Annual Report to the Securities and Exchange Commission For the Year Ended December 31, 1993 _____________ TABLE OF CONTENTS Item Page PART I 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 9 4. Submission of Matters to a Vote of Security Holders . . . . . . . 9 Executive Officers of the Registrant . . . . . . . . . . . . . . 10 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . 12 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 15 8. Financial Statements and Supplementary Data . . . . . . . . . . . 22 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . 42 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . 42 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 42 12. Security Ownership of Certain Beneficial Owners and Management . 42 13. Certain Relationships and Related Transactions . . . . . . . . . 42 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 43 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 -2- PART I Item 1. Business General Kentucky Utilities Company (Kentucky Utilities) is a wholly owned subsidiary of KU Energy Corporation (KU Energy). Kentucky Utilities is a public utility engaged in producing and selling electric energy. Kentucky Utilities provides electric service to about 409,700 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky, and to about 27,900 customers in 5 counties in southwestern Virginia. In Virginia, Kentucky Utilities operates under the name Old Dominion Power Company. Of the Kentucky communities, 160 are incorporated municipalities served under unexpired municipal franchises and the rest are unincorporated communities where no franchises are required. Service has been provided in Virginia without franchises for a number of years. This lack of Virginia franchises is not expected to have a material effect on Kentucky Utilities' operations. Kentucky Utilities also sells electric energy at wholesale for resale in 12 municipalities. The territory served by Kentucky Utilities has an aggregate population estimated at 1,000,000. The largest city served is Lexington, Kentucky. The population of the metropolitan Lexington area is estimated at 225,000. The populations of the next 10 largest cities served at retail range from about 21,000 to 9,000. The territory served includes most of the Blue Grass Region of central Kentucky and parts of the coal mining areas in southeastern and western Kentucky and southwestern Virginia. Lexington is the center of the Blue Grass Region, in which thoroughbred horse, burley tobacco and bourbon whiskey distilling industries are located. Among the principal industries in the territory served are coal mining, automotive and related industries, agriculture, primary metals processing, crude oil production, pipeline transportation, and the manufacture of electrical and other machinery and of paper and paper products. Revenues Kentucky Utilities' sources of electric revenues and the respective percentages of total revenues for the three years 1991-1993 were as follows:
Year Ended December 31, 1993 1992 1991 Amount % Amount % Amount % (dollars in thousands) Residential $ 210,759 35 $194,817 34 $ 202,885 35 Commercial 138,271 23 133,519 23 137,653 23 Industrial 111,857 18 102,808 18 98,595 17 Mine Power 34,977 6 36,696 7 37,093 6 Public Authorities 48,142 8 45,570 8 46,332 8 Other Electric Utilities 62,463 10 58,979 10 61,542 11 Miscellaneous Revenues 119 - 3,432 - 3,560 - Total $ 606,588 100 $575,821 100 $ 587,660 100
The electric utility business is affected by varying seasonal weather patterns. As a result, operating revenues (and associated operating expenses) are not generated evenly throughout the year. Operations Kentucky Utilities' net generating capability is 3,164 megawatts. The net generating capability available for operation at any time may be lower because of periodic outages of generating units due to inspection, -3- maintenance, fuel restrictions, or modifications required by regulatory agencies. Kentucky Utilities obtains power from other utilities under bulk power purchase and interchange contracts. At December 31, 1993, Kentucky Utilities' system capability, including purchases from others, was 3,529 megawatts. The all-time system peak demand, on a one-hour integrated basis, occurred on July 28, 1993 and was 3,176 megawatts. During 1993, Kentucky Utilities generated about 89% and purchased about 11% of its net system output. Kentucky Utilities is one of 28 members of the East Central Area Reliability Coordination Agreement, the purpose of which is to augment the reliability of the members' bulk power supply through coordination of planning and operation of generation and transmission facilities. The members are engaged in the generation, transmission and sale of electric power and energy in the east central area of the United States, which covers all or portions of Michigan, Indiana, Ohio, Kentucky, Pennsylvania, Virginia, West Virginia and Maryland. Kentucky Utilities also has interconnections and contractually established operating arrangements with neighboring utilities and cooperatives. Under a contract with Owensboro Municipal Utilities (OMU), Kentucky Utilities has agreed to purchase from OMU the surplus output of the 150 megawatt and 250 megawatt generating units at OMU's Elmer Smith station. Purchases under the contract are made under a contractual formula which has resulted in costs which were and are expected to be comparable to the cost of other power purchased or generated by Kentucky Utilities. Such power constituted about 8% of Kentucky Utilities' net system output during 1993. See Note 5 of the Notes to Financial Statements. Kentucky Utilities owns 20% of the common stock of Electric Energy, Inc. (EEI), which owns and operates a 1,000-MW station in southern Illinois. Prior to 1994, Kentucky Utilities was entitled to receive varying amounts of power from EEI when available. Such power constituted about 1% of Kentucky Utilities' net system output during 1993. Commencing January 1, 1994, Kentucky Utilities' entitlement is 20% of the available capacity of the station. Such power is expected to be about 5% of Kentucky Utilities' net system output in 1994. See Note 5 of the Notes to Financial Statements. Kentucky Utilities has contracted to purchase 75 megawatts of generating capacity from Illinois Power Company from January 1, 1993 to March 31, 1994, and 125 megawatts from April 1, 1994 to December 31, 1994. Kentucky Utilities had approximately 2,260 employees at December 31, 1993, of which about 300 are covered by union contracts expiring August 1994. Fuel Matters Coal-burning generating units provided more than 99% of Kentucky Utilities' net kilowatt-hour generation for 1993. The remainder of Kentucky Utilities' net generation for 1993 was provided by hydroelectric plants, oil and/or natural gas burning units. The average delivered cost of coal purchased, per ton and per million BTU, for the periods indicated were as follows: 1993 1992 1991 Per ton $ 27.92 $ 27.94 $ 27.99 Per million BTU $ 1.15 $ 1.16 $ 1.16 -4- The average delivered costs of coal purchased on a spot basis during 1993 were $26.23 per ton and $1.08 per million BTU. Kentucky Utilities purchased 44%, 42% and 33% of its coal on a spot basis during 1993, 1992 and 1991, respectively. Kentucky Utilities maintains its fuel inventory at levels estimated to be necessary to avoid operational disruptions at its coal-fired generating units. Reliability of coal deliveries can be affected from time to time by a number of factors, including coal mine labor strikes and other supplier operating difficulties. Kentucky Utilities believes there are adequate reserves available to supply its existing base-load generating units with the quantity and quality of coal required for those units throughout their useful lives. Kentucky Utilities intends to meet a substantial portion of its coal requirements with 5 year contracts. Kentucky Utilities anticipates that coal supplied under such agreements will represent about two-thirds of the requirements over the next several years. The balance of coal requirements will be met through spot purchases. See Note 5 of the Notes to Financial Statements for the estimated obligations under fuel contracts for each of the years 1994 through 1998. Kentucky Utilities does not anticipate encountering any significant problems acquiring an adequate supply of fuel necessary to operate its new peaking units. See "Construction" for a discussion of Kentucky Utilities' plans to add peaking capacity. Kentucky Utilities' fuel adjustment clause for Kentucky customers, which operates to reflect changes in the cost of fuel in billings to customers, is designed to conform to a general regulation providing for a uniform monthly fuel adjustment clause for all electric utilities in Kentucky subject to the jurisdiction of the Kentucky Public Service Commission (PSC). The clause is based on a formula approved by the Federal Energy Regulatory Commission (FERC) but with certain modifications, including the exclusion of excess fuel expense attributable to certain forced outages, the filing of fuel procurement documentation, a procedure for billing over and under recoveries of fuel cost fluctuations from the base rate level and provision for periodic public hearings to review past adjustments, to make allowance for any past adjustments found not justified, to disallow any improper expenses and to re-index base rates to include current fuel costs. The fuel adjustment clause mechanism for Virginia customers, which is adjusted annually, uses an average fuel cost factor based primarily on projected test year fuel costs. The fuel cost factor is adjusted for the over or under collection of fuel costs from the previous year. Environmental Matters Federal and state agencies have adopted environmental protection standards which apply to the electric operations of Kentucky Utilities. To comply with these standards, Kentucky Utilities has spent $296 million through 1993 for the installation of pollution control equipment and for the institution of other environmental protection measures. Kentucky Utilities' generating units are operated in compliance with the Kentucky Natural Resources and Environmental Protection Cabinet's (the "Cabinet") State Implementation Plan (the "KYSIP") and New Source Performance Standards developed under the Clean Air Act. The KYSIP is a federally-approved plan for the attainment of the national ambient air quality standards. The KYSIP contains standards relating to the -5- emissions of various pollutants (sulfur dioxide, total suspended particulates and nitrogen oxides) from Kentucky Utilities' fossil-fuel fired steam electric generating units. These emission standards are of varying stringencies and compliance with these standards is attained through a variety of pollution control technologies (scrubbers, electrostatic precipitators, and low NOx burners) and the use of low sulfur coal. Kentucky Utilities' operations are in substantial compliance with current emission standards. The acid rain control provisions of the 1990 Clean Air Act Amendments, which are effective in two phases, will require Kentucky Utilities to further decrease the emissions of sulfur dioxide and nitrogen oxides from its fossil-fuel fired steam electric generating units. Ghent Unit 1, E. W. Brown Units 1, 2 and 3, and Green River Unit 4 have been designated as Phase I affected units which must comply with sulfur dioxide emission reduction obligations by January 1, 1995. Kentucky Utilities has adopted a strategy designed to comply with the acid rain control provisions, which will involve the installation of a scrubber and related facilities on Ghent Unit 1 during the first phase (which begins January 1, 1995) as well as fuel switching to lower sulfur coal on some other Phase I affected units to comply with sulfur dioxide limitations. In addition, the retrofit of low NOx burners on these units will be required in order to comply with nitrogen oxide limitations. On July 21, 1993, the United States Environmental Protection Agency (the EPA) issued final acid rain permits for each of Kentucky Utilities' Phase I affected units. The EPA's approval of Kentucky Utilities acid rain compliance plan was accompanied by bonus allowances awarded for the installation of the scrubber on Ghent Unit 1 and an extension of the Phase I effective date to January 1, 1997, for certain portions of the acid rain control requirements. Kentucky Utilities current plans are to be in compliance with sulfur dioxide emission reduction obligations by January 1, 1995. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Construction and - Environmental Matters for additional discussion. During 1990, each of Kentucky Utilities' five fossil-fuel fired steam electric generating stations was re-issued a wastewater discharge permit by the Cabinet under the Clean Water Act's National Pollutant Discharge Elimination System. These 5-year permits place water quality-based effluent limitations (i.e., thermal and chemical limits) on each of the power plant's discharges. Kentucky Utilities' operations are in substantial compliance with the conditions in the permits. Pursuant to the Resource Conservation and Recovery Act, utility wastes (fly ash, bottom ash and scrubber sludge) have been categorized as special wastes (i.e., wastes of large volume, but low environmental hazard). The EPA has concluded that the disposal of coal combustion by- products by practices common to the utility industry are adequate for the protection of human health and the environment. The Cabinet also regulates utility wastes as special wastes under its waste management program. Under the Toxic Substances Control Act, the EPA regulates the use, servicing, repair, storage and disposal of electrical equipment containing polychlorinated biphenyls (PCB). To comply with these regulations, Kentucky Utilities has implemented procedures to be followed in the handling, storage and disposal of PCBs. In addition, Kentucky Utilities has completed the mandated phase out of all of its pole-class PCB capacitors and has no vault-type PCB transformers in use, in or near commercial buildings. -6- On February 13, 1990, Kentucky Utilities received a letter from the EPA identifying Kentucky Utilities and others as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA or "Superfund") for a disposal site in Daviess County, Kentucky. The letter also asked Kentucky Utilities, and the other persons or entities named, to proceed voluntarily with a remediation program at the site. Under Superfund, a responsible party may be liable for all or a portion of all monies expended by the government to take corrective action at the site. The EPA has turned over responsibility for investigation of the site and development of a remediation plan to a group (not including Kentucky Utilities) originally named as potentially responsible parties. Kentucky Utilities has entered into an agreement with the group as to the portion of the investigation and development costs to be borne by Kentucky Utilities in connection with the site. The agreement does not cover costs which may be incurred in connection with any remediation plan. Any remediation plan would be subject to approval of the EPA. Although a final plan has yet to be developed or approved, Kentucky Utilities does not believe that any liability with respect to the site will have a material impact on its financial position or results of operations. Regulation Kentucky Utilities is subject to the jurisdiction of the PSC and the Virginia State Corporation Commission (SCC) as to rates, service, accounts, issuance of securities and in other respects. By reason of owning and operating a small amount of electric utility property in one county in Tennessee (having a gross book value of about $212,000), Kentucky Utilities may also be subject to the jurisdiction of the Tennessee Public Service Commission as to rates, accounts, issuance of securities and in other respects. Since 1992, utilities in Kentucky have been allowed to use either a historical test period or a forward-looking test period in rate filings. Rate regulation in Kentucky allows each utility, with a PSC-approved environmental compliance plan and environmental surcharge rider, to recover on a current basis the cost of complying with any federal, state or local environmental requirements, including the 1990 Clean Air Act Amendments, which apply to coal combustion wastes and by-products from facilities utilized for the production of energy from coal. An approved surcharge rider will allow Kentucky Utilities to recover any compliance related operating expenses and to earn a reasonable rate of return on compliance related capital expenditures through the application of the surcharge each month to customers' bills. For information regarding Kentucky Utilities filing with the PSC for approval of a rider, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters - Environmental Surcharge. Integrated resource planning regulations in Kentucky require Kentucky Utilities and the other major utilities to make biennial filings, with the PSC, of various historical and forecasted information relating to forecasted load, capacity margins and demand-side management techniques. Pursuant to Kentucky law, the PSC has established the boundaries of the service territory or area of each supplier of retail electric service in Kentucky (including Kentucky Utilities), other than municipal corporations, within which each such supplier shall have the exclusive right to render retail electric service. The FERC has jurisdiction under the Federal Power Act over certain of the electric utility facilities and operations and accounting practices of Kentucky Utilities, and in certain other respects as provided in the Act. -7- The FERC has classified Kentucky Utilities as a "public utility" as defined in the Act. Kentucky Utilities is presently exempt from all the provisions of the Public Utility Holding Company Act of 1935, except Section 9(a)(2) thereof (which relates to the acquisition of securities of public utility companies), by virtue of the exemption granted by an order of the Securities and Exchange Commission dated April 19, 1949 and, absent further action by the Commission, by virtue of annual exemption statements filed by Kentucky Utilities with the Commission pursuant to Rule 2 prescribed under the Act. National Energy Policy Act See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation - National Energy Policy Act. Item 2. Properties Kentucky Utilities owns and operates the following electric generating stations:
Nameplate Effective Rating (KW) Capability (KW) Steam: Ghent Ghent, Ky 2,226,060 2,006,000 Green River South Carrollton, Ky 263,636 238,000 E. W. Brown Burgin, Ky 739,534 668,000 Tyrone Tyrone, Ky 137,500 135,000 Pineville Four Mile, Ky 37,500 34,000 Hydro: Dix Dam & Lock #7 Burgin, Ky 30,297 24,000 Gas/Oil Peaking: Haefling Lexington, Ky 62,100 59,000 3,496,627 3,164,000
Substantially all properties are subject to the lien of Kentucky Utilities' Mortgage Indenture. Construction The total construction expenditures of Kentucky Utilities for the years 1994 through 1998 are estimated at $631.6 million. Such expenditures include an estimated $326.1 million for generating facilities, $65.5 million for transmission facilities and $240.0 million for distribution and general facilities. Included in total construction expenditures for the 1994 - 1998 period are $137.8 million for 660-MW of peak generating capacity to be added during 1994 - 1998 (220-MW in 1994, and 110-MW in each year 1995-1998) and $152.3 million for environmental compliance (of which $128.6 million is for compliance with the 1990 Clean Air Act Amendments). All necessary permits and approvals for the three units to go on line in 1994 and 1995 have been obtained. An application for a Certificate of Convenience and Necessity to construct the peaking unit to go on line in 1996 was filed with the PSC in December 1993. Kentucky Utilities has no plans to install base load generating capacity before 2010. Construction expenditures for the years 1989 through 1993 aggregated about $440.2 million. See Note 5 of the Notes to Financial Statements for the estimated amounts of construction expenditures for each of the years 1994 through 1998. Kentucky Utilities frequently reviews its construction program and -8- construction expenditures, which may be affected by numerous factors, including the rate of load growth, changes in construction costs, changes in environmental regulations, the adequacy of rate relief and Kentucky Utilities' ability to raise necessary capital (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations). Kentucky Utilities' planned additions to its electric generating capacity are based on projections of its future load using estimated load growth rates. Consideration is also given to projections by neighboring utilities of their future loads and capacity. A major effort in the industry is being made to control future construction requirements by managing customer demand. However, forecasts of future loads are subject to numerous uncertainties, including economic conditions and effectiveness of energy conservation measures. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. -9- Executive Officers of the Registrant Current Positions Positions Held During at Least the Name and Age Held Last 5 Years John T. Newton Chairman and Chairman of the Board of Kentucky Age 63 President, Utilities since November 1987, and and Director President since January 1987. Director of Kentucky Utilities since December 1974. O. M. Goodlett Senior Vice- Senior Vice-President of Kentucky Age 46 President Utilities since November 1992. Vice-President of Kentucky Utilities from April 1982 to November 1992. James W. Tipton Senior Vice- Senior Vice-President of Kentucky Age 50 President Utilities since November 1986. Michael R. Whitley Senior Vice- Director of Kentucky Utilities Age 50 President and since March 1992, and Senior Vice- Director President since March 1987. Secretary of Kentucky Utilities from July 1978 to November 1992. George S. Brooks II General Corporate Secretary of Kentucky Age 43 Counsel and Utilities since November 1992, and Corporate General Counsel since January 1988. Secretary James M. Allison Vice- Vice-President of Kentucky Age 40 President Utilities since February 1993. President and Chief Operating Officer of Wheeling Power Company from October 1989 to January 1993. South Bend Division Manager of Indiana Michigan Power Company from January 1986 to October 1989. Gary E. Blake Vice- Vice-President of Kentucky Age 40 President Utilities since November 1992. Western Division Manager of Kentucky Utilities from October 1991 to November 1992. Assistant Western Division Manager of Kentucky Utilities from March 1990 to October 1991. Field Operations Coordinator for Kentucky Utilities from April 1986 to March 1990. William E. Casebier Vice- Vice-President of Kentucky Age 51 President Utilities since May 1988. -10- Executive Officers of the Registrant (continued) Current Positions Positions Held During at Least the Name and Age Held Last 5 Years Robert M. Hewett Vice- Vice-President of Kentucky Age 46 President Utilities since January 1982. Wayne T. Lucas Vice- Vice-President of Kentucky Age 46 President Utilities since November 1986. Ronald L. Whitmer Vice- Vice-President of Kentucky Age 61 President Utilities since November 1992. Director of Production and Generation Construction of Kentucky Utilities from May 1985 to November 1992. William N. English Treasurer Treasurer of Kentucky Utilities Age 43 since April 1982. Michael D. Robinson Controller Controller of Kentucky Utilities Age 38 since August 1990. Assistant Controller of Kentucky Utilities from August 1983 to August 1990. John J. Maloy, Jr. Assistant Assistant Treasurer of Kentucky Age 39 Treasurer Utilities since August 1984. (Not an Executive Officer) Note: Officers are elected annually by the Board of Directors. There is no family relationship between any executive officer and any other executive officer or any director. -11- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Since December 1, 1991, all of the outstanding common stock of Kentucky Utilities has been held by KU Energy. The following table sets forth the cash distributions (in thousands of dollars) on common stock paid by Kentucky Utilities for the periods indicated: 1993 1992 First Quarter $15,127 $64,749 Second Quarter $15,127 $14,749 Third Quarter $15,127 $14,749 Fourth Quarter $15,127 $14,749 The 1992 first quarter amount includes a $50 million special dividend to the parent company, KU Energy. See Note 6 of the Notes to Financial Statements. -12- Item 6. Selected Financial Data
