-----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, Ubd5yWf2t4rvYX/uwY7A48nrHp8V5dwmeJG1rVJi2OnRHIAMEuDU3+a4N28aQidt W074TgFHW03plSS5eLJDmA== 0000835715-97-000022.txt : 19971127 0000835715-97-000022.hdr.sgml : 19971127 ACCESSION NUMBER: 0000835715-97-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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: SEC FILE NUMBER: 001-10944 FILM NUMBER: 97713249 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: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03464 FILM NUMBER: 97713250 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 September 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 November 11, 1997 Kentucky Utilities Company: Common stock, no par value, 37,817,878 shares outstanding and held by KU Energy Corporation at November 11, 1997 -1- KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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 15-24 PART II. OTHER INFORMATION Item 1: Legal Proceedings 25 Item 4: Submission of Matters to a Vote of Security Holders 25 Item 5: Other Information 25 Item 6: Exhibits and Reports on Form 8-K 34 Signatures 35 *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 September 30, 1997 1996 Operating Revenues $192,095 $178,269 Operating Expenses: Fuel, principally coal, used in generation 51,962 48,781 Electric power purchased 18,277 15,847 Other operating expenses 30,948 32,094 Maintenance 15,167 14,414 Depreciation 21,131 20,235 Federal and state income taxes 16,225 13,374 Other taxes 3,755 3,704 Total Operating Expenses 157,465 148,449 Net Operating Income 34,630 29,820 Other Income and Deductions: Interest and dividend income 749 638 Other income and deductions - net 1,787 2,426 Total Other Income and Deductions 2,536 3,064 Income Before Interest and Other Charges 37,166 32,884 Interest and Other Charges 10,613 10,391 Net Income $ 26,553 $ 22,493 Average Common Shares Outstanding 37,818 37,818 Earnings Per Common Share $ .70 $ .60 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -3- KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share amounts) For the Nine Months Ended September 30, 1997 1996 Operating Revenues $533,864 $536,769 Operating Expenses: Fuel, principally coal, used in generation 138,288 147,885 Electric power purchased 55,479 50,940 Other operating expenses 93,197 92,818 Maintenance 47,674 46,224 Depreciation 62,970 60,454 Federal and state income taxes 37,487 38,710 Other taxes 11,681 11,965 Total Operating Expenses 446,776 448,996 Net Operating Income 87,088 87,773 Other Income and Deductions: Interest and dividend income 1,933 2,189 Other income and deductions - net 5,962 6,421 Total Other Income and Deductions 7,895 8,610 Income Before Interest and Other Charges 94,983 96,383 Interest and Other Charges 31,517 31,498 Net Income $ 63,466 $ 64,885 Average Common Shares Outstanding 37,818 37,818 Earnings Per Common Share $ 1.68 $ 1.72 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 Nine Months Ended September 30, 1997 1996 Cash Flows from Operating Activities: Net Income $ 63,466 $ 64,885 Items not requiring (providing) cash currently: Depreciation 62,970 60,454 Deferred income taxes and investment tax credit 3,245 1,356 Changes in current assets and liabilities: Change in fuel inventory 1,892 (5,527) Change in accounts receivable 3,810 2,438 Change in accounts payable (4,866) (8,340) Change in accrued taxes 2,942 3,948 Change in accrued utility revenues 886 8,642 Change in liability to ratepayers - (6,599) Change in escrow funds - 6,599 Change in other current assets and liabilities 5,336 10,771 Other--net (6,280) 5,419 Net Cash Provided by Operating Activities 133,401 144,046 Cash Flows from Investing Activities: Construction expenditures - utility (68,423) (72,928) Investment in independent power projects (4,805) (1,048) Proceeds from insurance reimbursements 4,265 211 Other 1,801 1,545 Net Cash Used by Investing Activities (67,162) (72,220) Cash Flows from Financing Activities: Short-term borrowings - net (24,300) (25,700) 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 (49,919) (48,785) Net Cash Used by Financing Activities (74,240) (71,216) Net Increase (Decrease) in Cash and Cash Equivalents (8,001) 610 Cash and Cash Equivalents Beginning of Period 30,270 29,492 Cash and Cash Equivalents End of Period $ 22,269 $ 30,102 Supplemental Disclosures Cash paid for: Interest $ 25,316 $ 24,643 Income taxes $ 31,748 $ 37,175 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 Sept. 