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, 19961997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-3464Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification
No.
1-10944 KU Energy Corporation 61-1141273
(A Kentucky Utilities Company
(Exact name of registrant as specified in its charter)
Kentucky and Virginia 61-0247570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)Corporation)
One Quality Street
Lexington, Kentucky 40507
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 606-255-2100
Not Applicable
Former name, former address40507-1428
(606) 255-2100
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and former fiscal year, if changed since
last reportVirginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(606) 255-2100
Indicate by check mark whether the RegistrantRegistrants (1) hashave filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant wassuch Registrants were required to file such
reports) and (2) hashave been subject to such filing requirements for the
past 90 days.
Yes X No .
NumberIndicate the number of shares outstanding of each of the issuers'
classes of common stock, as of the latest practicable date:
KU Energy Corporation: Common Stockstock, no par value, 37,817,878
shares outstanding at May 2, 1996:1997
Kentucky Utilities Company: Common stock, no par value, 37,817,878
shares (ownedoutstanding and held by KU Energy
Corporation at May 2, 1997
-1-
KU ENERGY CORPORATION
AND
KENTUCKY UTILITIES COMPANY
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997*
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 - 12
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
KU ENERGY CORPORATION AND KENTUCKY
UTILITIES COMPANY 13 - 19
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 6: Exhibits and Reports on Form 8-K 20
Signatures 21
*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 parent-KU Energy Corporation).
-1-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,
1997 1996
Operating Revenues $178,908 $190,990
Operating Expenses:
Fuel, principally coal,
used in generation 44,713 54,025
Electric power purchased 17,603 17,504
Other operating expenses 31,156 29,997
Maintenance 12,013 14,204
Depreciation 20,882 20,065
Federal and state income taxes 15,334 15,700
Other taxes 4,071 4,367
Total Operating Expenses 145,772 155,862
Net Operating Income 33,136 35,128
Other Income and Deductions:
Interest and dividend income 612 885
Other income and deductions - net 1,555 1,068
Total Other Income and Deductions 2,167 1,953
Income Before Interest and Other Charges 35,303 37,081
Interest and Other Charges 10,440 10,762
Net Income $ 24,863 $ 26,319
Average Common Shares Outstanding 37,818 37,818
Earnings Per Common Share $ .66 $ .70
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,
1997 1996
Cash Flows from Operating Activities:
Net Income $ 24,863 $ 26,319
Items not requiring (providing) cash currently:
Depreciation 20,882 20,065
Deferred income taxes and investment tax credit 3,213 321
Changes in current assets and liabilities:
Change in fuel inventory 5,646 4,127
Change in accounts receivable 7,476 1,712
Change in accounts payable (3,506) (2,900)
Change in accrued taxes 13,517 15,110
Change in other current assets and liabilities 4,956 9,510
Other--net (4,706) 3,187
Net Cash Provided by Operating Activities 72,341 77,451
Cash Flows from Investing Activities:
Construction expenditures - utility (18,127) (21,105)
Investment in independent power projects (4,995) (284)
Proceeds from insurance reimbursements 4,046 201
Other 230 650
Net Cash Used by Investing Activities (18,846) (20,538)
Cash Flows from Financing Activities:
Short-term borrowings - net (41,700) (40,200)
Issuance of long-term debt - 35,710
Funds deposited with trustee - net - 1,500
Retirement of long-term debt, incl. premiums (21) (36,192)
Payment of common stock dividends (16,640) (16,262)
Net Cash Used by Financing Activities (58,361) (55,444)
Net Increase (Decrease) in Cash and Cash Equivalents (4,866) 1,469
Cash and Cash Equivalents Beginning of Period 30,270 29,492
Cash and Cash Equivalents End of Period $ 25,404 $ 30,961
Supplemental Disclosures
Cash paid for:
Interest $ 6,672 $ 6,294
Income taxes $ (320) $ 2,425
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 1997 1996
Utility Plant:
Plant in service, at cost $ 2,489,427 $ 2,482,812
Less: Accumulated depreciation 1,087,644 1,067,911
1,401,783 1,414,901
Construction work in progress 73,125 63,435
1,474,908 1,478,336
Current Assets:
Cash and cash equivalents 25,404 30,270
Accounts receivable 43,022 50,498
Accrued utility revenues 23,616 24,239
Fuel, principally coal, at average cost 25,249 30,895
