-----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, OVoJOe6QDCIVuHWXvY1qacuxEXengP8Q7day6RK/DE2+usqrFjCQWxju6renXzLD 1lEfhtzlGnvKP+QBvvsBsQ== 0000835715-98-000009.txt : 19980515 0000835715-98-000009.hdr.sgml : 19980515 ACCESSION NUMBER: 0000835715-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE SROS: PHLX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KU ENERGY CORP CENTRAL INDEX KEY: 0000835715 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [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: 98620952 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: ELECTRIC SERVICES [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: 98620953 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 March 31, 1998 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, none Kentucky Utilities Company: Common stock, no par value, 37,817,878 shares outstanding and held by LG&E Energy Corp. at May 13, 1998 -1- KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998* CONTENTS PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements KU ENERGY CORPORATION Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Consolidated Balance Sheets 5 KENTUCKY UTILITIES COMPANY Statements of Income 6 Statements of Cash Flows 7 Balance Sheets 8 CONDENSED NOTES TO FINANCIAL STATEMENTS OF KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY 9-13 Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY 14-21 PART II. OTHER INFORMATION Item 1: Legal Proceedings 22 Item 5: Other Information 22 Item 6: Exhibits and Reports on Form 8-K 28 Signatures 29 *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 March 31, 1998 1997 Operating Revenues $183,210 $178,908 Operating Expenses: Fuel, principally coal, used in generation 48,347 44,713 Electric power purchased 17,989 17,603 Other operating expenses 30,400 31,156 Maintenance 13,335 12,013 Depreciation 21,533 20,882 Federal and state income taxes 14,738 15,334 Other taxes 4,172 4,071 Total Operating Expenses 150,514 145,772 Net Operating Income 32,696 33,136 Other Income and Deductions: Interest and dividend income 628 612 Other income and deductions - net 2,351 1,555 Total Other Income and Deductions 2,979 2,167 Income Before Interest and Other Charges 35,675 35,303 Interest and Other Charges 10,270 10,440 Net Income $ 25,405 $ 24,863 Average Common Shares Outstanding 37,818 37,818 Basic Earnings Per Common Share $ .67 $ .66 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -3- KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of dollars) For the Three Months Ended March 31, 1998 1997 Cash Flows from Operating Activities: Net Income $ 25,405 $ 24,863 Items not requiring (providing) cash currently: Depreciation 21,533 20,882 Deferred income taxes and investment tax credit 250 3,213 Changes in current assets and liabilities: Change in fuel inventory 4,907 5,646 Change in accounts receivable (1,802) 7,476 Change in accounts payable (1,509) (3,506) Change in accrued taxes 15,802 13,517 Change in accrued utility revenues 6,576 623 Change in other current assets and liabilities 3,865 4,333 Other--net 369 (4,706) Net Cash Provided by Operating Activities 75,396 72,341 Cash Flows from Investing Activities: Construction expenditures - utility (15,299) (18,127) Investment in independent power projects (886) (4,995) Proceeds from insurance reimbursements 8 4,046 Proceeds from independent power projects 1,356 30 Other 724 200 Net Cash Used by Investing Activities (14,097) (18,846) Cash Flows from Financing Activities: Short-term borrowings - net (33,600) (41,700) Retirement of long-term debt, incl. premiums (21) (21) Payment of common stock dividends (17,018) (16,640) Net Cash Used by Financing Activities (50,639) (58,361) Net Increase (Decrease) in Cash and Cash Equivalents 10,660 (4,866) Cash and Cash Equivalents Beginning of Period 21,726 30,270 Cash and Cash Equivalents End of Period $ 32,386 $ 25,404 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. Supplemental Disclosures Cash paid for: Interest $ 6,476 $ 6,672 Income taxes 500 $ (320) The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -4- KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) As of As of Mar. 31, Dec. 31, ASSETS 1998 1997 Utility Plant: Plant in service, at cost $ 2,561,149 $ 2,552,695 Less: Accumulated