-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OUkoojt/WMu3m7GEt7VvRTkDRpJNTTs+mnGZYxDHkSIQVBMfUH5W2dA2DfkRvwYm A6+UotGn51GblV6PWRMYbQ== 0000835715-97-000014.txt : 19970825 0000835715-97-000014.hdr.sgml : 19970825 ACCESSION NUMBER: 0000835715-97-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KU ENERGY CORP CENTRAL INDEX KEY: 0000835715 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 611141273 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10944 FILM NUMBER: 97659325 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 FORMER COMPANY: FORMER CONFORMED NAME: HOLDINGS INC DATE OF NAME CHANGE: 19600201 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03464 FILM NUMBER: 97659326 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 10-Q 1 KU ENERGY CORP. AND KENTUCKY UTILITIES CO. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-10944 KU Energy Corporation 61-1141273 (A Kentucky Corporation) One Quality Street Lexington, Kentucky 40507-1428 (606) 255-2100 1-3464 Kentucky Utilities Company 61-0247570 (A Kentucky and Virginia Corporation) One Quality Street Lexington, Kentucky 40507-1428 (606) 255-2100 Indicate by check mark whether the Registrants (1) have 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 such Registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: KU Energy Corporation: Common stock, no par value, 37,817,517 shares outstanding at August 12, 1997 Kentucky Utilities Company: Common stock, no par value, 37,817,878 shares outstanding and held by KU Energy Corporation at August 12, 1997 -1- KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 CONTENTS* PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements KU ENERGY CORPORATION Consolidated Statements of Income 3-4 Consolidated Statements of Cash Flows 5 Consolidated Balance Sheets 6 KENTUCKY UTILITIES COMPANY Statements of Income 7-8 Statements of Cash Flows 9 Balance Sheets 10 CONDENSED NOTES TO FINANCIAL STATEMENTS OF KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY 11-14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY 15-23 PART II. OTHER INFORMATION Item 1: Legal Proceedings 24 Item 4: Submission of Matters to a Vote of Security Holders 24 Item 5: Other Information 25 Item 6: Exhibits and Reports on Form 8-K 39 Signatures 40 *Information included herein which relates solely to KU Energy Corporation is provided solely by KU Energy Corporation and not by Kentucky Utilities Company and shall be deemed not included in the Quarterly Report of Kentucky Utilities Company. -2- PART I. FINANCIAL INFORMATION KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share amounts) For the Three Months Ended June 30, 1997 1996 Operating Revenues $162,861 $167,510 Operating Expenses: Fuel, principally coal, used in generation 41,613 45,079 Electric power purchased 19,599 17,589 Other operating expenses 31,093 30,727 Maintenance 20,494 17,606 Depreciation 20,957 20,154 Federal and state income taxes 5,928 9,636 Other taxes 3,855 3,894 Total Operating Expenses 143,539 144,685 Net Operating Income 19,322 22,825 Other Income and Deductions: Interest and dividend income 572 666 Other income and deductions - net 2,620 2,927 Total Other Income and Deductions 3,192 3,593 Income Before Interest and Other Charges 22,514 26,418 Interest and Other Charges 10,464 10,345 Net Income $ 12,050 $ 16,073 Average Common Shares Outstanding 37,818 37,818 Earnings Per Common Share $ .32 $ .42 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -3- PART I. FINANCIAL INFORMATION KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share amounts) For the Six Months Ended June 30, 1997 1996 Operating Revenues $341,769 $358,500 Operating Expenses: Fuel, principally coal, used in generation 86,326 99,104 Electric power purchased 37,202 35,093 Other operating expenses 62,249 60,724 Maintenance 32,507 31,810 Depreciation 41,839 40,219 Federal and state income taxes 21,262 25,336 Other taxes 7,926 8,261 Total Operating Expenses 289,311 300,547 Net Operating Income 52,458 57,953 Other Income and Deductions: Interest and dividend income 1,184 1,551 Other income and deductions - net 4,175 3,995 Total Other Income and Deductions 5,359 5,546 Income Before Interest and Other Charges 57,817 63,499 Interest and Other Charges 20,904 21,107 Net Income $ 36,913 $ 42,392 Average Common Shares Outstanding 37,818 37,818 Earnings Per Common Share $ .98 $ 1.12 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -4- KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Six Months Ended June 30, 1997 1996 Cash Flows from Operating Activities: Net Income $ 36,913 $ 42,392 Items not requiring (providing) cash currently: Depreciation 41,839 40,219 Deferred income taxes and investment tax credit 4,370 701 Changes in current assets and liabilities: Change in fuel inventory (6,294) (8,089) Change in accounts receivable 6,903 1,505 Change in accounts payable (1,316) 3,050 Change in liability to ratepayers - (6,599) Change in escrow funds - 6,599 Change in other current assets and liabilities (3,398) 6,467 Other--net (10,467) 2,806 Net Cash Provided by Operating Activities 68,550 89,051 Cash Flows from Investing Activities: Construction expenditures - utility (41,824) (47,431) Investment in independent power projects (4,805) (666) Proceeds from insurance reimbursements 4,056 201 Other 872 874 Net Cash Used by Investing Activities (41,701) (47,022) Cash Flows from Financing Activities: Short-term borrowings - net (2,400) (14,900) Issuance of long-term debt - 35,682 Funds deposited with trustee - net - 3,779 Retirement of long-term debt, incl. premiums (21) (36,192) Payment of common stock dividends (33,280) (32,523) Net Cash Used by Financing Activities (35,701) (44,154) Net Decrease in Cash and Cash Equivalents (8,852) (2,125) Cash and Cash Equivalents Beginning of Period 30,270 29,492 Cash and Cash Equivalents End of Period $ 21,418 $ 27,367 Supplemental Disclosures Cash paid for: Interest $ 18,504 $ 17,896 Income taxes $ 20,448 $ 26,975 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -5- KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands) As of As of Jun. 30, Dec. 31, ASSETS 1997 1996 Utility Plant: Plant in service, at cost $ 2,498,103 $ 2,482,812 Less: Accumulated depreciation 1,099,749 1,067,911 1,398,354 1,414,901 Construction work in progress 79,508 63,435 1,477,862 1,478,336 Current Assets: Cash and cash equivalents 21,418 30,270 Accounts receivable 39,840 50,498 Accrued utility revenues 26,585 24,239 Fuel, principally coal, at average cost 37,189 30,895 Materials and supplies, at average cost 23,370 21,656 Other 6,679 7,486 155,081 165,044 Other Assets: Investment in leveraged leases 26,352 24,650 Investment in independent power projects 9,614 4,745 Unamortized loss on reacquired debt 10,297 10,838 Other 47,535 43,335 93,798 83,568 Total Assets $ 1,726,741 $ 1,726,948 CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $ 649,135 $ 645,513 Preferred stock of Subsidiary 40,000 40,000 Long-term debt of Subsidiary 546,351 546,373 1,235,486 1,231,886 Current Liabilities: Long-term debt due within one year 21 21 Short-term borrowings 51,800 54,200 Accounts payable 26,937 28,253 Accrued interest 7,892 8,048 Accrued taxes 2,849 4,005 Customers' deposits 9,454 8,746 Accrued payroll and vacations 10,230 9,921 Other 7,730 5,954 116,913 119,148 Other Liabilities: Accumulated deferred income taxes 249,208 242,674 Accumulated deferred investment tax credits 28,123 