SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 1-3464
KENTUCKY UTILITIES COMPANY
(Exact name of Registrant as specified in its charter)
Kentucky and Virginia 61-0247570
(State of Incorporation) (I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Preferred Stock, 4 3/4% cumulative, Philadelphia Stock Exchange, Inc.
stated value $100 per share
Securities registered pursuant to Section 12(g) of the Act:
Preferred stock, cumulative, stated value $100 per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant: None
Number of shares of Common Stock outstanding at March 9, 1995: 37,817,878
shares (owned by the parent - KU Energy Corporation).
Documents Incorporated by Reference: None
Exhibit Index appears on page 42.
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KENTUCKY UTILITIES COMPANY
Form 10-K
Annual Report to the Securities and Exchange Commission
For the Year Ended December 31, 1994
_____________
TABLE OF CONTENTS
Item Page
PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 10
4. Submission of Matters to a Vote of Security Holders . . . . . . 10
Executive Officers of the Registrant . . . . . . . . . . . . . 11
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . 13
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 16
8. Financial Statements and Supplementary Data . . . . . . . . . . 24
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . 40
PART III
10. Directors and Executive Officers of the Registrant . . . . . . 40
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 40
12. Security Ownership of Certain Beneficial Owners and Management 40
13. Certain Relationships and Related Transactions . . . . . . . . 40
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 42
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 47
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PART I
Item 1. Business
General
Kentucky Utilities Company (Kentucky Utilities) is a wholly owned
subsidiary of KU Energy Corporation (KU Energy). Kentucky Utilities is a
public utility engaged in producing and selling electric energy.
Kentucky Utilities provides electric service to about 418,100 customers
in over 600 communities and adjacent suburban and rural areas in 77
counties in central, southeastern and western Kentucky, and to about
28,300 customers in 5 counties in southwestern Virginia. In Virginia,
Kentucky Utilities operates under the name Old Dominion Power Company.
Of the Kentucky communities, 160 are incorporated municipalities served
under unexpired municipal franchises and the rest are unincorporated
communities where no franchises are required. Service has been provided
in Virginia without franchises for a number of years. This lack of
Virginia franchises is not expected to have a material adverse effect on
Kentucky Utilities' operations. Kentucky Utilities also sells electric
energy at wholesale for resale in 12 municipalities.
The territory served by Kentucky Utilities has an aggregate population
estimated at about 1,000,000. The largest city served is Lexington,
Kentucky. The population of the metropolitan Lexington area is estimated
at about 225,000. The populations of the next 10 largest cities served
at retail range from about 21,000 to 9,000. The territory served
includes most of the Blue Grass Region of central Kentucky and parts of
the coal mining areas in southeastern and western Kentucky and
southwestern Virginia. Lexington is the center of the Blue Grass Region,
in which thoroughbred horse, burley tobacco and bourbon whiskey
distilling industries are located. Among the principal industries in the
territory served are coal mining, automotive and related industries, the
manufacture of paper and paper products and of electrical and other
machinery and primary metals processing.
Revenues
Kentucky Utilities' sources of electric revenues and the respective
percentages of total revenues for the three years 1992-1994 were as
follows:
Year Ended December 31, 1994 1993 1992
Amount % Amount % Amount %
(dollars in thousands)
Residential $ 213,574 34 $210,759 35 $ 194,817 34
Commercial 142,207 22 138,271 23 133,519 23
Industrial 120,043 19 111,857 18 102,808 18
Mine Power 36,498 6 34,977 6 36,696 7
Public Authorities 49,869 8 48,142 8 45,570 8
Other Electric Utilities 89,665 14 62,463 10 58,979 10
Miscellaneous Revenues 4,181 - 3,428 - 3,432 -
Provision for Refund -
Litigation Settlement (19,385) (3) (3,309) - - -
Total $ 636,652 100 $606,588 100 $ 575,821 100
The electric utility business is affected by varying seasonal weather
patterns. As a result, operating revenues (and associated operating
expenses) are not generated evenly throughout the year. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results
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of Operations - Sales and Revenues for information related to revenues
from sales to Other Electric Utilities.
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Operations
Kentucky Utilities' net generating capability was 3,265 megawatts at
December 31, 1994. An additional 110-megawatt combustion turbine peaking
unit was placed into commercial operation in February 1995. The net
generating capability available for operation at any time may be lower
because of periodic outages of generating units due to inspection,
maintenance, fuel restrictions, or modifications required by regulatory
agencies. Kentucky Utilities obtains power from other utilities under
bulk power purchase and interchange contracts. At December 31, 1994,
Kentucky Utilities' system capability, including purchases from others,
was 3,805 megawatts. The all-time system peak demand, on a one-hour
integrated basis, occurred on July 28, 1993 and was 3,176 megawatts.
The percentage of Kentucky Utilities' system output which was internally
generated and purchased for the periods indicated was as follows:
1994 1993 1992
Internally Generated 83% 89% 87%
Purchased 17% 11% 13%
Kentucky Utilities is one of 28 members of the East Central Area
Reliability Coordination Agreement, the purpose of which is to augment
the reliability of the members' bulk power supply through coordination of
planning and operation of generation and transmission facilities. The
members are engaged in the generation, transmission and sale of electric
power and energy in the east central area of the United States, which
covers all or portions of Michigan, Indiana, Ohio, Kentucky,
Pennsylvania, Virginia, West Virginia and Maryland. Kentucky Utilities
also has interconnections and contractually established operating
arrangements with neighboring utilities and cooperatives.
Under a contract with Owensboro Municipal Utilities (OMU), Kentucky
Utilities has agreed to purchase from OMU the surplus output of the 150-
megawatt and 250-megawatt generating units at OMU's Elmer Smith station.
Purchases under the contract are made under a contractual formula which
has resulted in costs which were and are expected to be comparable to the
cost of other power purchased or generated by Kentucky Utilities. Such
power constituted about 8% of Kentucky Utilities' net system output
during 1994. See Note 4 of the Notes to Financial Statements.
Kentucky Utilities owns 20% of the common stock of Electric Energy, Inc.
(EEI), which owns and operates a 1,000-megawatt station in southern
Illinois. Kentucky Utilities' entitlement is 20% of the available
capacity of the station. Such power constituted about 8% of Kentucky
Utilities' net system output in 1994. See Note 4 of the Notes to
Financial Statements.
Kentucky Utilities had approximately 2,240 employees at December 31,
1994, of which about 300 are covered by union contracts expiring
August 1995.
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Fuel Matters
Coal-burning generating units provided more than 99% of Kentucky
Utilities' net kilowatt-hour generation for 1994. The remainder of
Kentucky Utilities' net generation for 1994 was provided by hydroelectric
plants, oil and/or natural gas burning units. The average delivered cost
of coal purchased, per ton and per million BTU (MBTU), and the percentage
of spot coal purchases for the periods indicated were as follows:
1994 1993 1992
Per ton - all sources $ 28.91 $ 27.92 $ 27.94
Per MBTU - all sources $ 1.19 $ 1.15 $ 1.16
Per ton - spot purchases only $ 28.33 $ 26.23 $ 25.32
Per MBTU - spot purchases only $ 1.16 $ 1.08 $ 1.07
Spot purchases as % of all sources 46 % 44 % 42 %
Kentucky Utilities maintains its fuel inventory at levels estimated to be
necessary to avoid operational disruptions at its coal-fired generating
units. Reliability of coal deliveries can be affected from time to time
by a number of factors, including coal mine labor strikes and other
supplier or transporter operating difficulties.
Kentucky Utilities believes there are adequate reserves available to
supply its existing base-load generating units with the quantity and
quality of coal required for those units throughout their useful lives.
Kentucky Utilities intends to meet a substantial portion of its coal
requirements with 5 year contracts. Kentucky Utilities anticipates that
coal supplied under such agreements will represent about two-thirds of
the requirements over the next several years. As part of this strategy,
Kentucky Utilities is currently and will continue to negotiate
replacement contracts as contracts expire. Kentucky Utilities does not
anticipate any problems negotiating new contracts for future coal needs.
The balance of coal requirements will be met through spot purchases. See
Note 4 of the Notes to Financial Statements for the estimated obligations
under fuel contracts for each of the years 1995 through 1999.
Kentucky Utilities has no long-term contracts in place for the purchase
of natural gas for its combustion turbine peaking units. Kentucky
Utilities does not anticipate encountering any significant problems
acquiring an adequate supply of fuel necessary to operate its new peaking
units. See "Construction" for a discussion of Kentucky Utilities' plans
to add peaking capacity.
Environmental Matters
Federal and state agencies have adopted environmental protection
standards which apply to the electric operations of Kentucky Utilities.
Capital expenditures to comply with these standards amounted to about
$185 million during the 1990-1994 time period.
Kentucky Utilities' generating units are operated in compliance with the
Kentucky Natural Resources and Environmental Protection Cabinet's (the
"Cabinet") State Implementation Plan (the "KYSIP") and New Source
Performance Standards developed under the Clean Air Act. The KYSIP is a
federally-approved plan for the attainment of the national ambient air
quality standards. The KYSIP contains standards relating to the
emissions of various pollutants (sulfur dioxide, particulates and
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nitrogen oxides) from Kentucky Utilities' fossil-fuel fired steam
electric generating units. These emission standards are of varying
stringencies and compliance with these standards is attained through a
variety of air pollution control technologies (scrubbers, electrostatic
precipitators, and low NOx burners) and the use of low sulfur coal.
Kentucky Utilities' operations are in substantial compliance with current
emission standards.
The acid rain control provisions of the 1990 Clean Air Act Amendments,
which are effective in two phases, require Kentucky Utilities to further
decrease the emissions of sulfur dioxide and nitrogen oxides from its
fossil-fuel fired steam electric generating units. Ghent Unit 1, E. W.
Brown Units 1, 2 and 3, and Green River Unit 4 have been designated as
Phase I affected units which are required to comply with sulfur dioxide
emission reduction obligations beginning January 1, 1995. In order to
comply with these sulfur dioxide emission limitations, Kentucky Utilities
has installed a scrubber and related facilities on Ghent Unit 1 (which
was declared commercial December 20, 1994) and switched to lower sulfur
coal on some other Phase I affected units. In addition, the retrofit of
low NOx burners on these units is required in order to comply with
nitrogen oxide limitations and is expected to be complete in the Spring
of 1995, which is in compliance with applicable requirements of the
United States Environmental Protection Agency (EPA). The EPA issued
final acid rain permits for each of Kentucky Utilities' Phase I affected
units. The EPA's approval of Kentucky Utilities acid rain compliance
plan was accompanied by bonus allowances awarded for the installation of
the scrubber on Ghent Unit 1 and an extension of the Phase I effective
date to January 1, 1997, for certain portions of the sulfur dioxide
emission limitations. Kentucky Utilities' current emission allowance
strategy is to bank unused sulfur dioxide emission allowances. These
unused allowances result from the bonus allowances received from the EPA
and the expected reduced sulfur dioxide emissions from the installation
of the Ghent Unit 1 scrubber. These banked allowances are expected to
allow Kentucky Utilities to delay capital expenditures associated with
Kentucky Utilities' Phase II acid rain compliance obligations, which are
effective January 1, 2000. Kentucky Utilities' Phase II compliance
strategy, in addition to utilizing banked allowances, may include
additional fuel switching or the installation of additional scrubbers.
However, Kentucky Utilities will continue to reassess its options for
complying with Phase II emission reduction requirements to determine an
overall least cost strategy. See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Construction
Requirements and - Environmental Matters for additional discussion.