30, Dec. 31, ASSETS 1997 1996 Utility Plant: Plant in service, at cost $ 2,524,395 $ 2,482,812 Less: Accumulated depreciation 1,112,102 1,067,911 1,412,293 1,414,901 Construction work in progress 67,890 63,435 1,480,183 1,478,336 Current Assets: Cash and cash equivalents 22,269 30,270 Accounts receivable 42,933 50,498 Accrued utility revenues 23,353 24,239 Fuel, principally coal, at average cost 29,003 30,895 Materials and supplies, at average cost 23,793 21,656 Other 6,121 7,486 147,472 165,044 Other Assets: Investment in leveraged leases 27,157 24,650 Investment in independent power projects 9,357 4,745 Unamortized loss on reacquired debt 10,027 10,838 Other 48,846 43,335 95,387 83,568 Total Assets $ 1,723,042 $ 1,726,948 CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $ 659,049 $ 645,513 Preferred stock 40,000 40,000 Long-term debt 546,351 546,373 1,245,400 1,231,886 Current Liabilities: Long-term debt due within one year 21 21 Short-term borrowings 29,900 54,200 Accounts payable 23,387 28,253 Accrued interest 10,634 8,048 Accrued taxes 6,947 4,005 Customer deposits 9,655 8,746 Accrued payroll and vacations 12,119 9,921 Other 7,874 5,954 100,537 119,148 Other Liabilities: Accumulated deferred income taxes 250,074 242,674 Accumulated deferred investment tax credits 27,127 30,167 Regulatory tax liability 51,773 54,388 Other 48,131 48,685 377,105 375,914 Total Capitalization and Liabilities $ 1,723,042 $ 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 September 30, 1997 1996 Operating Revenues $192,102 $178,275 Operating Expenses: Fuel, principally coal, used in generation 51,962 48,781 Electric power purchased 18,277 15,847 Other operating expenses 29,851 31,348 Maintenance 15,165 14,412 Depreciation 21,084 20,189 Federal and state income taxes 16,703 13,585 Other taxes 3,717 3,656 Total Operating Expenses 156,759 147,818 Net Operating Income 35,343 30,457 Other Income and Deductions: Interest and dividend income 546 370 Other income and deductions - net 1,082 1,709 Total Other Income and Deductions 1,628 2,079 Income Before Interest Charges 36,971 32,536 Interest Charges 10,047 9,812 Net Income 26,924 22,724 Preferred Stock Dividend Requirements 564 564 Net Income Applicable to Common Stock $ 26,360 $ 22,160 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 Nine Months Ended September 30, 1997 1996 Operating Revenues $533,884 $536,787 Operating Expenses: Fuel, principally coal, used in generation 138,288 147,885 Electric power purchased 55,479 50,940 Other operating expenses 91,122 91,250 Maintenance 47,666 46,218 Depreciation 62,830 60,314 Federal and state income taxes 38,445 39,136 Other taxes 11,545 11,736 Total Operating Expenses 445,375 447,479 Net Operating Income 88,509 89,308 Other Income and Deductions: Interest and dividend income 1,265 1,384 Other income and deductions - net 4,019 5,515 Total Other Income and Deductions 5,284 6,899 Income Before Interest Charges 93,793 96,207 Interest Charges 29,820 29,790 Net Income 63,973 66,417 Preferred Stock Dividend Requirements 1,692 1,692 Net Income Applicable to Common Stock $ 62,281 $ 64,725 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 Nine Months Ended September 30, 1997 1996 Cash Flows from Operating Activities: Net Income $ 63,973 $ 66,417 Items not requiring (providing) cash currently: Depreciation 62,830 60,314 Deferred income taxes and investment tax credit 204 (214) Changes in current assets and liabilities: Change in fuel inventory 1,892 (5,527) Change in accounts receivable 4,274 2,230 Change in accounts payable (5,152) (8,363) Change in accrued taxes 4,045 4,027 Change in accrued utility revenues 886 8,642 Change in liability to ratepayers - (6,599) Change in escrow funds - 6,599 Change in other current assets and liabilities 5,372 10,634 Other--net 1,374 6,906 Net Cash Provided by Operating Activities 139,698 145,066 Cash Flows from Investing Activities: Construction expenditures - utility (68,423) (72,928) Proceeds from insurance reimbursements 4,265 211 Net Cash Used by Investing Activities (64,158) (72,717) Cash Flows from Financing Activities: Short-term borrowings - net (24,300) (25,700) 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 (51,611) (50,477) Net Cash Used by Financing Activities (75,932) (72,908) Net Decrease in Cash and Cash Equivalents (392) (559) Cash and Cash Equivalents Beginning of Period 5,719 5,697 Cash and Cash Equivalents End of Period $ 5,327 $ 5,138 Supplemental Disclosures Cash paid for: Interest $ 25,316 $ 24,643 Income