30,167 Regulatory tax liability 52,642 54,388 Other 44,369 48,685 374,342 375,914 Total Capitalization and Liabilities $ 1,726,741 $ 1,726,948 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -6- KENTUCKY UTILITIES COMPANY STATEMENTS OF INCOME (Unaudited) (in thousands) For the Three Months Ended June 30, 1997 1996 Operating Revenues $162,868 $167,516 Operating Expenses: Fuel, principally coal, used in generation 41,613 45,079 Electric power purchased 19,599 17,589 Other operating expenses 30,483 30,214 Maintenance 20,490 17,604 Depreciation 20,911 20,107 Federal and state income taxes 6,215 9,215 Other taxes 3,815 3,845 Total Operating Expenses 143,126 143,653 Net Operating Income 19,742 23,863 Other Income and Deductions: Interest and dividend income 353 401 Other income and deductions - net 1,891 1,706 Total Other Income and Deductions 2,244 2,107 Income Before Interest Charges 21,986 25,970 Interest Charges 9,898 9,780 Net Income 12,088 16,190 Preferred Stock Dividend Requirements 564 564 Net Income Applicable to Common Stock $ 11,524 $ 15,626 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -7- KENTUCKY UTILITIES COMPANY STATEMENTS OF INCOME (Unaudited) (in thousands) For the Six Months Ended June 30, 1997 1996 Operating Revenues $341,782 $358,512 Operating Expenses: Fuel, principally coal, used in generation 86,326 99,104 Electric power purchased 37,202 35,093 Other operating expenses 61,271 59,902 Maintenance 32,501 31,806 Depreciation 41,746 40,125 Federal and state income taxes 21,742 25,551 Other taxes 7,828 8,080 Total Operating Expenses 288,616 299,661 Net Operating Income 53,166 58,851 Other Income and Deductions: Interest and dividend income 719 1,014 Other income and deductions - net 2,937 3,806 Total Other Income and Deductions 3,656 4,820 Income Before Interest Charges 56,822 63,671 Interest Charges 19,773 19,978 Net Income 37,049 43,693 Preferred Stock Dividend Requirements 1,128 1,128 Net Income Applicable to Common Stock $ 35,921 $ 42,565 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -8- KENTUCKY UTILITIES COMPANY STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Six Months Ended June 30, 1997 1996 Cash Flows from Operating Activities: Net Income $ 37,049 $ 43,693 Items not requiring (providing) cash currently: Depreciation 41,746 40,125 Deferred income taxes and investment tax credit 1,789 (497) Changes in current assets and liabilities: Change in fuel inventory (6,294) (8,089) Change in accounts receivable 7,247 1,447 Change in accounts payable (1,754) 3,650 Change in liability to ratepayers - (6,599) Change in escrow funds - 6,599 Change in other current assets and liabilities (2,112) 6,435 Other--net (4,845) 3,307 Net Cash Provided by Operating Activities 72,826 90,071 Cash Flows from Investing Activities: Construction expenditures - utility (41,824) (47,431) Proceeds from insurance reimbursements 4,056 201 Net Cash Used by Investing Activities (37,768) (47,230) Cash Flows from Financing Activities: Short-term borrowings - net (2,400) (14,900) Issuance of long-term debt - 35,682 Funds deposited with trustee - net - 3,779 Retirement of long-term debt, incl. premiums (21) (36,192) Payment of dividends (34,408) (33,651) Net Cash Used by Financing Activities (36,829) (45,282) Net Decrease in Cash and Cash Equivalents (1,771) (2,441) Cash and Cash Equivalents Beginning of Period 5,719 5,697 Cash and Cash Equivalents End of Period $ 3,948 $ 3,256 Supplemental Disclosures Cash paid for: Interest $ 18,504 $ 17,896 Income taxes $ 21,139 $ 27,918 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -9- KENTUCKY UTILITIES COMPANY BALANCE SHEETS (Unaudited) (in thousands) As of As of Jun. 30, Dec. 31, 1997 1996 ASSETS Utility Plant: Plant in service, at cost $2,498,103 $2,482,812 Less: Accumulated depreciation 1,099,749 1,067,911 1,398,354 1,414,901 Construction work in progress 79,508 63,435 1,477,862 1,478,336 Current Assets: Cash and cash equivalents 3,948 5,719 Accounts receivable 39,580 50,582 Accrued utility revenues 26,585 24,239 Fuel, principally coal, at average cost 37,189 30,895 Materials and supplies, at average cost 23,370 21,656 Other 6,679 7,486 137,351 140,577 Other Assets: Unamortized loss on reacquired debt 10,297 10,838 Other 44,863 43,304 55,160 54,142 Total Assets $1,670,373 $1,673,055 CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $ 598,038 $ 595,397 Preferred stock 40,000 40,000 Long-term debt 546,351 546,373 1,184,389 1,181,770 Current Liabilities: Long-term debt due within one year 21 21 Short-term borrowings 51,800 54,200 Accounts payable 27,206 28,960 Accrued interest 7,892 8,048 Accrued taxes 5,396 5,383 Customers' deposits 9,454 8,746 Accrued payroll and vacations 10,184 9,862 Other 7,607 5,728 119,560 120,948 Other Liabilities: Accumulated deferred income taxes 242,494 238,542 Accumulated deferred investment tax credits 28,123 30,167 Regulatory tax liability 52,642 54,388 Other 43,165 47,240 366,424 370,337 Total Capitalization and Liabilities $1,670,373 $1,673,055 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -10- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. PRESENTATION OF CONDENSED INFORMATION The unaudited interim financial statements presented herein include the consolidated statements of KU Energy Corporation and Subsidiaries (KU Energy or the Company) as well as separate financial statements for Kentucky Utilities Company (KU). KU Energy Corporation is a holding company organized under the laws of Kentucky with two first-tier subsidiaries: KU Capital Corporation (KU Capital), a non- utility subsidiary, and KU, an electric utility. KU Energy Corporation owns 100 percent of the common equity of KU Capital and KU. KU is KU Energy Corporation's principal subsidiary. The unaudited statements have been prepared by the Company and KU, respectively, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company and KU believe the disclosures are adequate to make the information presented not misleading. The Company's consolidated financial statements should be read in conjunction with the financial statements and notes thereto incorporated by reference in the Annual Report on Form 10-K of KU Energy and KU for the year ended December 31, 1996; and the KU financial statements should be read in conjunction with the KU financial statements and notes thereto included in the Annual Report on Form 10-K of KU Energy and KU for the year ended December 31, 1996. -11- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited) In the opinion of the Company and KU, the respective information furnished herein reflects all adjustments, all of which are normal and recurring, which are necessary to present fairly the results of the periods shown, and the disclosures which have been made are adequate to make the information not misleading. Results of interim periods are not necessarily indicative of results for any twelve-month period due to the seasonal nature of KU's business. Certain prior year amounts have been reclassified on a basis consistent with the June 30, 1997 presentation. 