depreciation 1,149,284 1,128,282 1,411,865 1,424,413 Construction work in progress 64,079 58,939 1,475,944 1,483,352 Current Assets: Cash and cash equivalents 32,386 21,726 Accounts receivable 47,071 45,269 Accrued utility revenues 23,092 29,668 Fuel, principally coal, at average cost 22,892 27,799 Plant materials and operating supplies, at average cost 24,147 23,648 Other 6,360 5,769 155,948 153,879 Other Assets: Investment in leveraged leases 28,477 28,152 Investment in independent power projects 9,079 8,730 Regulatory assets 15,291 14,773 Other 51,478 48,376 104,325 100,031 Total Assets $ 1,736,217 $ 1,737,262 CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $ 672,509 $ 664,122 Preferred stock 40,000 40,000 Long-term debt 546,330 546,351 1,258,839 1,250,473 Current Liabilities: Long-term debt due within one year 21 21 Short-term borrowings - 33,600 Accounts payable 28,052 29,561 Accrued interest 10,576 8,283 Accrued taxes 23,512 7,710 Customer deposits 9,754 9,841 Accrued payroll and vacations 12,256 10,407 Other 7,370 6,492 91,541 105,915 Other Liabilities: Accumulated deferred income taxes 255,037 252,492 Accumulated deferred investment tax credits 25,163 26,131 Regulatory tax liability - net 49,598 50,904 Other 56,039 51,347 385,837 380,874 Total Capitalization and Liabilities $ 1,736,217 $ 1,737,262 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -5- KENTUCKY UTILITIES COMPANY STATEMENTS OF INCOME (Unaudited) (in thousands of dollars) For the Three Months Ended March 31, 1998 1997 Operating Revenues $183,219 $178,914 Operating Expenses: Fuel, principally coal, used in generation 48,347 44,713 Electric power purchased 17,989 17,603 Other operating expenses 29,973 30,788 Maintenance 13,333 12,011 Depreciation 21,486 20,835 Federal and state income taxes 14,968 15,527 Other taxes 4,088 4,013 Total Operating Expenses 150,184 145,490 Net Operating Income 33,035 33,424 Other Income and Deductions: Interest and dividend income 419 366 Other income and deductions - net 1,295 1,046 Total Other Income and Deductions 1,714 1,412 Income Before Interest Charges 34,749 34,836 Interest Charges 9,700 9,875 Net Income 25,049 24,961 Preferred Stock Dividend Requirements 564 564 Net Income Applicable to Common Stock $ 24,485 $ 24,397 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -6- KENTUCKY UTILITIES COMPANY STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of dollars) For the Three Months Ended March 31, 1998 1997 Cash Flows from Operating Activities: Net Income $ 25,049 $ 24,961 Items not requiring (providing) cash currently: Depreciation 21,486 20,835 Deferred income taxes and investment tax credit (121) 1,154 Changes in current assets and liabilities: Change in fuel inventory 4,907 5,646 Change in accounts receivable (1,975) 7,525 Change in accounts payable (5,270) (4,320) Change in accrued taxes 15,873 15,231 Change in accrued utility revenues 6,576 623 Change in other current assets and liabilities 3,861 4,486 Other--net 2,170 (3,412) Net Cash Provided by Operating Activities 72,556 72,729 Cash Flows from Investing Activities: Construction expenditures - utility (15,299) (18,127) Proceeds from insurance reimbursements 8 4,046 Net Cash Used by Investing Activities (15,291) (14,081) Cash Flows from Financing Activities: Short-term borrowings - net (33,600) (41,700) Retirement of long-term debt, incl. premiums (21) (21) Payment of dividends (17,582) (17,204) Net Cash Used by Financing Activities (51,203) (58,925) Net Increase (Decrease) in Cash and Cash Equivalents 6,062 (277) Cash and Cash Equivalents Beginning of Period 5,453 5,719 Cash and Cash Equivalents End of Period $ 11,515 $ 5,442 Supplemental Disclosures Cash paid for: Interest $ 6,476 $ 6,672 Income taxes $ 138 $ (320) The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -7- KENTUCKY UTILITIES COMPANY BALANCE SHEETS (Unaudited) (in thousands of dollars) As of As of Mar. 31, Dec. 31, 1998 1997 ASSETS Utility Plant: Plant in service, at cost $2,561,149 $2,552,695 Less: Accumulated depreciation 1,149,284 1,128,282 1,411,865 1,424,413 Construction work in progress 64,079 58,939 1,475,944 1,483,352 Current Assets: Cash and cash equivalents 11,515 5,453 Accounts receivable 46,831 44,856 Accrued utility revenues 23,092 29,668 Fuel, principally coal, at average