During 1990, each of Kentucky Utilities' five fossil-fuel fired steam
electric generating stations was re-issued a wastewater discharge permit
by the Cabinet under the Clean Water Act's National Pollutant Discharge
Elimination System. These 5-year permits place water quality-based
effluent limitations (i.e., thermal and chemical limits) on each of the
power plant's discharges. Kentucky Utilities' operations are in
substantial compliance with the conditions in the permits. Kentucky
Utilities does not anticipate any difficulties in renewing the required
permits which are expiring in 1995.
Pursuant to the Resource Conservation and Recovery Act, utility wastes
(fly ash, bottom ash and scrubber sludge) have been categorized as
special wastes (i.e., wastes of large volume, but low environmental
hazard). The EPA has concluded that the disposal of coal combustion by-
products by practices common to the utility industry are adequate for the
protection of human health and the environment. The Cabinet also
regulates utility wastes as special wastes under its waste management
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program.
Under the Toxic Substances Control Act, the EPA regulates the use,
servicing, repair, storage and disposal of electrical equipment
containing polychlorinated biphenyls (PCB). To comply with these
regulations, Kentucky Utilities has implemented procedures to be followed
in the handling, storage and disposal of PCBs. In addition, Kentucky
Utilities has completed the mandated phase out of all of its pole-class
PCB capacitors and has no vault-type PCB transformers in use, in or near
commercial buildings.
On February 13, 1990, Kentucky Utilities received a letter from the EPA
identifying Kentucky Utilities and others as potentially responsible
parties under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA or "Superfund") for a disposal site in Daviess
County, Kentucky. The letter also asked Kentucky Utilities, and the
other persons or entities named, to proceed voluntarily with a
remediation program at the site. Under Superfund, a responsible party
may be liable for all or a portion of all monies expended by the
government to take corrective action at the site. The EPA has turned
over responsibility for investigation of the site and development of a
remediation plan to a group (not including Kentucky Utilities) originally
named as potentially responsible parties. Kentucky Utilities has entered
into an agreement with the group as to the portion of the investigation
and development costs to be borne by Kentucky Utilities in connection
with the site. The agreement does not cover costs which may be incurred
in connection with any remediation plan. Any remediation plan would be
subject to approval of the EPA. Although a final plan has yet to be
developed or approved, Kentucky Utilities does not believe that any
liability with respect to the site will have a material impact on its
financial position or results of operations.
Regulation
Kentucky Utilities is subject to the jurisdiction of the Kentucky Public
Service Commission (PSC) and the Virginia State Corporation Commission
(SCC) as to rates, service, accounts, issuance of securities and in other
respects. By reason of owning and operating a small amount of electric
utility property in one county in Tennessee (having a gross book value of
about $212,000), Kentucky Utilities may also be subject to the
jurisdiction of the Tennessee Public Service Commission as to rates,
accounts, issuance of securities and in other respects. Since 1992,
utilities in Kentucky have been allowed to use either a historical test
period or a forward-looking test period in rate filings.
Kentucky Utilities' fuel adjustment clause for Kentucky customers, which
operates to reflect changes in the cost of fuel in billings to customers,
is designed to conform to a general regulation providing for a uniform
monthly fuel adjustment clause for all electric utilities in Kentucky
subject to the jurisdiction of the PSC. The clause is based on a formula
approved by the Federal Energy Regulatory Commission (FERC) but with
certain modifications, including the exclusion of excess fuel expense
attributable to certain forced outages, the filing of fuel procurement
documentation, a procedure for billing over and under recoveries of fuel
cost fluctuations from the base rate level and provision for periodic
public hearings to review past adjustments, to make allowance for any
past adjustments found not justified, to disallow any improper expenses
and to re-index base rates to include current fuel costs.
The fuel adjustment clause mechanism for Virginia customers, which is
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adjusted annually, uses an average fuel cost factor based primarily on
projected test year fuel costs. The fuel cost factor is adjusted for the
over or under collection of fuel costs from the previous year.
Rate regulation in Kentucky allows each utility, with a PSC-approved
environmental compliance plan and environmental surcharge rider, to
recover on a current basis the cost of complying with federal, state or
local environmental requirements, including the 1990 Clean Air Act
Amendments, which apply to coal combustion wastes and by-products from
facilities utilized for the production of energy from coal. During 1994,
the PSC approved Kentucky Utilities' environmental surcharge, which is
designed to allow Kentucky Utilities to recover any compliance related
operating expenses and to earn a return on compliance related capital
expenditures on costs not already included in existing rates through the
application of the surcharge each month to customers' bills. Surcharge
billings are subject to periodic PSC review of the level of environmental
expenditures and reconciliation of previous surcharge billings with
actual costs. For additional information regarding the environmental
surcharge, see Item 3, Legal Proceedings.
Integrated resource planning regulations in Kentucky require Kentucky
Utilities and the other major utilities to make biennial filings with the
PSC, of various historical and forecasted information relating to
forecasted load, capacity margins and demand-side management techniques.
Pursuant to Kentucky law, the PSC has established the boundaries of the
service territory or area of each supplier of retail electric service in
Kentucky (including Kentucky Utilities), other than municipal
corporations, within which each such supplier shall have the exclusive
right to render retail electric service.
The SCC requires each Virginia utility to make annual filings of either a
base rate change or an Annual Informational Filing consisting of a set of
standard financial schedules. These filings are subject to review by the
SCC Staff. The SCC issues a Staff Report, which includes any findings or
recommendations to the SCC relating to the individual utility's financial
performance during the historic 12 month period, including previously
accepted adjustments.
The FERC has jurisdiction under the Federal Power Act over certain of the
electric utility facilities and operations and accounting practices of
Kentucky Utilities, and in certain other respects as provided in the Act.
The FERC has classified Kentucky Utilities as a "public utility" as
defined in the Act.
Kentucky Utilities is presently exempt from all the provisions of the
Public Utility Holding Company Act of 1935, except Section 9(a)(2)
thereof (which relates to the acquisition of securities of public utility
companies), by virtue of the exemption granted by an order of the
Securities and Exchange Commission dated April 19, 1949 and, absent
further action by the Commission, by virtue of annual exemption
statements filed by Kentucky Utilities with the Commission pursuant to
Rule 2 prescribed under the Act.
National Energy Policy Act
See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operation - Utility Issues - Competition.
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Transmission Services and Power Services Tariffs
On September 30, 1994, Kentucky Utilities filed an application with the
FERC for approval to sell power on a wholesale basis at market-based
rates under a proposed Power Services (PS) Tariff. In connection with
the PS Tariff filing, Kentucky Utilities also filed a Transmission
Service Tariff (TS) under which it would provide firm and nonfirm
transmission services to eligible customers. Kentucky Utilities would
offer the TS Tariff to customers seeking access to KU's transmission
lines, and would use the TS Tariff for its own transmission needs when it
makes opportunity sales.
On November 30, 1994, the FERC accepted for filing the Transmission
Services Tariff and permitted the tariff to be placed in effect, subject
to refund, on December 1, 1994. A procedural schedule was also
established, with hearings scheduled for July, 1995. In the same Order,
the FERC rejected Kentucky Utilities' proposed market-based PS Tariff,
without prejudice, thereby permitting Kentucky Utilities to correct
identified deficiencies. On December 13, 1994, Kentucky Utilities filed
a response to the FERC's Order seeking clarification of certain aspects
of the Order and included in its response certain supplemental
information which the FERC deemed necessary for approval of the PS
Tariff.
Item 2. Properties
Kentucky Utilities owns and operates the following electric generating
stations:
Nameplate Effective
Rating (KW) Capability (KW)
Steam: Ghent Ghent, Ky 2,226,060 2,000,000
Green River South Carrollton, Ky 263,636 241,000
E. W. Brown Burgin, Ky 739,534 661,000
Tyrone Tyrone, Ky 137,500 135,000
Pineville Four Mile, Ky 37,500 35,000
Hydro: Dix Dam &
Lock #7 Burgin, Ky 30,297 24,000
Gas/Oil Peaking: Haefling Lexington, Ky 62,100 59,000
E.W. Brown Burgin, Ky 119,000 110,000
3,615,627 3,265,000
Substantially all properties are subject to the lien of Kentucky
Utilities' Mortgage Indenture.
Construction
Construction on two 110-MW combustion turbine peaking units was
substantially completed in 1994. The first peaking unit was placed into
commercial operation in 1994 and the second unit was placed into
commercial operation in February 1995. The total construction
expenditures of Kentucky Utilities for the years 1995 through 1999 are
estimated at $521 million. Such expenditures include an estimated
$182 million for generating facilities, $66 million for transmission
facilities and $273 million for distribution and general facilities.
Included in total construction expenditures for the 1995-1999 period are
$120 million for 440-MW of peak generating capacity, in addition to the
units mentioned above, to be added during 1995-1999 (110-MW in each year
1995-1998) and $23 million for environmental compliance (of which
$18 million is for compliance with the 1990 Clean Air Act Amendments).
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All necessary permits and approvals for the units to go on line in 1995
and 1996 have been obtained. Kentucky Utilities has no plans to install
base load generating capacity before 2010. Construction expenditures for
the years 1990 through 1994 aggregated about $581 million. See Note 4 of
the Notes to Financial Statements for the estimated amounts of
construction expenditures for each of the years 1995 through 1999.
Kentucky Utilities frequently reviews its construction program and
construction expenditures, which may be affected by numerous factors,
including the rate of load growth, changes in construction costs, changes
in environmental regulations, least cost planning, the adequacy of rate
relief and Kentucky Utilities' ability to raise necessary capital (See
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations). Kentucky Utilities' planned additions to its
electric generating capacity are based on future load projections using
estimated load growth rates. Consideration is also given to projections
by neighboring utilities of their future loads and capacity. However,
forecasts of future loads are subject to numerous uncertainties,
including economic conditions and effectiveness of energy conservation
measures.
Item 3. Legal Proceedings
By order of July 19, 1994, the PSC approved Kentucky Utilities' plan for
environmental surcharge adjustments to customer billings beginning in
August 1994. The surcharge, authorized by a Kentucky statute enacted in
1992, is designed to recover certain ongoing operating and capital
costs, not already included in existing rates, related to compliance with
federal, state or local environmental requirements associated with the
production of energy from coal, including the 1990 Clean Air Act
Amendments. Surcharge billings are subject to periodic PSC review of the
level of environmental expenditures and reconciliation of previous
surcharge billings with actual costs.
On September 9, 1994, the Attorney General of the Commonwealth of
Kentucky (Attorney General) filed an action in the Franklin County (KY)
Circuit Court challenging the constitutionality of the Kentucky surcharge
statute and seeking to vacate the PSC order of July 19, 1994 on the
ground, among others, that the environmental surcharge approved by the
PSC will deprive Kentucky Utilities' customers of their property without
due process of law. The Attorney General has been joined by interveners
asserting similar claims on behalf of ratepayer groups. In December
1994, the Circuit Court denied a motion by the Attorney General and two
interveners seeking to have surcharge collections deposited with the
court pending the outcome of the litigation. Management believes that,
based on its review of the circumstances, the surcharge statute is
constitutional and that the PSC order of July 19, 1994 approving the
surcharge will be upheld. In the remote occurrence that the statute is
declared unconstitutional, amounts collected pursuant to the PSC order
may be subject to refund.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Executive Officers of the Registrant
Current Positions Held During at Least the
Name and Age Positions Held Last 5 Years
John T. Newton Chairman and Chairman of the Board of Kentucky
Age 64 Director Utilities since November 1987, and
President from January 1987 to
November 1994. Director of
Kentucky Utilities since December
1974.
Michael R. Whitley President and President of Kentucky Utilities
Age 51 Director since November 1994, and Director
since March 1992. Senior Vice-
President of Kentucky Utilities
from March 1987 to November 1994.
