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, 1995
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 8, 1996: 37,817,878
shares (owned by the parent - KU Energy Corporation).
Documents Incorporated by Reference: None
Exhibit Index appears on page 43.
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KENTUCKY UTILITIES COMPANY
Form 10-K
Annual Report to the Securities and Exchange Commission
For the Year Ended December 31, 1995
_____________
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 . . . . . . . . . . . . . . . . . . 41
PART III
10. Directors and Executive Officers of the Registrant . . . . . . 41
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 41
12. Security Ownership of Certain Beneficial Owners and Management 41
13. Certain Relationships and Related Transactions . . . . . . . . 41
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 42
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 43
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 48
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PART I
Item 1. Business
General
Kentucky Utilities Company (KU) is a wholly owned subsidiary of KU Energy
Corporation (KU Energy). KU is a public utility engaged in producing and
selling electric energy. KU provides electric service to about 425,500
customers in over 600 communities and adjacent suburban and rural areas
in 77 counties in central, southeastern and western Kentucky, and to
about 28,600 customers in 5 counties in southwestern Virginia. In
Virginia, KU operates under the name Old Dominion Power Company. Of the
Kentucky communities, 161 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. The lack of
Virginia franchises is not expected to have a material adverse effect on
KU's operations. KU also sells electric energy at wholesale for resale
in 12 municipalities.
The territory served by KU 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
KU's sources of electric revenues and the respective percentages of total
revenues for the three years 1993-1995 were as follows:
Year Ended December 31, 1995 1994 1993
Amount % Amount % Amount %
(dollars in thousands)
Residential $ 232,760 34 $ 213,574 34 $ 210,759 35
Commercial 151,778 22 142,207 22 138,271 23
Industrial 130,066 19 120,043 19 111,857 18
Mine Power 36,076 5 36,498 6 34,977 6
Public Authorities 54,161 8 49,869 8 48,142 8
Wholesale 50,699 7 47,961 7 46,898 8
Opportunity 25,241 4 41,704 7 15,565 2
Miscellaneous Revenues 5,649 1 4,181 - 3,428 -
Provision for Refund -
Litigation Settlement - - (19,385) (3) (3,309) -
Total $ 686,430 100 $ 636,652 100 $ 606,588 100
The electric utility business is affected by 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 of Operations -
Sales and Revenues for information related to revenues including those
from opportunity sales.
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Operations
KU's net generating capability was 3,509 megawatts at December 31, 1995.
An additional 110-megawatt combustion turbine peaking unit is scheduled
to be placed into commercial operation in 1996. 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. KU
obtains power from other utilities under bulk power purchase and
interchange contracts. At December 31, 1995, KU's system capability,
including purchases from others, was 3,903 megawatts. On August 16, 1995,
an all-time system peak demand, on a one-hour integrated basis, was set
at 3,341 megawatts. This peak was surpassed on February 5, 1996 by a
3,391 megawatt peak. See Item 2, Properties-Construction for a
discussion of KU's plans to add additional peaking capacity.
The percentage of KU's system output which was internally generated and
purchased for the periods indicated was as follows:
1995 1994 1993
Internally Generated 82% 83 % 89 %
Purchased 18% 17 % 11 %
KU 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. KU also has interconnections and contractually established
operating arrangements with neighboring utilities and cooperatives.
Under a contract with Owensboro Municipal Utilities (OMU), KU 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 KU. Such power constituted
about 8% of KU's net system output during 1995. See Note 4 of the Notes
to Financial Statements.
KU owns 20% of the common stock of Electric Energy, Inc. (EEI), which
owns and operates a 1,000-megawatt generating station in southern
Illinois. KU's entitlement is 20% of the available capacity of the
station. Purchases from EEI 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 KU. Such power constituted
about 8% of KU's net system output in 1995. See Note 4 of the Notes to
Financial Statements.
KU had approximately 2,230 employees at December 31, 1995, of which about
300 are covered by union contracts expiring August 1996.
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Fuel Matters
Coal-fired generating units provided more than 99% of KU's net kilowatt-
hour generation for 1995. The remainder of KU's net generation for 1995
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:
1995 1994 1993
Per ton - all sources $ 28.37 $ 28.91 $ 27.92
Per MBTU - all sources $ 1.16 $ 1.19 $ 1.15
Per ton - spot purchases only $ 26.84 $ 28.33 $ 26.23
Per MBTU - spot purchases only $ 1.10 $ 1.16 $ 1.08
Spot purchases as % of all sources 30 % 46 % 44 %
KU 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.
KU 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. KU intends to meet a
substantial portion of its coal requirements with 3-year and 5-year
contracts. KU anticipates that coal supplied under such contracts will
represent about two-thirds of the requirements over the next several
years. As part of this strategy, KU is currently negotiating and will
continue to negotiate replacement contracts as contracts expire. KU 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 existing fuel contracts for each of the years
1996 through 2000.