taxes $ 32,810 $ 38,010 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 Sept. 30, Dec. 31, 1997 1996 ASSETS Utility Plant: Plant in service, at cost $2,524,395 $2,482,812 Less: Accumulated depreciation 1,112,102 1,067,911 1,412,293 1,414,901 Construction work in progress 67,890 63,435 1,480,183 1,478,336 Current Assets: Cash and cash equivalents 5,327 5,719 Accounts receivable 42,553 50,582 Accrued utility revenues 23,353 24,239 Fuel, principally coal, at average cost 29,003 30,895 Materials and supplies, at average cost 23,793 21,656 Other 6,121 7,486 130,150 140,577 Other Assets: Unamortized loss on reacquired debt 10,027 10,838 Other 45,547 43,304 55,574 54,142 Total Assets $1,665,907 $1,673,055 CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $ 607,758 $ 595,397 Preferred stock 40,000 40,000 Long-term debt 546,351 546,373 1,194,109 1,181,770 Current Liabilities: Long-term debt due within one year 21 21 Short-term borrowings 29,900 54,200 Accounts payable 23,808 28,960 Accrued interest 10,634 8,048 Accrued taxes 9,428 5,383 Customer deposits 9,655 8,746 Accrued payroll and vacations 12,059 9,862 Other 7,687 5,728 103,192 120,948 Other Liabilities: Accumulated deferred income taxes 242,900 238,542 Accumulated deferred investment tax credits 27,127 30,167 Regulatory tax liability 51,773 54,388 Other 46,806 47,240 368,606 370,337 Total Capitalization and Liabilities $1,665,907 $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 September 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 September 30, 1997 were approximately $55 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 September 30, 1997 were approximately $51 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 September 30, 1997, from the implementation of the surcharge would be approximately $14 million, and from February 1, 1995 would be approximately $12 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. -14- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. FINANCIAL CONDITION At September 30, 1997, KU's short-term borrowings were $29.9 million compared to $54.2 million at December 31, 1996. The short-term borrowings have been used primarily to temporarily finance ongoing construction expenditures and general corporate requirements. The decrease between September 30, 1997 and December 31, 1996 is due primarily to cash provided by operations exceeding cash required for investing and financing activities (exclusive of short-term borrowings) through the third quarter of 1997. RESULTS OF OPERATIONS Quarter ended September 30, 1997 compared to the Quarter ended September 30, 1996 The Company's earnings per common share for the three-month period ended September 30, 1997 were $.70 compared to $.60 for the corresponding period of 1996. The increase was primarily due to increases in kilowatt-hour sales throughout the retail sector and to an increase in sales for resale. The increase in retail sales was primarily the result of warmer weather in the third quarter of 1997 when compared to 1996 and to an increase in sales to industrial -15- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 is intercompany revenues that are eliminated in the consolidated financial statements. These intercompany amounts are immaterial. Increase (Decrease) From Prior Year Three Months Ended Sept. 30, 1997 kWh Revenues (%) (000's) Residential 5 $ 2,966 Commercial 5 1,982 Industrial 11 3,535 Mine Power - 178 Public Authorities 5 705 Total Retail Sales 6 9,366 Sales for Resale 4 3,863 Miscellaneous Revenues & Other - 597 Total 6 $ 13,826 Operating revenues increased $13.8 million (8%). The increase reflects a 6% increase in kilowatt-hour sales. The increases in residential and commercial sales were primarily due to warmer weather during the third quarter of 1997 compared to the corresponding period of 1996. KU set an all-time record peak demand for electricity of 3,510 megawatts on July 28, 1997. The increase in industrial sales reflects continued economic growth in the manufacturing sector of KU's service area. The increase in sales for resale (893,622 megawatt- hours versus 855,475 megawatt-hours) was primarily due to increased demand. -16- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fuel expense increased $3.2 million (7%). The increase in fuel expense was primarily attributable to a 3% increase in million British thermal units (MBTU) used and to a 3% increase in the cost per MBTU. The increased consumption was primarily caused by the previously mentioned increase in