Secretary of Kentucky Utilities
from July 1978 to November 1992.
James M. Allison Senior Vice- Senior Vice-President of Kentucky
Age 41 President Utilities since November 1994.
Vice-President of Kentucky
Utilities from February 1993 to
November 1994. President and
Chief Operating Officer of
Wheeling Power Company from
October 1989 to January 1993.
O. M. Goodlett Senior Vice- Senior Vice-President of Kentucky
Age 47 President Utilities since November 1992.
Vice-President of Kentucky
Utilities from April 1982 to
November 1992.
Wayne T. Lucas Senior Vice- Senior Vice-President of Kentucky
Age 47 President Utilities since November 1994.
Vice President of Kentucky
Utilities from November 1986 to
November 1994.
George S. Brooks II General Corporate Secretary of Kentucky
Age 44 Counsel and Utilities since November 1992, and
Corporate General Counsel since January
Secretary 1988.
Gary E. Blake Vice-President Vice-President of Kentucky
Age 41 Utilities since November 1992.
Western Division Manager of
Kentucky Utilities from October
1991 to November 1992. Assistant
Western Division Manager of
Kentucky Utilities from March 1990
to October 1991. Field Operations
Coordinator for Kentucky Utilities
from April 1986 to March 1990.
William E. Casebier Vice-President Vice-President of Kentucky
Age 52 Utilities since May 1988.
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Executive Officers of the Registrant (continued)
Current Positions Held During at Least the
Name and Age Positions Held Last 5 Years
Linda M. DiMascio Vice-President Vice-President of Kentucky
Age 40 Utilities since February 1995.
Director of Human Resources of
Tucker Housewares from September
1994 to February 1995. Senior
Area Coordinator for U.S.
Manufacturing Department of Mobil
Oil Corporation from April 1992 to
September 1994. Assistant
Employee Relations Manager,
Torrance Refinery of Mobil Oil
Corporation from October 1989 to
April 1992.
Robert M. Hewett Vice-President Vice-President of Kentucky
Age 47 Utilities since January 1982.
Ronald L. Whitmer Vice-President Vice-President of Kentucky
Age 62 Utilities since November 1992.
Director of Production and
Generation Construction of
Kentucky Utilities from May 1985
to November 1992.
William N. English Treasurer Treasurer of Kentucky Utilities
Age 44 since April 1982.
Michael D. Robinson Controller Controller of Kentucky Utilities
Age 39 since August 1990. Assistant
Controller of Kentucky Utilities
from August 1983 to August 1990.
John J. Maloy, Jr. Assistant Assistant Treasurer of Kentucky
Age 40 Treasurer Utilities since August 1984.
(Not an Executive Officer)
Note: Officers are elected annually by the Board of Directors. There is
no family relationship between any executive officer and any other
executive officer or any director.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
All of the outstanding common stock of Kentucky Utilities is held by
KU Energy.
The following table sets forth the cash distributions (in thousands of
dollars) on common stock paid by Kentucky Utilities for the periods
indicated:
1994 1993
First Quarter $ 15,411 $ 15,127
Second Quarter $ 15,411 $ 15,127
Third Quarter $ 15,411 $ 15,127
Fourth Quarter $ 15,411 $ 15,127
See Note 5 of the Notes to Financial Statements.
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Item 6. Selected Financial Data
Year ended December 31, 1994 1993 1992 1991 1990
(in thousands)
Operating Revenues:
Residential $213,574 $ 210,759 $194,817 $ 202,885 $187,100
Commercial 142,207 138,271 133,519 137,653 131,990
Industrial 120,043 111,857 102,808 98,595 96,524
Mine power 36,498 34,977 36,696 37,093 37,877
Public authorities 49,869 48,142 45,570 46,332 43,125
Total sales to ultimate
consumers 562,191 544,006 513,410 522,558 496,616
Other electric utilities 89,665 62,463 58,979 61,542 53,295
Miscellaneous revenues and other 4,181 3,428 3,432 3,560 3,870
Provision for refund -
litigation settlement (19,385) (3,309) - - -
Total operating revenues 636,652 606,588 575,821 587,660 553,781
Operating Expenses:
Fuel used in generation (1) 170,654 178,910 168,470 183,167 175,439
Electric power purchased 61,442 34,711 32,753 26,744 27,521
Other operating expenses 112,712 104,930 93,915 91,779 85,111
Maintenance 66,134 59,451 61,118 58,590 52,606
Depreciation 65,259 60,800 58,849 57,337 56,173
Federal and state income taxes 44,683 48,178 41,489 46,569 42,331
Other taxes 14,582 14,347 13,359 12,858 12,384
Total operating expenses 535,466 501,327 469,953 477,044 451,565
Net Operating Income 101,186 105,261 105,868 110,616 102,216
Other Income and Deductions 9,299 8,331 11,226 12,062 15,102
Income Before Interest Charges
and AFUDC 110,485 113,592 117,094 122,678 117,318
Interest Charges:
Interest on long-term debt 32,147 31,650 39,571 36,559 36,132
Other interest 2,411 1,249 1,394 1,626 1,219
Total interest charges 34,558 32,899 40,965 38,185 37,351
AFUDC 1,585 593 169 262 146
Net Income $ 77,512 $ 81,286 $ 76,298 $ 84,755 $ 80,113
Preferred Stock Dividend
Requirements 2,384 2,558 2,518 3,031 5,513
Net Income Applicable to Common
Stock $ 75,128 $ 78,728 $ 73,780 $ 81,724 $ 74,600
Common Dividends $ 61,644 $ 60,509 $108,996 $ 56,727 $ 55,214
(1) Amounts for 1994 and 1993 reflect reductions of $23.1 million and $4.1 million,
respectively, associated with refunds to customers related to a litigation settlement
with a former coal supplier.
-15-
Item 6. Selected Financial Data
(continued)
1994 1993 1992 1991 1990
Assets (in thousands) $1,618,100 $1,523,274 $1,408,453 $1,412,961 $1,416,487
Capitalization: (in thousands)
Bonds $ 495,830 $ 441,830 $ 443,330 $ 407,330 $ 408,070
Notes 86 107 128 149 171
Unamortized premium on
long-term debt 96 108 519 713 772
Preferred stock 40,000 40,000 40,000 40,000 40,000
Preferred stock with mandatory
redemption - - - - -
Common stock equity 565,201 552,106 534,073 569,289 546,477
Total capitalization $1,101,213 $1,034,151 $1,018,050 $1,017,481 $ 995,490
% Total Capitalization
Represented by:
Long-term debt 45.1 42.7 43.6 40.1 41.1
Preferred stock 3.6 3.9 3.9 3.9 4.0
Common stock equity 51.3 53.4 52.5 56.0 54.9
Kilowatt-hours Generated,
Purchased and Sold:
(in thousands)
Power generated 15,524,844 14,934,839 13,700,313 14,183,713 13,024,722
Power purchased 3,066,917 1,926,299 2,032,110 1,464,812 1,425,899
Power interchanged - net 2,638 1,556 3,393 (10,725) 14,934
Total 18,594,399 16,862,694 15,735,816 15,637,800 14,465,555
Less - losses and company use 998,010 1,066,251 876,862 906,468 878,337
Remainder - kilowatt-hours
sold 17,596,389 15,796,443 14,858,954 14,731,332 13,587,218
Sales classified:
Residential 4,706,058 4,702,697 4,278,098 4,385,670 4,012,324
Commercial 3,272,370 3,217,504 3,080,045 3,122,156 2,968,049
Industrial 3,641,469 3,409,213 3,093,113 2,874,016 2,791,304
Mine power 974,233 933,317 977,032 955,410 983,778
Public authorities 1,225,668 1,199,893 1,123,494 1,133,176 1,048,483
Total sales to
ultimate consumers 13,819,798 13,462,624 12,551,782 12,470,428 11,803,938
Other electric utilities 3,776,591 2,333,819 2,307,172 2,260,904 1,783,280
Total 17,596,389 15,796,443 14,858,954 14,731,332 13,587,218
Average Number of Customers 440,590 432,636 425,403 419,340 413,843
Residential Sales (per customer):
Average kilowatt-hours 12,781 12,995 12,007 12,471 11,546
Average revenue $ 580.05 $ 582.41 $ 546.80 $ 576.93 $ 538.43
System Capability - Megawatts:
Kentucky Utilities' plants 3,265 3,164 3,163 3,162 3,150
Purchased contracts 540 365 293 254 251
Total system capability 3,805 3,529 3,456 3,416 3,401
Net System Maximum Demand -
Megawatts 3,127 3,176 2,845 2,894 2,835
Load Factor (%) 59.8 57.7 59.4 58.4 56.5
Heat Rate (BTU per KWH) (1) 10,306 10,367 10,344 10,350 10,449
Fuel - Average Cost per Ton(1) $ 28.84 $ 28.31 $ 27.88 $ 29.67 $ 30.74
Average Cost per Million BTU(1) $ 1.19 $ 1.17 $ 1.18 $ 1.24 $ 1.28
(1) Based on coal consumed
-16-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Kentucky Utilities Company (KU), an electric utility, is a wholly owned
subsidiary of KU Energy Corporation (KU Energy).
RESULTS OF OPERATIONS
1994 Compared to 1993
Net Income Applicable to Common Stock
Net income applicable to common stock in 1994 was $75.1 million as
compared to $78.7 million in 1993. The decline reflects increases in
operating expenses primarily related to purchased power. The benefits of
weather in the first half of 1994 were offset by the impact of milder
weather in the third and fourth quarters of the year. Net income
applicable to common stock for 1994 includes a one-time recovery of about
$1.9 million associated with the resolution of a coal contract dispute.
For additional detail concerning the refunds resulting from resolution of
the dispute, refer to Note 1 of the Notes to Financial Statements,
"Operating Revenues and Fuel Costs".
Sales and Revenues
Increase (Decrease)
From Prior Years
1994 1993
kWh Revenues kWh Revenues
(%) (000's) (%) (000's)
Residential - $ 2,815 10 $15,942
Commercial 2 3,936 4 4,752
Industrial 7 8,186 10 9,049
Mine Power & Public
Authorities 3 3,248 2 853
Total Retail Sales 3 18,185 7 30,596
Other Electric Utilities 62 27,202 1 3,484
Miscellaneous Revenues
and Other - 753 - (4)
Total Before Refund 11 46,140 6 34,076
Provision for Refund -
Litigation Settlement - (16,076) - (3,309)
Total 11 $ 30,064 6 $30,767
Kilowatt-hour (kWh) sales in 1994 were 11% above sales in 1993. The
increase was primarily due to greater sales to neighboring utilities and
increased sales to industrial customers. Sales to other electric
utilities rose 62% in 1994 due to increased demand for power from
neighboring utilities. While management believes the level of sales to
other utilities was unusually high in 1994, KU will aggressively pursue
future opportunities in the bulk power market. Industrial sales rose 7%
in 1994 reflecting a continued trend of growth in the manufacturing
sector of KU's service area. About 42% of the industrial sales increase
for 1994 was due to greater sales to Toyota Motor Manufacturing, USA,
Inc. (TMM), KU's largest customer. In March 1994, TMM completed an $800
million assembly plant expansion. Residential sales were flat as
-17-
compared to 1993.
As a result of refunds to customers of fuel costs savings associated with
the resolution of a coal contract dispute, operating revenues in 1994
were reduced by about $19.4 million, and fuel expense was reduced by
about $23.1 million (refer to Note 1 of the Notes to Financial
Statements, "Operating Revenues and Fuel Costs"). Excluding the impact
of the refund to customers, revenues in 1994 increased $46.1 million (8%)
over 1993 as a result of increased kWh sales.