Materials and supplies, at average cost 22,604 21,656
Other 6,795 7,486
146,690 165,044
Other Assets:
Investment in leveraged leases 25,408 24,650
Investment in independent power projects 9,885 4,745
Unamortized loss on reacquired debt 10,567 10,838
Other 45,013 43,335
90,873 83,568
Total Assets $ 1,712,471 $ 1,726,948
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 653,737 $ 645,513
Preferred stock of Subsidiary 40,000 40,000
Long-term debt of Subsidiary 546,351 546,373
1,240,088 1,231,886
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings 12,500 54,200
Accounts payable 24,747 28,253
Accrued interest 10,409 8,048
Accrued taxes 17,522 4,005
Customers' deposits 9,206 8,746
Accrued payroll and vacations 11,868 9,921
Other 7,001 5,954
93,274 119,148
Other Liabilities:
Accumulated deferred income taxes 246,499 242,674
Accumulated deferred investment tax credits 29,169 30,167
Regulatory tax liability 53,548 54,388
Other 49,893 48,685
379,109 375,914
Total Capitalization and Liabilities $ 1,712,471 $ 1,726,948
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,
1997 1996 1995
Operating Revenues $178,914 $190,996 $167,148
Operating Expenses:
Fuel, principally coal,
used in generation 44,713 54,025 45,706
Electric power purchased 17,603 17,504 15,777
Other operating expenses 30,788 29,688
30,598
Maintenance 12,011 14,202
14,856
Depreciation 20,835 20,018 18,701
Federal and state income taxes 15,527 16,336 10,634
Other taxes 4,013 4,235 4,314
Total Operating Expenses 145,490 156,008 140,586
Net Operating Income 33,424 34,988 26,562
Other Income and Deductions:
Interest and dividend income 366 613 633
Other income and deductions - net 1,046 2,100 1,480
Total Other Income and Deductions 1,412 2,713 2,113
Income Before Interest Charges 34,836 37,701 28,675
Interest Charges 9,875 10,198 9,747
Net Income 24,961 27,503 18,928
Preferred Stock Dividend Requirements 564 564
Net Income Applicable to Common Stock $ 26,93924,397 $ 18,36426,939
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-2--6-
KENTUCKY UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
For the Three
Months Ended
March 31,
1997 1996 1995
Cash Flows from Operating Activities:
Net Income $ 27,50324,961 $ 18,92827,503
Items not requiring (providing) cash currently:
Depreciation 20,835 20,018 18,701
Deferred income taxes
and investment tax credit 1,154 (352) (630)
Changes in current assets and liabilities:
Change in fuel inventory 5,646 4,127 (254)
Change in accounts receivable 7,525 1,508 5,623
Change in accounts payable (4,320) (2,455) (18,239)
Change in accrued taxes 15,231 15,300 10,725
Change in accrued utility revenues 2,704 2,493other current assets and liabilities 5,109 9,664
Other--net 9,665 8,570(3,412) 2,705
Net Cash Provided by Operating Activities 72,729 78,018 45,917
Cash Flows from Investing Activities:
Construction expenditures - utility (18,127) (21,105)
(28,035)
OtherProceeds from insurance reimbursements 4,046 201
10Net Cash Used by Investing Activities (14,081) (20,904) (28,025)
Cash Flows from Financing Activities:
Short-term borrowings - net (41,700) (40,200) (7,100)
Issuance of long-term debt - 35,710 (146)
Funds deposited with trustee - net - 1,500 8,600
Retirement of long-term debt, incl. premiums (21) (36,192) (21)
Payment of dividends (17,204) (16,826) (16,353)
Net Cash Used by Financing Activities (58,925) (56,008) (15,020)
Net Increase (Decrease) in Cash and
Cash Equivalents (277) 1,106 2,872
Cash and Cash Equivalents Beginning of Period 5,719 5,697 3,111
Cash and Cash Equivalents End of Period $ 6,8035,442 $ 5,9836,803
Supplemental Disclosures
Cash paid for:
Interest on short- and long-term debt$ 6,672 $ 6,294
$ 6,475
Federal and state incomeIncome taxes $ 2,753(320) $ -2,753
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-3--7-
KENTUCKY UTILITIES COMPANY
BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
As of As of
MarchMar. 31, Dec. 31,
1997 1996 1995
ASSETS
Utility Plant:
Plant in service, at cost $2,401,414 $2,394,018$2,489,427 $2,482,812
Less: Accumulated depreciation 1,015,733 997,366
1,385,681 1,396,6521,087,644 1,067,911
1,401,783 1,414,901
Construction work in progress 72,775 61,410
1,458,456 1,458,06273,125 63,435
1,474,908 1,478,336
Current Assets:
Cash and cash equivalents 6,803 5,697
Escrow funds - coal contract litigation 6,599 6,599
Construction funds held by trustee 2,270 3,7435,442 5,719
Accounts receivable 47,963 49,47143,057 50,582
Accrued utility revenues 25,196 27,90023,616 24,239
Fuel, principally coal, at average cost 25,311 29,43825,249 30,895
Materials and supplies, at average cost 23,547 23,06422,604 21,656
Other 8,471 8,121
146,160 154,033