2. ENVIRONMENTAL COST RECOVERY Since August 1994, KU has been collecting an environmental surcharge from its Kentucky retail customers under a Kentucky statute which authorizes electric utilities (including KU) to implement, beginning January 1, 1993, an environmental surcharge. The surcharge is designed to recover certain operating and capital costs of compliance with federal, state or local environmental requirements associated with the production of energy from coal, including the Federal Clean Air Act as amended. KU's environmental surcharge was approved by the Kentucky Public Service Commission (PSC) in July 1994 and was implemented in August 1994. The total surcharge collections from August 1, 1994 through June 30, 1997 were approximately $49 million. The constitutionality of the surcharge statute was challenged in the Franklin County (Kentucky) Circuit Court in an action brought against KU and the PSC by the Attorney General of Kentucky and joined -12- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited) by representatives of consumer groups. In July 1995, the Circuit Court entered a judgment upholding the constitutionality of the statute, but vacating that part of the PSC's July 1994 order which the judgment describes as allowing KU to recover, under the surcharge, certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. The Circuit Court further ordered the case remanded to the PSC for a determination in accordance with the judgment. KU and the PSC assert that none of the costs included in the surcharge were incurred prior to June 1994. The Attorney General and other consumer representatives appealed to the Kentucky Court of Appeals that part of the Circuit Court judgment upholding the constitutionality of the surcharge statute. The PSC and KU appealed that part of the judgment denying recovery of certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. The PSC has ordered all surcharge revenues collected by KU from February 1, 1995 subject to refund pending final determination of all appeals. The total surcharge collections from February 1, 1995 through June 30, 1997 were approximately $45 million. KU believes the constitutionality of the surcharge statute will be upheld, but it cannot predict the outcome of that part of the Circuit Court judgment disallowing recovery of certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. If the Circuit Court judgment is ultimately upheld as entered, KU estimates that the amount it would be required to refund (which is based solely on costs associated with -13- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited) certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993) for surcharge collections through June 30, 1997, from the implementation of the surcharge would be approximately $13 million, and from February 1, 1995 would be approximately $11 million. At this time, KU has not recorded any reserve for refund. 3. MERGER AGREEMENT WITH LG&E ENERGY CORP. KU Energy and LG&E Energy Corp. entered into a Merger Agreement dated May 20, 1997. For information concerning the agreement, see Managements' Discussion and Analysis - Merger Agreement with LG&E Energy Corp. The following discussion and analysis of financial condition and results of operations are for the Company unless otherwise stated. Material changes in the consolidated financial condition and operating results of KU Energy are based primarily upon the operations of KU. -14- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Quarter ended June 30, 1997 compared to the Quarter ended June 30, 1996 The Company's earnings per common share for the three-month period ended June 30, 1997 were $.32 compared to $.42 for the corresponding period of 1996. The decrease was primarily due to lower residential and commercial sales as a result of milder weather in the second quarter of 1997 when compared to 1996 and increased maintenance expense. The negative effects of these factors were somewhat offset by an increase in sales to industrial customers. The changes in operating revenues and kilowatt-hour sales described below are for the Company. The only difference between changes in operating revenues for the Company and operating revenues for KU are intercompany revenues that are eliminated in the consolidated financial statements. These intercompany amounts are immaterial. Increase (Decrease) From Prior Year Three Months Ended Jun. 30, 1997 kWh Revenues (%) (000's) Residential (8) $ (3,512) Commercial (5) (1,650) Industrial 7 2,142 Mine Power 10 452 Public Authorities (6) (756) Total Retail Sales (1) (3,324) Sales for Resale (8) (975) Miscellaneous Revenues & Other - (350) Total (3) $ (4,649) Operating revenues decreased $4.6 million (3%). The decrease reflects a 3% decrease in kilowatt-hour sales. The decline in -15- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS kilowatt-hour sales is primarily attributable to decreases in residential and commercial sales and sales for resale partially offset by an increase in industrial sales. The decreases in residential and commercial sales were primarily due to milder weather during the second quarter of 1997 compared to the corresponding period of 1996. The decrease in sales for resale (714,214 megawatt-hours versus 780,027 megawatt-hours) was primarily due to decreased demand for power from neighboring utilities. The increase in industrial sales reflects continued economic growth in the manufacturing sector of KU's service area. Fuel expense decreased $3.5 million (8%). The decrease in fuel expense was primarily attributable to an 11% decrease in tons of coal consumed offset by a 3% increase in the cost per million British thermal units (MBTU). The decreased consumption was primarily caused by the previously mentioned decrease in kilowatt-hour sales and to an increase in kilowatt-hour purchases discussed below. Purchased power expense increased $2.0 million (11%). The increase was primarily due to a 24% increase in megawatt-hour purchases resulting from increased availability of economical surplus power. Maintenance expense increased $2.9 million (16%). The increase was primarily due to the timing of expenditures for maintenance activities. Federal and state income taxes decreased $3.7 million (38%). The decrease was primarily attributable to a decline in pretax income. -16- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six Months ended June 30, 1997 compared to the Six Months ended June 30, 1996 The Company's earnings per common share for the six-month period ended June 30, 1997 were $.98 compared to $1.12 for the corresponding period of 1996. The decrease was primarily due to lower residential and commercial sales as a result of milder weather in 1997 when compared to 1996 and lower sales for resale when compared to 1996. The negative effects of these factors were offset somewhat by an increase in industrial sales. Increase (Decrease) From Prior Year Six Months Ended Jun. 30, 1997 kWh Revenues (%) (000's) Residential (9) $(11,527) Commercial (4) (3,489) Industrial 7 2,856 Mine Power 4 (92) Public Authorities (3) (1,060) Total Retail Sales (2) (13,312) Sales for Resale (10) (3,249) Miscellaneous Revenues & Other - (170) Total (4) $(16,731) In February 1997, pursuant to a PSC order, KU made a one-time refund through the fuel adjustment clause to Kentucky customers associated with the disposition of Company-owned railroad cars. As a result of the refund, revenues and fuel expense were reduced by approximately $3 million in the first quarter of 1997. KU had reserved for the refund amount in prior periods. Excluding the effect of the refund mentioned above, operating revenues decreased $13.5 million (4%). The decrease reflects a 4% decline in kilowatt-hour sales. The decline in kilowatt-hour sales is primarily attributable to decreases in residential