1994 Kilowatt-Hour Sales by Classification
Year Ended December 31, 1994
Residential 27%
Commercial 19%
Industrial 21%
Mine Power 5%
Public Authorities 7%
Other Electric Utilities 21%
Total 100%
Fuel Expense
Excluding the effect of the above referenced refunds to customers, fuel
expense increased $10.7 million (6%) in 1994. This increase was due to a
3% increase in annual coal consumption attributable to greater kWh
generation and to a 2% increase in the average price per ton of coal
consumed.
Purchased Power Expense
Purchased power expense increased $26.7 million (77%) in 1994 due to
higher demand costs ($13.8 million) and increased kWh purchases ($12.9
million). The higher demand costs are related to KU's decision to
increase purchased power commitments as part of its strategy to obtain
the most economical sources of energy supply, which allows KU to delay
the need for additional baseload capacity. Effective January 1, 1994, KU
elected to increase from 5% to 20% its entitlement to the available
capacity of a 1,000-megawatt generating station owned by Electric Energy,
Inc. (EEI). KU is a 20% owner of EEI. The increase in power purchases
was primarily from EEI.
Maintenance Expense
Maintenance expense for 1994 was $6.7 million (11%) above 1993. The
increase was primarily due to damage from two severe ice storms in the
first quarter of 1994 and to scheduled maintenance at KU's generating
stations.
1993 Compared to 1992
Net Income Applicable to Common Stock
-18-
Net income applicable to common stock was $78.7 million in 1993 compared
to $73.8 million in 1992. The increase in 1993 was largely due to
weather-related growth in sales and lower interest charges attributable
to debt refinancings and redemptions. Earnings in 1993 were negatively
impacted by an increase in other operating expenses and a decline in
interest and dividend income.
Sales and Revenues
Sales in 1993 were 6% above 1992. The increase was the result of greater
sales to residential and industrial customers. The increase in
residential sales was largely weather-related. KU's customers set an
all-time record peak demand for electricity of 3,176 megawatts in July
1993 during a period of unusually warm weather. The increase in
industrial sales for 1993 reflected the general strength of the service
area economy as well as an increase in the number of industrial
customers.
Excluding the effect of refunds to customers associated with the
resolution of a coal contract dispute (refer to Note 1 of the Notes to
Financial Statements, "Operating Revenues and Fuel Costs"), revenues
increased $34.1 million (6%) in 1993. This increase was primarily a
result of greater kWh sales.
Fuel and Purchased Power Expenses
Fuel expense, excluding the effect of the above referenced refunds to
customers, increased 9% in 1993. The increase was primarily due to a 7%
increase in coal consumption attributable to greater kWh generation.
Purchased power expense for 1993 was $2.0 million (6%) above 1992. The
increase reflected greater demand charges associated with a new short-
term capacity contract with a neighboring utility, partially offset by a
5% decrease in power purchases. The decline in power purchases was due
to a reduction in the availability of Owensboro Municipal Utilities'
(OMU) generating units during scheduled maintenance of those units in the
second quarter of 1993. A contract between KU and OMU allows KU to
purchase, on an economic basis, surplus power from a 400-megawatt
generating station owned by OMU.
Other Operating Expenses
Other operating expenses for 1993 increased $11.0 million (12%),
$6.3 million of which resulted from the adoption of a new accounting
standard. (Refer to Note 3 of the Notes to Financial Statements, "Other
Postretirement Benefits").
Other Income and Deductions
Other income and deductions in 1993 declined $2.6 million. A reduction
in interest and dividend income was the result of lower levels of cash
investments.
Interest Charges
Interest charges decreased $8.2 million (20%) in 1993. The decline
resulted from the redemption of two debt issues near the beginning of the
-19-
second quarter of 1993 and the refinancing of several debt issues during
the second half of 1992 and early in the third quarter of 1993 at
significantly lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
KU continues to maintain a strong financial position. At the end of
1994, common stock equity represented 51.3% of total capitalization while
long-term debt was 45.1%, and preferred stock was 3.6%. KU's financial
strength is reflected in excellent credit ratings. Rating agencies are
applying stricter standards to utility credits in light of increasing
competition in the utility industry. This has resulted in credit
downgrades for some utilities. Despite the more stringent standards, KU
has maintained high quality bond ratings of AA (Duff & Phelps), Aa2
(Moody's) and AA- (Standard & Poor's).
Total Capitalization
As of December 31, 1994 1993 1992 1991 1990
Capitalization (in millions) $1,101 $1,034 $1,018 $1,017 $ 995
Long-Term Debt 45.1% 42.7% 43.6% 40.1% 41.1%
Preferred Stock 3.6% 3.9% 3.9% 3.9% 4.0%
Common Stock Equity 51.3% 53.4% 52.5% 56.0% 54.9%
Cash from operations accounted for 55% of cash requirements in 1994 as
compared to 67% in 1993 and 68% for 1992. Cash requirements in the above
percentages exclude optional debt refinancings and redemptions and
optional preferred stock redemptions.
Financing
On behalf of KU, $54 million of Variable Rate Collateralized Solid Waste
Disposal Facility Revenue Bonds was issued in 1994, and $50 million of
5 3/4% Collateralized Solid Waste Disposal Facility Revenue Bonds was
issued in 1993. Proceeds from the sale of these tax exempt issues were
used to fund a portion of the costs of certain environmental compliance
facilities at KU's Ghent Generating Station.
To provide working capital for operations, KU issued commercial paper in
1994. At the end of 1994, KU had $76.3 million outstanding under its
commercial paper program.
Taking advantage of favorable market conditions in 1993, KU refinanced
$120 million of first mortgage bonds at significantly lower interest
rates. KU had refinanced about $180 million of higher cost debt in 1992.
These refinancings reduced annual interest expense by about $5.4 million.
-20-
KU also issued $20 million of 6.53% preferred stock in December 1993.
Proceeds from the sale of this issue were used to redeem KU's 7.84%
preferred stock in February 1994.
-21-
Through refinancing activities, KU has lowered its embedded costs of
long-term debt and preferred stock as shown below.
Embedded Cost
As of December 31, 1994 1993 1992
Long-Term Debt 7.06% 7.23% 8.00%
Preferred Stock 5.64% 6.37% 6.30%
Construction Requirements
Construction expenditures were $193 million in 1994. Of that amount,
about $62 million related to compliance with the 1990 Clean Air Act
Amendments, $21 million to other environmental compliance measures and
$38 million to construction of combustion turbine generating units
(peaking units).
Projected construction expenditures for the 1995-1999 period are
$521 million. Included in this amount is $120 million for peaking units.
Also included in the 1995-1999 construction total is $23 million for
environmental compliance measures of which $18 million is for compliance
with the 1990 Clean Air Act Amendments.
KU expects to provide about 93% of its 1995-1999 construction
requirements through internal sources of funds with the balance primarily
from long-term debt and/or preferred stock.
Construction Expenditures by Function - Actual 1994 and Estimated 1995-1999
Actual Estimated
(in millions of dollars) 1994 1995 1996 1997 1998 1999
Total Construction Expenditures $ 193 $ 123 $ 117 $ 106 $ 100 $ 75
Environmental Compliance 42.7% 8.1% 6.3% 5.6% -% -%
Generation 25.4% 33.1% 36.8% 31.3% 31.1% 15.1%
Distribution 23.0% 36.5% 36.8% 42.9% 47.6% 67.9%
Transmission and Other 8.9% 22.3% 20.1% 20.2% 21.3% 17.0%
UTILITY ISSUES
Competition
Increasing competitive pressures continue to challenge the utility
industry. Set in motion by the National Energy Policy Act of 1992
(NEPA), these pressures are moving the utility industry to a less
regulated and more competitive operating environment. Under NEPA, the
Federal Energy Regulatory Commission (FERC) was given authority to order
utilities to open their transmission lines to third parties. NEPA also
removed long-standing constraints on the development of wholesale power
generation by establishing a new class of independent power producers
which are generally exempt from traditional utility regulation.
-22-
While NEPA prohibits the FERC from ordering utilities to provide
transmission access to retail customers (so-called retail wheeling),
several states are considering proposals that would allow retail
wheeling.
To date, competition from independent power producers has not been a
factor in KU's service area largely due to KU's low rates. There are no
pending proposals for retail wheeling in Kentucky or Virginia. However,
the final impact of NEPA on the utility industry is yet to be determined.
KU believes that competition will become more intense and that customers
will demand and be given more energy options. With utility rates that
are among the lowest in the nation, KU believes it is well-positioned for
an increasingly competitive environment.
In September 1994, KU filed for FERC approval of a Power Services Tariff
which would allow KU to leverage its low-cost position by selling power
at competitive market-based rates. In connection with the Power Services
Tariff filing, KU also filed a Transmission Service Tariff. KU would
offer the Transmission Service Tariff to customers seeking access to its
transmission lines, and would use the transmission tariff for its own
transmission needs when it makes opportunity sales.
The Transmission Service Tariff became effective, subject to refund, on
December 1, 1994, according to a November 1994 FERC order. In the same
order, the FERC rejected, without prejudice, KU's proposed Power Services
Tariff. KU has subsequently filed a response seeking clarification of
certain aspects of the order. KU's filing included supplemental
information which the FERC deemed necessary for approval of the Power
Services Tariff.
In addition, KU has launched a series of innovative marketing programs
designed to increase market share. KU has also developed strategic
initiatives to increase off-system sales and to expand its market through
economic development. KU's strong competitive position was confirmed in
1994 by the findings of a management and operations audit by the Kentucky
Public Service Commission (PSC).
Management Audit
In August 1994, the PSC released the findings of a comprehensive
management and operations audit that found KU to be "one of the better
managed electric utilities in the country".
The audit, which began in November 1993, was a part of the PSC's ongoing
management audit program. Vantage Consulting, Inc., selected by the PSC
to perform the audit, found that "...KU is one of the most cost-effective
utilities in the country." The audit findings cited KU's low embedded
cost of generation, lean staff ratios, good corporate citizenship and
favorable ratings from customers, employees and the financial community.
Included in the audit report was a list of recommendations, accepted by
KU, designed to maintain KU's strong position in the future. Most of
these are strategic considerations that help position KU as an even
stronger energy provider in the increasingly competitive electric utility
industry.
-23-
ENVIRONMENTAL MATTERS
Clean Air Act
The Clean Air Act Amendments of 1990 require KU to reduce sulfur dioxide
and nitrogen oxide emissions in two phases. Phase I requirements, which
were effective January 1, 1995, were met primarily through the
installation of a flue gas desulfurization system (scrubber) on Unit 1 of
KU's Ghent Generating Station. The scrubber became operational in
December 1994. KU estimates capital costs for the scrubber and other
equipment modifications related to Clean Air Act compliance to be $151
million through the year 1999. About $133 million of this amount had
been spent through the end of 1994.
The flexible design of the Ghent Unit 1 scrubber provides an option of
installing an additional scrubber on Ghent Unit 2 at a favorable cost.
This option, which is not included in the above capital costs, may be
considered if it is cost beneficial to the KU system to meet Phase II
requirements, which become effective January 1, 2000. KU has purchased
12,900 Phase I emission allowances and has been awarded about 114,000
additional allowances through the Environmental Protection Agency's (EPA)
Phase I Extension Plan Program. KU's current emission allowance strategy
is to bank unused sulfur dioxide emission allowances. Under the current
strategy, allowances accumulated (from the additional allowances received
from the EPA and expected reduced emissions from the installation of the
scrubber) will begin to be consumed when Phase II requirements become
effective.
KU will continue to review and revise its compliance plans accordingly,
to ensure that its environmental obligations are met in the most
efficient and cost-effective manner.