cost 22,892 27,799 Plant materials and operating supplies, at average cost 24,147 23,648 Other 6,360 5,769 134,837 137,193 Other Assets: Regulatory assets 15,291 14,773 Other 47,664 44,562 62,955 59,335 Total Assets $1,673,736 $1,679,880 CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $ 619,762 $ 612,295 Preferred stock 40,000 40,000 Long-term debt 546,330 546,351 1,206,092 1,198,646 Current Liabilities: Long-term debt due within one year 21 21 Short-term borrowings - 33,600 Accounts payable 28,116 33,386 Accrued interest 10,576 8,283 Accrued taxes 23,346 7,473 Customer deposits 9,754 9,841 Accrued payroll and vacations 12,197 10,348 Other 7,090 6,215 91,100 109,167 Other Liabilities: Accumulated deferred income taxes 247,325 245,150 Accumulated deferred investment tax credits 25,163 26,131 Regulatory tax liability - net 49,598 50,904 Other 54,458 49,882 376,544 372,067 Total Capitalization and Liabilities $1,673,736 $1,679,880 The accompanying Condensed Notes to Financial Statements are an integral part of these statements. -8- 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). Pursuant to an Agreement and Plan of Merger dated May 20, 1997, between KU Energy and LG&E Energy Corp. (LG&E Energy), KU Energy merged with and into LG&E Energy, with LG&E Energy as the surviving corporation, effective May 4, 1998. As of that date, KU Energy's separate corporate existence ceased. LG&E Energy is a holding company organized under the laws of Kentucky. As of May 4, 1998, LG&E Energy's subsidiaries include KU Capital Corporation (KU Capital), a non-utility subsidiary, and KU, an electric utility, formerly subsidiaries of KU Energy. KU Energy Corporation owned, and as of May 4, 1998, LG&E Energy owns 100 percent of the common equity of KU Capital and KU. This Form 10-Q is the last report to be made by KU Energy under the Securities Exchange Act of 1934 (Exchange Act). KU will continue to be subject to Exchange Act reporting requirements. LG&E Energy and its other subsidiaries will file separate reports for the quarter ended March 31, 1998. 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, -9- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited) 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, 1997; and the KU financial statements should be read in conjunction with the 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, 1997. 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 March 31, 1998 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 -10- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 March 31, 1998 were approximately $65 million. The PSC's order approving the surcharge and the constitutionality of the surcharge statute were challenged in the Franklin County (Kentucky) Circuit Court (Circuit Court) in an action brought against KU and the PSC by the Attorney General of Kentucky and joined by representatives of consumer groups. In July 1995, the Circuit Court entered a judgment upholding the constitutionality of the surcharge statute, but vacating that part of the PSC's July 1994 order which the Circuit Court's judgment described as retroactively applying the surcharge statute. The Circuit Court further ordered the case remanded to the PSC for a determination in accordance with the judgment. KU and the PSC argued that the PSC's July 1994 order did not retroactively apply the statute. The Kentucky Attorney General and other consumer representatives appealed to the Kentucky Court of Appeals (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 concerning the retroactive application of the surcharge statute. The PSC previously ordered KU to collect all surcharge revenues beginning February 1, 1995 subject to refund pending final determination of all appeals. KU expects the PSC to continue to do so until the appeals -11- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited) are concluded. The total surcharge collections from February 1, 1995 through March 31, 1998 were approximately $61 million. In December 1997, the Court of Appeals rendered an opinion upholding the portion of the Circuit Court's judgment regarding the constitutionality of the surcharge statute but reversing that portion of the Circuit Court's judgment concerning the claim of retroactive application of the statute. The Kentucky