kilowatt-hour sales. Purchased power expense increased $2.4 million (15%). The increase was primarily due to an 18% increase in megawatt-hour purchases resulting from increased availability of surplus power on favorable pricing terms. Federal and state income taxes increased $2.9 million (21%). The increase was primarily attributable to an increase in pretax income. Nine Months ended September 30, 1997 compared to the Nine Months ended September 30, 1996 The Company's earnings per common share for the nine-month period ended September 30, 1997 were $1.68 compared to $1.72 for the corresponding period of 1996. The decrease was primarily due to lower residential and commercial sales as a result of milder weather during the first half of 1997 when compared to the same period of 1996, offset somewhat by the warmer weather in the third quarter of 1997 compared to the third quarter of 1996 and also by an increase in sales to industrial customers in the first nine months of 1997 compared to the same period of 1996. -17- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Increase (Decrease) From Prior Year Nine Months Ended Sept. 30, 1997 kWh Revenues (%) (000's) Residential (4) $ (8,561) Commercial (1) (1,507) Industrial 8 6,391 Mine Power 3 86 Public Authorities - (355) Total Retail Sales 1 (3,946) Sales for Resale (5) 614 Miscellaneous Revenues & Other - 427 Total - $ (2,905) Operating revenues were fairly flat compared to the same period of 1996, decreasing only $2.9 million (1%) which reflects a decline in residential and commercial sales offset by an increase in industrial sales. The decreases in residential and commercial sales were primarily due to milder weather during the first half of 1997 compared to the corresponding period of 1996, offset somewhat by the warmer weather in the third quarter of 1997 compared to the third quarter of 1996. The increase in industrial sales reflects continued economic growth in the manufacturing sector of KU's service area. About 18% of the industrial sales increase was due to greater sales to Toyota Motor Manufacturing U.S.A., Inc., KU's largest customer. Although sales for resale declined (2,442,727 megawatt-hours versus 2,574,604 megawatt- hours), revenues increased due to higher prices per megawatt-hour compared to the same period of 1996. Fuel expense decreased $9.6 million (6%). The decrease was primarily due to a 4% decrease in MBTU used. The decreased consumption was due primarily to an increase in kilowatt-hour purchases discussed below. -18- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Purchased power expense increased $4.5 million (9%). The increase was primarily due to a 17% increase in megawatt-hour purchases resulting from increased availability of surplus power on favorable pricing terms. Federal and state income taxes decreased $1.2 million (3%). 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 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 from the date of the Merger Agreement. 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. -19- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In July, 1997, KU Energy and LG&E Energy filed joint applications for approval of the Merger with the PSC and the SCC. The PSC approved the proposed Merger on September 12, 1997, making only minor changes to the regulatory plan proposed by KU Energy and LG&E Energy. Further details about the PSC's Order approving the proposed Merger are provided in KU Energy's current report on Form 8-K dated September 12, 1997 filed with the SEC on September 19, 1997. At special meetings held October 14, 1997, the shareholders of both KU Energy and LG&E Energy approved the Merger. The SCC issued an order to extend the date it was required to rule on approval of the Merger by 120 days to January 21, 1998. A joint application for approval was filed with the FERC on October 9, 1997. The Company cannot predict when the remaining regulatory approvals will be completed or what conditions, if any, may be attached to such approvals. 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 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. -20- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS UTILITY ISSUES Competition Refer to Managements' 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. 