Environmental Cost Recovery
In July 1994, the PSC approved KU's January 1994 application to implement
an environmental surcharge. The surcharge, authorized by a Kentucky
statute enacted in 1992, is designed to recover certain operating and
capital costs related to compliance with federal, state or local
environmental requirements associated with the production of energy from
coal, including the 1990 Clean Air Act Amendments. KU's environmental
surcharge was implemented in August 1994. KU estimates that it will
result in an average increase of about 4% in a customer's monthly bill,
leaving KU's rates very competitive. The constitutionality of the
surcharge is being challenged in the Franklin County (Kentucky) Circuit
Court. Management believes that, based on its review of the
circumstances, the surcharge statute is constitutional and the PSC
approval of July 1994 will be upheld.
Other
In 1990, KU received a letter from the EPA identifying KU and others as
potentially responsible parties under the Comprehensive Environmental
Response Compensation and Liability Act of 1980 for a disposal site in
Daviess County, Kentucky. The EPA has turned over responsibility for
investigation of the site and development of a remediation plan to a
group (not including KU) originally named as potentially responsible
parties. KU has entered into an agreement with the group as to the
portion of the investigation and development costs to be borne by KU in
connection with the site. Any remediation plan would be subject to
approval of the EPA. Although a final, approved plan has yet to be
developed, KU does not believe that any liability with respect to the
-24-
site will have a material impact on its financial position or results of
operations.
PROVIDING FOR CUSTOMER GROWTH
KU's forecast indicates annual growth in sales and peak demand of 2.1%
and 1.7%, respectively, over the next 15 years. KU plans to provide for
customer growth in the '90s through purchased power, the addition of
combustion turbine peaking units and demand-side management. There are
no plans for additional coal-fired baseload capacity before 2010.
INFLATION
KU's rates are designed to recover operating and historical plant costs.
Financial statements, which are prepared in accordance with generally
accepted accounting principles, report operating results in terms of
historic costs and do not evaluate the impact of inflation. Inflation
affects KU's construction costs, operating expenses and interest charges.
Inflation can also impact KU's financial performance if rate relief is
not granted on a timely basis for increased operating costs.
-25-
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kentucky Utilities Company:
We have audited the accompanying balance sheets and statements of
capitalization of Kentucky Utilities Company (a Kentucky and Virginia
corporation) as of December 31, 1994 and 1993, and the related statements
of income and retained earnings, and cash flows for each of the three
years in the period ended December 31, 1994. These financial statements
and the schedule referred to below are the responsibility of Kentucky
Utilities' management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kentucky
Utilities Company as of December 31, 1994 and 1993, and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As explained in Notes 2 and 3 to the financial statements, effective
January 1, 1993, Kentucky Utilities Company changed its method of
accounting for income taxes and postretirement benefits other than
pensions.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item
14(A)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
January 30, 1995
-26-
Statements of
Income and
Retained
Earnings
Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1994 1993 1992
Operating Revenues (See Note 1) $ 636,652 $ 606,588 $ 575,821
Operating Expenses:
Fuel, principally coal, used in generation
(See Note 1) 170,654 178,910 168,470
Electric power purchased 61,442 34,711 32,753
Other operating expenses 112,712 104,930 93,915
Maintenance 66,134 59,451 61,118
Depreciation 65,259 60,800 58,849
Federal and state income taxes 44,683 48,178 41,489
Other taxes 14,582 14,347 13,359
Total Operating Expenses 535,466 501,327 469,953
Net Operating Income 101,186 105,261 105,868
Other Income and Deductions:
Interest and dividend income 4,295 2,813 6,611
Other income and deductions - net 6,098 5,926 4,734
Total Other Income and Deductions 10,393 8,739 11,345
Income Before Interest Charges 111,579 114,000 117,213
Interest Charges:
Interest on long-term debt 32,147 31,650 39,571
Other interest charges 1,920 1,064 1,344
Total Interest Charges 34,067 32,714 40,915
Net Income 77,512 81,286 76,298
Preferred Stock Dividend Requirements 2,384 2,558 2,518
Net Income Applicable to Common Stock $ 75,128 $ 78,728 $ 73,780
Retained Earnings Beginning of Year $ 244,429 $ 226,210 $ 261,426
Add Net Income 77,512 81,286 76,298
321,941 307,496 337,724
Deduct:
Dividends on preferred stock 2,384 2,558 2,518
Dividends on common stock 61,644 60,509 108,996
Preferred stock redemption expense 257 - -
64,285 63,067 111,514
Retained Earnings End of Year $ 257,656 $ 244,429 $ 226,210
The accompanying Notes to Financial Statements are an integral part of these
statements.
-27-
Statements of
Cash Flows
Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1994 1993 1992
Cash Flows from Operating Activities:
Net income $ 77,512 $ 81,286 $ 76,298
Items not requiring (providing) cash currently:
Depreciation 65,259 60,800 58,849
Deferred income taxes (1,559) 5,725 3,974
Investment tax credit deferred (4,110) (4,131) (4,149)
Changes in current assets and liabilities:
Change in fuel inventory (4,579) 7,694 (642)
Change in accounts receivable (203) (9,331) 7,338
Change in accounts payable 5,511 22,768 (1,819)
Change in liability to ratepayers (29,958) 36,867 -
Change in escrow funds 30,841 (37,752) -
Other - net 2,555 724 (4,049)
Net Cash Provided by Operating Activities 141,269 164,650 135,800
Cash Flows from Investing Activities:
Construction expenditures - utility (193,344) (177,069) (86,077)
Nonutility property (465) (4,956) -
Other 836 380 801
Net Cash Used by Investing Activities (192,973) (181,645) (85,276)
Cash Flows from Financing Activities:
Short-term borrowings - net 76,300 - -
Issuance of long-term debt 54,000 173,500 219,930
Funds deposited with trustee - net 95 (18,268) 528
Retirement of long-term debt, including premiums (21) (180,677) (190,756)
Retirement of preferred stock, including premium (20,302) - -
Issuance of preferred stock - 20,000 -
Payment of dividends (64,089) (63,027) (111,514)
Net Cash Provided (Used) by Financing Activities 45,983 (68,472) (81,812)
Net Decrease in Cash and Cash Equivalents (5,721) (85,467) (31,288)
Cash and Cash Equivalents Beginning of Year 8,832 94,299 125,587
Cash and Cash Equivalents End of Year $ 3,111 $ 8,832 $ 94,299
Supplemental Disclosures
Cash paid for:
Interest on long-term debt $ 30,594 $ 33,860 $ 41,912
Federal and state income taxes $ 45,270 $ 42,483 $ 39,091
The accompanying Notes to Financial Statements are an integral part of these
statements.
-28-
Balance
Sheets Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1994 1993
Assets
Utility Plant:
Plant in service, at cost $ 2,238,926 $ 2,004,688
Less: Accumulated depreciation 933,394 879,960
1,305,532 1,124,728
Construction work in progress 104,385 158,829
Total Utility Plant 1,409,917 1,283,557
Current Assets:
Cash and cash equivalents 3,111 8,832
Escrow funds - coal contract litigation 6,911 37,752
Construction funds held by trustee 18,553 18,268
Accounts receivable, net of allowance
for doubtful accounts 41,660 41,457
Accrued utility revenues 24,227 25,575
Fuel, principally coal, at average cost 35,652 31,073
Plant materials and operating supplies, at average cost 20,081 17,261
Other 10,616 7,804
Total Current Assets 160,811 188,022
Investments, Deferred Charges and Other Assets:
Unamortized loss on reacquired debt 12,324 13,295
Other 35,048 38,400
Total Investments, Deferred Charges and Other Assets 47,372 51,695
Total Assets $ 1,618,100 $ 1,523,274
Capitalization and Liabilities
Capitalization: (See Statements of Capitalization)
Common stock equity $ 565,201 $ 552,106
Preferred stock 40,000 40,000
Long-term debt 496,012 442,045
Total Capitalization 1,101,213 1,034,151
Current Liabilities:
Preferred stock and long-term debt due within one year 21 20,021
Short-term borrowings 76,300 -
Accounts payable 49,517 44,006
Accrued interest 7,328 7,302
Accrued taxes 9,422 4,660
Customers' deposits 6,423 10,803
Accrued payroll and vacations 8,207 7,709
Liability to ratepayers - coal contract litigation 6,909 36,867
Other 6,275 6,434
Total Current Liabilities 170,402 137,802
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 214,892 212,325
Accumulated deferred investment tax credits 38,275 42,385
Regulatory tax liability 60,788 64,086
Other 32,530 32,525
Total Deferred Credits and Other Liabilities 346,485 351,321
Total Capitalization and Liabilities $ 1,618,100 $ 1,523,274
The accompanying Notes to Financial Statements are an integral part of these
statements.
-29-
Statements of
Capitalization
Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1994 1993
Common Stock Equity:
Common stock, without par value,
outstanding 37,817,878 shares $ 308,140 $ 308,140
Capital stock expense and other (595) (463)
Retained earnings 257,656 244,429
Total Common Stock Equity 565,201 552,106
Preferred Stock, cumulative, without par value,$100 stated value
4 3/4%, outstanding 200,000 shares 20,000 20,000
6.53%, outstanding 200,000 shares 20,000 20,000
7.84%, outstanding 200,000 shares - 20,000
Less: Amounts to be redeemed within one year - 20,000
Total Preferred Stock 40,000 40,000
Long-Term Debt:
First Mortgage Bonds:
5.95% Series Q, due June 15, 2000 61,500 61,500
7 3/8% Series K, due December 1, 2002 35,500 35,500
6.32% Series Q, due June 15, 2003 62,000 62,000
7.92% Series P, due May 15, 2007 53,000 53,000
8.55% Series P, due May 15, 2027 33,000 33,000
245,000 245,000
First Mortgage Bonds, Pollution Control Series:
7 3/8% Pollution Control Series 7, due May 1, 2010 4,000 4,000
7.45% Pollution Control Series 8, due September 15, 2016 96,000 96,000
6 1/4% Pollution Control Series 1B, due February 1, 2018 20,930 20,930
6 1/4% Pollution Control Series 2B, due February 1, 2018 2,400 2,400
6 1/4% Pollution Control Series 3B, due February 1, 2018 7,200 7,200
6 1/4% Pollution Control Series 4B, due February 1, 2018 7,400 7,400
7.60% Pollution Control Series 7, due May 1, 2020 8,900 8,900
5 3/4% Pollution Control Series 9, due December 1, 2023 50,000 31,900
5 3/4% County of Carroll, Kentucky, Collateralized Solid
Waste Disposal Facility Revenue Bonds, due
December 1, 2023 - 18,100
Variable Rate Pollution Control Series 10, due
November 1, 2024 35,700 -
Variable Rate County of Carroll, Kentucky, Collateralized
Solid Waste Disposal Facility Revenue Bonds, due
November 1, 2024 18,300 -
250,830 196,830
Total First Mortgage Bonds 495,830 441,830
Unamortized premium 96 108
8% secured note, due January 5, 1999(net of current maturity) 86 107
Total Long-Term Debt 496,012 442,045
Total Capitalization $ 1,101,213 $ 1,034,151
The accompanying Notes to Financial Statements are an integral part of these
statements.
-30-
Notes to
Financial
Statements
Kentucky Utilities Company
1. Summary of Significant Accounting Policies
General
Kentucky Utilities Company (Kentucky Utilities) is the principal
subsidiary of KU Energy Corporation. Certain amounts from prior periods
have been reclassified to conform with the current year presentation.
Regulation
Kentucky Utilities is a public utility subject to regulation by the
Kentucky Public Service Commission (PSC), the Virginia State Corporation
Commission (SCC) and the Federal Energy Regulatory Commission (FERC).