Year ended December 31, 1993 1992 1991 1990 1989 (in thousands) Operating Revenues: Residential $210,759 $ 194,817 $202,885 $ 187,100 $186,517 Commercial 138,271 133,519 137,653 131,990 127,158 Industrial 111,857 102,808 98,595 96,524 89,691 Mine power 34,977 36,696 37,093 37,877 37,056 Public authorities 48,142 45,570 46,332 43,125 41,967 Total sales to ultimate consumers 544,006 513,410 522,558 496,616 482,389 Other electric utilities 62,463 58,979 61,542 53,295 45,910 Miscellaneous revenues and other 119 3,432 3,560 3,870 3,596 Total operating revenues 606,588 575,821 587,660 553,781 531,895 Operating Expenses: Fuel used in generation 178,910 168,470 183,167 175,439 164,814 Electric power purchased 34,711 32,753 26,744 27,521 21,231 Other operating expenses 104,930 93,915 91,779 85,111 79,120 Maintenance 59,451 61,118 58,590 52,606 48,072 Depreciation 60,800 58,849 57,337 56,173 54,756 Federal and state income taxes 48,178 41,489 46,569 42,331 45,059 Other taxes 14,347 13,359 12,858 12,384 11,716 Total operating expenses 501,327 469,953 477,044 451,565 424,768 Net Operating Income 105,261 105,868 110,616 102,216 107,127 Other Income and Deductions 8,331 11,226 12,062 15,102 11,695 Income Before Interest Charges and AFUDC 113,592 117,094 122,678 117,318 118,822 Interest Charges: Interest on long-term debt 31,650 39,571 36,559 36,132 35,663 Other interest 1,249 1,394 1,626 1,219 912 Total interest charges 32,899 40,965 38,185 37,351 36,575 AFUDC 593 169 262 146 51 Income Before Cumulative Effect of a Change in Accounting Principle 81,286 76,298 84,755 80,113 82,298 Cumulative Effect on Prior Years of Accrual of Unbilled Revenues - - - - 11,470 Net Income $ 81,286 $ 76,298 $ 84,755 $ 80,113 $ 93,768 Preferred Stock Dividend Requirements 2,558 2,518 3,031 5,513 5,847 Net Income Applicable to Common Stock $ 78,728 $ 73,780 $ 81,724 $ 74,600 $ 87,921 Common Dividends $ 60,509 $ 108,996 $ 56,727 $ 55,214 $ 52,945
-13- Item 6. Selected Financial Data (continued)
1993 1992 1991 1990 1989 Assets (in thousands) $1,559,052 $1,424,295 $1,427,530 $1,426,269 $1,390,294 Capitalization: (in thousands) Bonds $ 441,830 $ 443,330 $ 407,330 $ 408,070 $ 395,860 Notes 107 128 149 171 192 Unamortized premium on long-term debt 108 519 713 772 832 Preferred stock 40,000 40,000 40,000 40,000 40,000 Preferred stock with mandatory redemption - - - - 31,000 Common stock equity 552,106 534,073 569,289 546,477 527,111 Total capitalization $1,034,151 $1,018,050 $1,017,481 $ 995,490 $ 994,995 % Total Capitalization Represented by: Long-term debt 42.7 43.6 40.1 41.1 39.9 Preferred stock 3.9 3.9 3.9 4.0 7.1 Common stock equity 53.4 52.5 56.0 54.9 53.0 Kilowatt-hours Generated, Purchased and Sold: (in thousands) Power generated 14,934,839 13,700,313 14,183,713 13,024,722 12,635,905 Power purchased 1,926,299 2,032,110 1,464,812 1,425,899 1,299,908 Power interchanged - net 1,556 3,393 (10,725) 14,934 (9,029) Total 16,862,694 15,735,816 15,637,800 14,465,555 13,926,784 Less - losses and company use 1,066,251 876,862 906,468 878,337 791,474 Remainder - kilowatt-hours sold 15,796,443 14,858,954 14,731,332 13,587,218 13,135,310 Sales classified: Residential 4,702,697 4,278,098 4,385,670 4,012,324 4,093,485 Commercial 3,217,504 3,080,045 3,122,156 2,968,049 2,888,661 Industrial 3,409,213 3,093,113 2,874,016 2,791,304 2,650,383 Mine power 933,317 977,032 955,410 983,778 978,363 Public authorities 1,199,893 1,123,494 1,133,176 1,048,483 1,047,461 Total sales to ultimate consumers 13,462,624 12,551,782 12,470,428 11,803,938 11,658,353 Other electric utilities 2,333,819 2,307,172 2,260,904 1,783,280 1,476,957 Total 15,796,443 14,858,954 14,731,332 13,587,218 13,135,310 Average Number of Customers 432,636 425,403 419,340 413,843 408,331 Residential Sales (per customer): Average kilowatt-hours 12,995 12,007 12,471 11,546 11,923 Average revenue $ 582.41 $ 546.80 $ 576.93 $ 538.43 $ 543.27 System Capability - Megawatts: Kentucky Utilities' plants 3,164 3,163 3,162 3,150 3,158 Purchased contracts 365 293 254 251 232 Total system capability 3,529 3,456 3,416 3,401 3,390 Net System Maximum Demand - Megawatts 3,176 2,845 2,894 2,835 2,919 Load Factor (%) 57.7 59.4 58.4 56.5 53.9 Heat Rate (BTU per KWH) (1) 10,367 10,344 10,350 10,449 10,426 Fuel - Average Cost per Ton(1) $ 28.31 $ 27.88 $ 29.67 $ 30.74 $ 28.93 Average Cost per Million BTU(1) $ 1.17 $ 1.18 $ 1.24 $ 1.28 $ 1.22 (1) Based on coal consumed
-14- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Kentucky Utilities Company (Kentucky Utilities), an electric utility, is a wholly owned subsidiary of KU Energy Corporation (KU Energy). RESULTS OF OPERATIONS Net Income Applicable to Common Stock Net income applicable to common stock was $78.7 million in 1993 compared to $73.8 million in 1992 and $81.7 million in 1991. The increase in 1993 was primarily due to weather-related growth in sales and lower interest charges attributable to debt refinancings and redemptions. Earnings in 1993 were negatively impacted by an increase in other operating expenses and a decline in interest and dividend income. The decline in 1992 earnings was due to unusually mild weather, increases in operating and maintenance costs, and an increase in interest charges attributed to a $35 million increase in long-term debt. Sales & Revenues Increase (Decrease) From Prior Years
1993 1992 kWh Revenues kWh Revenues (%) (000's) (%) (000's) Residential 10 $ 15,942 (2) $ (8,068) Commercial 4 4,752 (1) (4,134) Industrial 10 9,049 8 4,213 Mine Power & Public Authorities 2 853 1 (1,159) Total Retail Sales 7 30,596 1 (9,148) Other Electric Utilities 1 3,484 2 (2,563) Provision for Refund - Litigation Settlement - (3,309) - - Miscellaneous Revenues and Other - (4) - (128) Total 6 $ 30,767 1 $ (11,839)
Sales increased 6% to 15.8 billion kilowatt-hours (kWh) in 1993. The increase resulted primarily from increases in sales to residential and industrial customers. The rise in residential sales reflects cooler weather in the first and fourth quarters of 1993 and warmer weather during the second and third quarters of 1993 as compared to the corresponding periods of 1992. Due to the exceptionally warm weather in the third quarter of 1993, Kentucky Utilities set an all-time peak demand for electricity on July 28, 1993, of 3,176 megawatts. The increase in industrial sales reflects the general strength of the service area economy as well as an increase in the number of industrial customers. As a result of the increase in sales, revenues rose 5% in 1993 to $606.6 million. Revenues in 1993 were reduced approximately $3.3 million as a result of refunds to customers of amounts recovered from a litigation settlement with a former coal supplier. The $3.3 million, which was charged against revenue, represents $4.1 million of fuel savings less -15- $.8 million for incurred litigation costs. See Note 2 of the Notes to Financial Statements. Despite declines in residential and commercial sales in 1992, total sales increased due to greater sales to industrial customers. The decline in residential and commercial sales was the result of cooler than normal weather in the second and third quarters of 1992, compared to warmer than normal weather in the corresponding periods of 1991. The decline in 1992 revenues was due primarily to lower average fuel costs passed on to customers. Kilowatt-Hour Sales
Year Ended December 31, 1993 1992 1991 1990 1989 kWh Sales (in millions) 15,796 14,859 14,731 13,587 13,135
1993 Kilowatt-Hour Sales by Classification Year Ended December 31, 1993 Residential 30% Commercial 20% Industrial 22% Mine Power 6% Public Authorities 8% Other Electric Utilities 14% Total 100% Fuel and Purchased Power Expense Fuel expense in 1993 totaled $178.9 million, a 6% increase over 1992. The increase was largely attributable to greater coal consumption. Fuel expense for 1993 reflects a $4.1 million reduction associated with the refunding to customers of fuel cost savings resulting from the litigation settlement with a former coal supplier. See Note 2 of the Notes to Financial Statements. Purchased power expense increased $2.0 million (6%) in 1993. The increase reflects greater demand charges associated with a new short-term capacity contract with a neighboring utility, partially offset by a 5% decline in power purchases. The decline in power purchases was due to a reduction in the availability of Owensboro Municipal Utilities' (OMU) generating units during scheduled maintenance of those units in the second quarter of 1993. A contract between Kentucky Utilities and OMU allows Kentucky Utilities to purchase, on an economic basis, surplus power from a 400-megawatt generating station owned by OMU. Fuel expense in 1992 declined $14.7 million (8%) to $168.5 million. The reduction was due to a lower average price per ton of coal consumed (6%) and to a decline in coal consumption (2%). The decline in the average price per ton was due to lower cost coal and to the completion in May 1992 of the amortization of buyout costs associated with a terminated coal contract. Coal consumption in 1992 was reduced as a result of increases in power purchases. Purchased power expense rose $6.0 million (22%) in 1992 due to increased power purchases (39%), primarily under the OMU contract. The increase in purchased power costs resulting from -16- greater kWh purchases in 1992 was partially offset by a reduction in the average price per kWh purchased. Other Operating Expenses Other operating expenses for 1993 increased $11.0 million (12%), $6.3 million of which resulted from the adoption of a new accounting standard. See Note 4 (Other Postretirement Benefits) of the Notes to Financial Statements. Other Income and Deductions Other income and deductions in 1993 declined $2.6 million. A reduction in interest and dividend income resulted from lower levels of cash investments. Other income and deductions in 1992 were comparable to 1991. Additional interest and dividend income associated with an increase in the average amounts available for investment and bond proceeds deposited pending retirement of existing debt issues were offset by lower available short- term investment returns. Interest Charges Interest charges decreased $8.2 million (20%) in 1993. The decrease was the result of the redemption of two debt issues near the beginning of the second quarter of 1993 and the refinancing of several debt issues during the second half of 1992 and early in the third quarter of 1993 at significantly lower interest rates. See Note 5 of the Notes to Financial Statements for information pertaining to Kentucky Utilities' refinancing and redemption activities in 1993. Interest charges in 1992 increased $2.8 million (7%). The interest expense associated with the issuance of additional debt was partially offset by the refinancing of higher cost existing debt. The effects of the increase in interest expense were partially offset by the above mentioned interest income on bond proceeds deposited. LIQUIDITY & RESOURCES Capital Structure Kentucky Utilities continues to maintain a strong capital structure. At the end of 1993, common stock equity represented 53.4% of total capitalization while long-term debt stood at 42.7%, and preferred stock was 3.9%. Total Capitalization
As of December 31, 1993 1992 1991 1990 1989 Capitalization (in millions) $1,034 $1,018 $1,017 $ 995 $ 995 Long-Term Debt 42.7% 43.6% 40.1% 41.1% 39.9% Preferred Stock 3.9% 3.9% 3.9% 4.0% 7.1% Common Stock Equity 53.4% 52.5% 56.0% 54.9% 53.0%
-17- Cash Flow In 1993, cash provided by operating activities accounted for 67% of total cash requirements as compared to 68% in 1992 and 105% for 1991. Cash requirements included in the above percentages exclude optional debt refinancings and redemptions. At the end of 1993, cash and cash equivalents totaled $8.8 million. Cash and cash equivalents were $94.3 million at the end of 1992 and $125.6 million at year-end 1991. Cash and cash equivalents were utilized to redeem $55 million of first mortgage bonds and to help meet expenditures for compliance with the 1990 Clean Air Act Amendments and peaking unit construction, thus lowering cash levels at the end of 1993. Financing During 1993, Kentucky Utilities continued to take advantage of opportunities to reduce its embedded cost of long-term debt through refinancings. A total of $120 million of first mortgage bonds was refinanced in 1993 at significantly lower interest rates. Kentucky Utilities has refinanced over $300 million of long-term debt over the past year and a half. The reduction of interest expense on an annual basis from these refinancings will total about $5.4 million. In 1992, Kentucky Utilities refinanced $53 million of first mortgage bonds (including a $3 million redemption premium) and $133.9 million of pollution control bonds at significantly lower interest rates. As a result of the foregoing activities, Kentucky Utilities' embedded cost of long-term debt declined to 7.23% in 1993 as compared to 8.00% in 1992 and 8.94% in 1991. In December 1993, $50 million of 5 3/4% Collateralized Solid Waste Disposal Facility Revenue Bonds was issued to finance a portion of the costs of environmental compliance facilities currently under construction. Kentucky Utilities also issued $20 million of 6.53% preferred stock in December 1993. Proceeds from the sale of this issue were used to redeem the utility's 7.84% Preferred Stock on February 1, 1994. See Note 5 of the Notes to Financial Statements for additional information on 1993 financing activities. Embedded Cost of Long-Term Debt
As of December 31, 1993 1992 1991 1990 1989 Embedded Cost of Long-Term Debt 7.23% 8.00% 8.94% 8.93% 8.97%
Construction Construction expenditures totaled $177.1 million in 1993 as compared to $86.1 million in 1992 and $65.6 million in 1991. The 1993 increase was largely attributable to $48.7 million expended for compliance with the 1990 Clean Air Act Amendments and $55.5 million expended for construction of peaking units. Projected construction requirements for the 1994-1998 period are $631.6 million. Included in this amount are $152.3 million for environmental compliance measures of which $128.6 million is for compliance with the 1990 Clean Air Act Amendments. Also included in the 1994-1998 construction total is $137.8 million for peaking units. Kentucky Utilities expects to provide about 79% of its 1994-1998 construction requirements through internal sources of funds with the balance primarily from long-term debt. -18- Construction Expenditures by Function - Actual
(in millions of dollars) 1989 1990 1991 1992 1993 Total Construction Expenditures $ 52.2 $ 59.2 $ 65.6 $ 86.1 $177.1 Generation 12.0% 25.7% 33.7% 42.1% 69.7% Distribution 59.1% 53.6% 47.6% 36.3% 21.5% Transmission and Other 28.9% 20.7% 18.7% 21.6% 8.8%
Construction Expenditures by Function - Projected
(in millions of dollars) 1994 1995 1996 1997 1998 Total Construction Expenditures $183.6 $109.1 $128.6 $125.0 $ 85.3 Generation 70.9% 46.6% 53.9% 48.1% 18.5% Distribution 19.6% 33.6% 29.3% 33.0% 51.2% Transmission and Other 9.5% 19.8% 16.8% 18.9% 30.3%
Providing for Customer Growth Kentucky Utilities utilizes a least cost planning strategy to ensure that growth in customer demand is provided for in the most efficient and cost- effective manner. The Kentucky Public Service Commission (PSC) requires filing of an Integrated Resource Plan every two years. Kentucky Utilities filed its 1993 Integrated Resource Plan in October 1993. This plan includes a 15-year load forecast and description of existing and planned conservation programs, load management programs and generation facilities to meet forecasted requirements in a reliable manner at the lowest reasonable costs. The PSC has initiated an informal review of the plan according to existing regulations. As outlined in Kentucky Utilities' 1993 Integrated Resource Plan, annual growth in sales and customer peak demand is forecast at 1.8% and 1.9%, respectively, over the next 15 years. The utility plans to provide for customer growth in the '90s through purchased power and the addition of combustion turbine peaking units. Three 110-megawatt peaking units are currently under construction. Two of the units will be installed in 1994 and the other in 1995. An additional peaking unit may be required in each year from 1996-1998. There are no plans for additional baseload capacity before 2010. ENVIRONMENTAL MATTERS Clean Air Act Compliance Kentucky Utilities' compliance strategy for the 1990 Clean Air Act Amendments includes installing flue gas desulfurization systems (scrubbers), low nitrogen oxide burners and continuous emission monitoring devices as well as fuel switching to lower sulfur coal. The key component of the utility's compliance plan for Phase I requirements, which are effective January 1, 1995, is a scrubber under construction at Ghent Unit 1. The flexible design of the Ghent Unit 1 scrubber provides the option of installing equipment to scrub flue gas from Ghent Unit 2 at an economical cost. Anticipated costs of implementing this option are included in the total estimated 1994-1998 construction expenditures shown above. -19- In 1993, Kentucky Utilities revised its previous cost estimates for compliance to reflect lower than expected costs for construction of the Ghent Unit 1 scrubber. Kentucky Utilities also deferred, until the 2005 time frame, an additional scrubber originally planned at Brown Unit 3 for compliance with Phase II requirements, which are effective January 1, 2000. The utility had anticipated capital spending of about $359 million through 2000 for the 1990 Clean Air Act Amendments ($166 million for Phase I and $193 million for Phase II). With the above mentioned revisions and the anticipated additional equipment to scrub Ghent Unit 2, current estimates of the capital costs for compliance through the year 2000 are about $200 million (over two-thirds of which should be incurred by January 1, 1995). Through December 31, 1993, about $70 million had been spent for compliance. Kentucky Utilities has purchased 12,900 Phase I emission allowances and has been awarded about 114,000 additional allowances through participation in the Environmental Protection Agency's Phase I Extension Plan Program. The allowances give the utility additional flexibility in implementing its compliance plans and will be incorporated into its strategy to achieve the most economical means of compliance. Kentucky Utilities will continue to review and revise its compliance plans to ensure that its obligations are most effectively met. Environmental Surcharge In January 1994, Kentucky Utilities filed plans with the PSC to implement an environmental surcharge. The surcharge will permit the utility to recover certain ongoing operating and capital costs of compliance with any federal, state or local environmental requirements associated with the production of energy from coal, including the 1990 Clean Air Act Amendments. Upon PSC approval, the proposed environmental surcharge would begin August 1, 1994. Kentucky Utilities estimates that under the proposed surcharge, it would recover about $15.5 million in environmental costs during the first twelve months and about $23 million during the second twelve months. Other In 1990, Kentucky Utilities received a letter from the Environmental Protection Agency (EPA) identifying Kentucky Utilities and others as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act of 1980 for a disposal site in Daviess County, Kentucky. The EPA has turned over responsibility for investigation of the site and development of a remediation plan to a group (not including Kentucky Utilities) originally named as potentially responsible parties. Kentucky Utilities has entered into an agreement with the group as to the portion of the investigation and development costs to be borne by Kentucky Utilities in connection with the site. Any remediation plan would be subject to approval of the EPA. Although a final, approved plan has yet to be developed, Kentucky Utilities does not believe that any liability with respect to the site will have a material impact on its financial position or results of operations. NATIONAL ENERGY POLICY ACT The National Energy Policy Act of 1992 (Energy Act) promotes energy efficiency, environmental protection and increased competition. -20- Provisions of the Energy Act of most importance to electric utilities are those that promote competition in the generation and transmission of electricity. The Energy Act removes long-standing constraints on the development of wholesale power generation by establishing a new class of independent power producers which are exempt from traditional utility regulation. The Energy Act also makes it easier for nonutility power producers to gain access to utility-owned transmission networks by allowing the Federal Energy Regulatory Commission to order wholesale "wheeling" by public utilities. While the final impact of the Energy Act is yet to be determined, Kentucky Utilities believes that it will increase competition and may affect the traditional business strategies of the utility industry. Kentucky Utilities further believes it is well positioned for increased competition because Kentucky Utilities' rates continue to be among the lowest in the nation. IMPACT OF ACCOUNTING STANDARDS Refer to Note 8 of the Notes to Financial Statements for information concerning a new standard for accounting for investments in debt and equity securities. INFLATION Kentucky Utilities' rates are designed to recover operating and historical plant costs. Financial statements, which are prepared in accordance with generally accepted accounting principles, report operating results in terms of historic costs and do not evaluate the impact of inflation. Inflation affects Kentucky Utilities' construction costs, operating expenses and interest charges. Inflation can also impact Kentucky Utilities' financial performance if rate relief is not granted on a timely basis for increased operating costs. -21- Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kentucky Utilities Company: We have audited the accompanying balance sheets and statements of capitalization of Kentucky Utilities Company (a Kentucky and Virginia corporation) as of December 31, 1993 and 1992, and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements and the schedules referred to below are the responsibility of Kentucky Utilities' management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kentucky Utilities Company as of December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As explained in Notes 3 and 4 to the financial statements, effective January 1, 1993, Kentucky Utilities Company changed its method of accounting for income taxes and postretirement benefits other than pensions. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14(A)(2) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen & Co. Arthur Andersen & Co. Chicago, Illinois January 26, 1994 -22- Statements of Income and Retained Earnings Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1993 1992 1991 Operating Revenues $ 606,588 $ 575,821 $ 587,660 Operating Expenses: Fuel, principally coal, used in generation 178,910 168,470 183,167 Electric power purchased 34,711 32,753 26,744 Other operating expenses 104,930 93,915 91,779 Maintenance 59,451 61,118 58,590 Depreciation 60,800 58,849 57,337 Federal and state income taxes 48,178 41,489 46,569 Other taxes 14,347 13,359 12,858 501,327 469,953 477,044 Net Operating Income 105,261 105,868 110,616 Other Income and Deductions: Interest and dividend income 2,813 6,611 8,744 Other income and deductions - net 5,926 4,734 3,503 8,739 11,345 12,247 Income Before Interest Charges 114,000 117,213 122,863 Interest Charges: Interest on long-term debt 31,650 39,571 36,559 Other interest charges 1,064 1,344 1,549 32,714 40,915 38,108 Net Income 81,286 76,298 84,755 Preferred Stock Dividend Requirements 2,558 2,518 3,031 Net Income Applicable to Common Stock $ 78,728 $ 73,780 $ 81,724 Retained Earnings Beginning of Year $ 226,210 $ 261,426 $ 238,614 Add Net Income 81,286 76,298 84,755 307,496 337,724 323,369 Deduct: Dividends on preferred stock 2,558 2,518 3,031 Dividends on common stock 60,509 108,996 56,727 Preferred stock redemption expense and other - - 2,185 63,067 111,514 61,943 Retained Earnings End of Year $ 244,429 $ 226,210 $ 261,426 The accompanying Notes to Financial Statements are an integral part of these statements.
-23- Statements of Cash Flows Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1993 1992 1991 Cash Flows from Operating Activities: Net income $ 81,286 $ 76,298 $ 84,755 Items not requiring (providing) cash currently: Depreciation 60,800 58,849 57,337 Deferred income taxes 5,725 3,974 272 Investment tax credit deferred (4,131) (4,149) (4,377) Change in fuel inventory 7,694 (642) 15,836 Change in accounts receivable (9,331) 7,338 (1,845) Change in accounts payable 22,768 (1,819) 5,495 Change in accrued utility revenues (2,019) (1,970) 883 Change in liability to ratepayers 36,867 - - Change in escrow funds (37,752) - - Other - net 2,743 (2,079) 8,741 Net Cash Provided by Operating Activities 164,650 135,800 167,097 Cash Flows from Investing Activities: Construction expenditures - utility (177,069) (86,077) (65,649) Nonutility property (4,956) - (135) Other 380 801 504 Net Cash Used by Investing Activities (181,645) (85,276) (65,280) Cash Flows from Financing Activities: Issuance of long-term debt 173,500 219,930 - Funds deposited with trustee - net (18,268) 528 6,311 Retirement of long-term debt, including premiums (180,677) (190,756) (711) Retirement of preferred stock - - (32,732) Issuance of preferred stock 20,000 - - Payment of dividends (63,027) (111,514) (60,002) Net Cash Used by Financing Activities (68,472) (81,812) (87,134) Net Increase (Decrease) in Cash and Cash Equivalents (85,467) (31,288) 14,683 Cash and Cash Equivalents Beginning of Year 94,299 125,587 110,904 Cash and Cash Equivalents End of Year $ 8,832 $ 94,299 $ 125,587 Supplemental Disclosures Cash paid for: Interest on long-term debt $ 33,860 $ 41,912 $ 36,441 Federal and state income taxes $ 42,483 $ 39,091 $ 48,080 The accompanying Notes to Financial Statements are an integral part of these statements.
-24- Balance Sheets Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1993 1992 Assets Utility Plant: Plant in service, at cost $ 2,004,688 $ 1,955,164 Less: Accumulated depreciation 879,960 823,502 1,124,728 1,131,662 Construction work in progress 158,829 37,422 1,283,557 1,169,084 Current Assets: Cash and cash equivalents 8,832 94,299 Escrow funds - coal contract litigation 37,752 - Construction funds held by trustee 18,268 - Accounts receivable, net of allowance for doubtful accounts 41,457 32,126 Accrued utility revenues 25,575 23,556 Fuel, principally coal, at average cost 31,073 38,767 Plant materials and operating supplies, at average cost 17,261 11,932 Other 7,804 1,947 188,022 202,627 Investments, Deferred Charges and Other Assets: Accumulated deferred income taxes 35,778 15,842 Unamortized loss on reacquired debt 13,295 8,613 Other 38,400 28,129 87,473 52,584 $ 1,559,052 $ 1,424,295 Capitalization and Liabilities Capitalization: (See Statements of Capitalization) Common stock equity $ 552,106 $ 534,073 Preferred stock 40,000 40,000 Long-term debt 442,045 443,977 1,034,151 1,018,050 Current Liabilities: Preferred stock and long-term debt due within one year 20,021 21 Accounts payable 44,006 21,238 Accrued interest 7,302 10,621 Accrued taxes 4,660 4,029 Customers' deposits 10,803 10,605 Accrued payroll and vacations 7,709 6,760 Liability to ratepayers - coal contract litigation 36,867 - Other 6,434 5,993 137,802 59,267 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 248,103 280,631 Accumulated deferred investment tax credits 42,385 46,516 Regulatory liabilities 69,689 5,090 Other 26,922 14,741 387,099 346,978 $ 1,559,052 $ 1,424,295 The accompanying Notes to Financial Statements are an integral part of these statements.
-25- Statements of Capitalization Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1993 1992 Common Stock Equity: Common stock, without par value, outstanding 37,817,878 shares $ 308,140 $ 308,140 Capital stock expense and other (463) (277) Retained earnings 244,429 226,210 552,106 534,073 Preferred Stock, cumulative, without par value,$100 stated value 4 3/4%, outstanding 200,000 shares 20,000 20,000 6.53%, outstanding 200,000 shares 20,000 - 7.84%, outstanding 200,000 shares 20,000 20,000 Less: Amounts to be redeemed within one year 20,000 - 40,000 40,000 Long-Term Debt: First mortgage bonds, substantially all of Kentucky Utilities' utility plant is pledged as security for these bonds 441,830 443,330 Unamortized premium 108 519 441,938 443,849 8% secured note, due January 5, 1999 128 149 Less: Amounts to be redeemed within one year 21 21 442,045 443,977 $ 1,034,151 $ 1,018,050 The accompanying Notes to Financial Statements are an integral part of these statements.
-26- Notes to Financial Statements Kentucky Utilities Company 1. Summary of Significant Accounting Policies General Kentucky Utilities Company (Kentucky Utilities) is the principal subsidiary of KU Energy Corporation. Regulation Kentucky Utilities is a public utility subject to regulation by the Kentucky Public Service Commission (PSC), the Virginia State Corporation Commission (SCC) and the Federal Energy Regulatory Commission (FERC). With respect to accounting matters, Kentucky Utilities maintains its accounts in accordance with the Uniform System of Accounts as defined by these agencies. Its accounting policies conform to generally accepted accounting principles applicable to rate regulated enterprises and reflect the effects of the ratemaking process. Utility Plant Utility plant is stated at the original cost of construction. The cost of repairs and minor renewals is charged to maintenance expense as incurred. Property unit replacements are capitalized and the depreciation reserve is charged with the cost, less net salvage, of units retired. Depreciation Provision for depreciation of utility plant is based on straight-line composite rates applied to the cost of depreciable property. The rates approximated 3.3% in 1993, 1992 and 1991. Cash and Cash Equivalents For purposes of reporting cash flows, Kentucky Utilities considers highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. Kentucky Utilities utilizes a cash management mechanism that funds certain bank accounts for checks as they are presented to those banks. Kentucky Utilities classified checks written but not presented to those banks, which amounted to $9.9 million at December 31, 1993, in accounts payable. -27- Notes to Financial Statements Kentucky Utilities Company Unamortized Loss on Reacquired Debt Kentucky Utilities defers costs (primarily call premiums) arising from the reacquisition or retirement of long-term debt. Costs related to refinanced debt are amortized over the lives of the new debt issues. Costs related to retired debt not refinanced are amortized over the period to the scheduled maturity of the retired debt. Operating Revenues and Fuel Costs Revenues are recorded based on services rendered to customers. Kentucky Utilities accrues an estimate of revenues for electric service furnished from the meter reading dates to the end of each accounting period. Cost of fuel used in electric generation is charged to expense as the fuel is consumed. The cost of fuel for 1991 and 1992 included an amortization of buyout costs associated with the termination of a coal supply contract. A fuel adjustment clause adjusts operating revenues for changes in the level of fuel costs charged to expense. 2. Fuel Litigation Refund Kentucky Utilities had been involved in litigation which began in 1984 with a former coal supplier over the price and other terms of the parties' long-term contract for Ghent Unit 3. Pursuant to an order of the Fayette (KY) Circuit Court, Kentucky Utilities deposited part of the disputed coal prices with the Fayette Circuit Court pending a final decision. During the course of the proceedings, the supplier filed for relief under the Federal Bankruptcy Code. On February 1, 1993, the Bankruptcy Court for the Eastern District of Kentucky approved a settlement agreement disposing of all litigation and claims between Kentucky Utilities and the supplier. All other actions and appeals involving the various parties and claimants have been dismissed. In March 1993, the deposited funds (totaling approximately $44 million, including interest through that date) were released by the Fayette Circuit Court to Kentucky Utilities and have been held by Kentucky Utilities in a segregated escrow account pending disposition in accordance with appropriate orders of regulatory agencies. During 1993, Kentucky Utilities submitted plans to the FERC, PSC and SCC for distributing a portion of the deposited funds to customers. Kentucky Utilities' plan was approved by the SCC, as submitted, and refunds of the Virginia retail portion of the deposited funds (approximately $2.3 million), plus interest, are being made to Virginia retail customers over 12 months beginning August 1, 1993. Kentucky Utilities' plan was approved by the FERC, as submitted, and a refund of that portion of the deposited funds (approximately $3.9 million) relating to wholesale customers was made in lump sum payments in September 1993. In an order which became final in February 1994, the PSC ordered Kentucky Utilities to refund that portion of the deposited funds relating to Kentucky retail customers (approximately $35.5 million), plus interest, to customers on its system from April 1985 through December 1990. The -28- Notes to Financial Statements Kentucky Utilities Company order allows Kentucky Utilities to retain $.8 million of incurred litigation costs and $2.4 million for savings attributable to off-system sales. The PSC order also allows Kentucky Utilities recovery of its costs incurred in administering an approved refund plan. A refund plan in accordance with the PSC order has been filed by Kentucky Utilities for PSC approval. The total escrow funds remaining after the above mentioned FERC and SCC refunds and the withdrawals for savings attributable to off-system sales ($2.4 million) and incurred litigation costs ($.8 million) resulting from the FERC and SCC orders are reflected on the Balance Sheet under the caption "Escrow funds - coal contract litigation." The "Liability to ratepayers - coal contract litigation" represents the fuel cost savings (including interest) that will be credited to Kentucky and Virginia retail customers. Approximately $3.2 million of "Other Deferred Credits" represents the portion of savings attributable to off-system sales and the Kentucky jurisdictional allowed litigation costs. Kentucky Utilities will record a $3.2 million reduction of expense (for the off-system sales and allowed litigation costs) in 1994. 3. Income Taxes Effective January 1, 1993, Kentucky Utilities adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). This statement requires an asset and liability approach for financial accounting and reporting for income taxes rather than the deferred method. It requires Kentucky Utilities to establish deferred tax assets and liabilities, as appropriate, for all temporary differences, and to adjust deferred tax balances to reflect changes in tax rates expected to be in effect during the periods the temporary differences reverse. At the date of adoption, because of the effects of rate regulation, Kentucky Utilities recorded an increase of $22 million in deferred tax assets and a decrease of $53 million in deferred tax liabilities, and established a corresponding regulatory liability of $75 million, primarily to recognize the probable future reduction in rates to flowback to customers amounts previously collected for deferred taxes in excess of current statutory tax rates. The adoption of this standard did not have a material impact on results of operation, cash flows or financial position. Kentucky Utilities is included in the consolidated federal tax return of its parent company, KU Energy. Income taxes are allocated to the individual companies, including Kentucky Utilities, based on their respective taxable income or loss. Investment tax credits result from provisions of the tax law which permitted a reduction of Kentucky Utilities' tax liability based on certain construction expenditures. Such credits have been deferred in the accounts and are being amortized as reductions in income tax expense over the life of the related property. The accumulated deferred income taxes as set forth below and in the Balance Sheet arise from the following temporary differences at -29- Notes to Financial Statements Kentucky Utilities Company December 31 and January 1, 1993:
December 31 January 1 (in thousands of dollars) Deferred Deferred Deferred Deferred Tax Assets Tax Liabilities Tax Assets Tax Liabilities Accelerated depreciation and other property related differences $ 28,529 $ 241,893 $ 27,820 $ 224,441 Other 13,147 6,210 10,008 2,631 Total accumulated deferred income taxes $ 41,676 $ 248,103 $ 37,828 $ 227,072
Of the $3.8 million increase in deferred tax assets and the $21.0 million increase in deferred tax liabilities, approximately $1.3 million and $9.6 million, respectively, resulted from an increase in the federal statutory corporate income tax rate from 34% to 35% effective January 1, 1993. This resulted in a net decrease of $8.3 million in the regulatory liability. -30- Notes to Financial Statements Kentucky Utilities Company The components of income tax expense are as follows:
Year Ended December 31, (in thousands of dollars) 1993 1992 1991 Income taxes charged to Operating Income: Current - federal $ 35,893 $ 30,838 $ 37,241 - state 9,484 7,951 9,252 45,377 38,789 46,493 Deferred - federal 2,837 2,269 570 - state 71 561 160 2,908 2,830 730 Deferred investment tax credit (107) (130) (654) 48,178 41,489 46,569 Income taxes charged to Other Income and Deductions: Current - federal (2,056) (7) 1,581 - state (560) (217) 504 (2,616) (224) 2,085 Deferred - federal 2,261 909 (362) - state 556 235 (96) 2,817 1,144 (458) Amortization of deferred investment tax credit (4,024) (4,019) (3,723) (3,823) (3,099) (2,096) Total income tax expense $ 44,355 $ 38,390 $ 44,473
The provisions for deferred income taxes relate to the following items:
Year Ended December 31, (in thousands of dollars) 1993 1992 1991 Accelerated depreciation and other property related differences $ 5,600 $ 6,806 $ 5,658 Power plant inventory 418 (10) (3,564) Loss on reacquired debt 3,459 1,165 (39) Other (3,752) (3,987) (1,783) Total provisions for deferred income taxes $ 5,725 $ 3,974 $ 272
Kentucky Utilities' effective income tax rate, determined by dividing income taxes by the sum of such taxes and net income, was 35.3% in 1993, 33.5% in 1992, and 34.4% in 1991. The difference between the effective rate and the statutory federal income tax rate is attributable to the following factors:
Year Ended December 31, (in thousands of dollars) 1993 1992 1991 Federal income tax computed at 35%, 34% and 34%, respectively $ 43,974 $ 38,994 $ 43,938 Add (Deduct): State income taxes, net of federal income tax benefit 6,208 5,630 6,480 Amortization of deferred investment tax credit (4,131) (4,140) (3,857) Other, net (1,696) (2,094) (2,088) Total income tax expense $ 44,355 $ 38,390 $ 44,473
-31- Notes to Financial Statements Kentucky Utilities Company 4. Retirement and Postemployment Benefits Pensions Kentucky Utilities has a noncontributory defined benefit pension plan covering substantially all of its employees. Benefits under this plan are based on years of service, final average base pay and age at retirement. Kentucky Utilities' funding policy is to make such contributions as are necessary to finance the benefits provided under the plan. Kentucky Utilities' contributions meet the funding standards set forth in the Employee Retirement Income Security Act of 1974. The plan assets consist primarily of equity and fixed income investments. Kentucky Utilities also has a Supplemental Security Plan for certain management personnel. Retirement benefits under this plan are based on years of service, earnings and age at retirement. The plan has no advance funding. Benefit payments are made to retired employees or their beneficiaries from the general assets of Kentucky Utilities. The reconciliation of the funded status of the retirement plans and the pension liability is as follows:
As of December 31, (in thousands of dollars) 1993 1992 Fair value of plan assets $ 157,137 $ 147,235 Projected benefit obligation (169,309) (144,380) Plan assets in excess of (less than) projected benefit obligation (12,172) 2,855 Unrecognized net (gain)/loss from past experience different than that assumed 6,361 (7,628) Unrecognized prior service cost 4,966 5,334 Unrecognized net asset (1,949) (2,099) Regulatory effect recorded (5,146) (5,090) Pension liability $ (7,940) $ (6,628) Accumulated benefit obligation (including vested benefits of $128,779 and $105,442, respectively) $ 130,758 $ 107,503
-32- Notes to Financial Statements Kentucky Utilities Company Components of Net Pension Cost:
Year Ended December 31, (in thousands of dollars) 1993 1992 1991 Service cost (benefits earned during the period) $ 5,036 $ 4,774 $ 4,307 Interest cost on projected benefit obligation 12,311 11,482 10,473 Actual return on plan assets (13,229) (11,384) (20,158) Net amortization and deferral 1,785 350 10,941 Regulatory effect based on funding 56 705 1,139 Net pension cost $ 5,959 $ 5,927 $ 6,702 Assumptions Used in Determining Actuarial Valuations: 1993 1992 1991 Weighted average discount rate used to determine the projected benefit obligation 7 1/2% 8 3/4% 8 3/4% Rate of increase for compensation levels (1) 4 3/4% 6% 6% Weighted average expected long-term rate of return on assets 8 1/4% 8 3/4% 8 3/4% (1) 5 1/4%, 6 1/2% and 6 1/2%, respectively, used for the Supplemental Security Plan valuation.