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 -21- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 September 30, 1997, from the implementation of the surcharge would be approximately $14 million, and from February 1, 1995 would be approximately $12 million. At this time, KU has not recorded any reserve for refund. For additional discussion, refer to Note 2 of the Condensed Notes to Financial Statements, Environmental Cost Recovery. Nitrogen Oxide Emissions Reductions The Environmental Protection Agency (EPA) 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 (including those at KU's generating stations) -22- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning in 2004. Certain implementation proposals, which are not yet finalized, would target coal-fired utilities in the Midwest and South, including Kentucky, for more substantial reductions than other areas and other sources of emissions. Implementation methods will be determined by the EPA as well as state regulatory authorities. KU believes that the costs relating to compliance with the new standards, including capital costs, as well as associated increases in operating and maintenance costs, are likely to be substantial, but in any event would qualify for recovery from customers under its environmental surcharge mechanism, subject to PSC approval. (See Note 2 of the Condensed Notes to Financial Statements, Environmental Cost Recovery). KU will continue to closely monitor developments in this area and anticipates that the exact nature of the impact of the new standards on its operations will not be known for some time. 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 No. 47, Disclosure of Long-Term Obligations. Both statements are -23- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Managements' 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. -24- 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 At the October 14, 1997, Special Meeting of Shareholders, the following proposal was acted upon and approved. (a) To consider and vote upon the adoption and approval of the Agreement and Plan of Merger, dated as of May 20, 1997, between LG&E Energy Corp. and KU Energy Corporation. Affirming Negative Broker Votes Votes Abstentions Non-Votes 29,113,099 441,062 943,712 0 The Merger was approved by 77% of the outstanding common shares and by 95% of those shares represented at the meeting. 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 September 30, 1997 gives effect to the Merger as if it had occurred at September 30, 1997. The unaudited pro forma combined condensed statements of income for all periods give effect to the Merger as if it had occurred at January 1, 1996. 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 -25- 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 nine-month periods ended September 30, 1997 and 1996 are not necessarily indicative of trends for any twelve-month period. -26- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET At September 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 $ 155,703 $ 22,269 $ - $ 177,972 Marketable securities 11,317 - - 11,317 Accounts receivable - less reserve 455,276 66,286 (11) 521,551 Materials and supplies - primarily at average cost: Fuel (predominately coal) 16,128 29,003 - 45,131 Gas stored underground 42,346 - - 42,346 Other 32,662 23,793 - 56,455 Price risk management assets 83,105 - - 83,105 Prepayments and other 4,927 6,121 - 11,048 Total current assets 801,464 147,472 (11) 948,925 Utility plant, at original cost: Electric 2,258,247 2,592,285 - 4,850,532 Gas 345,023 - - 345,023 Common 142,104 - - 142,104 Gross utility plant 2,745,374 2,592,285 - 5,337,659 Less: reserve for depreciation 1,057,511 1,112,102 - 2,169,613 Net utility plant 1,687,863 1,480,183 - 3,168,046 Other property and investments - less reserve: Investments in affiliates 172,339 2,180 - 174,519 Non-utility property and plant, net 407,650 2,690 - 410,340 Price risk management assets 42,400 - - 42,400 Other 22,332 41,788 - 64,120 Total other property and investments 644,721 46,658 - 691,379 Deferred debits and other assets 113,869 48,729 8,250 170,848 Total assets $ 3,247,917 $ 1,723,042 $ 8,239 $ 4,979,198 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-27- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET At September 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 289,161 29,900 - 319,061 Accounts payable 418,162 23,387 16,489 458,038 Trimble County settlement 14,032 - - 14,032 Accrued taxes 27,012 6,947 (3,330) 30,629 Price risk management liabilities 108,962 - - 108,962 Other 80,773 40,282 - 121,055 Total current liabilities 958,102 100,537 13,159 1,071,798 Long-Term Debt 664,315 546,351 - 1,210,666 