Investments, Deferred Charges and6,795 7,486
126,763 140,577
Other Assets:
Unamortized loss on reacquired debt 11,640 11,30410,567 10,838
Other 37,615 36,589
49,255 47,89344,986 43,304
55,553 54,142
Total Assets $1,653,871 $1,659,988$1,657,224 $1,673,055
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 587,214603,154 $ 576,537595,397
Preferred stock 40,000 40,000
Long-term debt 546,351 546,373
545,980
1,173,587 1,162,5171,189,505 1,181,770
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings 15,400 55,60012,500 54,200
Accounts payable 35,545 38,00024,640 28,960
Accrued interest 10,695 7,55610,410 8,048
Accrued taxes 20,501 5,20120,614 5,383
Customers' deposits 7,245 6,8769,206 8,746
Accrued payroll and vacations 11,177 8,706
Liab. to ratepayers - coal contract litigation 6,599 6,59911,819 9,862
Other 8,697 6,752
115,880 135,311
Deferred Credits and6,918 5,728
96,128 120,948
Other Liabilities:
Accumulated deferred income taxes 233,158 231,717240,308 238,542
Accumulated deferred investment tax credits 33,177 34,18029,169 30,167
Regulatory tax liability 56,806 57,72653,548 54,388
Other 41,263 38,537
364,404 362,16048,566 47,240
371,591 370,337
Total Capitalization and Liabilities $1,653,871 $1,659,988$1,657,224 $1,673,055
The accompanying Condensed Notes to Financial Statements are an
integral part of these statements.
-4--8-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. PRESENTATION OF CONDENSED INFORMATION
PursuantThe 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, certainCommission. Certain information has been condensed and
certain footnote
disclosures have been omitted, which are normal-
lynormally included in financial statements prepared in
accordance with generally accepted accounting principles.
Theseprinciples 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 Kentucky
Utilities Company (KU) Annual
Report on Form 10-K of KU Energy and KU for the year ended
December 31, 1995.1996; 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, 1996.
-9-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, 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, 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 -5-
KENTUCKY UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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, 1997 were approximately
$45 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
-10-
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, and ordering1993. The Circuit Court
further ordered the case remanded to the PSC for a determination in
accordance with the Circuit Court
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. On August 22, 1995, theThe PSC has ordered
all surcharge revenues collected by KU from that dateFebruary 1, 1995 subject
to
refund pending final determination of all appeals. In March 1996
in the semi-annual reconciliation review, the PSC ordered all
surcharge revenues collected during the six-month period then
under review (February 1, 1995 through July 31, 1995) subject to
-6-
KENTUCKY UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited) refund pending final determination of all appeals. The total
surcharge collections from February 1, 1995 through March 31, 19961997
were approximately $22$41 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
-11-
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 March 31, 1996,1997, from the implementation of the
surcharge would be approximately $7$12 million, and from February 1,
1995 would be approximately $5$10 million. At this time, KU has not
recorded any reserve for refund.
3. FINANCING
In January 1996,-12-
KU issued $36 million of Series S First
Mortgage Bonds which will mature January 15, 2006 and bear
interest at 5.99%. The proceeds were used to redeem
$35.5 million of Series K First Mortgage Bonds. A redemption
premium of approximately $.7 million was recorded on the balance
sheet and will be amortized over the period to the scheduled
maturity of the new bonds.
-7-
ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY & RESOURCESThe 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, 1996,1997, KU's short-term borrowings were $15.4$12.5 million
compared to $55.6$54.2 million at December 31, 1995.1996. The short-term
borrowings have been used primarily to finance ongoing construction
expenditures and general corporate requirements. The decrease between
March 31, 1997 and December 31, 1996 is due primarily to planned
reductions in construction expenditures and additional cash provided
by operations duringexceeding cash required for investing and financing
activities (exclusive of short-term borrowings) in the first quarter
of 1996.