Other Postretirement Benefits Effective January 1, 1993, Kentucky Utilities adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). This standard provides accounting and disclosure requirements associated with Kentucky Utilities' obligation to provide postretirement benefits other than pensions to present and future retirees. In accordance with this standard, Kentucky Utilities will accrue, during the years that the employee renders service, the expected cost of providing these benefits for retired employees, their beneficiaries and covered dependents. Kentucky Utilities previously recognized these costs on a pay-as-you-go (cash) basis. Amounts paid for retirees for 1992 and 1991 amounted to $2.3 million and $2.4 million, respectively. Kentucky Utilities provides certain health care and life insurance benefits to eligible retired employees and their dependents. The postretirement health care plan is contributory for employees who retired after December 31, 1992, with retiree contributions indexed annually based upon the experience of retiree medical expenses for the preceding year. Pre-1993 retirees are not required to contribute to the plan. Kentucky Utilities' employees become eligible for retiree medical benefits after 15 years of service and attainment of age 55. The life insurance plan is noncontributory and is based on compensation levels prior to retirement. -33- Notes to Financial Statements Kentucky Utilities Company Employees may purchase additional life insurance equal to the amount provided by Kentucky Utilities. In 1993, Kentucky Utilities began funding, in addition to current requirements for benefit payments, the maximum tax-favored amount allowed through certain tax deductible funding vehicles. Kentucky Utilities anticipates making similar funding decisions in future years, but will consider and make such funding decisions on the basis of tax, regulatory and other relevant conditions in effect at such times. The PSC issued a decision in December 1992 stating that the rate treatment resulting from the adoption of SFAS 106 will be considered on a case-by-case basis in the context of a general rate case. Based on management's interpretation of this PSC Order, Kentucky Utilities is not deferring the Kentucky jurisdictional portion of these costs. The FERC and the SCC both have approved accrual of these costs for ratemaking purposes in accordance with SFAS 106. Kentucky Utilities is deferring, in accordance with the SCC and FERC Orders, the difference between costs determined in accordance with SFAS 106 and the level currently reflected in rates for the portion of costs associated with the Virginia and FERC jurisdictions until the next general rate cases in the respective jurisdictions as a result of the above mentioned Orders. The impact on results of operations, after giving effect to the regulatory treatment discussed above, is an increase in pre-tax expense for the year ended December 31, 1993 of $6.3 million (net of capitalized payroll benefits). -34- Notes to Financial Statements Kentucky Utilities Company The reconciliation of the funded status of the plans and the postretirement benefit liability is as follows:
As of December 31, (in thousands of dollars) 1993 Accumulated postretirement benefit obligation: Retirees $ (38,331) Fully eligible active plan participants (8,448) Other active plan participants (28,813) (75,592) Plan assets at fair value 2,440 Accumulated postretirement benefit obligation in excess of plan assets (73,152) Unrecognized net loss from past experience different from that assumed 3,230 Unrecognized transition obligation 63,483 Regulatory effect recorded 689 Accrued postretirement benefit liability $ (5,750) Components of the net periodic postretirement benefit cost are as follows: Year Ended December 31, (in thousands of dollars) 1993 Service cost (benefits attributed to service during the period) $ 2,048 Interest cost on accumulated postretirement benefit obligation 5,730 Amortization of transition obligation 3,341 Regulatory deferral (689) Net periodic postretirement benefit cost $ 10,430
For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits is assumed for 1994. The health care cost trend rate is assumed to decrease gradually to 5.25% through 2004 and remain at that level thereafter over the projected payout period of the benefits. Increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993, by $12 million (16%) and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year by $1.6 million (20%). The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. The weighted-average discount rate used in determining the initial transition amount was 8.75%. The rate of increase for compensation levels was assumed to be 4.75%. Other Postemployment Benefits In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". This statement establishes standards of accounting and reporting for the estimated cost of benefits -35- Notes to Financial Statements Kentucky Utilities Company provided by an employer to former or inactive employees after employment but before retirement. Kentucky Utilities provides medical and life insurance benefits to disabled employees that are covered by this statement. Kentucky Utilities adopted this standard effective in 1993. The adoption of this standard did not have a material impact on financial condition or results of operation. 5. Commitments and Contingencies The effects of certain commitments made by Kentucky Utilities are estimated below:
(in thousands of dollars) 1994 1995 1996 1997 1998 Estimated Construction Expenditures $183,600 $ 109,100 $128,600 $ 125,000 $ 85,300 Estimated Contract Obligations: Fuel 153,400 92,500 66,300 54,200 12,500 Purchased power 25,000 23,300 25,500 26,300 26,100 Operating leases 3,100 3,100 3,000 3,000 3,000 Sinking Fund Requirements and Redemptions: First mortgage bonds 376 376 376 376 376 Preferred stock $ 20,000 $ - $ - $ - $ -
Construction Program Kentucky Utilities frequently reviews its construction program and may revise its projections of related expenditures based on revisions to its estimated load growth and projections of its future load. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Construction for a discussion of future expenditures relating to compliance with the 1990 Clean Air Act Amendments and construction of peaking units. Coal Supply Obligations under Kentucky Utilities' coal purchase contracts are stated at prices effective January 1, 1994 and are subject to changes as defined by the terms of the contracts. Purchased Power Agreements Kentucky Utilities has purchase power arrangements with Owensboro Municipal Utilities (OMU), Electric Energy, Inc. (EEI) and Illinois Power Company (IP). Under the OMU agreement, which expires on January 1, 2020, Kentucky Utilities purchases, on an economic basis, all of the output of a 400-MW generating station not required by OMU. The amount of purchased power available to Kentucky Utilities during 1994- 1998, which is expected to be approximately 8% of Kentucky Utilities' total kWh requirements, is dependent upon a number of factors including the units' availability, maintenance schedules, fuel costs and OMU -36- Notes to Financial Statements Kentucky Utilities Company requirements. Payments are based on the total costs of the station allocated per terms of the OMU agreement, which generally follows delivered kWh. Included in the total costs is Kentucky Utilities' proportionate share of debt service requirements on $30.1 million of OMU bonds outstanding at December 31, 1993. The debt service is allocated to Kentucky Utilities based on its annual allocated share of capacity, which averaged approximately 51% in 1993. In 1995, Kentucky Utilities' total costs will increase to include Kentucky Utilities' proportionate share of debt service requirements on approximately $171.5 million of additional OMU bonds issued to finance capital improvements designed to enable OMU to comply with the 1990 Clean Air Act Amendments. Kentucky Utilities has a 20% equity ownership in EEI, which is accounted for on the equity method of accounting. Through 1993, the equity ownership permitted Kentucky Utilities to share in the output of a 1,000- MW station not needed by EEI. Kentucky Utilities' entitlement beginning January 1, 1994, will be 20% of the available capacity of the station. Payments are based on the total costs of the station allocated per terms of an agreement among the owners, which generally follows delivered kWh. Kentucky Utilities has contracted to purchase 75-MW of capacity from IP for the period of January 1993 through March 1994, and 125-MW of capacity from April 1994 through December 1994. Sinking Fund Requirements and Redemptions Annual sinking fund requirements for Kentucky Utilities' first mortgage bonds may be met with cash or expenditures for bondable property as provided in the Mortgage Indenture. Kentucky Utilities intends to meet the 1994 sinking fund requirements with expenditures for bondable property. Kentucky Utilities redeemed all of the outstanding shares of its 7.84% preferred stock on February 1, 1994, at a total price of $20.3 million. Lines of Credit Kentucky Utilities has aggregate bank lines of credit of $55 million, all of which remained unused at December 31, 1993. These lines of credit may not be withdrawn at the banks' option prior to September 30, 1994. In support of these lines of credit, Kentucky Utilities compensates the banks by paying a commitment fee. Short-Term Borrowings Kentucky Utilities' short-term financing requirements are satisfied through the sale of commercial paper. Beginning November 1993, Kentucky Utilities sold short-term commercial paper at interest rates varying from 3.10 to 3.25 percent. At December 31, 1993, Kentucky Utilities had no short-term commercial paper borrowings outstanding. -37- Notes to Financial Statements Kentucky Utilities Company Long-Term Debt First Mortgage Bonds of Kentucky Utilities (including those collateralizing pollution control revenue bonds) outstanding at December 31, 1993 and 1992, were as follows:
(in thousands of dollars) 1993 1992 First Mortgage Bonds: 7 5/8% Series H, due May 1, 1999 $ - $ 25,000 8 3/4% Series I, due April 1, 2000 - 30,000 5.95% Series Q, due June 15, 2000 61,500 - 7 5/8% Series J, due September 1, 2001 - 35,000 7 3/8% Series K, due December 1, 2002 35,500 35,500 6.32% Series Q, due June 15, 2003 62,000 - 9 1/8% Series L, due April 1, 2004 - 25,000 9 1/4% Series M, due June 1, 2006 - 30,000 8 1/2% Series N, due April 1, 2007 - 30,000 7.92% Series P, due May 15, 2007 53,000 53,000 8.55% Series P, due May 15, 2027 33,000 33,000 245,000 296,500 First Mortgage Bonds, Pollution Control Series: 7 3/8% Pollution Control Series 7, due May 1, 2010 4,000 4,000 7.45% Pollution Control Series 8, due September 15, 2016 96,000 96,000 6 1/4% Pollution Control Series 1B, due February 1, 2018 20,930 20,930 6 1/4% Pollution Control Series 2B, due February 1, 2018 2,400 2,400 6 1/4% Pollution Control Series 3B, due February 1, 2018 7,200 7,200 6 1/4% Pollution Control Series 4B, due February 1, 2018 7,400 7,400 7.60% Pollution Control Series 7, due May 1, 2020 8,900 8,900 5 3/4% Pollution Control Series 9, due December 1, 2023 31,900 - 5 3/4% County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facility Revenue Bonds, due December 1, 2023 18,100 - 196,830 146,830 $ 441,830 $ 443,330
Kentucky Utilities redeemed $30 million of Series M and $25 million of Series L First Mortgage Bonds (including redemption premiums of $1.4 million and $.9 million, respectively) in March and April of 1993, respectively. In June 1993, Kentucky Utilities issued $123.5 million of Series Q First Mortgage Bonds. Proceeds of the issue were used to redeem $25 million of Series H, $30 million of Series I, $35 million of Series J and $30 million of Series N First Mortgage Bonds (plus redemption premiums aggregating $3.3 million) in July 1993. In 1993, Kentucky Utilities entered into a loan agreement with the County of Carroll, Kentucky, to finance the construction of solid waste disposal facilities. The County issued $50 million of the 5 3/4% revenue bonds, with the proceeds held in a construction fund by a trustee. As the construction funds held by the trustee are drawn down, Kentucky Utilities Pollution Control Series 9 Bonds are delivered to the trustee in an amount equal to the amount drawn down. -38- Notes to Financial Statements Kentucky Utilities Company 6. Common Stock Kentucky Utilities is subject to restrictions applicable to all corporations under Kentucky and Virginia law on the use of retained earnings for cash dividends on common stock, as well as those contained in its Mortgage Indenture and Articles of Incorporation. At December 31, 1993, there were no restricted retained earnings. 7. Preferred Stock Kentucky Utilities redeemed all 120,000 shares of its 8.65% preferred stock and 180,000 shares of its 9.96% preferred stock on March 1, 1991, and the remaining 10,000 shares of its 9.96% preferred stock on June 1, 1991 at a total price of $32.7 million. In December 1993, Kentucky Utilities issued 200,000 shares of 6.53% preferred stock. The proceeds were used to redeem 200,000 shares of 7.84% preferred stock on February 1, 1994. Each series of preferred stock is redeemable at the option of Kentucky Utilities upon 30 days' written notice as follows:
Redemption Price per Share Series (plus accrued and unpaid dividends, if any) 4 3/4% $101.00 6.53% (Not redeemable prior to December 1, 2003.) $103.265 through November 30, 2004, decreasing approximately $.33 each twelve months thereafter to $100 on or after December 1, 2013. 7.84% $101.50
As of December 31, 1993, there were 5.3 million shares of Kentucky Utilities preferred stock, having a maximum aggregate stated value of $200 million, authorized for issuance. 8. Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents, escrow funds, construction funds and customers' deposits carrying values approximate fair value because of the short maturity of these amounts. Long-term debt fair values are based on quoted market prices for Kentucky Utilities' first mortgage bonds and on current rates available to Kentucky Utilities for debt of the same remaining maturities for Kentucky Utilities' pollution control bonds and promissory note. -39- Notes to Financial Statements Kentucky Utilities Company Kentucky Utilities has an interest rate swap agreement with a notional amount of $70 million. Fair value of this instrument is the estimated amount the counterparty would pay to Kentucky Utilities to terminate the swap at the date of measurement. The estimated fair values of Kentucky Utilities' financial instruments at December 31 are as follows:
1993 1992 Carrying Estimated Carrying Estimated (in thousands of dollars) Amount Fair Value Amount Fair Value Interest rate swap $ - $ 2,550 $ - $ 3,260 Long-term debt $ 442,066 $ 489,042 $ 443,998 $ 471,278
If the excess of fair value over carrying value of Kentucky Utilities' long-term debt were settled at amounts approximating those above, the anticipated regulatory treatment would allow recovery of these amounts in rates over a prescribed amortization period. Accordingly, any settlement would not have a significant impact on Kentucky Utilities' financial position or results of operations. In May 1993, the FASB issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This statement, which must be adopted on January 1, 1994, addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and all investments in debt securities. Kentucky Utilities does not anticipate that the new standard will have a material impact on its financial condition or results of operations. -40- Supplementary Quarterly Financial Information (Unaudited) Kentucky Utilities Company Quarterly financial results for 1993 and 1992 are summarized below. Generally, quarterly results may fluctuate due to seasonal variations, changes in fuel costs and other factors.