With respect to accounting matters, Kentucky Utilities maintains its
accounts in accordance with the Uniform System of Accounts as defined by
these agencies. Its accounting policies conform to generally accepted
accounting principles applicable to rate regulated enterprises and
reflect the effects of the ratemaking process. Other than the
unamortized loss on reacquired debt, Kentucky Utilities' regulatory
assets are insignificant.
Utility Plant
Utility plant is stated at the original cost of construction. The cost
of repairs and minor renewals is charged to maintenance expense as
incurred. Property unit replacements are capitalized and the
depreciation reserve is charged with the cost, less net salvage, of units
retired.
Depreciation
Provision for depreciation of utility plant is based on straight-line
composite rates applied to the cost of depreciable property. The rates
approximated 3.4% in 1994, and 3.3% in 1993 and 1992.
Cash and Cash Equivalents
For purposes of reporting cash flows, Kentucky Utilities considers highly
liquid investments with a maturity of three months or less from the date
of purchase to be cash equivalents.
Kentucky Utilities utilizes a cash management mechanism that funds
certain bank accounts for checks as they are presented to those banks.
Kentucky Utilities classified checks written but not presented to those
banks, which amounted to $11.5 million and $9.9 million at December 31,
1994 and 1993, respectively, in accounts payable.
Financial Instruments
Kentucky Utilities' temporary cash investments are classified as held-to-
maturity and are reported under the caption "Cash and cash equivalents"
on the Balance Sheet.
-31-
Notes to
Financial
Statements
Kentucky Utilities Company
Unamortized Loss on Reacquired Debt
Kentucky Utilities defers costs (primarily call premiums) arising from
the reacquisition or retirement of long-term debt. Costs related to
refinanced debt are amortized over the lives of the new debt issues.
Costs related to retired debt not refinanced are amortized over the
period to the scheduled maturity of the retired debt.
Operating Revenues and Fuel Costs
Revenues are recorded based on services rendered to customers. Kentucky
Utilities accrues an estimate of revenues for electric service furnished
from the meter reading dates to the end of each accounting period. Cost
of fuel used in electric generation is charged to expense as the fuel is
consumed. The cost of fuel for 1992 included an amortization of buyout
costs associated with the termination of a coal supply contract. A fuel
adjustment clause adjusts operating revenues for changes in the level of
fuel costs charged to expense. An environmental surcharge, implemented
in August 1994, permits the utility to recover certain ongoing operating
and capital costs of compliance with federal, state or local
environmental requirements associated with the production of energy from
coal, including the 1990 Clean Air Act Amendments.
Pursuant to regulatory orders, Kentucky Utilities has been refunding fuel
cost savings related to the resolution of a coal contract dispute.
Refunds to Kentucky retail customers commenced in July 1994. Refunds
were made to Virginia retail customers during the period August 1993
through June 1994. Refunds were made to wholesale customers under the
jurisdiction of the Federal Energy Regulatory Commission in lump sum
payments in September 1993.
Operating revenues and fuel expense for the respective periods were
reduced by the following amounts resulting from the above-mentioned
refunds:
Year Ended December 31, (in thousands of dollars) 1994 1993
Operating Revenues $ 19,385 $ 3,309
Fuel, principally coal, used in generation $ 23,082 $ 4,095
The difference between the reduction in Operating Revenues and the
reduction in Fuel Expense is attributed to incurred litigation costs,
fuel costs savings related to off-system sales and costs incurred to
administer the refund plan. These amounts were allowed to be retained by
Kentucky Utilities pursuant to regulatory orders.
Income Taxes
Kentucky Utilities establishes deferred tax assets and liabilities, as
appropriate, for all temporary differences, and adjusts deferred tax
balances to reflect changes in tax rates expected to be in effect during
the periods the temporary differences reverse. Investment tax credits
resulted from provisions of the tax law which permitted a reduction of
-32-
Notes to
Financial
Statements
Kentucky Utilities Company
Kentucky Utilities' tax liability based on certain construction
expenditures. Such credits have been deferred in the accounts and are
being amortized as reductions in income tax expense over the life of the
related property. Because of rate regulation, changes in tax rates are
deferred and amortized as the temporary differences reverse.
2. Income Taxes
Effective January 1, 1993, Kentucky Utilities adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The adoption of this standard did not have a material impact on results
of operation, cash flows or financial position.
Kentucky Utilities is included in the consolidated federal tax return of
its parent company, KU Energy. Income taxes are allocated to the
individual companies, including Kentucky Utilities, based on their
respective taxable income or loss.
The accumulated deferred income taxes as set forth below and in the
Balance Sheet arise from the following temporary differences:
As of December 31, (in thousands of dollars) 1994 1993
Deferred Tax Assets:
Unamortized investment tax credit and other property
related differences $ 31,805 $ 28,529
Other 17,363 13,146
Less: Amounts included in current assets 6,726 5,897
42,442 35,778
Deferred Tax Liabilities:
Accelerated depreciation and other property
related differences 251,282 241,893
Other 6,052 6,210
257,334 248,103
Net accumulated deferred income tax liability $ 214,892 $ 212,325
-33-
Notes to
Financial
Statements
Kentucky Utilities Company
The components of income tax expense are as follows:
Year Ended December 31, (in thousands of dollars) 1994 1993 1992
Income taxes charged to Operating Income:
Current - federal $ 37,058 $ 35,893 $ 30,838
- state 8,812 9,484 7,951
45,870 45,377 38,789
Deferred - federal (1,114) 2,837 2,269
- state 13 71 561
(1,101) 2,908 2,830
Deferred investment tax credit (86) (107) (130)
44,683 48,178 41,489
Income taxes charged to Other Income and Deductions:
Current - federal 1,537 (2,056) (7)
- state 344 (560) (217)
1,881 (2,616) (224)
Deferred - federal (365) 2,261 909
- state (93) 556 235
(458) 2,817 1,144
Amortization of deferred investment tax credit (4,024) (4,024) (4,019)
(2,601) (3,823) (3,099)
Total income tax expense $ 42,082 $ 44,355 $ 38,390
The provision for deferred income taxes in 1992 primarily related to
accelerated depreciation and other property related differences.
Kentucky Utilities' effective income tax rate, determined by dividing
income taxes by the sum of such taxes and net income, was 35.2% in 1994,
35.3% in 1993 and 33.5% in 1992. The difference between the effective
rate and the statutory federal income tax rate is attributable to the
following factors:
Year Ended December 31, (in thousands of dollars) 1994 1993 1992
Federal income tax computed
at 35%, 35% and 34%, respectively $ 41,858 $ 43,974 $ 38,994
Add (Deduct):
State income taxes, net of federal
income tax benefit 5,899 6,208 5,630
Amortization of deferred investment tax credit (4,110) (4,131) (4,140)
Other, net (1,565) (1,696) (2,094)
Total income tax expense $ 42,082 $ 44,355 $ 38,390
3. Retirement Benefits
Pensions
Kentucky Utilities has a noncontributory defined benefit pension plan
covering substantially all of its employees. Benefits under this plan
are based on years of service, final average base pay and age at
-34-
Notes to
Financial
Statements
Kentucky Utilities Company
retirement. Kentucky Utilities' funding policy is to make such
contributions as are necessary to finance the benefits provided under the
plan. Kentucky Utilities' contributions meet the funding standards set
forth in the Employee Retirement Income Security Act of 1974. The plan
assets consist primarily of equity and fixed income investments.
Kentucky Utilities also has a Supplemental Security Plan for certain
management personnel. Retirement benefits under this plan are based on
years of service, earnings and age at retirement. The plan has no
advance funding. Benefit payments are made to retired employees or their
beneficiaries from the general assets of Kentucky Utilities.
The reconciliation of the funded status of the retirement plans and the
pension liability recorded by Kentucky Utilities is as follows:
As of December 31, (in thousands of dollars) 1994 1993
Fair value of plan assets $ 154,314 $ 157,137
Projected benefit obligation (169,599) (169,309)
Plan assets less than projected benefit obligation (15,285) (12,172)
Unrecognized net loss from past
experience different than that assumed 5,246 6,361
Unrecognized prior service cost 4,705 4,966
Unrecognized net asset (1,799) (1,949)
Regulatory effect recorded (3,229) (5,146)
Pension liability $ (10,362) $ (7,940)
Accumulated benefit obligation (including vested benefits
of $124,094 and $128,779, respectively) $ 126,146 $ 130,758
Components of Net Pension Cost:
Year Ended December 31, (in thousands of dollars) 1994 1993 1992
Service cost (benefits earned during the
period) $ 6,017 $ 5,036 $ 4,774
Interest cost on projected benefit obligation 12,366 12,311 11,482
Actual return on plan assets (3,723) (13,229) (11,384)
Net amortization and deferral (8,765) 1,785 350
Regulatory effect recorded (1,916) 56 705
Net pension cost $ 3,979 $ 5,959 $ 5,927
Assumptions Used in Determining Actuarial Valuations:
1994 1993 1992
Weighted average discount rate used to
determine the projected benefit obligation 8 1/4 % 7 1/2% 8 3/4%
Rate of increase for compensation levels (1) 5 1/2 % 4 3/4% 6%
Weighted average expected long-term rate
of return on assets 8 1/4 % 8 1/4% 8 3/4%
(1) 6%, 5 1/4% and 6 1/2%, respectively, used for the Supplemental Security Plan
valuation.
-35-
Notes to
Financial
Statements
Kentucky Utilities Company
Other Postretirement Benefits
Effective January 1, 1993, Kentucky Utilities adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This standard provides
accounting and disclosure requirements associated with Kentucky
Utilities' obligation to provide postretirement benefits other than
pensions to present and future retirees. In accordance with this
standard, Kentucky Utilities accrues, during the years that the employee
renders service, the expected cost of providing these benefits for
retired employees, their beneficiaries and covered dependents. The
impact on results of operations was an increase in pre-tax expense for
the year ended December 31, 1993 of $6.3 million (net of capitalized
payroll benefits). Kentucky Utilities, prior to 1993, recognized these
costs on a pay-as-you-go (cash) basis. Amounts paid for retirees for
1992 amounted to $2.3 million.
Kentucky Utilities provides certain health care and life insurance
benefits to eligible retired employees and their dependents. The
postretirement health care plan is contributory for employees who retired
after December 31, 1992, with retiree contributions indexed annually
based upon the experience of retiree medical expenses for the preceding
year. Pre-1993 retirees are not required to contribute to the plan.
Kentucky Utilities' employees become eligible for retiree medical
benefits after 15 years of service and attainment of age 55. The life
insurance plan is noncontributory and is based on compensation levels
prior to retirement.
In 1993, Kentucky Utilities began funding, in addition to current
requirements for benefit payments, the maximum tax-favored amount allowed
through certain tax deductible funding vehicles. Kentucky Utilities
anticipates making similar funding decisions in future years, but will
consider and make such funding decisions on the basis of tax, regulatory
and other relevant conditions in effect at such times. The plan assets
consist primarily of equity investments.