KU has no long-term contracts in place for the purchase of natural gas
for its combustion turbine peaking units. KU has met its gas
requirements through spot purchases. KU does not anticipate encountering
any significant problems acquiring an adequate supply of fuel necessary
to operate its peaking units. See Item 2, Properties-Construction for a
discussion of KU's plans to add additional peaking capacity.
Environmental Matters
Federal and state agencies have adopted environmental protection
standards which apply to the electric operations of KU. Capital
expenditures to comply with these standards amounted to about
$193 million during the 1991-1995 time period.
KU's generating units are operated in compliance with the Kentucky
Natural Resources and Environmental Protection Cabinet's (Cabinet) State
Implementation Plan (KYSIP) and New Source Performance Standards
developed under the Clean Air Act. The KYSIP is a federally approved
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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 nitrogen oxides) from KU's
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. KU's 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 KU 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 were required to comply with sulfur dioxide emission
reduction obligations beginning January 1, 1995. In order to comply with
these sulfur dioxide emission limitations, KU has installed a scrubber
and related facilities on Ghent Unit 1 and switched to lower sulfur coal
on some other Phase I affected units. In addition, these units were
retrofitted with low NOx burners in order to comply with applicable
nitrogen oxide limitations under United States Environmental Protection
Agency (EPA) regulations. The EPA issued final acid rain permits for
each of KU's Phase I affected units. The EPA's approval of KU 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. KU's current emission allowance
strategy, in part, includes the banking of 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. The banked
allowances are expected to allow KU to delay capital expenditures
associated with KU's Phase II acid rain compliance obligations, which
are effective January 1, 2000. KU's Phase II compliance strategy, in
addition to utilizing banked allowances, may include additional fuel
switching or the installation of additional scrubbers. However, KU 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 KU's 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. KU's operations are in substantial compliance
with the conditions in the permits. KU is in the process of renewing the
required permits that expired in 1995, which continue in effect until new
permits are issued.
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
byproducts by practices common to the utility industry are adequate for
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the protection of human health and the environment. The Cabinet also
regulates utility wastes as special wastes under its waste management
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, KU has implemented procedures to be followed in the
handling, storage and disposal of PCBs. In addition, KU 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, KU received a letter from the EPA identifying KU
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 KU 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 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. The
agreement does not cover costs which may be incurred in connection with
any remediation plan. A remediation plan is before the EPA for approval.
KU 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
KU is subject to the jurisdiction of the Kentucky Public Service
Commission (PSC) and the Virginia State Corporation Commission (SCC) as
to retail rates and service, accounts, issuance of securities and in
other respects. The Federal Energy Regulatory Commission (FERC) has
jurisdiction under the Federal Power Act over certain of the electric
utility facilities and operations, wholesale sale of power and related
transactions and accounting practices of KU, and in certain other
respects as provided in the Act. The FERC has classified KU as a "public
utility" as defined in the Act. 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), KU may also be subject to
the jurisdiction of the Tennessee Public Service Commission as to retail
rates, accounts, issuance of securities and in other respects. Since
1992, utilities in Kentucky have had the option to use either a
historical test period or a forward-looking test period in rate filings.
KU's 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 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
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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 uses
an average fuel cost factor based primarily on projected test year fuel
costs. The fuel cost factor is adjusted annually for the over or under
collection of fuel costs from the previous year.
Rate regulation in Kentucky allows each electric utility with a PSC-
approved environmental compliance plan and environmental surcharge to
recover on a current basis the cost of complying with federal, state or
local environmental requirements, including the Federal Clean Air Act as
amended, which applies to coal combustion wastes and by-products from
facilities utilized for the production of energy from coal. During 1994,
the PSC approved KU's environmental surcharge, which is designed to allow
KU to recover compliance related operating expenses and to earn a return
on those compliance related capital expenditures 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, including information concerning
pending legal proceedings, see Note 9 of the Notes to Financial
Statements, "Environmental Cost Recovery."
Integrated resource planning regulations in Kentucky require KU and the
other major utilities to make triennial filings with the PSC, of various
historical and forecasted information relating to forecasted load,
capacity margins and demand-side management techniques. KU is required
to make its next filing on April 22, 1996.
Pursuant to Kentucky law, the PSC has established the boundaries of the
service territory or area of each retail electric supplier in Kentucky
(including KU), 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.
KU 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 KU 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
In March 1995, the FERC issued a Notice of Proposed Rulemaking (NOPR) by
which the FERC will require public utilities that own or control
facilities used for the transmission of electric energy in interstate
commerce to offer "open access" transmission service on a
nondiscriminatory basis. The FERC also proposes to allow, in certain
circumstances, the collection of charges for the recovery of stranded
costs when customers change power suppliers. The FERC expects to issue
final rules in 1996. For further discussion, see Item 7, Managements'
Discussion and Analysis of Financial Condition and Results of Operation -
Utility Issues- Competition.