Quarter 4th 3rd 2nd 1st (in thousands of dollars) 1993 Operating Revenues $ 151,828 $ 160,615 $ 139,909 $ 154,236 Net Operating Income 21,257 30,640 22,209 31,155 Net Income 15,526 24,790 16,422 24,548 Net Income Applicable to Common Stock 14,856 24,161 15,792 23,919 1992 Operating Revenues $ 139,695 $ 151,888 $ 137,754 $ 146,484 Net Operating Income 20,943 31,176 24,293 29,456 Net Income 14,366 22,756 16,566 22,610 Net Income Applicable to Common Stock 13,736 22,127 15,936 21,981 These quarterly amounts reflect, in Kentucky Utilities' opinion, all adjustments (including only normal recurring adjustments) necessary for a fair presentation.
-41- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Refer to KU Energy's definitive proxy statement (the "Proxy Statement") filed with the Securities and Exchange Commission in connection with its 1994 Annual Shareholder Meeting under the caption "Election of Directors--General" for the information required by this item pertaining to directors. Such information is incorporated herein by reference and is also filed herewith as Exhibit 99B. Information required by this item relating to executive officers of Kentucky Utilities is set forth under a separate caption in Part I hereof. Item 11. Executive Compensation Refer to KU Energy's Proxy Statement under the caption Election of Directors-- "Directors' Compensation", and -- "Executive Compensation" (but excluding any information contained under the subheadings --"Report of Compensation Committee on Executive Compensation", and --"Performance Graph") for the information required by this item. Such information is incorporated herein by reference and is also filed herewith as Exhibit 99B. Item 12. Security Ownership of Certain Beneficial Owners and Management Refer to KU Energy's Proxy Statement under the caption "Election of Directors--Voting Securities Beneficially Owned by Directors, Nominees and Executive Officers; Other Information" for the information required by this item. Such information is incorporated herein by reference and is also filed herewith as Exhibit 99B. Item 13. Certain Relationships and Related Transactions None. -42- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (A) The following (1) financial statements, (2) schedules, and (3) exhibits, are filed as a part of this Annual Report. (1) Financial Statements Report of Independent Public Accountants, Statements of Income and Retained Earnings for the three years ended December 31, 1993, Statements of Cash Flows for the three years ended December 31, 1993, Balance Sheets as of December 31, 1993 and 1992, Statements of Capitalization as of December 31, 1993 and 1992, and Notes to Financial Statements. (2) Schedules Schedule V Property, plant and equipment. Schedule VI Accumulated depreciation, depletion and amortization of property, plant and equipment. Schedule VIII Valuation and qualifying accounts. Schedule IX Short-term borrowings. Schedule X Supplementary income statement information. The following Schedules are omitted as not applicable or not required under Regulation S-X: I, II, III, IV, VII, XI, XII, XIII, XIV. -43- (3) Exhibits Number Description Page 3.A Amended and Restated Articles of Incorporation of Kentucky Utilities Company. (Exhibits 4.03 and 4.04 to Form 8-K Current Report of Kentucky Utilities Company, dated December 10, 1993). Incorporated by reference. - 3.B By-laws of Kentucky Utilities Company dated December 14, 1992. (Exhibit 3B to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1992). Incorporated by reference. - 4.A Indenture of Mortgage or Deed of Trust dated May 1, 1947 between Kentucky Utilities Company and Continental Illinois National Bank and Trust Company of Chicago and Edmond B. Stofft, as Trustees (Amended Exhibit 7(a) in File No. 2-7061), and Supplemental Indentures thereto dated, respectively, January 1, 1949 (Second Amended Exhibit 7.02 in File No. 2- 7802), July 1, 1950 (Amended Exhibit 7.02 in File No. 2-8499), June 15, 1951 (Exhibit 7.02(a) in File No. 2-8499), June 1, 1952 (Amended Exhibit 4.02 in File No. 2-9658), April 1, 1953 (Amended Exhibit 4.02 in File No. 2-10120), April 1, 1955 (Amended Exhibit 4.02 in File No. 2-11476), April 1, 1956 (Amended Exhibit 2.02 in File No. 2-12322), May 1, 1969 (Amended Exhibit 2.02 in File No. 2-32602), April 1, 1970 (Amended Exhibit 2.02 in File No. 2-36410), September 1, 1971 (Amended Exhibit 2.02 in File No. 2-41467), December 1, 1972 (Amended Exhibit 2.02 in File No. 2-46161), April 1, 1974 (Amended Exhibit 2.02 in File No. 2-50344), September 1, 1974 (Exhibit 2.04 in File No. 2-59328), July 1, 1975 (Exhibit 2.05 in File No. 2-59328), May 15, 1976 (Amended Exhibit 2.02 in File No. 2-56126), April 15, 1977 (Exhibit 2.06 in File No. 2-59328), August 1, 1979 (Exhibit 2.04 in File No. 2-64969), May 1, 1980 (Exhibit 2 to Form 10-Q Quarterly Report of Kentucky Utilities for the quarter ended June 30, 1980), September 15, 1982 (Exhibit 4.04 in File No. 2-79891), August 1, 1984 (Exhibit 4B to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1984), June 1, 1985 (Exhibit 4 to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended June 30, 1985), May 1, 1990 (Exhibit 4 to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended June 30, 1990), May 1, 1991 (Exhibit 4 to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended June 30, 1991), May 15, 1992 (Exhibit 4.02 to Form 8-K of -44- Number Description Page 4.A Kentucky Utilities Company dated May 14, 1992), (cont.) August 1, 1992 (Exhibit 4 to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended September 30, 1992), June 15, 1993 (Exhibit 4.02 to Form 8-K of Kentucky Utilities Company dated June 15, 1993) and December 1, 1993 (Exhibit 4.01 to Form 8-K of Kentucky Utilities Company dated December 10, 1993). Incorporated by reference. - 4.B Supplemental Indenture dated March 1, 1992 between Kentucky Utilities and Continental Bank, National Association and M. J. Kruger, as Trustees, providing for the conveyance of properties formerly held by Old Dominion Power Company. (Exhibit 4B to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1992). Incorporated by reference. - 10.A Kentucky Utilities' Amended and Restated Performance Share Plan (Exhibit 10A to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended June 30, 1993). Incorporated by reference. - 10.B Kentucky Utilities' Annual Performance Incentive Plan (Exhibit 10B to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1990). Incorporated by reference. - 10.C Amendment No. 1 to Kentucky Utilities' Annual Performance Incentive Plan (Exhibit 10D to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1991). Incorporated by reference. - 10.D Kentucky Utilities' Executive Optional Deferred Compensation Plan (Exhibit 10C to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1990). Incorporated by reference. - 10.E Amendment No. 1 to Kentucky Utilities' Executive Optional Deferred Compensation Plan (Exhibit 10F to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1991). Incorporated by reference. - 10.F Kentucky Utilities' Director Retirement Retainer Program, and Amendment No. 1 (Exhibit 10G to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1991). Incorporated by reference. - -45- Number Description Page 10.G Kentucky Utilities' Supplemental Security Plan (Exhibit 10I to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1991). Incorporated by reference. - 10.H Amendment No. 2 to Kentucky Utilities' Annual Performance Incentive Plan N/A 10.I Amendment No. 3 to Kentucky Utilities' Annual Performance Incentive Plan N/A 10.J Amendment No. 2 to Kentucky Utilities' Executive Optional Deferred Compensation Plan N/A 10.K Kentucky Utilities' Amended and Restated Director Deferred Compensation Plan N/A 12 Computation of Ratio of Earnings to Fixed Charges N/A 21 List of Subsidiaries N/A 23 Consent of Independent Public Accountants N/A 99.A Description of Common Stock N/A 99.B Director and Executive Officer Information N/A Note - Exhibit numbers 10.A through 10.K are management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K. -46- The following instruments defining the rights of holders of certain long- term debt of Kentucky Utilities Company have not been filed with the Securities and Exchange Commission but will be furnished to the Commission upon request. 1. Loan Agreement dated as of May 1, 1990 between Kentucky Utili- ties and the County of Mercer, Kentucky, in connection with $12,900,000 County of Mercer, Kentucky, Collateralized Solid Waste Disposal Facility Revenue Bonds (Kentucky Utilities Company Project) 1990 Series A, due May 1, 2010 and May 1, 2020. 2. Loan Agreement dated as of May 1, 1991 between Kentucky Utili- ties and the County of Carroll, Kentucky, in connection with $96,000,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series A, due September 15, 2016. 3. Loan Agreement dated as of August 1, 1992 between Kentucky Utilities and the County of Carroll, Kentucky, in connection with $2,400,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series C, due February 1, 2018. 4. Loan Agreement dated as of August 1, 1992 between Kentucky Utilities and the County of Muhlenberg, Kentucky, in connection with $7,200,000 County of Muhlenberg, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series A, due February 1, 2018. 5. Loan Agreement dated as of August 1, 1992 between Kentucky Utilities and the County of Mercer, Kentucky, in connection with $7,400,000 County of Mercer, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series A, due February 1, 2018. 6. Loan Agreement dated as of August 1, 1992 between Kentucky Utilities and the County of Carroll, Kentucky, in connection with $20,930,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series B, due February 1, 2018. 7. Loan Agreement dated as of December 1, 1993, between Kentucky Utilities and the County of Carroll, Kentucky, in connection with $50,000,000 County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities Revenue Bonds (Kentucky Utilities Company Project) 1993 Series A due December 1, 2023. (B) On December 10, 1993, Kentucky Utilities filed a form 8-K which filed as exhibits the Underwriting Agreement, Amended and Restated Articles of Incorporation, and the Amendment to the Articles of Incorporation establishing a new series of preferred stock. Also filed as an exhibit was a Supplemental Indenture associated with First Mortgage Bonds, Pollution Control Series 9. -47- SCHEDULE V KENTUCKY UTILITIES COMPANY PROPERTY, PLANT AND EQUIPMENT
Retirements Balance or Sales at Other Balance Jan. 1, Additions Original Changes Dec. 31, 1991 At Cost Cost (a) 1991 Electric Plant (in thousands) Intangible $ 102 $ 2 $ (1) $ - $ 103 Production Steam 948,164 30,254 (11) - 978,407 Hydro 8,905 1,278 - - 10,183 Other 4,662 - - - 4,662 Transmission 344,239 4,250 (384) 83 348,188 Distribution 473,938 28,885 (5,963) (83) 496,777 General 54,152 4,699 (1,937) - 56,914 Plant in Service 1,834,162 69,368 (8,296) - 1,895,234 Construction Work in Progress 25,311 (3,456) - - 21,855 Total $1,859,473 $ 65,912 $ (8,296) $ - $ 1,917,089 Retirements Balance or Sales at Other Balance Jan. 1, Additions Original Changes Dec. 31, 1992 At Cost Cost (a) 1992 Electric Plant (in thousands) Intangible $ 103 $ - $ - $ - $ 103 Production Steam 978,407 17,329 (3,437) - 992,299 Hydro 10,183 395 (3) - 10,575 Other 4,662 99 - - 4,761 Transmission 348,188 13,647 (473) 1,126 362,488 Distribution 496,777 33,224 (5,200) (1,087) 523,714 General 56,914 5,984 (1,635) (39) 61,224 Plant in Service 1,895,234 70,678 (10,748) - 1,955,164 Construction Work in Progress 21,855 15,567 - - 37,422 Total $1,917,089 $ 86,245 $ (10,748) $ - $ 1,992,586 Retirements Balance or Sales at Other Balance Jan. 1, Additions Original Changes Dec. 31, 1993 At Cost Cost (a) 1993 Electric Plant (in thousands) Intangible $ 103 $ 6 $ (4) $ - $ 105 Production Steam 992,299 11,596 (122) (753) 1,003,020 Hydro 10,575 18 - - 10,593 Other 4,761 327 - - 5,088 Transmission 362,488 6,339 (356) (85) 368,386 Distribution 523,714 32,791 (4,826) 85 551,764 General 61,224 5,178 (1,752) 1,310 65,960 Plant in Service 1,955,164 56,255 (7,060) 557 2,004,916 Plant - Purchased or Sold - - - (228) (228) Total Plant 1,955,164 56,255 (7,060) 329 2,004,688 Construction Work in Progress 37,422 121,407 - - 158,829 Total $1,992,586 $ 177,662 $ (7,060) $ 329 $ 2,163,517 ( ) Denotes deduction. Note-Refer to Note 1 of the Notes to Financial Statements for information as to Kentucky Utilities depreciation method and rates and to Management's Discussion and Analysis - Construction for information concerning 1993 additions. (a) Amounts in Other Changes column represent transfers between plant accounts, the transfer of nonutility property to utility property and entries related to the disposition of an asset.
-48- SCHEDULE VI KENTUCKY UTILITIES COMPANY ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment Intangibles Total Electric Vehicles Franchises (in thousands) Balance January 1, 1991 $ 718,715 $ 707,774 $ 10,916 $ 25 Additions: Provision charged to-- Depreciation expense $ 57,337 $ 57,335 $ - $ 2 Transportation expense clearing 2,318 - 2,318 - Fuel inventory 3 3 - - Other(1) 2,243 2,208 35 - 61,901 59,546 2,353 2 Deductions: Retirements (8,296) (6,468) (1,827) (1) Removal costs, net of salvage (1,276) (1,276) - - (9,572) (7,744) (1,827) (1) Balance January 1, 1992 $ 771,044 $ 759,576 $ 11,442 $ 26 Additions: Provision charged to-- Depreciation expense $ 58,849 $ 58,847 $ - $ 2 Transportation expense clearing 2,393 - 2,393 - Fuel inventory 379 379 - - Other(1) 2,556 2,514 42 - 64,177 61,740 2,435 2 Deductions: Retirements (10,748) (9,165) (1,583) - Removal costs, net of salvage (971) (971) - - (11,719) (10,136) (1,583) - Balance January 1, 1993 $ 823,502 $ 811,180 $ 12,294 $ 28 Additions: Provision charged to-- Depreciation expense $ 60,800 $ 60,798 $ - $ 2 Transportation expense clearing 2,524 - 2,524 - Fuel inventory 382 382 - - Other(1) 1,791 1,768 23 - 65,497 62,948 2,547 2 Deductions: Retirements (7,060) (5,419) (1,637) (4) Removal costs, net of salvage (1,979) (1,988) 9 - (9,039) (7,407) (1,628) (4) Balance December 31, 1993 $ 879,960 $ 866,721 $ 13,213 $ 26 (1) Includes reimbursement for relocation of properties and the accumulated depreciation applicable to minor properties acquired.
-49- SCHEDULE VIII KENTUCKY UTILITIES COMPANY VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1993 1992 1991 (in thousands) Accumulated Provision for Uncollectible Accounts Receivable Balance at beginning of year $1,033 $ 1,132 $ 1,013 Balance at end of year $ 923 $ 1,033 $ 1,132 ____________ Note-Other valuation and qualifying accounts are not significant.
-50- SCHEDULE IX KENTUCKY UTILITIES COMPANY SHORT-TERM BORROWINGS
As of December 31, Year Ended December 31, Weighted Amount Outstanding Weighted Average (in thousands) Average Balance Interest Month End Weighted Interest Year (in thousands) Rate Maximum Average(1) Rate(2) Commercial Paper 1991 $ - - $ - $ - - 1992 $ - - - - - 1993 $ - - $ 14,900 $ 1,916 3.22% (1) Based on a daily weighting of total short-term borrowings outstanding. (2) Based on the percentage relationship that total annual interest expense bears to the total annual weighted average amount outstanding.
-51- SCHEDULE X KENTUCKY UTILITIES COMPANY SUPPLEMENTARY INCOME STATEMENT INFORMATION
Year Ended December 31, 1993 1992 1991 (in thousands) Other Taxes Real estate and personal property $ 6,873 $ 6,197 $ 6,250 Payroll 5,584 5,261 4,727 Other 1,890 1,901 1,881 Total $ 14,347 $ 13,359 $ 12,858 ____________ Note-The amounts of depreciation and taxes charged to other income and balance sheet accounts are not significant. The amounts charged to the respective accounts for rents, royalties, advertising costs, and research and development aggregated less than one percent of total revenues.