and commercial sales and sales for resale partially offset by an increase in -17- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS industrial sales. The decreases in residential and commercial sales were primarily due to milder weather during 1997 compared to the corresponding period of 1996. The decrease in sales for resale (1,549,106 megawatt-hours versus 1,719,128 megawatt-hours) was primarily due to decreased demand for power from neighboring utilities. The increase in industrial sales reflects continued economic growth in the manufacturing sector of KU's service area. Excluding the effect of the above mentioned refund, fuel expense decreased $9.9 million (10%). The decrease was primarily due to an 8% decrease in tons of coal consumed and to a 2% decrease in the price per MBTU. The decreased consumption was due primarily to the previously mentioned decrease in kilowatt-hour sales and to an increase in kilowatt-hour purchases discussed below. Purchased power expense increased $2.1 million (6%). The increase was primarily due to a 16% increase in megawatt-hour purchases. As mentioned previously, the increase in megawatt-hour purchases was primarily due to increased availability of economical surplus power. Federal and state income taxes decreased $4.1 million (16%). The decrease was primarily attributable to a decline in pretax income. MERGER AGREEMENT WITH LG&E ENERGY CORP. On May 20, 1997, KU Energy and LG&E Energy Corp. (LG&E Energy) entered into an Agreement and Plan of Merger (Merger Agreement) providing for a tax-free, stock-for-stock merger of KU Energy and LG&E Energy, with the latter as the survivor (the Merger). In addition, simultaneously with the Merger Agreement, KU Energy and LG&E Energy -18- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS entered into stock option agreements pursuant to which each company grants to the other an option to purchase, under certain circumstances, a certain number of shares of common stock of such company at a specified price. The Merger is subject to customary closing conditions, including, the approval of the shareholders of both companies and receipt of certain regulatory and governmental approvals including the PSC, the Virginia State Corporation Commission (SCC), the Federal Energy Regulatory Commission (FERC), the SEC and the Federal Trade Commission. The approval process is expected to take approximately 12 to 18 months to complete. The Company cannot predict when such regulatory approvals will be completed or what conditions, if any, may be attached to such approvals. Further details about the proposed merger are provided in KU Energy's current reports on Form 8-K, filed with the SEC on May 21, 1997 and May 30, 1997. In July, 1997, KU Energy and LG&E Energy filed joint applications for approval of the Merger with the PSC and the SCC. A joint application for approval is expected to be filed with the FERC in late August or early September. KU Energy and LG&E Energy plan to seek shareholders' approval of the Merger at special meetings expected to be held on October 14, 1997. NONUTILITY ACTIVITIES KU Solutions, an indirect non-regulated subsidiary of KU Energy Corporation, was formed in March 1997. KU Solutions will offer products and services designed to complement the Company's core energy -19- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS business. In March 1997, KU Solutions entered into a gas marketing joint venture with Alliance Energy Services Partnership (AES), a Kentucky general partnership between Conoco, Inc., and Alliance Gas Services, Inc. The venture will allow KU Solutions and AES to capitalize on their combined marketing expertise in electricity and natural gas by offering both sources of energy to respond to the increasing demands of customers for a single supplier to meet all of their energy needs. UTILITY ISSUES Competition Refer to Management's Discussion and Analysis incorporated by reference in the 1996 Annual Report on Form 10-K of KU Energy and KU under the heading Utility Issues - Competition for a discussion of FERC Order No. 888 (Order 888) and FERC Order No. 889 (Order 889). In March 1997 the FERC issued its Final Rule (Order 888-A), reaffirming the legal and policy basis on which Orders 888 and 889 were based. The Final Rule for the Orders responded to public comments on the various provisions of Orders 888 and 889; but no major changes were made. The Final Rule was effective May 13, 1997. On July 14, 1997, KU filed its Transmission Services Tariff, which management believes is in compliance with the provisions set forth in the Final Rule. KU requested an effective date for the tariff of September 12, 1997, sixty days following the July 14, 1997 filing. -20- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENVIRONMENTAL MATTERS Environmental Cost Recovery In August 1994, KU implemented an environmental cost recovery mechanism (surcharge) in Kentucky. Authorized by a 1992 state statute and approved by the PSC, the surcharge is designed to recover certain environmental compliance costs, including costs to comply with the 1990 Clean Air Act Amendments, through a surcharge on customers bills. The constitutionality of the surcharge was challenged in a Kentucky state court action brought against KU and the PSC by the Attorney General of Kentucky and representatives of consumer groups. In July 1995, the state court upheld the constitutionality of the surcharge statute but vacated that part of the PSC's order which the state court described as allowing KU to recover certain environmental expenditures characterized by the state court as having been incurred before January 1, 1993. All parties (including KU) have appealed to the Kentucky Court of Appeals. KU believes the constitutionality of the surcharge statute will be upheld, but it cannot predict the outcome of that part of the state court judgment disallowing recovery of certain environmental expenditures characterized by the state court as having been incurred before January 1, 1993. If the state court judgment is ultimately upheld as entered, KU estimates that the amount it would be required to refund (which is based solely on costs associated with certain environmental expenditures characterized by the state court as having been incurred before January 1, 1993) for surcharge collections through June 30, 1997, from the implementation of the surcharge would be approximately $13 million, and from February 1, 1995 would be approximately $11 million. At this time, KU has not recorded any -21- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS reserve for refund. For additional discussion, refer to Note 2 of the Condensed Notes to Financial Statements, Environmental Cost Recovery. National Ambient Air Quality Standards The Environmental Protection Agency issued final rules on July 18, 1997 revising the National Ambient Air Quality Standards for ozone and particulate matter. The revised standards would require significant reductions in sulfur dioxide and nitrogen oxide emissions from coal-fired boilers beginning in 2005. Because of the magnitude of these additional reductions (50 percent beyond that already required by the Phase II acid rain control provisions of the 1990 Clean Air Act Amendments which become effective January 1, 2000), KU could be required to incur substantial costs to meet future compliance obligations for its coal-fired boilers. IMPACT OF ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), and Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure (SFAS 129). SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock. SFAS 129 was issued in conjunction with the FASB's earnings per share project and incorporated related disclosure requirements from APB Opinion No. 10, Disclosure of Long- Term Obligations, and Statement of Financial Accounting Standards -22- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS No. 47, Disclosure of Long-Term Obligations. Both statements are effective for fiscal years ending after December 15, 1997. The Company will adopt the statements for year-end 1997 and does not expect adoption of the statements to have any impact on its current earnings per share calculation or disclosures. FORWARD LOOKING STATEMENTS This report includes forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made herein which are not based on historical facts are forward looking and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Such forward looking statements include those under Management's Discussion and Analysis relating to the anticipated results of proceedings related to the environmental surcharge, the impact of the revisions to the National Ambient Air Quality Standards, Management's belief as to the nature of its recently filed Transmission Services Tariff and the expected timing of regulatory approvals of the Merger. Such statements are based on management's belief, judgment and analysis as well as assumptions made by and information available to management at the date hereof. In addition to any assumptions and cautionary factors referred to specifically in this report in connection with such forward looking statements, factors that could cause actual results to differ materially from those contemplated by the forward looking statements include unanticipated or adverse decisions in regulatory proceedings or litigation and other matters detailed in Exhibit 99.06, Cautionary Statements, to the 1996 Annual Report on Form 10-K of KU Energy and KU, incorporated herein by reference. -23- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 2 of the Condensed Notes to Financial Statements, Environmental Cost Recovery, for a discussion of KU's environmental surcharge. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS KU Energy Corporation At the April 22, 1997, Annual Meeting of Shareholders, the following proposals were acted upon and approved. (1) To elect three Directors to the Board of Directors of the Company. Votes Votes For Withheld Milton W. Hudson 32,208,540 557,678 John T. Newton 32,319,688 554,713 William L. Rouse, Jr. 32,252,200 554,963 (2) To consider and vote upon the adoption by the Company of a Long Term Incentive Plan whereby officers and other key employees of the Company and its affiliates will receive grants of options or other awards based on predetermined financial and other performance goals. Affirming Negative Votes Votes Abstentions 25,550,638 5,859,830 1,408,520 (3) To consider and vote upon the adoption by the Company of an Annual Performance Incentive Plan whereby officers and other key employees of the Company or its affiliates will receive cash incentive compensation awards based on predetermined financial and other performance goals. Affirming Negative Votes Votes Abstentions 27,944,475 3,605,768 1,268,746 Kentucky Utilities Company At the April 22, 1997, Annual Meeting of Shareholders, the following proposal was acted upon and approved. To elect three Directors to the Board of Directors of KU. Votes Votes For Withheld Milton W. Hudson 37,817,878 0 John T. Newton 37,817,878 0 William L. Rouse, Jr. 37,817,878 0 -24- ITEM 5. OTHER INFORMATION Unaudited Pro Forma Combined Condensed Consolidated Financial Information The following unaudited pro forma financial information combines the historical balance sheets and statements of income of LG&E Energy and KU Energy, including their respective subsidiaries, after giving effect to the Merger. The unaudited pro forma combined condensed balance sheet at June 30, 1997 gives effect to the Merger as if it had occurred at June 30, 1997. The unaudited pro forma combined condensed statements of income for each of the years in the three-year period ended December 31, 1996, the three- and six-month periods ended June 30, 1997 and 1996, and the twelve-month period ended June 30, 1997 give effect to the Merger as if it had occurred at January 1, 1994. These statements are prepared on the basis of accounting for the Merger as a pooling of interests and are based on the assumptions set forth in the notes thereto. The pro forma financial information does not give effect to the expected synergies of the transaction. The following pro forma financial information has been prepared from, and should be read in conjunction with, the historical financial statements and related notes thereto of LG&E Energy and KU Energy as included in their respective Annual Reports on Form 10-K for the year ended December 31, 1996. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Merger been consummated on the date as of which, or at the beginning of the periods for which, the Merger is being given effect, nor is it necessarily indicative of future operating results or financial position. In addition, due to the effect of seasonal fluctuations in temperature and other weather-related factors on the operations of LG&E Energy and KU Energy, financial results for the three- and six-month periods ended June 30, 1997 and 1996 are not necessarily indicative of trends for any future period. -25- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET At June 30, 1997 (Thousands of Dollars)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) ASSETS Current assets: Cash and temporary cash investments $ 132,210 $ 21,418 $ - $ 153,628 Marketable securities 10,996 - - 10,996 Accounts receivable - less reserve 376,327 66,425 (21) 442,731 Materials and supplies - primarily at average cost: Fuel (predominately coal) 15,651 37,189 - 52,840 Gas stored underground 16,174 - - 16,174 Other 31,802 23,370 - 55,172 Price risk management assets 62,782 - - 62,782 Prepayments and other 3,472 6,679 - 10,151 Total current assets 649,414 155,081 (21) 804,474 Other property and investments - less reserve: Investments in affiliates 171,384 2,172 - 173,556 Non-utility property and plant, net 408,058 2,714 - 410,772 Price risk management assets 49,924 - - 49,924 Other 25,261 41,327 - 66,588 Total other property and investments 654,627 46,213 - 700,840 Utility plant, at original cost: Electric 2,245,213 2,577,611 - 4,822,824 Gas 337,324 - - 337,324 Common 138,724 - - 138,724 Gross utility plant 2,721,261 2,577,611 - 5,298,872 Less: reserve for depreciation 1,037,437 1,099,749 - 2,137,186 Net utility plant 1,683,824 1,477,862 - 3,161,686 Deferred debits and other assets 121,389 47,585 8,250 177,224 Total assets $ 3,109,254 $ 1,726,741 $ 8,229 $ 4,844,224 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-26- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET At June 30, 1997 (Thousands of Dollars)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) CAPITAL AND LIABILITIES Current liabilities: Long term debt due within one year $ 20,000 $ 21 $ - $ 20,021 Notes payable 298,000 51,800 - 349,800 Accounts payable 322,749 26,937 16,479 366,165 Trimble County settlement 15,072 - - 15,072 Accrued taxes 5,532 2,849 (3,330) 5,051 Price risk management liabilities 77,637 - - 77,637 Other 76,006 35,306 - 111,312 Total current liabilities 814,996 116,913 13,149 945,058 Long-Term Debt 664,284 546,351 - 1,210,635 Deferred credits and other liabilities: Accumulated deferred income taxes 312,326 249,208 - 561,534 Investment tax credit, in process of amortization 77,869 28,123 - 105,992 Regulatory liability 75,600 53,305 - 128,905 Price risk management liabilities 23,824 - - 23,824 Other 123,939 43,706 - 167,645 Total deferred credits and other liabilities 613,558 374,342 - 987,900 Minority interests 102,594 - - 102,594 Cumulative preferred stock 95,328 40,000 - 135,328 Common equity 818,494 649,135 (4,920) 1,462,709 Total capital and liabilities $ 3,109,254 $ 1,726,741 $ 8,229 $ 4,844,224 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-27- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Three Months Ended June 30, 1997 (Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) Revenues Energy marketing and trading $ 522,515 $ - $ - $ 522,515 Electric utility 145,919 162,861 (35) 308,745 Gas utility 34,191 - - 34,191 Other 44,636 1,550 - 46,186 Total revenues 747,261 164,411 (35) 911,637 Cost of revenues Energy marketing and trading 507,933 - - 507,933 Fuel and power purchased 38,407 61,212 (35) 99,584 Gas supply expenses 21,144 - - 21,144 Other 26,199 - - 26,199 Total cost of revenues 593,683 61,212 (35) 654,860 Gross Profit 153,578 103,199 - 256,777 Operating expenses Operation and maintenance Utility 55,965 54,787 - 110,752 Energy marketing and trading and other 23,927 844 - 24,771 Depreciation and amortization 28,875 20,957 - 49,832 Non-recurring charges (592) - - (592) Total operating expenses 108,175 76,588 - 184,763 Equity in earnings of joint ventures 5,557 - - 5,557 Operating Income 50,960 26,611 - 77,571 Other Income and (deductions) 2,710 1,833 - 4,543 Interest charges, minority interest and preferred dividends 19,468 10,464 - 29,932 Income before income taxes 34,202 17,980 - 52,182 Income taxes 12,585 5,930 - 18,515 Net Income (Note 5) $ 21,617 $ 12,050 $ - $ 33,667 Average common shares outstanding (Note 4) 66,492 37,818 25,338 129,648 Earnings per share of common stock $ 0.33 $ 0.32 $ - $ 0.26 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-28- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Three Months Ended June 30, 1996 (Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) Revenues Energy marketing and trading $ 575,160 $ - $ - $ 575,160 Electric utility 151,857 167,510 (250) 319,117 Gas utility 29,362 - - 29,362 Other 4,534 1,091 - 5,625 Total revenues 760,913 168,601 (250) 929,264 Cost of revenues Energy marketing and trading 563,605 - (45) 563,560 Fuel and power purchased 41,863 62,668 (205) 104,326 Gas supply expenses 18,652 - - 18,652 Other 3,248 - - 3,248 Total cost of revenues 627,368 62,668 (250) 689,786 Gross Profit 133,545 105,933 - 239,478 Operating expenses Operation and maintenance Utility ` 51,773 51,664 - 103,437 Energy marketing and trading and other 11,517 563 - 12,080 Depreciation and amortization 25,764 20,154 - 45,918 Non-recurring charges - - - - Total operating expenses 89,054 72,381 - 161,435 Equity in earnings of joint ventures 4,201 - - 4,201 Operating Income 48,692 33,552 - 82,244 Other Income and (deductions) 1,555 1,456 - 3,011 Interest charges, minority interest and preferred dividends 13,834 10,345 - 24,179 Income before income taxes 36,413 24,663 - 61,076 Income taxes 12,591 8,590 - 21,181 Net Income $ 23,822 $ 16,073 $ - $ 39,895 Average common shares outstanding (Note 4) 66,294 37,818 25,338 129,450 Earnings per share of common stock $ 0.36 $ 0.42 $ - $ 0.31 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-29- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Six Months Ended June 30, 1997 (Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) Revenues Energy marketing and trading $ 1,580,966 $ - $ (4) $ 1,580,962 Electric utility 274,746 341,769 (240) 616,275 Gas utility 130,929 - - 130,929 Other 63,863 2,727 - 66,590 Total revenues 2,050,504 344,496 (244) 2,394,756 Cost of revenues Energy marketing and trading 1,554,329 - (15) 1,554,314 Fuel and power purchased 73,426 123,528 (229) 196,725 Gas supply expenses 88,969 - - 88,969 Other 37,593 - - 37,593 Total cost of revenues 1,754,317 123,528 (244) 1,877,601 Gross Profit 296,187 220,968 - 517,155 Operating expenses Operation and maintenance Utility 109,396 101,599 - 210,995 Energy marketing and trading and other 43,699 1,463 - 45,162 Depreciation and amortization 56,762 41,839 - 98,601 Non-recurring charges (592) - - (592) Total operating expenses 209,265 144,901 - 354,166 Equity in earnings of joint ventures 8,941 - - 8,941 Operating Income 95,863 76,067 - 171,930 Other Income and (deductions) 6,077 2,361 - 8,438 Interest charges, minority interest and preferred dividends 34,458 20,904 - 55,362 Income before income taxes 67,482 57,524 - 125,006 Income taxes 24,626 20,611 - 45,237 Net Income (Note 5) $ 42,856 $ 36,913 $ - $ 79,769 Average common shares outstanding (Note 4) 66,433 37,818 25,338 129,589 Earnings per share of common stock $ 0.65 $ 0.98 $ - $ 0.62 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-30- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Six Months Ended June 30, 1996 (Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) Revenues Energy marketing and trading $ 1,218,714 $ - $ - $ 1,218,714 Electric utility 287,676 358,500 (575) 645,601 Gas utility 120,418 - - 120,418 Other 9,534 2,210 - 11,744 Total revenues 1,636,342 360,710 (575) 1,996,477 Cost of revenues Energy marketing and trading 1,178,266 - (186) 1,178,080 Fuel and power purchased 80,879 134,197 (389) 214,687 Gas supply expenses 76,884 - - 76,884 Other 6,947 - - 6,947 Total cost of revenues 1,342,976 134,197 (575) 1,476,598 Gross Profit 293,366 226,513 - 519,879 Operating expenses Operation and maintenance Utility 110,492 99,788 - 210,280 Energy marketing and trading and other 32,431 1,007 - 33,438 Depreciation and amortization 51,492 40,219 - 91,711 Non-recurring charges (Note 8) - 1,480 - 1,480 Total operating expenses 194,415 142,494 - 336,909 Equity in earnings of joint ventures 8,801 - - 8,801 Operating Income 107,752 84,019 - 191,771 Other Income and (deductions) 1,541 3,502 - 5,043 Interest charges, minority interest and preferred dividends 27,879 21,107 - 48,986 Income before income taxes 81,414 66,414 - 147,828 Income taxes 30,497 24,022 - 54,519 Net Income $ 50,917 $ 42,392 $ - $ 93,309 Average common shares outstanding (Note 4) 66,263 37,818 25,338 129,419 Earnings per share of common stock $ 0.77 $ 1.12 $ - $ 0.72 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-31- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Twelve Months Ended June 30, 1997 (Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) Revenues Energy marketing and trading (Note 6) $ 3,099,192 $ - $ (4) $ 3,099,188 Electric utility 594,230 694,955 (425) 1,288,760 Gas utility 224,930 - - 224,930 Other 85,275 5,039 - 90,314 Total revenues 4,003,627 699,994 (429) 4,703,192 Cost of revenues Energy marketing and trading 3,039,965 - (85) 3,039,880 Fuel and power purchased 158,870 250,020 (344) 408,546 Gas supply expenses 152,567 - - 152,567 Other 44,202 - - 44,202 Total cost of revenues 3,395,604 250,020 (429) 3,645,195 Gross Profit 608,023 449,974 - 1,057,997 Operating expenses Operation and maintenance Utility 213,690 203,622 - 417,312 Energy marketing and trading and other 79,175 3,215 - 82,390 Depreciation