KU placed a Transmission Services (TS) Tariff into effect in 1994 and a
Power Services (PS) Tariff into effect in 1995. The TS Tariff covers
wholesale transactions involving the use of KU's transmission system.
The PS tariff allows KU to sell wholesale power at market-based rates.
The FERC staff, intervenors and KU are engaged in settlement discussions
designed to settle all outstanding issues. Both tariffs are subject to
refund pending final FERC approval.
Although these new tariffs did not have a material impact on KU's 1995
revenues or net income, they are indicative of the increasingly
competitive environment in which KU and other utilities operate.
Item 2. Properties
KU owns and operates the following electric generating stations:
Nameplate Effective
Rating (KW) Capability (KW)
Steam: Ghent Ghent, Ky 2,226,060 1,976,000
Green River South Carrollton, Ky 263,636 242,000
E. W. Brown Burgin, Ky 739,534 661,000
Tyrone Tyrone, Ky 137,500 136,000
Pineville Four Mile, Ky 37,500 34,000
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 357,000 377,000
3,853,627 3,509,000
Substantially all properties are subject to the lien of KU's Mortgage
Indenture.
Construction
Three 110-MW combustion turbine peaking units have been installed over
the past two years. The first peaking unit was placed into commercial
operation in late 1994. The second and third units were placed into
commercial operation in February 1995 and December 1995, respectively.
The total construction expenditures for the years 1996 through 2000 are
estimated at $547 million. Such expenditures include an estimated
$190 million for generating facilities, $83 million for transmission
facilities and $274 million for distribution and general facilities.
Included in total construction expenditures for the 1996-2000 period are
$120 million for 485 MW of peak generating capacity to be added during
1996-2000 (including one substantially complete unit with an effective
capability of 110-MW scheduled for commercial operation in 1996.) KU has
no plans to install coal-fired baseload generating capacity before 2010.
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Construction expenditures for the years 1991 through 1995 aggregated
about $647 million. See Note 4 of the Notes to Financial Statements for
the estimated amounts of construction expenditures for each of the years
1996 through 2000.
KU 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 KU's ability to raise necessary capital. (See Item 7,
Management's Discussion and Analysis of Financial Condition and Results
of Operations.) KU's 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
Environmental Cost Recovery
See Note 9 of the Notes to Financial Statements, "Environmental Cost
Recovery," for a discussion of environmental surcharge legal proceedings.
Fuel Matters
As previously reported in Item 3 of the Quarterly Report on Form 10-Q for
the period ending June 30, 1995, a former coal supplier of KU initiated
arbitration proceedings to recover on-going reclamation costs claimed to
have been incurred during mining operations at the supplier's mine used
to supply KU under a contract that expired in 1988. In addition, the
supplier also was seeking to recover final reclamation costs which began
in 1994 and were estimated to continue for four more years. This matter
was settled in December 1995 resulting in no obligation to KU.
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
Michael R. Whitley Chairman and Chairman of the Board of KU since
Age 52 President* August 1995 and President from
November 1994. Director of KU
since March 1992. Senior Vice-
President of KU from March 1987 to
November 1994. Secretary of KU
from July 1978 to November 1992.
James M. Allison Senior Vice- Senior Vice-President of KU since
Age 42 President November 1994. Vice-President of
KU 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 KU since
Age 48 President* November 1992. Vice-President of
KU from April 1982 to November
1992.
Wayne T. Lucas Senior Vice- Senior Vice-President of KU since
Age 48 President November 1994. Vice President of
KU from November 1986 to November
1994.
George S. Brooks II General Corporate Secretary of KU since
Age 45 Counsel and November 1992, and General Counsel
Corporate since January 1988.
Secretary*
Gary E. Blake Vice-President Vice-President of KU since
Age 42 November 1992. Western Division
Manager of KU from October 1991 to
November 1992. Assistant Western
Division Manager of KU from March
1990 to October 1991. Field
Operations Coordinator for KU from
April 1986 to March 1990.
William E. Casebier Vice-President Vice-President of KU since May
Age 53 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 KU since
Age 41 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.
Gary L. Hawley Vice-President Vice President of KU since January
Age 47 1996. Director of Bulk Power
Planning from November 1986 to
January 1996.
Robert M. Hewett Vice-President Vice-President of KU since January
Age 48 1982.
Ronald L. Whitmer Vice-President Vice-President of KU since
Age 63 November 1992. Director of
Production and Generation
Construction of KU from May 1985
to November 1992. (Retired
effective January 1996.)
William N. English Treasurer* Treasurer of KU since April 1982.
Age 45
Michael D. Robinson Controller* Controller of KU since August
Age 40 1990.
John J. Maloy, Jr. Assistant Assistant Treasurer of KU since
Age 41 Treasurer 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.
* Certain executive officers of KU may be considered "executive
officers" of KU Energy for certain purposes. Identified persons
hold positions with the same titles at KU Energy. Refer to KU
Energy's Annual Report on Form 10-K for information concerning
positions held during the last five years and information
concerning KU Energy executive officers.
