SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 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 1-10944 KU Energy Corporation (Exact name of registrant as specified in its charter) Kentucky 61-1141273 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Quality Street, Lexington, Kentucky 40507 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 606-255-2100 Not Applicable Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Number of shares of Common Stock outstanding at August 11, 1994: 37,817,878 shares. -1- PART I. FINANCIAL INFORMATION KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share amounts) For the Three Months Ended June 30, 1994 1993 Operating Revenues $154,020 $139,903 Operating Expenses: Fuel, principally coal, used in generation 43,372 43,867 Electric power purchased 16,356 5,471 Other operating expenses 27,962 25,619 Maintenance 18,895 15,140 Depreciation 16,151 15,193 Federal and state income taxes 7,781 9,020 Other taxes 3,692 3,524 Total Operating Expenses 134,209 117,834 Net Operating Income 19,811 22,069 Other Income and Deductions: Interest and dividend income 1,238 1,151 Other income and deductions - net 2,003 1,801 Total Other Income and Deductions 3,241 2,952 Income Before Interest and Other Charges 23,052 25,021 Interest and Other Charges 8,767 8,585 Net Income $ 14,285 $ 16,436 Average Common Shares Outstanding 37,818 37,818 Earnings Per Common Share $ .38 $ .44 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -2- KU ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share amounts) For the Six Months Ended June 30, 1994 1993 Operating Revenues $320,543 $294,176 Operating Expenses: Fuel, principally coal, used in generation 87,231 87,525 Electric power purchased 32,239 15,439 Other operating expenses 55,066 51,037 Maintenance 33,434 26,465 Depreciation 32,339 30,425 Federal and state income taxes 22,339 22,957 Other taxes 7,760 7,234 Total Operating Expenses 270,408 241,082 Net Operating Income 50,135 53,094 Other Income and Deductions: Interest and dividend income 3,393 2,526 Other income and deductions - net 3,380 3,051 Total Other Income and Deductions 6,773 5,577 Income Before Interest and Other Charges 56,908 58,671 Interest and Other Charges 17,604 18,386 Net Income $ 39,304 $ 40,285 Average Common Shares Outstanding 37,818 37,818 Earnings Per Common Share $ 1.04 $ 1.07 The accompanying Notes to Consolidated 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 Six Months Ended June 30, 1994 1993 Cash Flows from Operating Activities: Net Income $ 39,304 $ 40,285 Items not requiring (providing) cash currently: Depreciation 32,339 30,425 Deferred income taxes and investment tax credit (3,423) 3,012 Change in fuel inventory 179 (1,552) Change in accounts receivable 2,101 (3,209) Change in accounts payable (3,225) (455) Change in accrued taxes 3,004 360 Change in accrued utility revenues 1,865 827 Change in liability to ratepayers (791) 38,979 Change in escrow funds 1,577 (44,886) Other--net (3,867) 12,163 Net Cash Provided by Operating Activities 69,063 75,949 Cash Flows from Investing Activities: Construction expenditures - utility (89,468) (47,299) Nonutility property (7) (17) Purchase of long-term investments (379) (494) Proceeds from leveraged lease investments 197 - Investment in independent power projects (1,259) - Other 170 108 Net Cash Used by Investing Activities (90,746) (47,702) Cash Flows from Financing Activities: Short-term borrowings - net 47,900 - Issuance of long-term debt - 123,500 Funds deposited with trustee - net 18,393 (123,795) Retirement of long-term debt, incl. premiums (21) (57,334) Retirement of preferred stock, incl. premium (20,302) - Payment of common stock dividends (31,010) (30,254) Net Cash Provided (Used) by Financing Activities 14,960 (87,883) Net Decrease in Cash and Cash Equivalents (6,723) (59,636) Cash and Cash Equivalents Beginning of Period 32,500 122,802 Cash and Cash Equivalents End of Period $ 25,777 $ 63,166 Supplemental Disclosures Cash paid for: Interest on long-term debt $ 15,302 $ 17,018 Federal and state income taxes $ 25,527 $ 20,778 The accompanying Notes to Consolidated 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 June 30, Dec. 31, ASSETS 1994 1993 Utility Plant: Plant in service, at cost $2,020,277 $2,004,688 Less: Accumulated depreciation 910,853 879,960 1,109,424 1,124,728 