and amortization 108,826 82,232 - 191,058 Non-recurring charges (Notes 7 and 8) 25,738 4,012 - 29,750 Total operating expenses 427,429 293,081 - 720,510 Equity in earnings of joint ventures 18,958 - - 18,958 Operating Income 199,552 156,893 - 356,445 Other Income and (deductions) 8,344 4,186 - 12,530 Interest charges, minority interest and preferred dividends 60,466 41,687 - 102,153 Income before income taxes 147,430 119,392 - 266,822 Income taxes 51,488 42,923 - 94,411 Net Income (Note 5) $ 95,942 $ 76,469 $ - $ 172,411 Average common shares outstanding (Note 4) 66,378 37,818 25,338 129,534 Earnings per share of common stock $ 1.45 $ 2.02 $ - $ 1.33 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-32- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Year Ended December 31, 1996 (Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) Revenues Energy marketing and trading (Note 6) $ 2,736,940 $ - $ - $ 2,736,940 Electric utility 607,160 711,686 (760) 1,318,086 Gas utility 214,419 - - 214,419 Other 30,946 4,522 - 35,468 Total revenues 3,589,465 716,208 (760) 4,304,913 Cost of revenues Energy marketing and trading 2,663,902 - (257) 2,663,645 Fuel and power purchased 166,323 260,688 (503) 426,508 Gas supply expenses 140,482 - - 140,482 Other 13,556 - - 13,556 Total cost of revenues 2,984,263 260,688 (760) 3,244,191 Gross Profit 605,202 455,520 - 1,060,722 Operating expenses Operation and maintenance Utility 214,786 201,811 - 416,597 Energy marketing and trading and other 67,907 2,759 - 70,666 Depreciation and amortization 103,556 80,612 - 184,168 Non-recurring charges (Notes 7 and 8) 26,330 5,493 - 31,823 Total operating expenses 412,579 290,675 - 703,254 Equity in earnings of joint ventures 18,818 - - 18,818 Operating Income 211,441 164,845 - 376,286 Other Income and (deductions) 3,808 5,327 - 9,135 Interest charges, minority interest and preferred dividends 53,887 41,889 - 95,776 Income before income taxes 161,362 128,283 - 289,645 Income taxes 57,359 46,334 - 103,693 Net Income $ 104,003 $ 81,949 $ - $ 185,952 Average common shares outstanding (Note 4) 66,294 37,818 25,338 129,450 Earnings per share of common stock $ 1.57 $ 2.17 $ - $ 1.44 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-33- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Year Ended December 31, 1995 (Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) Revenues Energy marketing and trading $ 630,249 $ - $ (1,616) $ 628,633 Electric utility 571,086 686,400 (2,212) 1,255,274 Refund - Trimble County (Note 9) (28,300) - - (28,300) Gas utility 181,126 - - 181,126 Other 20,519 4,028 - 24,547 Total revenues 1,374,680 690,428 (3,828) 2,061,280 Cost of revenues Energy marketing and trading 604,302 - - 604,302 Fuel and power purchased 154,832 259,424 (3,828) 410,428 Gas supply expenses 110,738 - - 110,738 Other 19,858 - - 19,858 Total cost of revenues 889,730 259,424 (3,828) 1,145,326 Gross Profit 484,950 431,004 - 915,954 Operating expenses Operation and maintenance Utility 203,284 198,712 - 401,996 Energy marketing and trading and other 39,874 2,969 - 42,843 Depreciation and amortization 94,393 75,268 - 169,661 Total operating expenses 337,551 276,949 - 614,500 Equity in earnings of joint ventures 28,158 - - 28,158 Operating Income 175,557 154,055 - 329,612 Other Income and (deductions) 5,389 6,092 - 11,481 Interest charges, minority interest and preferred dividends 53,822 42,273 - 96,095 Income before income taxes 127,124 117,874 - 244,998 Income taxes 44,294 41,821 - 86,115 Net Income $ 82,830 $ 76,053 $ - $ 158,883 Average common shares outstanding (Note 4) 66,105 37,818 25,338 129,261 Earnings per share of common stock $ 1.25 $ 2.01 $ - $ 1.23 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-34- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Year Ended December 31, 1994 (Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma (As Reported) (As Reported) Adjustment Combined (Note 1) (Note 2) (Note 3) Revenues Energy marketing and trading $ 1,289 $ - $ - $ 1,289 Electric utility (Note 10) 559,327 636,628 (328) 1,195,627 Gas utility 200,129 - - 200,129 Other 68,918 2,604 - 71,522 Total revenues 829,663 639,232 (328) 1,468,567 Cost of revenues Energy marketing and trading 1,222 - - 1,222 Fuel and power purchased (Note 10) 153,356 232,096 (328) 385,124 Gas supply expenses 131,561 - - 131,561 Other 56,395 - - 56,395 Total cost of revenues 342,534 232,096 (328) 574,302 Gross Profit 487,129 407,136 - 894,265 Operating expenses Operation and maintenance Utility 202,123 193,428 - 395,551 Energy marketing and trading and other 24,629 2,053 - 26,682 Depreciation and amortization 84,173 65,441 - 149,614 Non-recurring charges (Note 11) 48,743 - - 48,743 Total operating expenses 359,668 260,922 - 620,590 Equity in earnings of joint ventures 12,883 - - 12,883 Operating Income 140,344 146,214 - 286,558 Other Income and (deductions) 13,718 8,121 - 21,839 Cont.to charitable foundation (Note 12) 15,000 - - 15,000 Interest charges and preferred dividends 48,839 36,453 - 85,292 Income from continuing operations before income taxes 90,223 117,882 - 208,105 Income taxes 33,394 42,006 - 75,400 Income from continuing operations 56,829 75,876 - 132,705 Gain on sale of discontinued operations, net of income taxes of $35,048 (Note 13) 51,805 - - 51,805 Income before cumulative effect of change in accounting principle 108,634 75,876 - 184,510 Cumulative effect of change in accounting for post-employment benefits, net of income taxes of $2,280 (Note 14) (3,369) - - (3,369) Net Income $ 105,265 $ 75,876 $ - $ 181,141 Average common shares outstanding (Note 4) 65,982 37,818 25,338 129,138 Earnings per share of common stock From continuing operations $ 0.86 $ 2.01 $ - $ 1.03 Gain on sale of discontinued operations 0.79 - - 0.40 Cumulative effect of accounting change (0.05) - - (0.03) Total $ 1.60 $ 2.01 $ - $ 1.40 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-35- LG&E ENERGY CORP. NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. Reclassifications have been made to certain as reported account balances reflected in KU Energy's financial statements to conform to this reporting presentation. All other financial statement presentation and accounting policy differences are immaterial and have not been adjusted in the pro forma combined condensed financial statements. 2. Intercompany transactions (power purchased and power sales transactions) between LG&E Energy and KU Energy during the periods presented were eliminated through pro forma adjustments. 3. The allocation between LG&E Energy and KU Energy and their customers of the estimated cost savings resulting from the Merger, net of the estimated costs incurred to achieve such savings, and the treatment of transaction costs, will be subject to regulatory review and approval. None of the estimated cost savings or costs to achieve such savings has been reflected in the pro forma combined condensed statements of income. A charge of $4.92 million ($8.25 million, net of income taxes of $3.33 million) to retained earnings and $8.25 million as deferred debits and other assets in the pro forma combined condensed balance sheet has been made to recognize such estimated transaction costs. Transaction costs are currently estimated to be approximately $16.5 million (including fees for financial advisors, attorneys, accountants, consultants, filings and printing). 