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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 KU is held by KU Energy.
The following table sets forth the cash distributions (in thousands of
dollars) on common stock paid by KU for the periods indicated:
1995 1994
First Quarter $ 15,789 $ 15,411
Second Quarter $ 15,789 $ 15,411
Third Quarter $ 15,789 $ 15,411
Fourth Quarter $ 15,883 $ 15,411
See Note 5 of the Notes to Financial Statements for information regarding
dividend restrictions.
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Item 6. Selected Financial Data
Year ended December 31, 1995 1994 1993 1992 1991
(in thousands)
Operating Revenues:
Residential $232,760 $ 213,574 $210,759 $ 194,817 $202,885
Commercial 151,778 142,207 138,271 133,519 137,653
Industrial 130,066 120,043 111,857 102,808 98,595
Mine power 36,076 36,498 34,977 36,696 37,093
Public authorities 54,161 49,869 48,142 45,570 46,332
Total sales to ultimate
consumers 604,841 562,191 544,006 513,410 522,558
Other electric utilities 75,940 89,665 62,463 58,979 61,542
Miscellaneous revenues and other 5,649 4,181 3,428 3,432 3,560
Provision for refund -
litigation settlement - (19,385) (3,309) - -
Total operating revenues 686,430 636,652 606,588 575,821 587,660
Operating Expenses:
Fuel used in generation (1) 189,845 170,654 178,910 168,470 183,167
Electric power purchased 69,579 61,442 34,711 32,753 26,744
Other operating expenses 121,426 112,712 104,930 93,915 91,779
Maintenance 62,592 66,134 59,451 61,118 58,590
Depreciation 75,080 65,259 60,800 58,849 57,337
Federal and state income taxes 44,670 44,683 48,178 41,489 46,569
Other taxes 14,694 14,582 14,347 13,359 12,858
Total operating expenses 577,886 535,466 501,327 469,953 477,044
Net Operating Income 108,544 101,186 105,261 105,868 110,616
Other Income and Deductions 8,235 9,299 8,331 11,226 12,062
Income Before Interest Charges
and AFUDC 116,779 110,485 113,592 117,094 122,678
Interest Charges:
Interest on long-term debt 36,095 32,147 31,650 39,571 36,559
Other interest 4,021 2,411 1,249 1,394 1,626
Total interest charges 40,116 34,558 32,899 40,965 38,185
AFUDC 179 1,585 593 169 262
Net Income $ 76,842 $ 77,512 $ 81,286 $ 76,298 $ 84,755
Preferred Stock Dividend
Requirements 2,256 2,384 2,558 2,518 3,031
Net Income Applicable to Common
Stock $ 74,586 $ 75,128 $ 78,728 $ 73,780 $ 81,724
Common Dividends $ 63,250 $ 61,644 $ 60,509 $ 108,996 $ 56,727
(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.
-14-
Item 6. Selected Financial Data
(continued)
1995 1994 1993 1992 1991
Assets (in thousands) $1,659,988 $1,618,100 $1,523,274 $1,408,453 $1,412,961
Capitalization: (in thousands)
Bonds $ 545,830 $ 495,830 $ 441,830 $ 443,330 $ 407,330
Notes 64 86 107 128 149
Unamortized premium on
long-term debt 86 96 108 519 713
Preferred stock 40,000 40,000 40,000 40,000 40,000
Preferred stock with mandatory
redemption - - - - -
Common stock equity 576,537 565,201 552,106 534,073 569,289
Total capitalization $1,162,517 $1,101,213 $1,034,151 $1,018,050 $1,017,481
% Total Capitalization
Represented by:
Long-term debt 47.0 45.1 42.7 43.6 40.1
Preferred stock 3.4 3.6 3.9 3.9 3.9
Common stock equity 49.6 51.3 53.4 52.5 56.0
Kilowatt-hours Generated,
Purchased and Sold:
(in thousands)
Power generated 15,223,851 15,524,844 14,934,839 13,700,313 14,183,713
Power purchased 3,254,861 3,066,917 1,926,299 2,032,110 1,464,812
Power interchanged - net (6,569) 2,638 1,556 3,393 (10,725)
Total 18,472,143 18,594,399 16,862,694 15,735,816 15,637,800
Less - losses and company use 1,054,589 998,010 1,066,251 876,862 906,468
Remainder - kilowatt-hours
sold 17,417,554 17,596,389 15,796,443 14,858,954 14,731,332
Sales classified:
Residential 5,016,012 4,706,058 4,702,697 4,278,098 4,385,670
Commercial 3,403,054 3,272,370 3,217,504 3,080,045 3,122,156
Industrial 3,850,647 3,641,469 3,409,213 3,093,113 2,874,016
Mine power 926,873 974,233 933,317 977,032 955,410
Public authorities 1,297,913 1,225,668 1,199,893 1,123,494 1,133,176
Total sales to
ultimate consumers 14,494,499 13,819,798 13,462,624 12,551,782 12,470,428
Other electric utilities 2,923,055 3,776,591 2,333,819 2,307,172 2,260,904
Total 17,417,554 17,596,389 15,796,443 14,858,954 14,731,332
Average Number of Customers 449,144 440,590 432,636 425,403 419,340
Residential Sales (per customer):
Average kilowatt-hours 13,377 12,781 12,995 12,007 12,471
Average revenue $ 620.75 $ 580.05 $ 582.41 $ 546.80 $ 576.93
System Capability - Megawatts:
Kentucky Utilities' plants 3,509 3,265 3,164 3,163 3,162
Purchased contracts 394 540 365 293 254
Total system capability 3,903 3,805 3,529 3,456 3,416
Net System Maximum Demand -
Megawatts 3,341 3,127 3,176 2,845 2,894
Load Factor (%) 58.7 59.8 57.7 59.4 58.4
Heat Rate (BTU per KWH) (1) 10,377 10,306 10,367 10,344 10,350
Fuel - Average Cost per Ton(1) $ 28.49 $ 28.84 $ 28.31 $ 27.88 $ 29.67
Average Cost per Million BTU(1) $ 1.18 $ 1.19 $ 1.17 $ 1.18 $ 1.24
(1) Based on coal consumed
-15-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
KU, an electric utility, is a wholly owned subsidiary of KU Energy.