-52- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on on March 14, 1994. KENTUCKY UTILITIES COMPANY /s/ John T. Newton John T. Newton Chairman and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated. Signature Title /s/ John T. Newton John T. Newton Chairman and President (Principal Executive Officer) and Director /s/ Michael R. Whitley Michael R. Whitley Senior Vice-President (Principal Financial Officer) and Director /s/ Michael D. Robinson Michael D. Robinson Controller (Principal Accounting Officer) /s/ Mira S. Ball Mira S. Ball Director /s/ W. B. Bechanan W. B. Bechanan Director /s/ Harry M. Hoe Harry M. Hoe Director /s/ Milton W. Hudson Milton W. Hudson Director /s/ Frank V. Ramsey, Jr. Frank V. Ramsey, Jr. Director /s/ Warren W. Rosenthal Warren W. Rosenthal Director /s/ William L. Rouse, Jr. William L. Rouse, Jr. Director /s/ Charles L. Shearer Charles L. Shearer Director March 14, 1994 -53- EX-10.H 2 EXHIBIT 10.H AMENDMENT NO. 2 TO KENTUCKY UTILITIES COMPANY ANNUAL PERFORMANCE INCENTIVE PLAN The Kentucky Utilities Company Annual Performance Incentive Plan, as heretofore amended (the "Plan"), is hereby amended, effective as of January 1, 1993, in the following respects: 1. By deleting Section 2.1 of the Plan and inserting in lieu thereof the following: "2.1 "Base Salary" -- Annualized base salary paid to a Participant as of January 1st of each Plan Year or as of such later date during a Plan Year as of which the Executive becomes a Participant in the Plan, except that if an executive becomes a Participant as of a date other than January 1st of a Plan Year, such amount shall be prorated in proportion to the portion of the Plan Year in which that Executive will be a Participant." 2. By deleting the word "compatible" in the first sentence of Section 2.5 of the Plan and inserting in lieu thereof the word "incompatible". 3. By adding a new sentence at the end of Article III of the Plan as follows: "The Committee may employ such counsel (who may be counsel for any Employer), consultants and/or agents and may arrange for such services as it may determine to be necessary or appropriate in the administration of the Plan. All expenses incurred by the Committee in administering the Plan shall be paid by the Employers." -54- 4. By adding a new sentence after the third sentence of Article IV of the Plan as follows: "From time to time during a Plan Year management may also recommend proposed additional Participants for such Plan Year and the award opportunities and performance criteria for such individuals." 5. By deleting the first sentence of Article VII of the Plan and inserting in lieu thereof the following: "Prior to the beginning of each Plan Year (or as soon as possible after an Executive is added as a Participant during a Plan Year), management shall recommend to the Committee threshold, target, and maximum performance goals for each performance criterion defined below applicable to each Participant." 6. By deleting Section 9.1 of the Plan and inserting in lieu thereof the following: "In the event of termination of employment with the Employer and Affiliates during a Plan Year by reason of Retirement, Disability or death of the Participant, the Participant, in the case of Disability or Retirement, or the Participant's Beneficiary, in the case of the Participant's death, shall earn an Incentive Award based on actual salary earned prior to termination during the Plan Year, and actual performance against established targets. The transfer of employment from the Employer to an Affiliate during Plan Year shall not be deemed a termination of employment for purposes of the Plan." 7. By adding the words "and Affiliates" after the word "Employer" in Section 9.2 of the Plan. 8. By deleting Section 12.1 of the Plan and inserting the following in lieu thereof: "12.1 By acceptance of any Incentive Award under the Plan, each Participant agrees that benefit calculations -55- under all other plans of the Employer will exclude, unless otherwise expressly provided in any such plan, the Incentive Awards under the Plan." IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its President and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 19th day of February, 1993. KENTUCKY UTILITIES COMPANY By: /s/ John T. Newton President [CORPORATE SEAL] ATTEST: /s/ George S. Brooks II Secretary -56- EX-10.I 3 EXHIBIT 10.I AMENDMENT NO. 3 TO KENTUCKY UTILITIES COMPANY ANNUAL PERFORMANCE INCENTIVE PLAN The Kentucky Utilities Company Annual Performance Incentive Plan, (the "Plan"), is hereby amended, effective as of January 1, 1994, in the following respects: 1. By renumbering Section 7.3 and Section 7.4 of the Plan as Section 7.4 and Section 7.5, respectively, and by adding a new Section 7.3 after Section 7.2 as follows: "7.3 Safety Criterion A measure, determined by commonly accepted practices or procedures, that reflects the number and/or severity of occupational injuries and illnesses." IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its President and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 13th day of December, 1993. KENTUCKY UTILITIES COMPANY By: /s/ John T. Newton [CORPORATE SEAL] Chairman and President ATTEST: /s/ George S. Brooks II Secretary -57- EX-10.J 4 EXHIBIT 10.J AMENDMENT NO. 2 TO EXECUTIVE OPTIONAL DEFERRED COMPENSATION PLAN OF KENTUCKY UTILITIES COMPANY The Executive Optional Deferred Compensation Plan of Kentucky Utilities Company, as heretofore amended (the "Plan"), is hereby amended, effective as of January 1, 1993, in the following respects: 1. By deleting the word "compatible" in the first sentence of Section 2.9 of the Plan and inserting in lieu thereof the word "incompatible". 2. By adding a new sentence at the end of Article III of the Plan as follows: "The Committee may employ such counsel (who may be counsel for any Employer), consultants and/or agents and may arrange for such services as it may determine to be necessary or appropriate in the administration of the Plan. All expenses incurred by the Committee in administering the Plan shall be paid by the Employers." 3. By adding a new sentence after the second sentence of Section 4.2 of the Plan as follows: "In addition, if an Executive becomes a participant in the Company's Annual Performance Incentive Plan for a Performance Cycle as of a date other than January 1st, he may deliver such notice to the Committee within 30 days of the date as of which that Executive becomes a participant in the Annual Performance Incentive Plan." 4. By deleting the words "each calendar quarter" at the end of Article VI of the Plan and inserting in lieu thereof the words "that calendar quarter". -58- 5. By deleting the words "Deferred Election Form(s)" in Article VII of the Plan and inserting in lieu thereof the words "Deferral Election Form(s)". 6. By deleting the words "Deferral Compensation Account" in Section 8.2 of the Plan and inserting in lieu thereof the words "Deferred Compensation Account". IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its President and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 19th day of February, 1993. KENTUCKY UTILITIES COMPANY By: /s/ John T. Newton President [CORPORATE SEAL] ATTEST: /s/ George S. Brooks II Secretary -59- EX-10.K 5 EXHIBIT 10.K KENTUCKY UTILITIES COMPANY DIRECTOR DEFERRED COMPENSATION PLAN (As Amended and Restated Effective As Of May 1, 1992) ARTICLE I Purpose The Kentucky Utilities Company Director Deferred Compensation Plan (the "Plan") was established, effective June 1, 1989, to provide eligible directors of Kentucky Utilities Company with the opportunity to defer some or all of the compensation which may be payable to them for services to be performed as members of the Board of Directors of Kentucky Utilities Company. The terms and conditions of the Plan, as amended and restated effective as of May 1, 1992, are set forth below. ARTICLE II Definitions The following words and phrases shall have the meanings set forth below unless a different meaning is clearly required by the context: (a) Account: The account maintained for each Participant showing his or her interest under the Plan as provided in Section 4.1. -60- (b) Accounting Date: Each March 31, June 30, September 30 and December 31 of each calendar year. The first Accounting Date under the Plan was June 30, 1989. (c) Beneficiary: The person or persons (natural or otherwise) designated, in accordance with Section 5.4, to receive the distribution of a Participant's Account balance in the event of the Participant's death. (d) Board: The Board of Directors of the Company. (e) Change in Control: A change in control as more fully defined in Section 5.6. (f) Committee: The Compensation Committee of the Board. (g) Company: Kentucky Utilities Company, a corporation organized and existing under the laws of the Commonwealth of Kentucky. (h) Compensation: Any retainer and meeting fees payable to the Director by the Company for services rendered as a member of the Board or any committee thereof. (i) Director: Any member of the Board on or after the Effective Date who is separately compensated for his or her services as a member of the Board. (j) Effective Date: June 1, 1989. (k) Parent: KU Energy Corporation or any successor thereto. (l) Participant: A Director participating in the Plan in accordance with the provisions of Section 3.2, or a former -61- Director whose Account balance under the Plan has not been paid in full. (m) Plan: The Kentucky Utilities Company Director Deferred Compensation Plan set forth in this instrument, as it may be amended from time to time. (n) Service: An individual's service on the Board and on the boards of the Parent or any Subsidiary. (o) Subsidiary: An entity in which the Company or the Parent directly or indirectly beneficially owns 50% or more of the voting securities. ARTICLE III Eligibility and Participation 3.1 Eligibility: Each member of the Board who was a Director on the Effective Date was eligible to participate in the Plan as of the Effective Date. Each other Director shall be eligible to participate in the Plan as of the first day of the month next following the date he or she becomes a Director. 3.2 Participation: A Director may elect to participate in the Plan effective as of the date the Director first becomes eligible to participate as provided in Section 3.1, or effective as of the January 1st of any calendar year beginning after such date, by filing written notice of such election with the Company prior to the effective date of such election. Such notice shall be accompanied by (i) an election to defer Compensation as provided in Section 3.4 and (ii) an election as -62- to the method of payment as provided in Section 5.1. Upon filing such election notice, the Director shall become a Participant in the Plan effective as of the date elected as permitted in this Section 3.2. 3.3 Crediting of Compensation: Commencing on the effective date of a Participant's participation in the Plan and continuing during the period that Compensation is to be credited to the Participant's Account under the Plan, the Company shall defer payment of and credit to the Participant's Account all or such portion, as elected by the Participant under Section 3.4, of the Compensation that the Participant would have received for services rendered by the Participant during such period as a member of the Board but for his participation in the Plan, such credits to be made as provided in Section 4.2(a). 3.4 Election to Defer: At the time a Director elects to become a Participant, the Director shall elect to have from 10% to 100%, in specified multiples of 10%, of his or her Compensation for services rendered subsequent to the date the Director becomes a Participant deferred under the Plan and credited to his or her Account as provided in Section 3.3. Such election shall remain in effect until changed or terminated as hereinafter provided. A Participant may change his or her election under this Section 3.4 effective as of the January 1st of any calendar year with respect to Compensation for services to be rendered as a Director on or subsequent to such January 1st, by giving the -63- Company written notice of such change at least 15 days prior to such January 1st. Any change may (i) increase or decrease, within the limits prescribed in the preceding paragraph, the portion of Compensation to be deferred and credited to the Participant's Account as provided in Section 3.3, (ii) terminate an election to defer Compensation under this Section 3.4 or (iii) resume the deferral of Compensation under the Plan within the limits prescribed in the preceding paragraph. A change in the portion of Compensation deferred or the termination of a Participant's election to defer Compensation shall not entitle the Participant to receive payment of his or her Account balance, which shall be payable only as provided in Article V. Any election or change in election under this Section 3.4 shall be made on a form provided or prescribed by the Company. ARTICLE IV Participants' Accounts 4.1 Individual Accounts: A separate Account shall be maintained by the Company on its books for each Participant. Effective on and after May 1, 1992, such Accounts (i) shall no longer be divided into subaccounts to identify the portion of the Accounts subject to the different methods of earnings adjustment available under the Plan prior to this amendment and restatement and (ii) shall be adjusted for earnings only as provided in this Plan. All elections with respect to subaccount adjustments as provided under the Plan as in effect prior to this amendment and -64- restatement shall be null and void and without effect on and after May 1, 1992. 4.2 Accounting Procedures: Each Participant's Account shall be adjusted as of each Accounting Date as follows and in the following order: (a) Each Participant's Account shall be credited with the amount of Compensation to be credited to his or her Account as provided in Section 3.3 during the calendar quarter ending on such Accounting Date. Credits shall be made as of the last business day of the respective calendar months in which such Compensation would have been paid to the Participant by the Company but for his or her participation in the Plan. (b) Each Participant's Account shall next be charged as of such Accounting Date with the amount of any distributions under the Plan to the Participant or to his or her Beneficiary effective as of such Accounting Date. (c) Unless (i) a Change in Control has occurred during the calendar quarter ending on such Accounting Date and the last paragraph of Section 5.1 is applicable to the Participant or (ii) a Participant has terminated his Service during the calendar quarter ending on such Accounting Date and Section 5.5 is applicable to the Participant, each Participant's Account shall next be credited with the amount equivalent to interest to be added to the Participant's Account as of such Accounting Date. The interest equivalent to be credited as of an Accounting Date shall be equal to the interest that would be earned on the average of the balances in the Participant's Account at the end of each calendar month during the calendar quarter ending on such Accounting Date, at a rate per annum which equals the average prime rate charged by banks as reported in the Federal Reserve Bulletin published on or next prior to such Accounting Date. -65- ARTICLE V Distribution of Benefits 5.1 Termination Prior to a Change in Control For Reasons Other Than Death: Within 15 days after the Accounting Date coincident with or next following the date on which the Participant terminates his or her Service prior to the date on which a Change in Control occurs for any reason other than death, the Company shall pay, or commence to pay, to the Participant in cash the amount credited to his or her Account. Payment shall be made in accordance with Payment Method I, Payment Method II or Payment Method III, below, as elected by the Director at the time the Director elects to become a Participant: (a) Payment Method I - By payment in a lump sum of the amount credited to the Participant's Account as of the Accounting Date coincident with or next following the date on which the Participant terminates his or her Service. (b) Payment Method II - By payment in quarterly installments, the number of which shall be the lesser of (i) 40 or (ii) the aggregate number of full calendar quarters during which compensation was credited to the Participant's Account under the Plan and to his or her account under any similar plan of the Parent or a Subsidiary (but not counting any such calendar quarter more than once). The amount of each installment shall be equal to the quotient obtained by dividing the balance credited to Participant's Account as of the Accounting Date coincident with or next preceding the date of such installment payment by the number of installment payments remaining to be made to such Participant at the time of such calculation. -66- (c) Payment Method III - By payment in annual installments, the number of which shall be the lesser of (i) 10 or (ii) the aggregate number of full calendar years (but not less than one) during which compensation was credited to the Participant's Account under the Plan and to his or her account under any similar plan of the Parent or a Subsidiary (but not counting any such calendar year more than once). The amount of each installment shall be equal to the quotient obtained by dividing the balance credited to Participant's Account as of the Accounting Date coincident with or next preceding the date of such installment payment by the number of installment payments remaining to be made to such Participant at the time of such calculation. An election under this Section 5.1 shall be made on a form provided or prescribed by the Company and once made shall be irrevocable. Notwithstanding a Participant's election under, or the foregoing provisions of, this Section 5.1, if a Change in Control occurs after a Participant terminates his or her Service but prior to the complete distribution under the Plan of the balance credited to his or her Account, the amount credited to the Participant's Account as of the date the Change in Control occurs increased by the amount of any Compensation deferred under the Plan by the Participant subsequent to the Accounting Date on or next preceding the date on which the Change in Control occurs (the "undistributed amount"), plus an amount equivalent to interest as provided below, shall be paid in cash in a lump sum to the Participant (or, in the event of the Participant's death after his termination of Service, to his or her Beneficiary) -67- within 15 days after the date on which the Change in Control occurs. The interest equivalent to be paid pursuant to the preceding sentence shall be equal to the interest that would be earned on the undistributed amount during the period from the Accounting Date on or next preceding the date on which the Change in Control occurs to the date of distribution, at the rate per annum used under Section 4.2(c) as of the Accounting Date on or next preceding the date on which the Change in Control occurs. 5.2 Death: Upon the death of a Participant, whether before or after termination as a member of the Board, prior to the complete distribution of the balance credited to his or her Account, any undistributed amount credited to the Participant's Account as of the Accounting Date coincident with or next following the Participant's date of death shall be paid in cash in a lump sum to the Participant's Beneficiary within 15 days after such Accounting Date; provided, however, if a Change in Control shall occur either before or after the Participant's death but prior to the complete distribution of the balance credited to the Participant's Account, distribution shall be made to the Beneficiary as provided in the last paragraph of Section 5.1 or in Section 5.5, whichever is applicable, rather than as provided in this Section 5.2. 5.3 Hardship Distribution: With the written consent of the Committee, a Participant may withdraw from his or her Account as of an Accounting Date a cash amount not in excess of the balance credited to the Participant's Account as of such -68- Accounting Date. The Committee, in its sole discretion, may consent to such withdrawal but only if the withdrawal is necessary, upon demonstration by or on behalf of the Participant, because of a substantial financial hardship of the Participant as a result of accident, illness or disability. The Committee, in its sole discretion, shall determine the amount of such a distribution that is needed to meet the need created by the hardship. Any such distribution shall be charged to the Participant's Account. 5.4 Beneficiary: As used in the Plan, the term "Beneficiary" means: (a) The last person designated as Beneficiary by the Participant in a written notice on a form prescribed by and filed with the Company; (b) If there is no designated Beneficiary or if the person so designated shall not survive the Participant, such Participant's spouse; or (c) If no such designated Beneficiary and no such spouse is living upon the death of a Participant, or if all such persons die prior to the full distribution of the Participant's Account, then the legal representative of the last survivor of the Participant and such persons, or, if the Company shall not receive notice of the appointment of any such legal representative within one year after such death, the heirs- at-law of such survivor (in the proportions in which they would inherit his intestate personal property) shall be the Beneficiaries to whom the then remaining balance of the Participant's Account shall be distributed. Any Beneficiary designation may be changed from time to time by like notice similarly delivered. No notice given under this -69- Section shall be effective unless and until the Company actually receives such notice and enters it in its records. 5.5 Termination On or After a Change in Control: If a Participant terminates his or her Service on or after the date on which a Change in Control occurs, the amount credited to the Participant's Account as of the Accounting Date on or next preceding the date on which the Participant terminates his or her Service increased by the amount of any Compensation deferred under the Plan by the Participant subsequent such Accounting Date (the "undistributed amount"), plus an amount equivalent to interest as provided below, shall be paid in cash in a lump sum to the Participant (or, in the event of the Participant's death, to his or her Beneficiary) within 15 days after the Participant's termination of Service. The interest equivalent to be paid pursuant to the preceding sentence shall be equal to the interest that would be earned on the undistributed amount during the period from the Accounting Date on or next preceding the Participant's termination of Service to the date of distribution, at the rate per annum used under Section 4.2(c) as of the Accounting Date on or next preceding the date of termination. 5.6 Change in Control: For purposes of the Plan, a "Change in Control" shall have occurred if at any time any of the following events shall occur: (a) The Company or the Parent is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the -70- combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Parent immediately prior to such transaction; (b) The Company or Parent sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less than a majority of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Parent, immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of the Parent; (d) The Company or the Parent files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company or the Parent has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (e) If at any time during any period of two consecutive years, individuals who at the -71- beginning of any such period constitute the directors of the Company or the Parent cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) or (d) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and the Parent, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Parent, (ii) a Subsidiary or (iii) any Company-sponsored, Parent- sponsored or Subsidiary-sponsored employee stock ownership plan or any other employee benefit plan of the Company, the Parent or Subsidiary, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or the Parent, whether in excess of 10% or otherwise, or because the Company, the Parent or a Subsidiary reports that a change in control of the Company or the Parent has or may have occurred or will or may occur in the future by reason of such beneficial ownership. Notwithstanding the foregoing provisions of this Section 5.6, a "Change in Control" shall not be deemed to have occurred by reason of the Reorganization. -72- 'Reorganization' shall mean the corporate reorganization whereby the Parent became the holding company of the Company as approved by the Board of Directors of the Company on May 16, 1988 and May 27, 1988. ARTICLE VI Financing of Benefits The Plan shall be a nonqualified and unfunded plan. Benefit payments under the Plan shall represent an unsecured general obligation of the Company and shall be paid by the Company from its general assets. No special fund or trust shall be created or held for the financing of benefits under the Plan. ARTICLE VII Facility of Payment Whenever a person entitled to receive any payment under the Plan is a person under legal disability or a person not adjudicated incompetent but who, by reason of illness or mental or physical disability, is in the opinion of the Committee unable properly to manage his or her affairs, then such payments shall be paid in such of the following ways as the Committee deems best: (a) to such person directly; (b) to the legally appointed guardian or conservator of such person; (c) to some relative or friend of such person for his or her benefit; (d) for the benefit of such person in such manner as the Committee considers advisable. Any payment made in accordance with the provisions of -73- this Article shall be a complete discharge of any liability for the making of such payment under the Plan, and the distributee's receipt shall be a sufficient discharge to the Company. ARTICLE VIII Administration The Plan shall be administered by the Compensation Committee of the Board. The Committee shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, to construe and interpret the Plan, decide all questions of eligibility and determine the amount and time of payment of benefits hereunder. The Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided under the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. No Participant who is a member of such Committee may vote on any question relating specifically to himself or herself. ARTICLE IX Miscellaneous 9.1 Other Agreements. The Plan shall not affect in any way the rights or obligations of a Director under any deferred compensation or other agreement between the Director and the Company or the Parent, including, but not limited to, the KU Energy Corporation Director Retirement Retainer Program. -74- 9.2 Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or sub- stantially all of the business and/or assets of the Company expressly to assume and to agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by sale, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Plan), and the heirs, executors and adminis- trators of each Director. 9.3 Interests Not Transferable. No person shall have any right to commute, encumber, pledge or dispose of any right to receive payments hereunder, nor shall such payments be subject to seizure, attachment or garnishment for the payments of any debts, judgments, alimony or separate maintenance obligations or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise, all payments and rights hereunder being expressly declared to be nonassignable and nontransferable. 9.4 Amendment and Termination. The Plan may be amended from time to time or terminated by the Board at any time, but no amendment or termination may adversely affect the rights -75- of any person without his or her prior written consent. 9.5 Applicable Law. This Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Kentucky. 9.6 Notices. For all purposes of this Plan, all communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to a Participant at his or her principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9.7 Severability: Each section, subsection and lesser section of this Plan constitutes a separate and distinct under- taking, covenant and/or provision hereof. Whenever possible, each provision of this Plan shall be interpreted in such manner as to be effective and valid under applicable law. In the event that any provision of this Plan shall finally be determined to be unlawful, such provision shall be deemed severed from this Plan, but every other provision of this Plan shall remain in full force and effect, and in substitution for any such provision held unlawful, there shall be substituted a provision of similar import reflecting the original intention of the parties hereto to -76- the extent permissible under law. 9.8 Withholding of Taxes: The Company may withhold from any amounts payable under this Plan all federal, state, city and other taxes as shall be legally required. IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its President and its Corporate Seal to be hereunto affixed, attested by its Secretary, on this 19th day of May, 1992. KENTUCKY UTILITIES COMPANY By /s/ John T. Newton President [Corporate Seal] ATTEST: /s/ Michael R. Whitley Secretary -77- EX-12 6 EXHIBIT 12 KENTUCKY UTILITIES COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, 1993 1992 1991 1990 1989 (in thousands except ratios) Earnings Income Before Cumulative Effect of a Change in Accounting Principle $ 81,286 $ 76,298 $ 84,755 $ 80,113 $ 82,298 Adjustments Fixed charges 32,899 40,965 38,185 37,351 36,575 Income taxes Current Federal 35,893 30,838 37,241 30,618 23,674 Current State 9,484 7,951 9,252 8,866 4,665 Deferred Federal--Net 2,837 2,269 570 3,024 12,766 Deferred State--Net 71 561 160 (26) 4,115 Deferred investment tax credit--Net (107) (130) (654) (151) (161) Income taxes included in Other Income and Deductions Current Fed and State (2,616) (224) 2,085 4,167 3,697 Deferred Fed and State 2,817 1,144 (458) (535) (825) Amortization of investment credit (4,024) (4,019) (3,723) (4,039) (4,127) Undistributed income of Electric Energy, Inc (38) (53) 5 76 (101) Total Earnings $158,502 $155,600 $167,418 $159,464 $162,576 Fixed Charges Int on long-term debt $ 31,650 $ 39,571 $ 36,559 $ 36,132 $ 35,663 Other interest charges 1,249 1,394 1,626 1,219 912 Total Fixed Charges $ 32,899 $ 40,965 $ 38,185 $ 37,351 $ 36,575 Ratio of Earnings to Fixed Charges 4.82 3.80 4.38 4.27 4.45 ____________ Note--Rentals are not material and have not been included in fixed charges.