Construction work in progress 231,087 158,829 1,340,511 1,283,557 Current Assets: Cash and cash equivalents 25,777 32,500 Escrow funds - coal contract litigation 36,175 37,752 Construction funds held by trustee 2 18,268 Accounts receivable 39,293 41,394 Accrued utility revenues 23,710 25,575 Fuel, principally coal, at average cost 30,894 31,073 Materials and supplies, at average cost 18,271 17,261 Other 8,401 7,808 182,523 211,631 Investments, Deferred Charges and Other Assets: Investment in marketable securities 15,819 16,397 Investment in leveraged leases 10,996 10,320 Accumulated deferred income taxes 41,446 36,418 Unamortized loss on reacquired debt 12,831 13,295 Other 38,432 37,994 119,524 114,424 Total Assets $1,642,558 $1,609,612 CAPITALIZATION AND LIABILITIES Capitalization: Common stock equity $ 609,468 $ 602,503 Preferred stock of Subsidiary 40,000 40,000 Long-term debt of Subsidiary 442,018 442,045 1,091,486 1,084,548 Current Liabilities: Preferred stock and long-term debt due within one year 21 20,021 Short-term borrowings 47,900 - Accounts payable 40,669 43,894 Accrued interest 7,029 7,302 Accrued taxes 7,460 4,456 Customers' deposits 6,278 10,803 Accrued payroll and vacations 8,175 7,719 Liab. to ratepayers - coal contract litigation 36,076 36,867 Other 8,461 6,444 162,069 137,506 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 253,080 248,369 Accumulated deferred investment tax credits 40,330 42,385 Regulatory liabilities 67,780 69,689 Other 27,813 27,115 389,003 387,558 Total Capitalization and Liabilities $1,642,558 $1,609,612 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -5- KU ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. PRESENTATION OF CONDENSED INFORMATION Pursuant to the rules and regulations of the Securities and Exchange Commission, certain information has been condensed and certain footnote disclosures have been omitted, which are normally included in financial statements prepared in accordance with generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements and notes thereto in the KU Energy Corporation (KU Energy or the Company) Annual Report on Form 10-K for the year ended December 31, 1993. In the opinion of management, the information furnished herein reflects all adjustments 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 the business of the Company's principal subsidiary, Kentucky Utilities Company (Kentucky Utilities). 2. PREFERRED STOCK Kentucky Utilities issued $20 million of 6.53% preferred stock in December 1993. On February 1, 1994, Kentucky Utilities used the proceeds from this issue, together with other available funds, to redeem its 7.84% Preferred Stock at a total cost of $20.3 million (including a redemption premium of $.3 million). Kentucky Utilities announced its intention to redeem this preferred stock on December 22, 1993. -6- KU ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS KU Energy Corporation is a holding company organized under the laws of Kentucky. KU Energy has two wholly owned subsidiaries, Kentucky Utilities Company, an electric utility, and KU Capital Corporation (KU Capital), a nonutility investment subsidiary. Kentucky Utilities is KU Energy's principal subsidiary. Material changes in the consolidated financial condition and operating results of KU Energy are based primarily upon the operations of Kentucky Utilities. LIQUIDITY & RESOURCES Kentucky Utilities' construction expenditures increased approximately $20 million and $42 million for the three-month and six-month periods ended June 30, 1994, respectively, when compared to the corresponding periods of 1993. The increases are attributable primarily to expenditures for combustion turbine peaking units and for compliance with the 1990 Clean Air Act Amendments. Kentucky Utilities expects to fund approximately 50% of its remaining 1994 construction expenditures from the issuance of short-term and long-term debt with the balance primarily from internal sources. In April 1994, KU Capital entered into agreements with Tenaska, Inc. (a developer of gas-fired cogeneration and independent power generation projects in the United States and Canada) and affiliates to purchase limited partnership interests in the ownership and development of certain independent power generation projects. Under the agreements, which are subject to -7- KU ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the completion of formal legal documentation, KU Capital will become a limited partner in two operating cogeneration projects and in two independent power projects being developed under the leadership of Tenaska. KU Capital estimates that its investment in the four Tenaska-sponsored projects will be about $15 million over the 1994-1997 period. In July 1994, KU Capital funded $7.3 million as cash collateral for its equity contribution commitment in one of the development projects which has commenced construction. KU Capital has also agreed to participate in funding the development of future Tenaska-sponsored independent power projects in North America. KU Capital will fund about $10 million of project development expenditures over the 1994-1996 time frame. This funding commitment will provide KU Capital with the opportunity to invest in future successful development projects. RESULTS OF OPERATIONS Quarter ended June 30, 1994, compared to the Quarter ended June 30, 1993 Increase (Decrease) From Prior Year Three Months Ended June 30, 1994 kWh Revenues (%) (000's) Residential 6 $ 2,395 Commercial 4 1,529 Industrial 8 2,186 Mine Power & Public Authorities 4 883 Total Retail Sales 6 6,993 Other Electric Utilities 58 7,037 Provision for Refund - Litigation Settlement - (365) Miscellaneous Revenues & Other - 452 Total 14 $14,117 -8- KU ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating revenues increased $14.1 million (10%) primarily as a result of a 14% increase in kilowatt-hour sales. The increase in kilowatt-hour sales is primarily attributable to increases in residential, commercial, industrial and off-system sales. The increases in residential and commercial sales reflect unusually warm weather during the month of June 1994. The increase in industrial sales reflects continued economic growth in the service area. Approximately one third of the increase in industrial sales is due to greater sales to Toyota Motor Manufacturing U.S.A., Inc. (TMM), Kentucky Utilities' largest customer. TMM completed an $800 million assembly plant expansion in March 1994. The increase in off-system sales is attributable to an increase in demand for power due to unusually warm weather and maintenance programs at neighboring utilities. Revenues were reduced by approximately $.4 million resulting from refunds to customers of amounts recovered from a litigation settlement with a former coal supplier. Fuel and purchased power expense increased $10.4 million (21%). Fuel expense decreased $.5 million (1%). This decrease reflects a 5% decline in net kilowatt-hour generation offset by a 4% increase in the average price per ton of coal consumed. Fuel expense also reflects a $.4 million reduction associated with the refunding to customers of fuel cost savings related to the resolution of a coal contract dispute. Purchased power expense increased by $10.9 million due to greater kilowatt-hour purchases -9- KU ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($7.2 million) and higher demand costs ($3.7 million). The increase in kilowatt-hour purchases during the second quarter of 1994 is the result of the previously discussed sales increases as well as the decline in net kilowatt-hour generation. The increased kilowatt-hour purchases reflect a permanent increase in capacity entitlement, effective January 1994, under an existing purchased power contract with Electric Energy, Inc. (EEI) and greater kilowatt-hour purchases from Owensboro Municipal Utilities (OMU). Scheduled maintenance of OMU's generating units in the second quarter of 1993 resulted in a reduction of availability during that period. The increase in demand costs is primarily due to the permanent increase in capacity entitlement from EEI. Maintenance expenses increased $3.8 million (25%), primarily due to the timing of scheduled maintenance at Kentucky Utilities' generating stations. Six months ended June 30, 1994, compared to the Six Months ended June 30, 1993 Increase (Decrease) From Prior Year Six Months Ended June 30, 1994 kWh Revenues (%) (000's) Residential 9 $ 7,807 Commercial 5 3,209 Industrial 8 3,477 Mine Power & Public Authorities 4 1,452 Total Retail Sales 7 15,945 Other Electric Utilities 48 10,487 Provision for Refund - Litigation Settlement - (902) Miscellaneous Revenues & Other - 837 Total 12 $26,367 -10- KU ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating revenues increased $26.4 million (9%) primarily as a result of a 12% increase in kilowatt-hour sales. The increase in kilowatt-hour sales is primarily attributable to increases in residential, commercial, industrial and off-system sales. The increases in residential and commercial sales reflect colder weather during the first quarter of 1994 and unusually warm weather during the month of June 1994. The increase in industrial sales reflects continued economic growth in the service area. Approximately one third of the increase in industrial sales is due to greater sales to TMM due to its recent plant expansion. The increase in off-system sales is attributable to an increase in demand for power due to extreme weather conditions and maintenance programs at neighboring utilities. Revenues were reduced by approximately $.9 million resulting from refunds to customers of amounts recovered from a litigation settlement with a former coal supplier. The $.9 million, which was charged against revenue, represents $3.3 million of fuel savings less $2.4 million for incurred litigation costs and off-system sales which Kentucky Utilities was allowed to retain pursuant to a regulatory order. Fuel and purchased power expense increased $16.5 million (16%). Fuel expense reflects a $3.3 million reduction associated with the refunding to customers of fuel cost savings related to -11- KU ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the resolution of a coal contract dispute. This reduction in fuel expense was substantially offset by a 3.5% increase in the average price of coal consumed. Net kilowatt-hour generation remained fairly constant in comparison to the corresponding six- month period in 1993. Purchased power expense increased $16.8 million due to greater kilowatt-hour purchases ($10.4 million) and higher demand costs ($6.4 million). The increase in kilowatt- hour purchases is the result of the previously discussed sales increases. The increased kilowatt-hour purchases reflect a permanent increase in capacity entitlement, effective January 1994, under an existing purchased power contract with EEI. The increase in demand costs is primarily due to the permanent increase in capacity entitlement from EEI. Maintenance expenses increased $7.0 million (26%). The increase is the result of distribution utility line maintenance costs incurred as a result of extensive ice storm damage during the first quarter of 1994, as well as the timing of scheduled maintenance at Kentucky Utilities' generating stations. ENVIRONMENTAL SURCHARGE On July 19, 1994, the Kentucky Public Service Commission (PSC) approved Kentucky Utilities' environmental surcharge application. The surcharge is designed to recover certain ongoing operating and capital costs of complying with federal, state or local environmental requirements associated with the -12- KU ENERGY CORPORATION AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS production of energy from coal, including the 1990 Clean Air Act Amendments. The environmental surcharge was implemented in August 1994. Kentucky Utilities estimates that it will recover approximately $15 million in environmental costs during the first twelve months and about $23 million during the second twelve months. Amounts collected will be subject to PSC review every two years. Two intervenors have filed petitions with the PSC seeking a rehearing of the PSC's surcharge order. The PSC has not ruled on either petition. Any party to the proceeding may appeal the final PSC order to the Franklin County (KY) Circuit Court. -13- PART II. OTHER INFORMATION KU ENERGY CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the April 26, 1994 Annual Meeting of Shareholders, the following proposal was acted upon and approved. (1) To elect three Directors to the Board of Directors of the Company Votes Votes for Withheld Milton W. Hudson 31,395,923 390,007 John T. Newton 31,494,442 390,007 William L. Rouse, Jr. 31,344,348 390,007 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None. (b) Reports on Form 8-K. None. -14- KU ENERGY CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KU ENERGY CORPORATION (Registrant) Date August 11, 1994 /s/ John T. Newton John T. Newton Chairman and President Date August 11, 1994 /s/ Michael D. Robinson Michael D. Robinson Controller -15-