RESULTS OF OPERATIONS
1995 Compared to 1994
Net Income Applicable to Common Stock
Net income applicable to common stock in 1995 was $74.6 million as
compared to $75.1 million in 1994 (which includes a one-time recovery of
about $1.9 million associated with the resolution of a coal contract
dispute). Refer to Note 1 of the Notes to Financial Statements,
"Operating Revenues and Fuel Costs."
Sales and Revenues
Increase (Decrease)
From Prior Years
1995 1994
kWh Revenues kWh Revenues
(%) (000's) (%) (000's)
Residential 7 $ 19,186 - $ 2,815
Commercial 4 9,571 2 3,936
Industrial 6 10,023 7 8,186
Mine Power & Public
Authorities 1 3,870 3 3,248
Total Retail Sales 5 42,650 3 18,185
Wholesale 5 2,738 2 1,063
Opportunity (42) (16,463) 176 26,139
Total Other Electric Utilities (23) (13,725) 62 27,202
Miscellaneous Revenues
and Other - 1,468 - 753
Total Before Refund (1) 30,393 11 46,140
Provision for Refund -
Litigation Settlement - 19,385 - (16,076)
Total (1) $ 49,778 11 $30,064
Kilowatt-hour (kWh) sales in 1995 were 1% below sales in 1994. The
decrease was largely due to a 42% decline in opportunity sales which
reflects a return to more normal levels from the unusually high levels of
opportunity sales in 1994.
Sales to residential customers increased by 7% in 1995 as a result of
favorable weather in the second half of 1995, continued growth in the
number of residential customers and the impact of KU's marketing efforts.
Industrial sales rose 6% as a result of continued economic growth in KU's
service area. About 29% of the increase in industrial sales for 1995
was due to greater sales to Toyota Motor Manufacturing, KU's largest
customer.
Operating revenues for 1995 were $686.4 million, up $30.4 million (5%)
-16-
from 1994, excluding the impact of the refunds to customers associated
with the above mentioned 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 as a result of the refunds.
The increase in 1995 revenues was largely due to the growth in retail
sales described above and to amounts recovered under an environmental
surcharge (about $17.9 million in 1995 compared to $3.5 million in 1994).
Refer to Note 9 of the Notes to Financial Statements, "Environmental Cost
Recovery."
1995 kWh Sales by Classification
Year Ended December 31, 1995
Residential 29%
Commercial 20%
Industrial 22%
Mine Power & Public Authorities 13%
Opportunity 7%
Wholesale 9%
Total 100%
Operating Expenses
Fuel expense for 1995 was $189.8 million, a $3.9 million (2%) decrease
from 1994, excluding the effect of the 1994 refunds to customers. This
decrease was due to a 1% decline in annual coal consumption and a 1%
decrease in the average price per ton of coal consumed.
Purchased power expense increased $8.1 million (13%) in 1995 due to
increased demand ($2.5 million) and energy costs ($5.6 million). The
increase in energy costs reflects a 6% increase in kWh purchases as well
as higher prices. The increase in kWh purchases is primarily
attributable to the significant demand for electricity in the third
quarter of 1995 due to unusually warm weather.
Other operating expenses increased $8.7 million (8%) in 1995 due to
increased generating plant operations expenses (primarily attributable
to costs associated with environmental compliance) and administrative and
general expenses.
Maintenance expense decreased $3.5 million (5%) in 1995. Maintenance
expense for 1994 included additional costs for damage from two severe ice
storms in the first quarter of 1994.