Refer to Note 3 of the Notes to Financial Statements for a
discussion of KU's recent financing activities.1997.
RESULTS OF OPERATIONS
Quarter ended March 31, 1996,1997 compared
to the Quarter ended March 31, 1995
Net income applicable to1996
The Company's earnings per common stockshare for the three-month
period ended March 31, 1996 was $26.9 million1997 were $.66 compared to $18.4 million$.70 for the
corresponding period of 1995.1996. The increasedecrease was primarily reflects the positive effectsdue to lower
residential sales as a result of coldermilder weather and
increased opportunity sales during the first quarter of 1996in 1997 when compared
to 1995.1996, and slightly lower sales for resale during 1997 when compared
to 1996. The positivenegative effects of these factors were somewhat offset
by increasesan increase in sales to industrial customers and decreases in fuel
and purchased power expense
as discussed below.
-8-maintenance expenses.
-13-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The changes in operating revenues and kilowatt-hour sales
described below are for the Company. The only difference between
changes in operating revenues for the Company and operating revenues
for KU are intercompany revenues that are eliminated in the
consolidated financial statements. These intercompany amounts are
immaterial.
Increase (Decrease)
From Prior Year
Three Months
Ended MarchMar. 31, 19961997
kWh Revenues
(%) (000's)
Residential 13(9) $ 8,186(8,014)
Commercial 5 2,018(2) (1,839)
Industrial 10 3,1347 713
Mine Power &- (544)
Public Authorities 3 907- (304)
Total Retail Sales 9 14,245
Wholesale 5 773
Opportunity 405 7,920
Total Other Electric Utilities 89 8,693(3) (9,988)
Sales for Resale (11) (2,274)
Miscellaneous Revenues & Other - 910180
Total 19 $ 23,848
Operating(4) $(12,082)
In February 1997, pursuant to a PSC order , KU made a one-time
refund through the fuel adjustment clause to Kentucky customers
associated with the disposition of Company-owned railroad cars. As a
result of the refund, revenues increased $23.8and fuel expense were reduced by
approximately $3 million (14%in the first quarter of 1997. KU had
reserved for the refund amount in prior periods.
Excluding the effect of the refund mentioned above, operating
revenues decreased $8.8 million (5%). The increasedecrease reflects a 19% increase4%
decline in kilowatt-hour sales. The increasedecline in kilowatt-hour sales is
primarily attributable to increasesdecreases in residential industrialsales and opportunitysales for
resale partially offset by an increase in industrial sales. The
increase-14-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
decrease in opportunityresidential sales (525,495 megawatt-hours versus
104,148 megawatt-hours) iswas primarily due to Non-Firm energymilder weather
during the first quarter of 1997 as compared to the corresponding
period of 1996. The decrease in sales agreements with twofor resale (834,892 megawatt-
hours versus 939,101 megawatt-hours) was primarily due to decreased
demand for power from neighboring utilities for the year 1996.utilities. The increase in
industrial sales reflects continued economic growth in the
manufacturing sector of KU's service area evidenced primarily
by a 6% increase inarea.
Excluding the numbereffect of industrial customers over 1995.
The increase in residential sales was primarily due to colder weather
in the first quarter of 1996 compared to 1995. KU set an all-time
peak demand for electricity on February 5, 1996 of 3,391 megawatts.
Fuelrefund mentioned above, fuel expense
increased $8.3decreased $6.4 million (18%(12%). The increasedecrease was primarily due to a 20% increase6%
decrease in the tons of coal consumed -9-and to a 4% decrease in the cost per
million British thermal units of coal consumed. The decline in
consumption was primarily caused by a decline in generation due to the
previously mentioned decrease in kilowatt-hour sales.
Maintenance expense decreased $2.2 million (15%). The decrease
was primarily due to the timing of expenditures for scheduled
maintenance at KU's generating stations.
Federal and state income taxes decreased $.4 million (2%). The
decrease was primarily attributable to a decline in pretax income.
NONUTILITY ACTIVITES
KU Solutions, a 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.
-15-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which was primarily causedThe 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 19% increase in generation. The
increase in consumption resulted from the previously mentioned
increase in kilowatt-hour sales. Purchased power expense
increased $1.7 million (11%) duesingle supplier to an increase inmeet all of their energy charges
($2.0 million) offset slightly by a decrease in demand charges
($.3 million). The increase in energy costs reflects a 10%
increase in kilowatt-hour purchases.