Deferred credits and other liabilities: Accumulated deferred income taxes 310,262 250,074 - 560,336 Investment tax credit, in process of amortization 76,783 27,127 - 103,910 Regulatory liability 74,756 52,454 - 127,210 Price risk management liabilities 13,018 - - 13,018 Other 121,482 47,450 - 168,932 Total deferred credits and other liabilities 596,301 377,105 - 973,406 Minority interests 104,901 - - 104,901 Cumulative preferred stock 95,328 40,000 - 135,328 Common equity 828,970 659,049 (4,920) 1,483,099 Total capital and liabilities $ 3,247,917 $ 1,723,042 $ 8,239 $ 4,979,198 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 September 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 $ 855,741 $ - $ - $ 855,741 Electric utility 189,638 192,095 (39) 381,694 Gas utility 18,953 - - 18,953 Other 49,189 1,521 - 50,710 Total revenues 1,113,521 193,616 (39) 1,307,098 Cost of revenues Energy marketing and trading 857,789 - - 857,789 Fuel and power purchased 46,807 70,239 (39) 117,007 Gas supply expenses 11,541 - - 11,541 Other 26,829 - - 26,829 Total cost of revenues 942,966 70,239 (39) 1,013,166 Gross Profit 170,555 123,377 - 293,932 Operating expenses Operation and maintenance Utility 55,744 48,734 - 104,478 Energy marketing and trading and other 22,759 1,350 - 24,109 Depreciation and amortization 30,852 21,131 - 51,983 Non-recurring charges - - - - Total operating expenses 109,355 71,215 - 180,570 Equity in earnings of joint ventures 5,985 - - 5,985 Operating Income 67,185 52,162 - 119,347 Other Income and (deductions) 1,368 741 - 2,109 Interest charges, minority interest and preferred dividends 20,347 10,613 - 30,960 Income before income taxes 48,206 42,290 - 90,496 Income taxes 19,013 15,737 - 34,750 Net Income (Note 5) $ 29,193 $ 26,553 $ - $ 55,746 Average common shares outstanding (Note 4) 66,491 37,818 25,338 129,647 Earnings per share of common stock $ .44 $ .70 $ - $ .43 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-29- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Three Months Ended September 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 $ 645,163 $ - $ - $ 645,163 Electric utility 183,624 178,269 (67) 361,826 Gas utility 20,306 - - 20,306 Other 4,835 1,115 - 5,950 Total revenues 853,928 179,384 (67) 1,033,245 Cost of revenues Energy marketing and trading 635,375 - (47) 635,328 Fuel and power purchased 43,377 64,628 (20) 107,985 Gas supply expenses 13,327 - - 13,327 Other 3,323 - - 3,323 Total cost of revenues 695,402 64,628 (67) 759,963 Gross Profit 158,526 114,756 - 273,282 Operating expenses Operation and maintenance Utility 48,928 49,416 - 98,344 Energy marketing and trading and other 15,910 796 - 16,706 Depreciation and amortization 25,893 20,235 - 46,128 Total operating expenses 90,731 70,447 - 161,178 Equity in earnings of joint ventures 2,512 - - 2,512 Operating Income 70,307 44,309 - 114,616 Other Income and (deductions) 1,812 1,296 - 3,108 Interest charges and preferred dividends 12,525 10,391 - 22,916 Income before income taxes 59,594 35,214 - 94,808 Income taxes 17,858 12,721 - 30,579 Net Income $ 41,736 $ 22,493 $ - $ 64,229 Average common shares outstanding (Note 4) 66,307 37,818 25,338 129,463 Earnings per share of common stock $ .63 $ .60 $ - $ .50 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-30- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Nine Months Ended September 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 $ 2,436,707 $ - $ (4) $ 2,436,703 Electric utility 464,689 533,864 (278) 998,275 Gas utility 149,882 - - 149,882 Other 113,052 4,248 - 117,300 Total revenues 3,164,330 538,112 (282) 3,702,160 Cost of revenues Energy marketing and trading 2,412,118 - (14) 2,412,104 Fuel and power purchased 120,233 193,767 (268) 313,732 Gas supply expenses 100,510 - - 100,510 Other 64,422 - - 64,422 Total cost of revenues 2,697,283 193,767 (282) 2,890,768 Gross Profit 467,047 344,345 - 811,392 Operating expenses Operation and maintenance Utility 165,140 150,334 - 315,474 Energy marketing and trading and other 66,458 2,811 - 69,269 Depreciation and amortization 87,614 62,970 - 150,584 Non-recurring charges (592) - - (592) Total operating expenses 318,620 216,115 - 534,735 Equity in earnings of joint ventures 14,926 - - 14,926 Operating Income 163,353 128,230 - 291,583 Other Income and (deductions) 7,140 3,100 - 10,240 Interest charges, minority interest and preferred dividends 54,805 31,517 - 86,322 Income before income taxes 115,688 99,813 - 215,501 Income taxes 43,639 36,347 - 