Depreciation expense increased $9.8 million (15%). This increase was
related to the Ghent Unit 1 scrubber, which was placed into service late
in 1994, and two combustion turbine peaking units placed into service
late in 1994 and early in 1995.
Interest Charges
Interest charges rose $5.9 million (17%) in 1995 reflecting the issuance
of $54 million of long-term debt in the fourth quarter of 1994, $50
million of long-term debt in the second quarter of 1995 and an increase
-17-
in the average amount of short-term debt outstanding during the first
half of 1995.
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 was largely due to
increased operating expenses which 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.
Earnings for 1994 include a one-time recovery of about $1.9 million
associated with the resolution of a coal contract dispute. Refer to
Note 1 of the Notes to Financial Statements, "Operating Revenues and Fuel
Costs."
Sales and Revenues
Sales in 1994 increased 11% from sales in 1993. The increase was
primarily due to greater opportunity sales and to increased sales to
industrial customers. Opportunity sales rose 176% in 1994 due to
increased demand for power from neighboring utilities. 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. In March 1994, Toyota completed an $800 million assembly
plant expansion. Residential sales were flat as compared to 1993.
Excluding the effect of the refunds to customers, revenues in 1994
increased $46.1 million (8%) over 1993 as a result of increased kWh
sales.
Operating Expenses
Fuel expense, excluding the effect of the above referenced refunds to
customers, 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 increased $26.7 million (77%) in 1994 due to
higher demand costs ($13.8 million) and increased energy charges
($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 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.
-18-
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
KU continues to maintain a strong financial position. At the end of
1995, common stock equity represented 49.6% of total capitalization,
while long-term debt was 47.0% and preferred stock was 3.4%. KU's
financial strength is reflected in high quality credit ratings. KU s
senior debt securities have ratings of AA (Duff & Phelps), Aa2 (Moody's)
and AA- (Standard & Poor's).
As of December 31, 1995 1994 1993 1992 1991
Capitalization (in millions) $1,163 $1,101 $1,034 $1,018 $1,017
Long-Term Debt 47.0% 45.1% 42.7% 43.6% 40.1%
Preferred Stock 3.4% 3.6% 3.9% 3.9% 3.9%
Common Stock Equity 49.6% 51.3% 53.4% 52.5% 56.0%
Cash from operations accounted for 78% of cash requirements in 1995 as
compared to 55% in 1994 and 67% in 1993. For these purposes, cash
requirements exclude optional debt refinancings and redemptions and
optional preferred stock redemptions.
Financing
Taking advantage of lower interest rates, KU issued $36 million of
Series S First Mortgage Bonds at a rate of 5.99% in January 1996 and used
the proceeds to redeem the $35.5 million of Series K First Mortgage Bonds
which carried a rate of 7 3/8%.
In June 1995, KU issued $50 million of Series R First Mortgage Bonds
bearing interest at 7.55%. The proceeds were used primarily to refinance
short-term indebtedness incurred to finance ongoing construction
expenditures and general corporate requirements.
In 1994, $54 million of Variable Rate Collateralized Solid Waste Disposal
Facility Revenue Bonds were issued on behalf of KU. In 1993, $50 million
of 5 3/4% Collateralized Solid Waste Disposal Facility Revenue Bonds were
issued. 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.
In 1993, KU refinanced $120 million of first mortgage bonds at
significantly lower interest rates.
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.
To provide working capital for operations, KU began issuing commercial
paper in 1994. At the end of 1994, KU had $76.3 million outstanding
under its commercial paper program. KU's commercial paper balance was
lowered to $55.6 million by year-end 1995 through refinancing with long-
-19-
term debt.
KU's financial strength is enhanced by its low cost of capital. Shown
below are KU's embedded costs of long-term debt and preferred stock at
the end of 1995, 1994 and 1993.
Embedded Cost 1995 1994 1993
Long-Term Debt 7.15% 7.06% 7.23%
Preferred Stock 5.64% 5.64% 6.37%
Construction Requirements
Construction expenditures were $124.5 million in 1995. Of that amount,
about $23.1 million related to construction of combustion turbine
generating units (peaking units), $11.7 million related to compliance
with the 1990 Clean Air Act Amendments and $5.6 million to other
environmental compliance measures.
Projected construction expenditures for the 1996-2000 period are
$547.3 million. Included in this amount is $120.4 million for additional
peaking units. Also included in the 1996-2000 construction total is
$9.7 million for environmental compliance measures.
KU expects to provide about 92% of its 1996-2000 construction
requirements through internal sources of funds with the balance primarily
from long-term debt.