Attorney General and other consumer representatives have filed motions for discretionary review with the Kentucky Supreme Court (Supreme Court). The Supreme Court has the discretion to grant or deny the motions. KU and the PSC have asked the Supreme Court to deny the motions. KU cannot predict whether the Supreme Court will grant review of the case or when it will act on the matter. KU continues to believe that the constitutionality of the surcharge statute will be upheld. Although KU cannot predict the outcome of the claim of retroactive application of the statute, it is the position of KU and the PSC that the July 1994 PSC order did not retroactively apply the statute. If the Court of Appeals opinion reversing the Circuit Court's judgment on the claim of retroactivity is overturned and the Circuit Court's judgment, as entered, is upheld, KU estimates that the amount it could be required to refund for surcharge collections through March 31, 1998, from the implementation of the surcharge would be approximately $16 million and from February 1, 1995, would be approximately $14 million. At this time, KU has not recorded any reserve for refund. -12- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 Management's Discussion and Analysis - Merger Agreement with LG&E Energy Corp. -13- 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 March 31, 1998, KU had no short-term borrowings compared to $33.6 million at December 31, 1997. The short-term borrowings have been used primarily to finance ongoing construction expenditures and general corporate requirements. The decrease between March 31, 1998 and December 31, 1997 is due primarily to cash provided by operations exceeding cash required for investing and financing activities (exclusive of short-term borrowings) in the first quarter of 1998. RESULTS OF OPERATIONS Quarter ended March 31, 1998 compared to the Quarter ended March 31, 1997 The Company's basic earnings per common share for the three-month period ended March 31, 1998 were $.67 compared to $.66 for the corresponding period of 1997. The increase was primarily due to increases in industrial sales and sales for resale during 1998 when compared to 1997. These increases were offset somewhat by an increase in maintenance expense. 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 -14- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Mar. 31, 1998 kWh Revenues (%) (000's) Residential (1) $ 407 Commercial 1 508 Industrial 6 1,939 Mine Power (3) (260) Public Authorities (1) 54 Total Retail Sales 1 2,648 Sales for Resale 12 1,246 Miscellaneous Revenues & Other - 408 Total 3 $ 4,302 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 KU-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 for the first quarter of 1998 were flat compared to the first quarter of 1997, increasing $1 million. The increase reflects a 3% increase in kilowatt-hour sales, which is primarily attributable to increases in industrial sales and sales for resale. The increase in industrial sales reflects continued economic growth in the manufacturing sector of KU's service area. The increase in sales for -15- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS resale (937,799 megawatt-hours versus 843,892 megawatt-hours) was primarily due to increased demand. Excluding the effect of the refund mentioned above, fuel expense increased $.8 million (2%). The increase was due to a 1% increase in million British thermal units (MBTU) used. The increased consumption was primarily caused by the previously mentioned increase in kilowatt- hour sales. Maintenance expense increased $1.3 million (11%). The increase was primarily due to distribution utility line maintenance costs incurred as a result of ice storm damage during the first quarter of 1998. Federal and state income taxes decreased $.6 million (4%). The decrease was primarily due to a decrease in pretax operating 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) providing for a tax-free, stock-for-stock merger of KU Energy and LG&E Energy. As a result of the Merger which became effective May 4, 1998, LG&E Energy, the surviving corporation, has become the parent company of KU and will continue as parent of Louisville Gas and Electric Company (LG&E). Shareholders of KU Energy common stock received 1.67 shares