The reconciliation of the funded status of the plans and the
postretirement benefit liability recorded by Kentucky Utilities is as
follows:
As of December 31, (in thousands of dollars) 1994 1993
Accumulated postretirement benefit obligation:
Retirees $ (31,992) $ (38,331)
Fully eligible active plan participants (8,287) (8,448)
Other active plan participants (25,578) (28,813)
(65,857) (75,592)
Plan assets at fair value 5,341 2,440
Accumulated postretirement benefit obligation
in excess of plan assets (60,516) (73,152)
Unrecognized net (gain)/loss from past
experience different from that assumed (11,353) 3,230
Unrecognized transition obligation 60,142 63,483
Regulatory effect recorded - 689
Accrued postretirement benefit liability $ (11,727) $ (5,750)
-36-
Notes to
Financial
Statements
Kentucky Utilities Company
Components of the net periodic postretirement benefit cost are as follows:
Year Ended December 31, (in thousands of dollars) 1994 1993
Service cost (benefits attributed to service
during the period) $ 2,105 $ 2,048
Interest cost on accumulated postretirement
benefit obligation 4,926 5,730
Actual return on plan assets (80) -
Net amortization and deferral (118) -
Amortization of transition obligation 3,341 3,341
Regulatory effect recorded 689 (689)
Net periodic postretirement benefit cost $ 10,863 $ 10,430
-37-
Notes to
Financial
Statements
Kentucky Utilities Company
Assumptions Used in Determining Actuarial Valuations: 1994 1993
Weighted average discount rate used to
determine the projected benefit obligation 8 1/4% 7 1/2%
Rate of increase for compensation levels 5 1/2% 4 3/4%
Weighted average expected long-term rate of
return on assets 8 1/4% -
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits is assumed for 1995. The health
care cost trend rate is assumed to decrease gradually to 5.5% through
2003 and remain at that level thereafter over the projected payout period
of the benefits. Increasing the assumed health care cost trend rates by
1 percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1994, by $11 million
(17%) and the aggregate of the service and interest cost components of
the net periodic postretirement benefit cost for the year by $1.5 million
(21%).
4. Commitments and Contingencies
The effects of certain commitments made by Kentucky Utilities are
estimated below:
(in thousands of dollars) 1995 1996 1997 1998 1999 1995-1999
Estimated Construction
Expenditures $122,900 $117,400 $105,600 $100,200 $ 75,000 $521,100
Estimated Contract
Obligations:
Fuel 136,400 79,700 66,100 29,100 20,800 332,100
Purchased power 24,800 26,100 27,100 26,700 26,400 131,100
Operating leases 3,100 3,100 3,000 3,000 3,000 15,200
Sinking Fund Requirements:
First mortgage bonds $ 376 $ 376 $ 376 $ 376 $ 376 $ 1,880
Construction Program
Kentucky Utilities frequently reviews its construction program and may
revise its projections of related expenditures based on revisions to its
estimated load growth and projections of its future load.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations - Construction Requirements for a discussion of
future expenditures relating to construction of peaking units and
compliance with the 1990 Clean Air Act Amendments.
Coal Supply
Obligations under Kentucky Utilities' coal purchase contracts are stated
at prices effective January 1, 1995, and are subject to changes as
defined by the terms of the contracts.
Purchased Power Agreements
-38-
Notes to
Financial
Statements
Kentucky Utilities Company
Kentucky Utilities has purchase power arrangements with Owensboro
Municipal Utilities (OMU) and Electric Energy, Inc. (EEI). Under the OMU
agreement, which expires on January 1, 2020, Kentucky Utilities
purchases, on an economic basis, all of the output of a 400-MW generating
station not required by OMU. The amount of purchased power available to
Kentucky Utilities during 1995-1999, which is expected to be
approximately 9% of Kentucky Utilities' total kWh requirements, is
dependent upon a number of factors including the units' availability,
maintenance schedules, fuel costs and OMU requirements. Payments are
based on the total costs of the station allocated per terms of the OMU
agreement, which generally follows delivered kWh. Included in the total
costs is Kentucky Utilities' proportionate share of debt service
requirements on $27.3 million of OMU bonds outstanding at
December 31, 1994. The debt service is allocated to Kentucky Utilities
based on its annual allocated share of capacity, which averaged
approximately 51% in 1994. In 1995, Kentucky Utilities' total costs will
increase to include its proportionate share of debt service requirements
on approximately $176.9 million of additional OMU bonds issued to finance
capital improvements designed to enable OMU to comply with the 1990 Clean
Air Act Amendments.
Kentucky Utilities has a 20% equity ownership in EEI, which is accounted
for on the equity method of accounting. Kentucky Utilities' entitlement,
beginning January 1, 1994, is 20% of the available capacity of a 1,000-MW
station. Payments are based on the total costs of the station allocated
per terms of an agreement among the owners, which generally follows
delivered kWh.
Sinking Fund Requirements
Annual sinking fund requirements for Kentucky Utilities' first mortgage
bonds may be met with cash or expenditures for bondable property as
provided in the Mortgage Indenture. Kentucky Utilities intends to meet
the 1995 sinking fund requirements with expenditures for bondable
property.
Lines of Credit
Kentucky Utilities has aggregate bank lines of credit of $90 million, all
of which remained unused at December 31, 1994. A portion of these credit
lines ($30 million) expires in September, 1995 and the balance ($60
million) expires in December, 1997. In support of these lines of credit,
Kentucky Utilities compensates the banks by paying a commitment fee.
5. Common Stock
Kentucky Utilities is subject to restrictions applicable to all
corporations under Kentucky and Virginia law on the use of retained
earnings for cash dividends on common stock, as well as those contained
in its Mortgage Indenture and Articles of Incorporation. At December 31,
1994, there were no restricted retained earnings.
6. Preferred Stock
-39-
Notes to
Financial
Statements
Kentucky Utilities Company
In December 1993, Kentucky Utilities issued 200,000 shares of 6.53%
preferred stock. The proceeds were used to redeem 200,000 shares of
7.84% preferred stock on February 1, 1994.
Each series of preferred stock is redeemable at the option of Kentucky
Utilities upon 30 days' written notice as follows:
Redemption Price per Share
Series (plus accrued and unpaid dividends, if any)
4 3/4% $101.00
6.53% (Not redeemable prior to December 1, 2003.)
$103.265 through November 30, 2004, decreasing
approximately $.33 each twelve months thereafter to
$100 on or after December 1, 2013.
As of December 31, 1994, there were 5.3 million shares of Kentucky
Utilities preferred stock, having a maximum aggregate stated value of
$200 million, authorized for issuance.
7. Short-Term and Long-Term Debt
Kentucky Utilities' short-term financing requirements are satisfied
through the sale of commercial paper. The weighted average interest rate
on the year-end balance was 6.07% for 1994.
In 1993, Kentucky Utilities entered into a loan agreement with the County
of Carroll, Kentucky to finance the construction of solid waste disposal
facilities. The County of Carroll issued $50 million of revenue bonds,
with the proceeds held in a construction fund by a trustee. In 1994,
Kentucky Utilities completed the draw down of the remaining $18.1 million
revenue bond proceeds.
In 1994, Kentucky Utilities entered into a loan agreement with the County
of Carroll, Kentucky to finance the construction of solid waste disposal
facilities. The County of Carroll issued $54 million of variable rate
revenue bonds, with the proceeds held in a construction fund. In 1994,
Kentucky Utilities drew down $35.7 million relating to these bonds.
Kentucky Utilities Pollution Control Series 10 Bonds are issued under
Kentucky Utilities' Mortgage Indenture.
Under the provisions for the variable rate revenue bonds, Kentucky
Utilities can choose between various interest rate options. Currently,
the daily interest rate mode is being utilized. The average annual
interest rate on the bonds during 1994 was 4.10%. The variable rate
bonds are subject to tender for purchase at the option of the holder and
to mandatory tender for purchase upon the occurrence of certain events.
If tendered bonds are not remarketed, Kentucky Utilities has available
lines of credit which may be used to repurchase the bonds.
Substantially all of Kentucky Utilities' utility plant is pledged as
security for the First Mortgage Bonds.
-40-
Notes to
Financial
Statements
Kentucky Utilities Company
8. Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash and cash equivalents, escrow funds, construction funds, short-term
borrowings and customers' deposits carrying values approximate fair value
because of the short maturity of these amounts.
Long-term debt fair values are based on quoted market prices for Kentucky
Utilities' first mortgage bonds and on current rates available to
Kentucky Utilities for debt of the same remaining maturities for Kentucky
Utilities' pollution control bonds and promissory note.
Kentucky Utilities has an interest rate swap agreement with a notional
amount of $70 million. Fair value of this instrument is the estimated
amount the counter-party would pay to Kentucky Utilities to terminate the
swap at the date of measurement. This agreement expires in 1996.
Kentucky Utilities has no downside interest rate risk associated with
this agreement.
The estimated fair values of Kentucky Utilities' financial instruments at
December 31 are as follows:
1994 1993
Carrying Estimated Carrying Estimated
(in thousands of dollars) Amount Fair Value Amount Fair Value
Interest rate swap $ - $ 1,550 $ - $ 2,550
Long-term debt $ 496,033 $ 475,976 $ 442,066 $ 489,042
If the difference between fair value and carrying value of Kentucky
Utilities' long-term debt was settled at amounts approximating those
above, the anticipated regulatory treatment would require return of or
allow recovery of these amounts in rates over a prescribed amortization
period. Accordingly, any settlement would not have a significant impact
on Kentucky Utilities' financial position or results of operations.
-41-
Supplementary
Quarterly
Financial
Information
(Unaudited)
Kentucky Utilities Company
Quarterly financial results for 1994 and 1993 are summarized below.
Generally, quarterly results may fluctuate due to seasonal variations,
changes in fuel costs and other factors. Operating revenues for the
third quarter of 1994 were reduced by $17.5 million related to refunds to
customers of fuel cost savings associated with the resolution of a coal
contract dispute. Operating revenues for other quarters were
insignificantly impacted by the refunds. Refer to Note 1 of the Notes to
Financial Statements for additional information.
Quarter 4th 3rd 2nd 1st
(in thousands of dollars)
1994
Operating Revenues $ 159,586 $ 156,512 $ 154,026 $ 166,528
Net Operating Income 20,835 29,737 20,034 30,580
Net Income 14,053 23,642 14,473 25,344
Net Income Applicable
to Common Stock 13,489 23,078 13,909 24,652
1993
Operating Revenues $ 151,828 $ 160,615 $ 139,909 $ 154,236
Net Operating Income 21,257 30,640 22,209 31,155
Net Income 15,526 24,790 16,422 24,548
Net Income Applicable
to Common Stock 14,856 24,161 15,792 23,919
These quarterly amounts reflect, in Kentucky Utilities' opinion, all
adjustments (including only normal recurring adjustments) necessary for a
fair presentation.
-42-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Refer to KU Energy's definitive proxy statement (the "Proxy Statement")
filed with the Securities and Exchange Commission in connection with its
1995 Annual Shareholder Meeting under the caption "Election of
Directors--General" for the information required by this item pertaining
to directors. Such information is incorporated herein by reference and
is also filed herewith as Exhibit 99B. Information required by this item
relating to executive officers of Kentucky Utilities is set forth under a
separate caption in Part I hereof.
Item 11. Executive Compensation
Refer to KU Energy's Proxy Statement under the caption "Election of
Directors -- Directors' Compensation, and -- Executive Compensation" (but
excluding any information contained under the subheadings -- "Report of
Compensation Committee on Executive Compensation", and -- "Performance
Graph") for the information required by this item. Such information is
incorporated herein by reference and is also filed herewith as
Exhibit 99B.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Refer to KU Energy's Proxy Statement under the caption "Election of
Directors--Voting Securities Beneficially Owned by Directors, Nominees
and Executive Officers; Other Information" for the information required
by this item. Such information is incorporated herein by reference and
is also filed herewith as Exhibit 99B.
Item 13. Certain Relationships and Related Transactions
None.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) The following (1) financial statements, (2) schedules, and (3)
exhibits, are filed as a part of this Annual Report.
(1) Financial Statements
Report of Independent Public Accountants,
Statements of Income and Retained Earnings for the three
years ended December 31, 1994,
Statements of Cash Flows for the three years ended
December 31, 1994,
Balance Sheets as of December 31, 1994 and 1993,
Statements of Capitalization as of December 31, 1994 and
1993, and
Notes to Financial Statements.