Construction Expenditures by Function - Actual 1995 and Estimated 1996-2000
Actual Estimated
(in millions of dollars) 1995 1996 1997 1998 1999 2000
Total Construction Expenditures $ 125 $ 108 $ 143 $ 115 $ 97 $ 84
Generation 42% 32% 48% 35% 33% 19%
Distribution 38% 43% 32% 42% 43% 53%
Transmission & Other 20% 25% 20% 23% 24% 28%
UTILITY ISSUES
Competition
The utility industry continues to move to a more competitive and less
regulated operating environment. Competition at the wholesale level was
set in motion with the National Energy Policy Act of 1992 (NEPA). Under
NEPA, the Federal Energy Regulatory Commission (FERC) was given authority
-20-
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. In March of 1995, the FERC issued a Notice of Proposed
Rulemaking (NOPR) which would require electric utilities to file
nondiscriminatory open access transmission tariffs that would apply to
all wholesale buyers and sellers of electricity as well as to the
utility's own wholesale sales and purchases. A natural outgrowth of
NEPA, the NOPR also proposes to allow, in certain circumstances, the
collection of charges for the recovery of stranded costs (fixed costs
which would likely be unrecoverable in a fully competitive market) when
customers change power suppliers. The FERC expects to issue final rules
in 1996.
For KU, the risks associated with stranded costs are small. A 1995
study by Moody's Investors Service estimated that stranded costs for the
U. S. investor-owned utility industry total some $135 billion. A
significant portion of these costs would become unrecoverable at
competitive market prices. KU was identified in the Moody's study as one
of the best-positioned companies with no stranded costs.
KU placed a Transmission Services (TS) Tariff into effect in 1994 and a
Power Services (PS) Tariff into effect in 1995. Both tariffs are
subject to refund pending final FERC approval. The TS Tariff covers
wholesale transactions involving the use of KU's transmission system,
while the PS Tariff allows KU to leverage its low-cost position by
selling wholesale power at market-based rates.
While NEPA prohibits the FERC from ordering utilities to provide
transmission access to retail customers, several states are considering
proposals that would allow retail wheeling. Regulators and legislators
have not pushed for retail wheeling in KU's service territory, largely
because rates in the area are already among the very lowest in the
country. There is also some concern that retail wheeling might put
upward pressure on rates for some customer classes.
KU believes that competition and change will continue to impact the
industry going forward. With utility rates that are among the lowest in
the nation, KU believes it is well-positioned for an increasingly
competitive environment.
KU has launched a series of innovative marketing programs that are
increasing KU's market share. In addition, KU has developed strategic
initiatives to increase opportunity sales and to expand its market
through economic development.
Environmental Matters
Clean Air Act
The Clean Air Act Amendments of 1990 require a two-phase reduction in
emissions of sulfur dioxide and nitrogen oxide. KU met its Phase I
requirements (which were effective January 1, 1995) primarily through the
addition of a flue gas desulfurization system (scrubber) on Unit 1 of
-21-
KU's Ghent Generating Station. The scrubber began commercial operation
late in 1994.
KU estimates capital costs for the scrubber and other equipment
modifications related to Clean Air Act compliance to be $145 million
through the year 1999. Substantially all of this amount had been spent
through the end of 1995.
KU's current strategy for Phase II requirements (which will be effective
January 1, 2000) is to use accumulated emission allowances to delay
additional capital expenditures. These allowances will accumulate from
saved emission allowances as a result of reduced emissions from the
Ghent Unit 1 scrubber and allowances received through the Environmental
Protection Agency's Phase I Extension Plan Program.
KU's future compliance plans are contingent upon many factors including
developments in the emission allowance market and the fuel market as well
as regulatory and legislative actions and advances in clean air
technology. 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 August 1994, KU implemented an environmental cost recovery mechanism
(surcharge). Authorized by a 1992 state statute and approved by the
Kentucky Public Service Commission (PSC), the surcharge is designed to
recover certain environmental compliance costs, including costs to
comply with the Federal Clean Air Act as amended, through a surcharge on
customers' bills.
The constitutionality of the surcharge was challenged in a state court
action brought against KU and the PSC by the Attorney General of Kentucky
and joined by representatives of consumer groups. In July 1995, the
state court upheld the constitutionality of the surcharge statute but
disallowed recovery of expenditures incurred before January 1, 1993.
All parties (including KU) have appealed to the Kentucky Court of
Appeals. Refer to Note 9 of the Notes to Financial Statements,
"Environmental Cost Recovery."
Other
In 1990, KU received a letter from the Environmental Protection Agency
(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. A remediation plan is before
the EPA awaiting approval. Even when the final plan is approved, KU does
not believe that any liability with respect to the site will have a
material impact on its financial position or results of operations.
-22-
Meeting Future Power Needs
KU's energy supply strategy is designed to provide an adequate and
reliable supply of electricity in an environmentally responsible and
cost-effective manner. KU projects an annual growth in sales and peak
demand of 2.8% and 3.0%, respectively, over the next 5 years. KU plans
to provide for the future power needs of its customers primarily through
purchased power and the addition of combustion turbine peaking units.
Three 110-megawatt gas/oil-fired peaking units have been installed over
the past two years. An additional 485 megawatts of peaking unit capacity
is planned through 2000 including a 110-megawatt unit scheduled for
commercial operation in 1996. There are no plans for additional coal-
fired baseload capacity before 2010.