of LG&E Energy common stock for each share of KU Energy common stock held. The Merger will be accounted for as a pooling-of-interests. Shareholders of both companies approved the Merger on October 14, 1997. The Merger also has been approved by the Virginia State Corporation Commission (SCC), the PSC, the Federal Energy Regulatory -16- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Commission (FERC) and the Securities and Exchange Commission. The PSC order approves a surcredit mechanism which passes one-half of the potential non-fuel merger savings (net of costs to achieve) to customers over the first five years following the consummation of the Merger. The credit will be nearly 2% of customers bills in the five-year period and will amount to approximately $63 million in net non-fuel savings to KU customers. Similar methods for passing net non-fuel merger savings have been approved for Virginia customers by the SCC and agreed to by KU's municipal wholesale customers. The surcredits will become effective for billings in July 1998. The PSC order also approves recovery from ratepayers of one-half of merger-related expenses (not to exceed $77.2 million) over a five-year period. The remaining merger-related expenses will be expensed as incurred after the effective date of the Merger. Total merger-related expenses are now expected to be approximately $94 million of which the Company's share is expected to be approximately $47 million. Merger- related expenses are higher than earlier estimates primarily as a result of higher than originally estimated separation costs. Amounts in excess of $77.2 million will be expensed consistent with the approved regulatory plan as part of the second quarter one-time charge. Through March 31, 1998, the Company has deferred approximately $9.1 million pending consummation of the Merger. Of that amount, $4.8 million is included in regulatory assets to be recovered following the consummation of the Merger as described above. As part of their PSC application, KU and LG&E have proposed a base rate cap for five years after consummation of the Merger, except in the event of extraordinary circumstances such as a significant increase in the federal corporate tax rate. The PSC order notes that the PSC has the statutory jurisdiction to regulate utility rates including the authority to investigate and review KU's and LG&E's earnings at any time. -17- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The PSC order also requires KU and LG&E to file by September 14, 1998, detailed plans to address any future rate regulation that may be adopted in the state. The PSC order further provides that the PSC will at that time determine, on the basis of the described filings and other information, whether changes should be made to the existing regulation of KU and LG&E. 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 in July 1994, 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 PSC's order approving the surcharge and the constitutionality of the surcharge were challenged in a Franklin County (Kentucky) Circuit Court (Circuit Court) action brought against KU and the PSC by the Attorney General of Kentucky and representatives of consumer groups. In July 1995, the Circuit Court entered a judgment upholding the constitutionality of the surcharge statute but vacating that part of the PSC's order which the Circuit Court's judgment described as retroactively applying the surcharge statute. All parties (including KU and the PSC) appealed the Circuit Court's judgment to the Kentucky Court of Appeals (Court of Appeals). The PSC previously ordered KU to collect all surcharge revenues beginning February 1, 1995 subject to refund pending final determination of all appeals. KU expects the PSC to continue to do so until the appeals are concluded. The total surcharge collections from February 1, 1995 through March 31, 1998 were approximately $61 million. -18- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In December 1997, the Court of Appeals rendered an opinion upholding the portion of the Circuit Court's judgment regarding the constitutionality of the surcharge statute but reversing that portion of the Circuit Court's judgment concerning the claim of retroactive application of the statute. The Kentucky Attorney