(2) Schedules
Schedule II Valuation and qualifying accounts.
The following Schedules are omitted as not applicable or not
required under Regulation S-X:
I, III, IV, V.
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(3) Exhibits
Number Description Page
3.A Amended and Restated Articles of Incorporation of
Kentucky Utilities Company. (Exhibits 4.03 and 4.04
to Form 8-K Current Report of Kentucky Utilities
Company, dated December 10, 1993). Incorporated by
reference. -
3.B By-laws of Kentucky Utilities Company dated
December 14, 1992. (Exhibit 3B to Form 10-K Annual
Report of Kentucky Utilities Company for the year
ended December 31, 1992). Incorporated by reference. -
4.A Indenture of Mortgage or Deed of Trust dated
May 1, 1947 between Kentucky Utilities Company and
Continental Illinois National Bank and Trust Company
of Chicago and Edmond B. Stofft, as Trustees (Amended
Exhibit 7(a) in File No. 2-7061), and Supplemental
Indentures thereto dated, respectively,
January 1, 1949 (Second Amended Exhibit 7.02 in File
No. 2-7802), July 1, 1950 (Amended Exhibit 7.02 in
File No. 2-8499), June 15, 1951 (Exhibit 7.02(a) in
File No. 2-8499), June 1, 1952 (Amended Exhibit 4.02
in File No. 2-9658), April 1, 1953 (Amended Exhibit
4.02 in File No. 2-10120), April 1, 1955 (Amended
Exhibit 4.02 in File No. 2-11476), April 1, 1956
(Amended Exhibit 2.02 in File No. 2-12322),
May 1, 1969 (Amended Exhibit 2.02 in File No. 2-
32602), April 1, 1970 (Amended Exhibit 2.02 in File
No. 2-36410), September 1, 1971 (Amended Exhibit 2.02
in File No. 2-41467), December 1, 1972 (Amended
Exhibit 2.02 in File No. 2-46161), April 1, 1974
(Amended Exhibit 2.02 in File No. 2-50344),
September 1, 1974 (Exhibit 2.04 in File No. 2-59328),
July 1, 1975 (Exhibit 2.05 in File No. 2-59328),
May 15, 1976 (Amended Exhibit 2.02 in File No. 2-
56126), April 15, 1977 (Exhibit 2.06 in File No. 2-
59328), August 1, 1979 (Exhibit 2.04 in File No. 2-
64969), May 1, 1980 (Exhibit 2 to Form 10-Q Quarterly
Report of Kentucky Utilities for the quarter ended
June 30, 1980), September 15, 1982 (Exhibit 4.04 in
File No. 2-79891), August 1, 1984 (Exhibit 4B to Form
10-K Annual Report of Kentucky Utilities Company for
the year ended December 31, 1984), June 1, 1985
(Exhibit 4 to Form 10-Q Quarterly Report of Kentucky
Utilities Company for the quarter ended June 30,
1985), May 1, 1990 (Exhibit 4 to Form 10-Q Quarterly
Report of Kentucky Utilities Company for the quarter
ended June 30, 1990), May 1, 1991 (Exhibit 4 to Form
10-Q Quarterly Report of Kentucky Utilities Company
for the quarter ended June 30, 1991), May 15, 1992
(Exhibit 4.02 to Form 8-K of Kentucky Utilities
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Number Description Page
4.A Company dated May 14, 1992), August 1, 1992 (Exhibit
(cont.) 4 to Form 10-Q Quarterly Report of Kentucky Utilities
Company for the quarter ended September 30, 1992),
June 15, 1993 (Exhibit 4.02 to Form 8-K of Kentucky
Utilities Company dated June 15, 1993) and
December 1, 1993 (Exhibit 4.01 to Form 8-K of
Kentucky Utilities Company dated December 10, 1993).
Incorporated by reference. -
4.B Supplemental Indenture dated March 1, 1992 between
Kentucky Utilities and Continental Bank, National
Association and M. J. Kruger, as Trustees, providing
for the conveyance of properties formerly held by Old
Dominion Power Company. (Exhibit 4B to Form 10-K
Annual Report of Kentucky Utilities Company for the
year ended December 31, 1992). Incorporated by
reference. -
4.C Supplemental Indenture dated November 1, 1994 between
Kentucky Utilities Company and Bank of America
Illinois, as Trustee. 48-65
10.A Kentucky Utilities' Amended and Restated Performance
Share Plan (Exhibit 10A to Form 10-Q Quarterly Report
of Kentucky Utilities Company for the quarter ended
June 30, 1993). Incorporated by reference. -
10.B Kentucky Utilities' Annual Performance Incentive Plan
(Exhibit 10B to Form 10-K Annual Report of Kentucky
Utilities Company for the year ended December 31,
1990). Incorporated by reference. -
10.C Amendment No. 1 to Kentucky Utilities' Annual
Performance Incentive Plan (Exhibit 10D to Form 10-K
Annual Report of Kentucky Utilities Company for the
year ended December 31, 1991). Incorporated by
reference. -
10.D Amendment No. 2 to Kentucky Utilities' Annual
Performance Incentive Plan (Exhibit 10H to Form 10-K
Annual Report of Kentucky Utilities Company for the
year ended December 31, 1993). Incorporated by
reference. -
10.E Amendment No. 3 to Kentucky Utilities' Annual
Performance Incentive Plan (Exhibit 10I to Form 10-K
Annual Report of Kentucky Utilities Company for the
year ended December 31, 1993). Incorporated by
reference. -
10.F Kentucky Utilities' Executive Optional Deferred
Compensation Plan (Exhibit 10C to Form 10-K Annual
Report of Kentucky Utilities Company for the year
ended December 31, 1990). Incorporated by reference. -
10.G Amendment No. 1 to Kentucky Utilities' Executive
Optional Deferred Compensation Plan (Exhibit 10F to
Form 10-K Annual Report of Kentucky Utilities Company
for the year ended December 31, 1991). Incorporated
by reference. -
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Number Description Page
10.H Amendment No. 2 to Kentucky Utilities' Executive
Optional Deferred Compensation Plan (Exhibit 10J to
Form 10-K Annual Report of Kentucky Utilities Company
for the year ended December 31, 1993). Incorporated
by reference. -
10.I Kentucky Utilities' Supplemental Security Plan
(Exhibit 10I to Form 10-K Annual Report of Kentucky
Utilities Company for the year ended December 31,
1991). Incorporated by reference. -
10.J Amendment No. 1 to Kentucky Utilities' Supplemental
Security Plan. 66-67
10.K Amendment No. 2 to Kentucky Utilities' Supplemental
Security Plan. 68-70
10.L Kentucky Utilities' Director Retirement Retainer
Program, and Amendment No. 1 (Exhibit 10G to Form
10-K Annual Report of Kentucky Utilities Company for
the year ended December 31, 1991). Incorporated by
reference. -
10.M Kentucky Utilities' Amended and Restated Director
Deferred Compensation Plan 71-87
12 Computation of Ratio of Earnings to Fixed Charges 88
21 List of Subsidiaries 89
23 Consent of Independent Public Accountants 90
27 Financial Data Schedule (required for electronic
filing only in accordance with Item 601(c)(1) of
Regulation S-K). -
99.A Description of Common Stock 91-92
99.B Director and Executive Officer Information 93-101
Note - Exhibit numbers 10.A through 10.M are management contracts
or compensatory plans or arrangements required to be filed as
exhibits to this Form 10-K.
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The following instruments defining the rights of holders of certain long-
term debt of Kentucky Utilities Company have not been filed with the
Securities and Exchange Commission but will be furnished to the
Commission upon request.
1. Loan Agreement dated as of May 1, 1990 between Kentucky Utili-
ties and the County of Mercer, Kentucky, in connection with
$12,900,000 County of Mercer, Kentucky, Collateralized Solid
Waste Disposal Facility Revenue Bonds (Kentucky Utilities
Company Project) 1990 Series A, due May 1, 2010 and May 1, 2020.
2. Loan Agreement dated as of May 1, 1991 between Kentucky Utili-
ties and the County of Carroll, Kentucky, in connection with
$96,000,000 County of Carroll, Kentucky, Collateralized
Pollution Control Revenue Bonds (Kentucky Utilities Company
Project) 1992 Series A, due September 15, 2016.
3. Loan Agreement dated as of August 1, 1992 between Kentucky
Utilities and the County of Carroll, Kentucky, in connection
with $2,400,000 County of Carroll, Kentucky, Collateralized
Pollution Control Revenue Bonds (Kentucky Utilities Company
Project) 1992 Series C, due February 1, 2018.
4. Loan Agreement dated as of August 1, 1992 between Kentucky
Utilities and the County of Muhlenberg, Kentucky, in connection
with $7,200,000 County of Muhlenberg, Kentucky, Collateralized
Pollution Control Revenue Bonds (Kentucky Utilities Company
Project) 1992 Series A, due February 1, 2018.
5. Loan Agreement dated as of August 1, 1992 between Kentucky
Utilities and the County of Mercer, Kentucky, in connection with
$7,400,000 County of Mercer, Kentucky, Collateralized Pollution
Control Revenue Bonds (Kentucky Utilities Company Project) 1992
Series A, due February 1, 2018.
6. Loan Agreement dated as of August 1, 1992 between Kentucky
Utilities and the County of Carroll, Kentucky, in connection
with $20,930,000 County of Carroll, Kentucky, Collateralized
Pollution Control Revenue Bonds (Kentucky Utilities Company
Project) 1992 Series B, due February 1, 2018.
7. Loan Agreement dated as of December 1, 1993, between Kentucky
Utilities and the County of Carroll, Kentucky, in connection
with $50,000,000 County of Carroll, Kentucky, Collateralized
Solid Waste Disposal Facilities Revenue Bonds (Kentucky
Utilities Company Project) 1993 Series A due December 1, 2023.
8. Loan Agreement dated as of November 1, 1994, between Kentucky
Utilities and the County of Carroll, Kentucky, in connection
with $54,000,000 County of Carroll, Kentucky, Collateralized
Solid Waste Disposal Facilities Revenue Bonds (Kentucky
Utilities Company Project) 1994 Series A due November 1, 2024.
(B) No reports on Form 8-K were filed by Kentucky Utilities during the
last quarter of 1994.
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SCHEDULE II
KENTUCKY UTILITIES COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1994 1993 1992
(in thousands)
Accumulated Provision for Uncollectible Accounts Receivable
Balance at beginning of year $ 923 $ 1,033 $ 1,132
Balance at end of year $ 457 $ 923 $ 1,033
Note-Other valuation and qualifying accounts are not significant.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on
March 9, 1995.
KENTUCKY UTILITIES COMPANY
/s/ John T. Newton
John T. Newton
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant in the capacities and on the date indicated.
Signature Title
/s/ John T. Newton
John T. Newton Chairman and Director (Principal Executive
Officer)
/s/ Michael R. Whitley
Michael R. Whitley President and Director
/s/ O. M. Goodlett
O. M. Goodlett Senior Vice-President (Principal Financial
Officer)
/s/ Michael D. Robinson
Michael D. Robinson Controller (Principal Accounting Officer)
/s/ Mira S. Ball
Mira S. Ball Director
/s/ W. B. Bechanan
W. B. Bechanan Director
/s/ Harry M Hoe
Harry M. Hoe Director
/s/ Milton W. Hudson
Milton W. Hudson Director
/s/ Frank V. Ramsey, Jr.
Frank V. Ramsey, Jr. Director
/s/ Warren W. Rosenthal
Warren W. Rosenthal Director
/s/ William L. Rouse, Jr.
William L. Rouse, Jr. Director
/s/ Charles L. Shearer
Charles L. Shearer Director
March 9, 1995
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