79,986 Net Income (Note 5) $ 72,049 $ 63,466 $ - $ 135,515 Average common shares outstanding (Note 4) 66,453 37,818 25,338 129,609 Earnings per share of common stock $ 1.08 $ 1.68 $ - $ 1.05 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-31- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Nine months Ended September 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 $ 1,863,877 $ - $ - $ 1,863,877 Electric utility 471,300 536,769 (642) 1,007,427 Gas utility 140,724 - - 140,724 Other 14,369 3,325 - 17,694 Total revenues 2,490,270 540,094 (642) 3,029,722 Cost of revenues Energy marketing and trading 1,813,641 - (234) 1,813,407 Fuel and power purchased 124,256 198,825 (408) 322,673 Gas supply expenses 90,211 - - 90,211 Other 10,270 - - 10,270 Total cost of revenues 2,038,378 198,825 (642) 2,236,561 Gross Profit 451,892 341,269 - 793,161 Operating expenses Operation and maintenance Utility 159,420 149,204 - 308,624 Energy marketing and trading and other 48,341 1,803 - 50,144 Depreciation and amortization 77,385 60,454 - 137,839 Non-recurring charges (Note 7) - 1,480 - 1,480 Total operating expenses 285,146 212,941 - 498,087 Equity in earnings of joint ventures 11,313 - - 11,313 Operating Income 178,059 128,328 - 306,387 Other Income and (deductions) 3,353 4,798 - 8,151 Interest charges and preferred dividends 40,404 31,498 - 71,902 Income before income taxes 141,008 101,628 - 242,636 Income taxes 48,355 36,743 - 85,098 Net Income $ 92,653 $ 64,885 $ - $ 157,538 Average common shares outstanding (Note 4) 66,278 37,818 25,338 129,434 Earnings per share of common stock $ 1.40 $ 1.72 $ - $ 1.22 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements. -32-
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. Merger-related transaction costs are currently estimated to be approximately $16.5 million (including fees for financial advisors, attorneys, accountants, consultants, filings and printing). None of the estimated cost savings resulting from the Merger 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. 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 nine months ended September 30, 1997, includes the receipt of an $8.5 million insurance settlement related to losses resulting from unauthorized transactions entered into in 1996 by a marketer in the Company's Calgary, Alberta, office. A one-time restructuring charge of $7.5 million for the consolidation of LG&E Energy's energy marketing group partially offsets the insurance recovery. 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 increases in energy marketing and trading revenues and income from operations of $1.1 million for the three months ended September 30, 1996, and $10.6 million for the nine months ended September 30, 1996. The impact on prior period financial results was immaterial. 7. KU Energy's net income for the nine months ended September 30, 1996 includes a nonrecurring write-off of nonutility investments. This charge is reflected in nonrecurring charges on the income statement. -33- 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. KU Energy and KU filed a report on Form 8-K dated September 12, 1997 to report an order by the Kentucky Public Service Commission approving the proposed merger of KU Energy with LG&E Energy Corp. -34- 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 November 11, 1997 /s/ Michael R. Whitley Michael R. Whitley Chairman and President Date November 11, 1997 /s/ Michael D. Robinson Michael D. Robinson Controller -35- 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 SEPTEMBER 30, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q QUARTERLY REPORT. 0000055387 KENTUCKY UTILITIES COMPANY 1,000 9-MOS DEC-31-1997 SEP-30-1997 PER-BOOK 1,480,183 12,643 130,150 42,931 0 1,665,907 308,140 (594) 300,212 607,758 0 40,000 546,351 29,900 0 0 21 0 0 0 441,877 1,665,907 533,884 38,445 406,930 445,375 88,509 5,284 93,793 29,820 63,973 1,692 62,281 49,919 28,039 139,698 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 APLICABLE.
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 SEPTEMBER 30, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q QUARTERLY REPORT. 0000835715 KU ENERGY CORPORATION 1,000 9-MOS DEC-31-1997 SEP-30-1997 PER-BOOK 1,480,183 49,183 147,472 46,204 0 1,723,042 308,137 (594) 351,506 659,049 0 40,000 546,351 29,900 0 0 21 0 0 0 447,721 1,723,042 533,864 37,487 409,289 446,776 87,088 7,895 94,983 31,517 63,466 0 63,466 49,919 28,039 133,401 1.68 1.68
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