Federal and state income taxes increased $5.7 million (54%).
The increase was primarily due to increased pre-tax income.needs.
UTILITY ISSUES
- COMPETITIONCompetition
Refer to Management's Discussion and Analysis incorporated by
reference in the 19951996 Annual Report on Form 10-K of KU Energy and KU
under the heading "UtilityUtility Issues - Competition"Competition for a discussion of
the Federal Energy Regulatory Commission'sCommission (FERC) proposed rules addressing open access trans-
mission service and the collection of charges for the recovery of
stranded costs. In late April 1996, the FERC issued two final rules
and a Notice of Proposed Rulemaking (NOPR). FERC Order No. 888
addresses both open access(Order 888) and stranded cost issues. FERC Order No. 889 requires utilities(Order 889). In March 1997 the
FERC issued its Final Rule, reaffirming the legal and policy basis on
which Orders 888 and 889 were based. The Final Rule for the Orders
responded to establish electronic systems to share
information about available transmission capacity. It also establishes
standardspublic comments on the various provisions of conduct.Orders 888
and 889; but no major changes were made. The NOPR proposes to establish a new system for
utilities to useFinal Rule is effective
May 13, 1997. KU does not anticipate any problem in reserving capacity on their own and other's
transmission lines. KU is currently evaluating the impactscomplying with
all aspects of the final rulesFERC's 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.
-16-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The constitutionality of the surcharge was challenged in a
Kentucky state court action brought against KU and the NOPR.
-10-PSC by the
Attorney General of Kentucky and representatives of consumer groups.
In July 1995, the state court upheld the constitutionality of the
surcharge statute but vacated that part of the PSC's order which the
state court described as allowing KU to recover certain environmental
expenditures characterized by the state court as having been incurred
before January 1, 1993. All parties (including KU) have appealed to
the Kentucky Court of Appeals.
KU believes the constitutionality of the surcharge statute will
be upheld, but it cannot predict the outcome of that part of the state
court judgment disallowing recovery of certain environmental
expenditures characterized by the state court as having been incurred
before January 1, 1993. If the state court judgment is ultimately
upheld as entered, KU estimates that the amount it would be required
to refund (which is based solely on costs associated with certain
environmental expenditures characterized by the state court as having
been incurred before January 1, 1993) for surcharge collections
through March 31, 1997, from the implementation of the surcharge would
be approximately $12 million, and from February 1, 1995 would be
approximately $10 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.
-17-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
effective for fiscal years ending after December 15, 1997. The
Company will adopt the statements for year-end 1997 and does not
expect adoption of the statements to have any impact on its current
earnings per share calculation or disclosures.
FORWARD LOOKING STATEMENTS
This report includes forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements
made herein which are not based on historical facts are forward
looking and, accordingly, involve risks and uncertainties that could
cause actual results to differ materially from those discussed. Such
forward looking statements include those under Management's Discussion
and Analysis relating to the anticipated results of proceedings
-18-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
related to the environmental surcharge and the Company's ability to
comply with the FERC's Final Rule issued in May 1997. 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.
-19-
PART II. OTHER INFORMATION
KENTUCKY UTILITIES COMPANY
ITEM 1. LEGAL PROCEEDINGS
See Note 2 of the Condensed Notes to Financial Statements,
Environmental Cost Recovery, for a discussion of theKU's
environmental surcharge.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibit isexhibits are filed as part of this report:
Exhibit Number Description
2727.01 Financial Data Schedule for KU Energy
(required for electronic filing only
in accordance with Item 601 (c)(1) of
Regulation S-K.)
27.02 Financial Data Schedule for KU
(required for electronic filing only
in accordance with Item 601(c)(1) of
Regulation S-K.)
99.01 Cautionary Statements - KU Energy and KU.
(Exhibit 99.06 to Form 10-K Annual Report of
KU Energy and KU for the year ended
December 31, 1996). Incorporated by
reference.
(b) Reports on Form 8-K.
(1) KU filed a Form 8-K dated January 18, 1996 to report
certain financial information included in the
Prospectus dated January 18, 1996 for its Series S
First Mortgage Bonds.
-11-None.
-20-
KENTUCKY UTILITIES COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant hasKU 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
(Registrant)(Registrants)
Date May 2, 19961997 /s/ Michael R. Whitley
Michael R. Whitley
Chairman and President
Date May 2, 19961997 /s/ Michael D. Robinson
Michael D. Robinson
Controller
-12--21-