-78- EX-21 7 EXHIBIT 21 KENTUCKY UTILITIES COMPANY LIST OF SUBSIDIARIES Electric Energy, Inc., an Illinois corporation--Kentucky Utilities owns 20% of EEI's common stock. -79- EX-23 8 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the previously filed Form S-8 Registration Statement of KU Energy Corporation and Kentucky Utilities Company (File No. 33-44234) and Kentucky Utilities Company's previously filed Form S-3 Registration Statement (File No. 33-69852) of our report dated January 26, 1994, included in Kentucky Utilities Company's Form 10-K for the year ended December 31, 1993. /s/ Arthur Andersen & Co. Arthur Andersen & Co. Chicago, Illinois March 14, 1994 -80- EX-99.A 9 EXHIBIT 99.A DESCRIPTION OF COMMON STOCK General. The authorized capital stock of Kentucky Utilities consists of 5,300,000 shares of Preferred Stock, cumulative, without par value, issuable in series, of which 600,000 shares were outstanding at December 31, 1993, 2,000,000 shares of Preference Stock, cumulative, without par value, issuable in series, and 80,000,000 shares of Common Stock, without par value of which 37,817,878 shares were outstanding (all of which were held by KU Energy) at December 31, 1993. No shares of Preference Stock are issued or outstanding. The following statements, unless the context otherwise indicates, are brief summaries of the substance or general effect of certain provisions of Kentucky Utilities' Restated Articles of Incorporation and resolutions and amendments establishing series of Preferred Stock (collectively, the "Articles") and of Kentucky Utilities' Mortgage Indenture, as amended, securing its first mortgage bonds (the "Indenture"). The statements make use of defined terms, are not complete and do not give effect to statutory or common law. Dividend Rights. The Board of Directors of Kentucky Utilities may declare dividends on the Common Stock out of any surplus or net profits of Kentucky Utilities legally available for the purpose, provided full cumulative dividends on the Preferred Stock and the Preference Stock for the current and all past quarterly dividend periods shall have been paid or declared and set apart for payment and Kentucky Utilities is not in arrears in its sinking fund obligations in respect of any shares of Preferred Stock or Preference Stock. Limitations on Dividends on Common Stock. The Indenture provides that, so long as certain currently outstanding series of First Mortgage Bonds are outstanding, Kentucky Utilities will not declare or pay any dividends on its Common Stock or make any other distribution on or purchase any of its Common Stock unless the amounts expended by Kentucky Utilities for maintenance and repairs and provided for depreciation subsequent to April 30, 1947, plus Kentucky Utilities' earned surplus (retained earnings) for such period and remaining after any such payment, distribution or purchase, shall aggregate not less than 15% of the gross operating revenues of Kentucky Utilities for the period. The Articles provide, in effect, that, so long as any of the Preferred Stock is outstanding, the total amount of all dividends or other distributions on Common Stock and purchases of such stock that may be paid or made during any 12-month period shall not exceed (a) 75% of the "net income available for dividends on common stock" if the ratio of "common stock equity" to "total capital" (each as defined) of Kentucky Utilities shall be 20% to 25%, or (b) 50% of such net income if such ratio shall be less than 20%. When such ratio is 25% or more, no such dividends, distributions or purchases may be paid or made which would reduce such ratio to less than 25% except to the extent permitted by clauses (a) and (b) above. As of December 31, 1993, no amount of retained earnings was restricted under the Indenture or Articles. Voting Rights. Each share of Common Stock is entitled to one vote on each matter voted on at stockholders' meetings, except as otherwise provided in the Articles, and to cumulative voting rights in the election of directors. Shares of Preferred Stock and Preference Stock are not entitled to vote for the election of directors or in respect of any other -81- matters, except as expressly provided in the Articles or as may be required by law. The Articles give to holders of Preferred Stock and Preference Stock certain special voting rights designed to protect their interest with respect to specified corporate action. In addition, in certain events relating to dividends in default on Preferred Stock, holders of Preferred Stock as a class are entitled to elect a majority of the full Board of Directors; and in certain events relating to dividends in default on the Preference Stock, holders of Preference Stock as a class are entitled to elect two directors. Liquidation Rights. Upon the liquidation or dissolution of Kentucky Utilities, the holders of Preferred Stock and the Preference Stock are entitled to be paid designated amounts out of the net assets of Kentucky Utilities in preference to the Common Stock. After such payment to holders of Preferred Stock and Preference Stock, the remaining assets and profits shall be distributed to the holders of Common Stock. Board of Directors. Kentucky Utilities' Bylaws provide for a Board of Directors comprised of from nine to eleven members as determined from time to time by the Board. The Board currently has ten members. Kentucky Utilities' Articles provide for the classification of the Board of Directors into groups with directors being elected for three-year terms subject to certain rights of holders of Preferred Stock and Preference Stock to elect directors. Preemptive Rights. Holders of Kentucky Utilities' Stock have no preemptive right to subscribe for stock or securities of Kentucky Utilities. Call of Special Meetings. Kentucky Utilities' Articles provide that no meeting of shareholders (except for certain meetings called by holders of Preferred Stock or Preference Stock) may be called by shareholders unless called by the holders of at least 51 percent of all the votes entitled to be cast on each issue proposed to be considered at the special meeting. Miscellaneous. The outstanding shares of Common Stock of Kentucky Utilities are fully paid and non-assessable. Under Kentucky and Virginia law, Kentucky Utilities may amend the Articles to increase, decrease or adjust its capital stock or any class thereof or otherwise amend any provision of the Articles or any amendment thereto, in the manner permitted by law, subject, however, to the limitations prescribed in the Articles; and all rights conferred on stockholders in the Articles or any amendment thereto are subject to the foregoing. The Transfer Agents of the Common Stock are Illinois Stock Transfer Company, Chicago, Illinois, and Harris Trust and Savings Bank, Chicago, Illinois; and the Registrar is Harris Trust and Savings Bank, Chicago, Illinois. -82- EX-99.B 10 EXHIBIT 99.B be counted in determining whether a quorum is in attendance. An abstention is not the equivalent of a "no" vote on a proposition. Shareholders may vote either in person or by duly authorized proxy. The giving of a proxy will not prevent a shareholder from voting in person at the meeting. A proxy may be revoked by a shareholder at any time prior to the voting thereof by giving written notice to the Secretary of the Company prior to such voting. All shares entitled to vote and represented by effective proxies on the enclosed form, received by the Company, will be voted at the meeting (or any adjourned session thereof) in accordance with the terms of such proxies. Each Participant in the Company's Automatic Dividend Reinvestment and Stock Purchase Plan (the "Reinvestment Plan"), Kentucky Utilities' Employee Stock Ownership Plan (the "ESOP") or the Kentucky Utilities Employee Savings Plan (the "Savings Plan") will receive a form of proxy by which such Participant may direct the agent or trustee under such Plans as to the manner of voting shares credited to the Participant's accounts under such Plans. Shareholders of record who are participants in the Reinvestment Plan will receive only one form of proxy which will be deemed to include shares held of record and shares, if any, held under such Plan. A Participant of any of such Plans wishing to vote in person at the meeting may obtain a proxy for shares credited to his account under such Plans by making a written request therefor by April 11, 1994, as follows: for the Reinvestment Plan, to George S. Brooks II, Secretary of the Company, at the address stated on page 2; for the ESOP, to Liberty National Bank and Trust, PO Box 32500, Louisville, Kentucky 40232, Attention: Kennedy H. Clark, Jr., Trust Investment Division; and for the Savings Plan, to National City Bank, Kentucky, PO Box 36010, Louisville, Kentucky 40233, Attention: Judith E. Meany. Election of Directors General. Three directors are to be elected at the meeting. Barring unforeseen circumstances and in the absence of contrary directions, the proxies solicited herewith will be voted for the election of Milton W. Hudson, John T. Newton and William L. Rouse, Jr. as directors of the Company, to hold office until the 1997 Annual Meeting of Shareholders of the Company or until their respective successors shall have been duly elected and qualified. The proxies may also be voted for a substitute nominee or nominees in the event any one or more of said persons shall be unable to serve for any reason or be withdrawn from nomination, an occurrence not now anticipated. Except as otherwise indicated, each nominee has been engaged in his present principal occupation for at least the past five years. All information regarding share ownership is as of January 31, 1994. The following information is given with respect to the nominees for election as directors: MILTON W. HUDSON, 66, has been an economic consultant - ------------ (Washington, D.C.) since 1991. He was Managing Director and - ------------ Senior Economic Advisor of Morgan Guaranty Trust Company of New York from January 1990 until his retirement in June 1991. He was Senior Vice President and Senior Economic Adviser for Morgan Guaranty from 1988 to 1990. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1990. Mr. Hudson beneficially owns 1,013 shares of Common Stock of the Company. -83- - ------------ JOHN T. NEWTON, 63, is Chairman of the Board, President and - ------------ Chief Executive Officer of the Company and Kentucky Utilities. He has been a director of the Company since 1988 and a director of Kentucky Utilities since 1974. Mr. Newton beneficially owns 25,538 shares of Common Stock of the Company which include 9,817 shares held jointly with his wife. WILLIAM L. ROUSE, JR., 61, was Chairman of the Board and Chief - ------------ Executive Officer and a director of First Security Corporation - ------------ of Kentucky, a multi-bank holding company, prior to his retirement in 1992. Mr. Rouse is a director of Ashland Oil, Incorporated. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1989. Mr. Rouse beneficially owns 1,000 shares of Common Stock of the Company. Information with respect to those directors whose terms are not expiring is as follows: MIRA S. BALL, 59, is Secretary-Treasurer and Chief Financial - ------------ Officer of Ball Homes, Inc., a single-family residential - ------------ developer and property management company. She has been a director of the Company and Kentucky Utilities since 1992. Ms. Ball beneficially owns 5,053 shares of Common Stock of the Company. Her term expires in 1996. W. B. BECHANAN, 68, retired in 1987 as Chairman of the Board and - ------------ Chief Executive Officer of Kentucky Utilities. He has been a - ------------ director of the Company since 1991 and a director of Kentucky Utilities since 1978. Mr. Bechanan beneficially owns 25,974 shares of Common Stock of the Company which include 22,389 shares held pursuant to family trusts under which Mr. Bechanan has shared investment power. His term expires in 1995. HARRY M. HOE, 68, is President and a director of J. R. Hoe & - ------------ Sons, Inc., Middlesboro, Kentucky, a foundry and casting - ------------ company. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1979. Mr. Hoe beneficially owns 14,018 shares of Common Stock of the Company which include 4,516 shares held solely by his wife. His term expires in 1995. -84- - ------------ FRANK V. RAMSEY, JR., 62, is President and Director of Dixon - ------------ Bank, Dixon, Kentucky, and a farm owner and operator. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1986. Mr. Ramsey beneficially owns 1,400 shares of Common Stock of the Company. His term expires in 1996. WARREN W. ROSENTHAL, 70, is a private investor and the owner of - ------------ Patchen Wilkes Farm, Lexington, Kentucky (a thoroughbred horse - ------------ breeding operation). Prior to September, 1989, he was Chairman of the Board and a director of Jerrico, Inc., Lexington, Kentucky, an operator of a national restaurant chain. Mr. Rosenthal is a director of Immununomedics, Inc. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1976. Mr. Rosenthal beneficially owns 17,400 shares of Common Stock of the Company. His term expires in 1996. CHARLES L. SHEARER, PH.D., 51, is President of Transylvania - ------------ University, Lexington, Kentucky. He has been a director of the - ------------ Company since 1991 and a director of Kentucky Utilities since 1987. Dr. Shearer beneficially owns 1,255 shares of Common Stock of the Company which include 200 shares held solely by his wife and 12 shares held by his children. His term expires in 1996. MICHAEL R. WHITLEY, 51, has been Senior Vice President of the - ------------ Company since 1988 and of Kentucky Utilities since 1987. Mr. - ------------ Whitley was Secretary of Kentucky Utilities from 1978 until 1992 and of the Company from 1988 until 1992. Mr. Whitley has been a director of the Company and Kentucky Utilities since 1992. Mr. Whitley beneficially owns 13,562 shares of the Common Stock of the Company which include 337 shares held solely by his wife. His term expires in 1995. Voting Securities Beneficially Owned by Directors, Nominees and Executive Officers; Other Information. The directors, nominees and executive officers of the Company and Kentucky Utilities owned beneficially at February 1, 1994 an aggregate of 157,619 shares of Common Stock of the Company, representing in the aggregate .4% of such stock. On January 12, 1993, a report on Form 4 (due January 10, 1993) was filed on behalf of John T. Newton, Chairman, President and CEO of the Company, with the Securities and Exchange Commission reporting a purchase of Company Common Stock. Meetings and Committees of the Board of Directors. All members of the Company's Board of Directors are currently members of Kentucky Utilities' Board of Directors. The Board of Directors of the Company and the Board of Directors of Kentucky Utilities have each established five committees: the Executive -85- Directors' Compensation. Each director of the Company is also a director of its principal subsidiary, Kentucky Utilities. Each director who is not an employee of the Company is paid an annual retainer of $15,000. This retainer is reduced by any retainer paid from a Company subsidiary. Kentucky Utilities pays non-employee directors an annual retainer of $12,600. Thus, the net annual Company retainer paid to such directors is $2,400 but the aggregate paid for serving on both Boards is $15,000. In addition to an annual retainer, the Company and Kentucky Utilities pay each non-employee director a $750 fee for each meeting of a Board or a particular committee attended; provided that if the Boards of the Company and Kentucky Utilities meet on the same day, only one $750 fee is paid for both meetings and if the same committee of the Boards of the Company and Kentucky Utilities meet on the same day, only one $750 fee is paid for both meetings. Out-of-pocket travel expenses are paid to directors for all meetings attended. All eligible directors of the Company and Kentucky Utilities are entitled to participate in the Director Retirement Retainer Programs (the "Director Retirement Plans") of the Company and Kentucky Utilities. Directors who are not, and have not previously been, an officer of Kentucky Utilities, the Company, or their affiliated companies ("outside directors") are eligible to participate. An outside director who is 65 years of age and has completed at least five consecutive years of service on the Company's and/or Kentucky Utilities' Board will receive, upon termination of service from a Board for any reason other than death, an annual retirement benefit equal to the annual retainer paid to such Board's directors in effect as of such termination, payable monthly over a period of years equal to the number of full years such director served on the Board, but not in excess of 10 years. Such payments cease, however, if the director dies before all such payments are made. In the event of a change in control of the Company or Kentucky Utilities, any person then receiving a retirement benefit would be paid, within 30 days of the change in control, a lump sum payment equal to the discounted present value of all then unpaid installments of the director's retirement benefit. In the event of a change in control, each outside director in office immediately prior to such change in control will be eligible to receive an accelerated retirement benefit if the director terminates service from a Board for any reason other than death within three years of the date of the change in control. Such accelerated retirement benefit would be paid in a lump sum within 30 days of such termination and would be equal to the discounted present value of the retirement benefit which such director would have received if the director had retired from the Board at age 70 (or for certain directors, 72) and lived to collect the full benefit otherwise payable under the applicable Director Retirement Plan. Such benefit would be based on the higher of the annual retainer in effect immediately prior to the change in control or immediately prior to such director's termination of service. Change in control is broadly defined under the Director Retirement Plans and includes any merger, consolidation, reorganization or sale of substantially all of the assets of the Company or Kentucky Utilities which results in less than a majority of the voting power of the resulting entity being owned by the holders of the Common Stock of the Company prior to the transaction; a change in the majority of the Board of Directors of the Company or Kentucky Utilities over a two-year period which is not approved by two-thirds of the incumbent directors; and the acquisition by any person or group of persons of beneficial ownership of 10% or more of the Common Stock of the Company or Kentucky Utilities. The annual retainer in effect upon the director's termination from a Board will be calculated as described in the first paragraph under this caption. Directors may elect to have all or a specified portion of their director's fees deferred under the Director Deferred Compensation Plans (the "Director Deferred Compensation Plans") of the Company and Kentucky Utilities. Amounts deferred will be maintained in unfunded accounts for each participant, which bear interest at a floating rate based upon the average prime rate charged by banks as reported in the Federal Reserve -86- Bulletin. Amounts credited under the Director Deferred Compensation Plans will be paid to the participant upon termination as a director for any reason other than death in a single payment or, with interest, quarterly over a period of not to exceed 40 calendar quarters, or, with interest, annually over a period of not to exceed 10 years. In the event of a participant's death, payment of any remaining balance of credited amounts will be made in a single payment to a designated beneficiary. In certain cases, directors may receive a distribution of deferred amounts in the event of substantial financial hardship. In the event of a change in control of the Company or Kentucky Utilities, any director who terminated prior to the change in control whose deferred amounts have not been distributed would receive, within 15 days of the change in control, a lump sum payment of the undistributed amounts. In the event of a change in control, each director who terminates thereafter would be paid, within 15 days after termination, a lump sum payment of the director's deferred amounts. Change in control has essentially the same meaning as under the Director Retirement Plans described above. Because officers of the Company and Kentucky Utilities receive no compensation for services as directors, any director who is an officer is not eligible to participate in the plans. Executive Compensation. The following table contains information with respect to the compensation paid by (or earned from) the Company and Kentucky Utilities, for all services rendered during 1991 through 1993 in all capacities, to the Chief Executive Officer and the four most highly compensated executive officers of the Company and Kentucky Utilities: Summary Compensation Table