General and other consumer representatives have filed motions for discretionary review with the Kentucky Supreme Court (Supreme Court). The Supreme Court has the discretion to grant or deny the motions. KU and the PSC have asked the Supreme Court to deny the motions. KU cannot predict whether the Supreme Court will grant review of the case or when it will act on the matter. KU continues to believe that the constitutionality of the surcharge statute will be upheld. Although KU cannot predict the outcome of the claim of retroactive application of the statute, it is the position of KU and the PSC that the July 1994 PSC order did not retroactively apply the statute. If the Court of Appeals opinion reversing the Circuit Court's judgment on the claim of retroactivity is overturned and the Circuit Court's judgment, as entered, is upheld, KU estimates that the amount it could be required to refund for surcharge collections through March 31, 1998, from the implementation of the surcharge would be approximately $16 million, and from February 1, 1995, would be approximately $14 million. At this time, KU has not recorded any reserve for refund. Refer to Note 2 of the Condensed Notes to Financial Statements, "Environmental Cost Recovery." Nitrogen Oxide Emission Reductions The Environmental Protection Agency (EPA) issued final rules revising the National Ambient Air Quality Standards for ozone and particulate matter in July 1997. The revised standards would require significant reductions in sulfur dioxide and nitrogen oxide emissions -19- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS from coal-fired boilers (including those at KU's generating stations) beginning in 2004. Certain implementation proposals, which are not yet final, would target coal-fired utilities in the Midwest and South, including Kentucky, for more substantial reductions than other areas and other sources of emissions. Final implementation methods will be set 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 costs, are likely to be substantial and are dependent upon the ultimate control program agreed to by the targeted states and EPA. Such costs are expected to be incurred in the 2004-2007 time period. KU further believes that such capital and operating costs are the type of costs that are eligible for recovery from customers under its environmental surcharge mechanism. However, approval from the PSC is required. Refer to Note 2 of the Condensed Notes to Financial Statements, Environmental Cost Recovery. The exact nature of the impact of the new standards on KU's operations will not likely be known for some time. 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' -20- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Discussion and Analysis relating to the anticipated results of proceedings related to the environmental surcharge, the Company's share of merger-related expenses, the anticipated amount of customer savings resulting from the Merger, the anticipated strengthened competetive position resulting from the Merger, and the impact of the revisions to the National Ambient Air Quality Standards and recovery of related costs. 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 99.04, Cautionary Statements, to the 1997 Annual Report on Form 10-K of KU Energy and KU, incorporated herein by reference. -21- KU ENERGY CORPORATION AND SUBSIDIARIES KENTUCKY UTILITIES COMPANY MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 5. OTHER INFORMATION Unaudited Supplemental Pro Forma Combined Condensed Consolidated Financial Information The following supplemental 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 March 31, 1998 gives effect to the Merger as if it had occurred at March 31, 1998. 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 supplemental 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, 1997. 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-month periods ended March 31, 1998 and 1997 are not necessarily indicative of trends for any twelve-month period. -22-
LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET At March 31,1998 (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 $ 134,984 $ 32,386 $ - $ 167,370 Marketable securities 25,048 - - 25,048 Accounts receivable - less reserve 465,114 70,163 (320) 534,957 Materials and supplies - primarily at average cost: Fuel (predominately coal) 21,501 22,892 - 44,393 Gas stored underground 13,365 - - 13,365 Other 31,985 24,147 - 56,132 Price risk management assets 182,262 - - 182,262 Prepayments and other 4,340 6,360 - 10,700 Total current assets 878,599 155,948 (320) 1,034,227 Utility plant: At original cost 2,789,600 2,625,228 - 5,414,828 Less: reserve for depreciation 1,087,647 1,149,284 - 2,236,931 Net utility plant 1,701,953 1,475,944 - 3,177,897 Other property and investments - less reserve: Investments in affiliates 153,042 2,081 - 155,123 Non-utility property and plant, net 420,918 2,642 - 423,560 Price risk management assets 57,025 - - 57,025 Other 29,228 43,349 - 72,577 Total other property and investments 660,213 48,072 - 708,285 Deferred debits and other assets 120,837 56,253 (2,798) 174,292 Total assets $ 3,361,602 $ 1,736,217 $ (3,118) $ 5,094,701 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-23- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET At March 31, 1998 (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 205,515 - - 205,515 Accounts payable 393,748 28,052 7,573 429,373 Trimble County settlement 11,542 - - 11,542 Price risk management liabilities 177,238 - - 177,238 Other 78,388 63,468 (4,314) 137,542 Total current liabilities 886,431 91,541 3,259 981,231 Long-term debt 814,371 546,330 - 1,360,701 Deferred credits and other liabilities: Accumulated deferred income taxes 319,633 255,037 - 574,670 Investment tax credit, in process of amortization 74,722 25,163 - 99,885 Regulatory liability 71,287 50,263 - 121,550 Price risk management liabilities 53,848 - - 53,848 Other 111,064 55,374 - 166,438 Total deferred credits and other liabilities 630,554 385,837 - 1,016,391 Minority interests 99,173 - - 99,173 Cumulative preferred stock 98,353 40,000 - 138,353 Common equity 832,720 672,509 (6,377) 1,498,852 Total capital and liabilities $ 3,361,602 $ 1,736,217 $ (3,118) $ 5,094,701 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-24- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Three Months Ended March 31, 1998 (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 $ 940,714 $ - $ - $ 940,714 Electric utility 140,585 183,210 (24) 323,771 Gas utility 92,759 - - 92,759 Argentine gas distribution and other 34,170 1,912 - 36,082 Total revenues 1,208,228 185,122 (24) 1,393,326 COST OF REVENUES Energy marketing and trading 932,479 - - 932,479 Fuel and power purchased 45,640 66,336 (24) 111,952 Gas supply expenses 64,076 - - 64,076 Argentine gas distribution and other 19,427 - - 19,427 Total cost of revenues 1,061,622 66,336 (24) 1,127,934 Gross profit 146,606 118,786 - 265,392 OPERATING EXPENSES Operation and maintenance: Energy marketing and trading 10,506 - - 10,506 Utility 55,590 47,393 - 102,983 Argentine gas distribution and other 12,781 540 - 13,321 Depreciation and amortization 31,750 21,533 - 53,283 Total operating expenses 110,627 69,466 - 180,093 Equity in earnings of joint ventures 5,119 - - 5,119 OPERATING INCOME 41,098 49,320 - 90,418 Other income and (deductions) 1,531 953 - 2,484 Interest charges and preferred dividends 16,627 10,270 - 26,897 Minority interest 1,343 - - 1,343 Income before income taxes 24,659 40,003 - 64,662 Income taxes 6,896 14,598 - 21,494 NET INCOME $ 17,763 $ 25,405 $ - $ 43,168 Average common shares outstanding (Note 4) 66,528 37,818 25,338 129,684 Earnings per share of common stock - basic and diluted $ 0.27 $ 0.67 $ N/A $ 0.33 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-25- LG&E ENERGY CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME Three Months Ended March 31, 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 $ 1,059,078 $ - $ (4) $ 1,059,074 Electric utility 128,827 178,908 (204) 307,531 Gas utility 96,738 - - 96,738 Argentine gas distribution and other 18,600 1,177 - 19,777 Total revenues 1,303,243 180,085 (208) 1,483,120 COST OF REVENUES Energy marketing and trading 1,046,396 - (14) 1,046,382 Fuel and power purchased 35,019 62,316 (194) 97,141 Gas supply expenses 67,825 - - 67,825 Argentine gas distribution and other 11,394 - - 11,394 Total cost of revenues 1,160,634 62,316 (208) 1,222,742 Gross profit 142,609 117,769 - 260,378 OPERATING EXPENSES Operation and maintenance: Energy marketing and trading 11,970 - - 11,970 Utility 53,431 46,812 - 100,243 Argentine gas distribution and other 7,802 619 - 8,421 Depreciation and amortization 27,887 20,882 - 48,769 Total operating expenses 101,090 68,313 - 169,403 Equity in earnings of joint ventures 3,384 - - 3,384 OPERATING INCOME 44,903 49,456 - 94,359 Other income and (deductions) 3,367 527 - 3,894 Interest charges and preferred dividends 14,422 10,440 - 24,862 Minority interest 568 - - 568 Income before income taxes 33,280 39,543 - 72,823 Income taxes 12,041 14,680 - 26,721 NET INCOME $ 21,239 $ 24,863 $ - $ 46,102 Average common shares outstanding (Note 4) 66,383 37,818 25,338 129,539 Earnings per share of common stock - basic and diluted $ 0.32 $ 0.66 $ - $ 0.36 See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-26- LG&E Energy Corp. Notes to Unaudited Supplemental 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 supplemental 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 $21.4 million (including fees for financial advisors, attorneys, accountants, consultants, filings and printing). LG&E Energy and KU Energy have incurred transaction costs of $13.5 million through March 31, 1998, which are included in deferred debits and other assets in the supplemental pro forma combined condensed balance sheet. None of the estimated cost savings resulting from the Merger or costs to achieve such savings have been reflected in the supplemental pro forma combined condensed statements of income. A charge of $6.4 million ($10.7 million, net of income taxes of $4.3 million) as a pro forma adjustment to retained earnings and a credit of $2.8 million ($10.7 million less $13.5 million actual charges incurred through March 31, 1998) as a pro forma adjustment to deferred debits and other assets have been made in the supplemental pro forma combined condensed balance sheet to recognize such estimated transaction costs and the proposed treatment following the consummation of the Merger. 4. The supplemental 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 supplemental pro forma combined condensed financial statements are presented as if the companies were combined during all periods included therein. -27- 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 99.04 to Form 10-K Annual Report of KU Energy and KU for the year ended D e cember 31, 1997). Incorporated by reference. (b) Reports on Form 8-K. None. -28- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, KU Energy Corporation (by its successor LG&E Energy Corp.) 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 (By its successor LG&E Energy Corp.) (Registrant) Date May 13, 1998 /s/ Victor A. Staffieri Victor A. Staffieri Chief Financial Officer Date May 13, 1998 /s/ Michael R. Whitley Michael R. Whitley Vice Chairman, President and Chief Operating Officer KENTUCKY UTILITIES COMPANY (Registrant) Date May 13, 1998 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (on behalf of the registrant in his capacity as Principal Accounting Officer) -29- EX-27 2 EXHIBIT 27.01 - ARTICLE UT FDS FOR KU ENERGY CORP.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF MARCH 31, 1998 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q QUARTERLY REPORT. 0000835715 KU ENERGY CORPORATION 1,000 3-MOS DEC-31-1998 MAR-31-1998 PER-BOOK 1,475,944 50,509 155,948 53,816 0 1,736,217 308,137 (594) 364,966 672,509 0 40,000 546,330 0 0 0 21 0 0 0 477,357 1,736,217 183,210 14,738 135,776 150,514 32,696 2,979 35,675 10,270 25,405 0 25,405 17,018 9,289 75,396 .67 .67 EX-27 3 EXHIBIT 27.02 - ARTICLE UT FDS FOR KU
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF MARCH 31, 1998 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD ENDED MARCH 31,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q QUARTERLY REPORT. 0000055387 KENTUCKY UTILITIES COMPANY 1,000 3-MOS DEC-31-1998 MAR-31-1998 PER-BOOK 1,475,944 12,932 134,837 50,023 0 1,673,736 308,140 (594) 312,216 619,762 0 40,000 546,330 0 0 0 21 0 0 0 467,623 1,673,736 183,219 14,968 135,216 150,184 33,035 1,714 34,749 9,700 25,049 564 24,485 17,018 9,289 72,556 0 0 AT MARCH 31, 1998, ALL OUTSTANDING COMMON STOCK OF KENTUCKY UTILITIES COMPANY WAS HELD BY ITS PARENT COMPANY, KU ENERGY CORPORATION. THEREFORE, EARNINGS PER SHARE IS NOT APPLICABLE.
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