4. The pro forma combined condensed financial statements reflect the conversion of each share of KU Energy Common Stock (no par value) outstanding into 1.67 shares of LG&E Energy Common Stock (no par value) as provided in the Merger Agreement. The pro forma combined condensed financial statements are presented as if the companies were combined during all periods included therein. 5. LG&E Energy's net income for the three months, six months, and twelve months, ended June 30, 1997, includes the effect of an $8.5 million insurance settlement related to the Calgary trading loss discussed in Note 7 below, partially offset by a one-time restructuring charge of $7 million for the consolidation of LG&E Energy's energy marketing group. 6. LG&E Energy adopted the mark-to-market method of accounting for its energy trading and price risk management activities during 1996. This resulted in an increase in Energy Marketing and Trading revenues and income from operations of $26.2 million for 1996 and $16.6 million for the twelve months ended June 30, 1997. The impact on prior period financial results was immaterial. 7. LG&E Energy's net income for the year ended December 31, 1996 and twelve months ended June 30, 1997, includes a non-recurring after-tax charge of $17.1 million for losses in its natural gas marketing business resulting from unauthorized transactions -36- LG&E ENERGY CORP. NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS entered into by a marketer in its Calgary, Alberta, office. This charge is reflected in non-recurring charges on the respective statements of income. 8. KU Energy's net income for the year ended 1996, the twelve months ended June 30, 1997, and the six months ended June 30, 1996 includes a non-recurring write-off of nonutility investments. This charge is reflected in non-recurring charges on the respective statements of income. 9. 1995 operating revenues were reduced by $28.3 million related to a settlement agreement approved by the Kentucky Commission on December 8, 1995, which resolved numerous legal and regulatory proceedings to determine the appropriate ratemaking treatment to implement the Kentucky Commission's 1988 decision that LG&E should not be allowed to recover 25 percent of the cost of Trimble County Unit 1 (Trimble County) from ratepayers. 10. Electric utility revenues and fuel and power purchased costs for KU Energy for 1994 were reduced by $19.4 million and $23.1 million, respectively, resulting from refunds made pursuant to regulatory orders related to the resolution of a coal contract dispute. The difference between the reduction in operating revenues and the reduction in fuel expense is attributable to incurred litigation costs, fuel cost savings related to opportunity sales and costs incurred to administer the refund plan. These amounts were retained by Kentucky Utilities pursuant to regulatory orders. 11. LG&E Energy's 1994 net income includes pre-tax non-recurring charges of $48.7 million. As part of a study of its business strategy and realignment during 1994, LG&E re-evaluated its regulatory strategy which previously had been to seek full recovery of certain costs deferred in accordance with prior precedents established by the Kentucky Commission. As a result of this re-evaluation, LG&E wrote off certain expenses that had previously been deferred amounting to approximately $38.6 million before taxes. While LG&E continues to believe that it could have reasonably expected to recover these costs in future rate proceedings before the Kentucky Commission, LG&E decided to deduct these expenses currently and not seek recovery for such expenses in future rates due to increasing competitive pressures and the existing and anticipated future economic conditions. In addition, a nonutility subsidiary of LG&E Energy recorded a reserve of $10.1 million before taxes for the costs related to vacating leased office space. 12. LG&E Energy's 1994 net income includes a pre-tax charge of $15 million. This represented an irrevocable payment made to a tax-exempt charitable foundation formed by LG&E Energy in 1994. This charge is reflected in the Contribution to Charitable Foundation on the statements of income. -37- LG&E ENERGY CORP. NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 13. LG&E Energy's 1994 net income includes the recognition of a gain on the sale of its 36.5 percent partnership interest in Natural Gas Clearinghouse for $170 million. The transaction resulted in an after-tax gain of approximately $52 million. This adjustment is reflected as a gain on sale of discontinued operations, net of income taxes. 14. LG&E Energy's 1994 net income includes an adjustment for a change in accounting for post-employment benefits adopted pursuant to Statement of Financial Accounting Standards No. 112, Employers Accounting for Post-Employment Benefits. This adjustment is reflected as a cumulative effect of change in accounting for post-employment benefits, net of income taxes. -38- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are filed as part of this report: Exhibit Number Description 27.01 Financial Data Schedule for KU Energy (required for electronic filing only in accordance with Item 601 (c)(1) of Regulation S-K.) 27.02 Financial Data Schedule for KU (required for electronic filing only in accordance with Item 601(c)(1) of Regulation S-K.) 99.01 Cautionary Statements - KU Energy and KU. (Exhibit 99.06 to Form 10-K Annual Report of KU Energy and KU for the year ended December 31, 1996). Incorporated by reference. (b) Reports on Form 8-K. (1) KU Energy and KU filed a Form 8-K dated May 20, 1997 to report a merger agreement between KU Energy and LG&E Energy Corp. (2) KU Energy and KU filed a Form 8-K dated May 30, 1997 to file the merger agreement dated May 21, 1997 between KU Energy and LG&E Energy and related exhibits. -39- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, KU Energy Corporation and Kentucky Utilities Company have each duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KU ENERGY CORPORATION and KENTUCKY UTILITIES COMPANY (Registrants) Date August 12, 1997 /s/ Michael R. Whitley Michael R. Whitley Chairman and President Date August 12, 1997 /s/ Michael D. Robinson Michael D. Robinson Controller -40- EX-27 2 EXHIBIT 27.01 - ARTICLE UT FDS FOR KU
UT THIS TABLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF JUNE 30, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q QUARTERLY REPORT. 0000055387 KENTUCKY UTILITIES COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1997 PER-BOOK 1,477,862 12,788 137,351 42,372 0 1,670,373 308,140 (594) 290,492 598,038 0 40,000 546,351 51,800 0 0 21 0 0 0 434,163 1,670,373 341,782 21,742 266,874 288,616 53,166 3,656 56,822 19,773 37,049 1,128 35,921 33,280 18,691 72,826 0 0 ALL OUTSTANDING COMMON STOCK OF KENTUCKY UTILITIES COMPANY IS HELD BY ITS PARENT COMPANY, KU ENERGY CORPORATION. THEREFORE, EARNINGS PER SHARE IS NOT APPLICABLE.
EX-27 3 EXHIBIT 27.02 - ARTICLE UT FDS FOR KU ENERGY CORP.
UT THIS TABLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF JUNE 30, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q QUARTERLY REPORT. 0000835715 KU ENERGY CORPORATION 1,000 6-MOS DEC-31-1997 JUN-30-1997 PER-BOOK 1,477,862 48,782 155,081 45,016 0 1,726,741 308,137 (594) 341,592 649,135 0 40,000 546,351 51,800 0 0 21 0 0 0 439,434 1,726,741 341,769 21,262 268,049 289,311 52,458 5,359 57,817 20,904 36,913 0 36,913 33,280 18,691 68,553 .98 .98
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