LONG TERM COMPENSATION ANNUAL COMPENSATION PAYOUTS ----------------------------------- ------------ NAME AND OTHER ANNUAL ALL OTHER PRINCIPAL SALARY BONUS COMPENSATION LTIP PAYOUTS COMPENSATION POSITION YEAR ($) ($)(1) ($)(2) ($) ($)(3) --------- ---- ------ ------ ------------ ------------ ------------ JOHN T. NEWTON; 1993 $424,237 $144,362 $11,886 $ 0 $8,444 Chairman of the Board, 1992 414,909 99,075 11,161 -- 4,870 President, Chief 1991 361,212 121,295 9,998 -- 3,299 Executive Officer & Director of the Company & Kentucky Utilities MICHAEL R. WHITLEY; 1993 219,529 62,164 1,258 0 6,045 Senior Vice President 1992 210,682 41,834 21 -- 3,574 & Director of the 1991 187,913 53,605 0 -- 2,748 Company & Kentucky Utilities JAMES W. TIPTON; 1993 204,042 60,331 1,201 0 5,712 Senior Vice President 1992 205,199 41,834 18 -- 3,346 of Kentucky Utilities 1991 187,913 53,605 0 -- 2,643 O. M. GOODLETT; 1993 188,724 54,257 0 0 4,497 Senior Vice President of 1992 160,215 24,736 0 -- 2,182 Kentucky Utilities 1991 136,610 29,640 0 -- 1,968 ROBERT M. HEWETT; 1993 144,850 32,514 0 0 4,180 Vice President of 1992 139,730 24,011 0 -- 2,065 Kentucky Utilities 1991 124,235 28,468 0 -- 1,856
-87- - -------- (1) Bonuses are paid under the Annual Performance Incentive Plan. Any bonus earned but deferred under the Executive Deferred Compensation Plan is included in the Table. (2) Other annual compensation consists of amounts for group term life insurance and related taxes. (3) All other compensation includes above market rate interest earned on deferred compensation and the employer matching contribution made to the officer's account in the 401(k) Employee Savings Plan. Such amounts for 1993 are shown in the following table.
INTEREST ON 401(K) EXECUTIVE DEFERRED MATCHING OFFICER COMPENSATION CONTRIBUTION --------- ------------ ------------ John T. Newton................................ $3,947 $4,497 Michael R. Whitley............................ 1,548 4,497 James W. Tipton............................... 1,215 4,497 O. M. Goodlett................................ 0 4,497 Robert M. Hewett.............................. 0 4,180
Performance Shares contingently awarded under the Company's and Kentucky Utilities' Performance Share Plans in 1993 are reported in the Long Term Incentive Plan awards table below. Normally only Long-Term Incentive Awards for the most recently completed fiscal year are disclosed. Because in 1993 the Company submitted for approval by its shareholders the adoption of the KUE Performance Share Plan and amendment of the Kentucky Utilities Performance Share Plan, applicable rules required disclosure in the Company's 1993 proxy materials of awards made in 1992 and 1993. Accordingly, the awards shown below under the Kentucky Utilities Performance Share Plan under "Number of Units or Other Rights" are the same awards as shown in last year's proxy statement under "Number of Performance Shares" and "Year of Contingent Grant--1993." However, amounts shown below under "Estimated Future Payouts Under Non-Stock Price-Based Plans" have been recalculated based on the price of the Company's Common Stock on December 31, 1993. A description of how awards are determined is presented under "Report of Compensation Committee on Executive Compensation." A description of the scale by which performance targets are set follows the table. Long Term Incentive Plan--Awards In Last Fiscal Year
NUMBER PERFORMANCE OF OR OTHER UNITS PERIOD OR UNTIL ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK OTHER MATURATION PRICE-BASED PLANS(3) RIGHTS OR ---------------------------------------------- NAME (#)(1) PAYOUT(2) THRESHOLD ($) TARGET ($) MAXIMUM ($) ---- ------ ----------- ------------- -------------------- ----------- John T. Newton.......... 7,110 3 $ 0 $103,095 or $154,642 $206,190 Michael R. Whitley...... 2,915 3 0 42,267 or 63,401 84,535 James W. Tipton......... 2,845 3 0 41,252 or 61,878 82,505 O. M. Goodlett.......... 1,920 3 0 27,840 or 41,760 55,680 Robert M. Hewett........ 1,210 3 0 17,545 or 26,317 35,090
- -------- (1) Constitutes Performance Shares contingently granted under the Kentucky Utilities Performance Share Plan in 1993. (2) Number of years in Performance Cycle. (3) See description below for the scale that determines which amount would be applicable. -88- Under the Kentucky Utilities Performance Share Plan, which commenced in 1990 and is described under "Report of Compensation Committee on Executive Compensation," above, Performance Shares have been contingently granted each year since 1990 in each case for a three-year Performance Cycle. For the Performance Cycle commencing in 1990, it has been determined that there is a zero payout. Shares of Common Stock are awarded under the plan only after the end of the Performance Cycle and if the performance goals have been met. Participants will not be able to sell such Common Stock for a designated period, expected to be seven years, or until earlier retirement, death or as otherwise provided in the Performance Share Plan. For the Performance Cycles commencing in 1992 and prior years, payouts of awards will be based on the extent to which Kentucky Utilities' growth in earnings per share compares to 19 selected utilities (including Kentucky Utilities). The scale that determines if awards are earned is as follows: if Kentucky Utilities ranks in the top three, the payout will be 100% of the contingent grant (the Maximum shown in the table), if its rank is fourth through sixth, 75%, if its rank is seventh or eighth, 50% (the two figures shown as Target in the table) and if Kentucky Utilities ranks ninth or below, no shares will be awarded for that Performance Cycle (shown as the Threshold in the table). The dollar amounts of the Threshold, Target and Maximum awards are calculated assuming shares are awarded and based on the price of the Common Stock on December 31, 1993 ($29). The actual value of the shares awarded, if any, may be higher or lower. Payouts for the 1993-1995 Cycle will be determined by calculating the average return on equity for the Performance Cycle of Kentucky Utilities compared to the average return on equity for the Performance Cycle of the comparable utilities. The returns will then be ranked in descending order, and the payout will be determined in accordance with the scale of Kentucky Utilities' rank described above (i.e. top 3=100%; 4-6=75%; 7-8=50%; 9 or below=0). The KU Energy Performance Share Plan, which commenced in 1993, operates similarly to the Kentucky Utilities Performance Share Plan described above. The group of 19 comparative companies is selected from among utility holding companies. Payouts will be determined based on average return on equity of KU Energy compared to the average return on equity for the Performance Cycle of the comparable utility holding companies. Each of the officers of the Company and Kentucky Utilities is entitled to participate in the Kentucky Utilities employee retirement plans described below. Executive officers, like other employees, are eligible to participate in Kentucky Utilities' Retirement Plan, and all eligible persons whose compensation is reported in the Summary Compensation Table participated in the Retirement Plan. Contributions to the Retirement Plan are determined actuarially and cannot be readily calculated as applied to any individual participant or small group of participants. Generally, compensation for Retirement Plan purposes means base compensation while a participant, excluding overtime pay, commissions, performance incentive compensation or other extraordinary compensation. The compensation for Retirement Plan purposes of the individuals named in the foregoing table is substantially equivalent to the base salary reported in the Summary Compensation Table. As of December 31, 1993, the credited years of service under the Retirement Plan for such persons were as follows: Mr. Newton, 35 years; Mr. Whitley, 29 years; Mr. Tipton, 26 years; Mr. Goodlett, 23 years; and Mr. Hewett, 24 years. Retirement Plan benefits depend upon length of service, age at retirement and amount of compensation (determined in accordance with the Retirement Plan). Although higher amounts are determined under the Retirement Plan and shown in the table below, in most cases, pension benefits under the Retirement Plan or compensation used to measure such benefits will -89- be reduced to comply with maximum limitations imposed by the Internal Revenue Code. Under such limitations effective in 1994, no base compensation above $150,000 may be used to calculate a benefit, except in the case of certain executive officers to preserve benefits accrued under previously applicable rules. In addition, no annual benefit derived from employer contributions may exceed $118,800. Assuming retirement at age 65, a Retirement Plan participant would be eligible at retirement for a maximum annual pension benefit (without taking into account the Internal Revenue Code limitations referred to above) set forth in the following table. However, assuming retirement at age 65, assuming 1993 base compensation and taking into account the Internal Revenue Code limitations, the annual pension benefit under the Retirement Plan for the executive officers named in the Summary Compensation Table would be as follows: Mr. Newton, $120,818, Mr. Whitley, $102,545, Mr. Tipton, $93,978, Mr. Goodlett, $84,578, and Mr. Hewett, $87,098.
ANNUAL BENEFIT AFTER SPECIFIED YEARS OF SERVICE(2) FINAL AVERAGE ------------------------------------------------------------- BASE PAY(1) 15 20 25 30 35 40 45 - ------------- ------- -------- -------- -------- -------- -------- -------- $125,000 $24,999 $ 33,333 $ 41,666 $ 49,999 $ 58,332 $ 66,665 $ 74,998 150,000......... $29,999 $ 39,999 $ 49,999 $ 59,999 $ 69,998 $ 79,998 $ 89,998 200,000......... $39,999 $ 53,332 $ 66,665 $ 79,998 $ 93,331 $106,664 $119,997 250,000......... $49,999 $ 66,665 $ 83,331 $ 99,998 $116,664 $133,330 $149,996 300,000......... $59,999 $ 79,998 $ 99,998 $119,997 $139,997 $159,996 $179,996 350,000......... $69,998 $ 93,331 $116,664 $139,997 $163,329 $186,662 $209,995 400,000......... $79,998 $106,664 $133,330 $159,996 $186,662 $213,328 $239,994 450,000......... $89,998 $119,997 $149,996 $179,996 $209,995 $239,994 $269,993 500,000......... $99,998 $133,330 $166,663 $199,995 $233,328 $266,660 $299,993
- -------- (1) "Final average base pay" generally means the average annual compensation during the 60 consecutive months of highest pay during the period of employment. (2) Annual benefits shown are on a straight life annuity basis. Amounts shown are not subject to any deduction for Social Security benefits or other offset amounts. Benefits may be reduced by Internal Revenue Code limitations described above. Executive officers and certain other employees of the Company and Kentucky Utilities are eligible to be members in Kentucky Utilities' Supplemental Security Plan which provides retirement, disability and death benefits as well as a change in control retirement benefit and a change in control severance benefit. As to executive officers, upon retirement at age 65, an eligible member will receive 15 annual payments of an amount equal to 75% of basic compensation, offset by benefits payable from any defined benefit plan of the Company or an affiliate (such as Kentucky Utilities' Retirement Plan) and social security benefits. Basic compensation is the annualized base monthly salary of the member, exclusive of performance incentive compensation or other extraordinary compensation, in effect at termination of employment by retirement, disability or death. Upon termination of employment by death prior to age 65, the member's beneficiary will receive an annual benefit equal to 50% of basic compensation until the later of the date such member would have attained age 65 or completion of 15 annual payments. Upon termination of employment by disability, the member will receive the "retirement benefit" if the member lives to retirement age and is then disabled or the "death benefit" if the member dies prior to retirement age and is disabled at death. Benefits will be paid from the general funds of the employer. The estimated annual benefits from Kentucky Utilities' Supplemental Security Plan that would be payable upon retirement at normal retirement age for the individuals named in the Summary Compensation Table (assuming 1993 basic salary) are as follows: Mr. Newton, $180,550; Mr. Whitley, $48,121; Mr. Tipton, $49,182; Mr. Goodlett, $42,376; and Mr. Hewett, $5,737. Under the terms of the Supplemental Security Plan, the foregoing amounts increased from those reported in 1993 because of -90- reductions in amounts that will be payable under the Retirement Plan resulting from the Internal Revenue Code limitations described above. To assist in providing funds to pay such benefits when they become payable, insurance is purchased on the lives of the members of the Supplemental Security Plan. Under the Supplemental Security Plan, members are entitled to change in control severance benefits in the following circumstances: (i) involuntary termination of the individual's employment within two years following the change in control for reasons other than cause, death, permanent disability or attainment of age 65, (ii) resignation within two years of the change in control for good reason (as defined in the plan) and (iii) in respect of the Chairman of the Board, the President, the Chief Financial Officer or, if such positions are filled by less than three persons, the Executive Vice President, in each case of Kentucky Utilities, termination of employment for any reason during the 30-day period commencing on the first anniversary of the change in control. In such circumstances, the employee will be entitled to a change in control severance payment equal to a certain percentage (300% in the case of executive officers of the Company or Kentucky Utilities) of the sum of (i) the employee's basic compensation and (ii) the employee's target annual performance incentive compensation. In addition, the employee will be entitled to continuation of certain employee welfare benefits for up to three years following termination of employment, subject to an offset for comparable benefits. Under the Supplemental Security Plan, the employee is entitled to receive additional payments, if necessary, to reimburse the employee for certain federal excise tax liabilities.The Supplemental Security Plan's change in control retirement benefit provides that, upon termination of employment, other than for cause (as defined in the Supplemental Security Plan) following a change in control, an eligible member will receive a lump sum amount equal to the present value of the retirement benefit (described in the preceding paragraph and assuming the member is then 65 but prorated if the member then has less than 15 years of service, including an assumed three additional years of service for executive officers); provided that, if the termination is more than two years from the change in control, the calculation of years of service will not include the assumed additional three years and the compensation upon which the benefit is calculated will be the actual compensation in effect at termination (rather than the compensation in effect at the change in control which, if higher, would be used if termination occurred within two years of the change in control). The change in control severance benefits and change in control retirement benefits are effective for a minimum of five years, which is automatically extended from year to year unless Kentucky Utilities gives notice that it does not wish to extend the period of effectiveness. Change in control has essentially the same meaning as under the Director Retirement Plans described under "Directors' Compensation." The Performance Share Plans and Executive Deferred Compensation Plans contain provisions relating to a change in control. Under each of these plans a change in control has essentially the same meaning as under the Director Retirement Plans described under "Directors' Compensation." Under the Performance Share Plans, if a participant's employment is terminated voluntarily or involuntarily after a change in control, such participant will have the right to an immediate cash payment for all Performance Cycles in which the participant is currently participating. The amount payable to a participant in the event of termination in connection with a change in control will be determined in accordance with the formula specified in the Performance Share Plan. In addition, after a change in control, whether or not the participant is terminated, under the Executive Deferred Compensation Plans, all amounts held under such plans will be paid to the participant. The Incentive Plans do not contain any change in control provisions. General Independent Public Accountants. The Audit Committee of the Board has selected the firm of Arthur Andersen & Co. as independent public accountants to examine the financial statements of the Company and -91- -----END PRIVACY-ENHANCED MESSAGE-----