Inflation
KU's rates are designed to recover operating and historical plant
investment 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.
-23-
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, 1995 and 1994, and the related statements
of income and retained earnings, and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements
and the schedule referred to below are the responsibility of KU's
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, 1995 and 1994, and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
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 29, 1996
-24-
Statements of
Income and
Retained
Earnings
Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1995 1994 1993
Operating Revenues (See Note 1) $ 686,430 $ 636,652 $ 606,588
Operating Expenses:
Fuel, principally coal, used in generation
(See Note 1) 189,845 170,654 178,910
Electric power purchased 69,579 61,442 34,711
Other operating expenses 121,426 112,712 104,930
Maintenance 62,592 66,134 59,451
Depreciation 75,080 65,259 60,800
Federal and state income taxes 44,670 44,683 48,178
Other taxes 14,694 14,582 14,347
Total Operating Expenses 577,886 535,466 501,327
Net Operating Income 108,544 101,186 105,261
Other Income and Deductions:
Interest and dividend income 2,838 4,295 2,813
Other income and deductions - net 5,467 6,098 5,926
Total Other Income and Deductions 8,305 10,393 8,739
Income Before Interest Charges 116,849 111,579 114,000
Interest Charges:
Interest on long-term debt 36,095 32,147 31,650
Other interest charges 3,912 1,920 1,064
Total Interest Charges 40,007 34,067 32,714
Net Income 76,842 77,512 81,286
Preferred Stock Dividend Requirements 2,256 2,384 2,558
Net Income Applicable to Common Stock $ 74,586 $ 75,128 $ 78,728
Retained Earnings Beginning of Year $ 257,656 $ 244,429 $ 226,210
Add Net Income 76,842 77,512 81,286
334,498 321,941 307,496
Deduct:
Dividends on preferred stock 2,256 2,384 2,558
Dividends on common stock 63,250 61,644 60,509
Preferred stock redemption expense - 257 -
65,506 64,285 63,067
Retained Earnings End of Year $ 268,992 $ 257,656 $ 244,429
The accompanying Notes to Financial Statements are an integral part of these
statements.
-25-
Statements of
Cash Flows
Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1995 1994 1993
Cash Flows from Operating Activities:
Net income $ 76,842 $ 77,512 $ 81,286
Items not requiring (providing) cash currently:
Depreciation 75,080 65,259 60,800
Deferred income taxes 15,502 (1,559) 5,725
Investment tax credit deferred (4,095) (4,110) (4,131)
Changes in current assets and liabilities:
Change in fuel inventory 6,214 (4,579) 7,694
Change in accounts receivable (7,759) (203) (9,331)
Change in accounts payable (11,517) 5,511 22,768
Change in liability to ratepayers (310) (29,958) 36,867
Change in escrow funds 312 30,841 (37,752)
Other - net (1,210) 3,250 2,643
Net Cash Provided by Operating Activities 149,059 141,964 166,569
Cash Flows from Investing Activities:
Construction expenditures - utility (124,515) (193,344) (177,069)
Nonutility property (272) (465) (4,956)
Other 153 836 380
Net Cash Used by Investing Activities (124,634) (192,973) (181,645)
Cash Flows from Financing Activities:
Short-term borrowings - net (20,700) 76,300 -
Issuance of long-term debt 49,288 53,305 171,581
Funds deposited with trustee - net 15,100 95 (18,268)
Retirement of long-term debt, including premiums (21) (21) (180,677)
Retirement of preferred stock, including premiums - (20,302) -
Issuance of preferred stock - - 20,000
Payment of dividends (65,506) (64,089) (63,027)
Net Cash Provided (Used) by Financing Activities (21,839) 45,288 (70,391)
Net Increase (Decrease) in Cash and Cash Equivalents 2,586 (5,721) (85,467)
Cash and Cash Equivalents Beginning of Year 3,111 8,832 94,299
Cash and Cash Equivalents End of Year $ 5,697 $ 3,111 $ 8,832
Supplemental Disclosures
Cash paid for:
Interest on short- and long-term debt $ 37,961 $ 31,864 $ 33,860
Federal and state income taxes $ 31,974 $ 45,270 42,483
The accompanying Notes to Financial Statements are an integral part of these
statements.
-26-
Balance
Sheets Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1995 1994
Assets
Utility Plant:
Plant in service, at cost $ 2,394,018 $ 2,238,926
Less: Accumulated depreciation 997,366 933,394
1,396,652 1,305,532
Construction work in progress 61,410 104,385
Total Utility Plant 1,458,062 1,409,917
Current Assets:
Cash and cash equivalents 5,697 3,111
Escrow funds - coal contract litigation 6,599 6,911
Construction funds held by trustee 3,743 18,553
Accounts receivable, net of allowance
for doubtful accounts 49,471 41,712
Accrued utility revenues 27,900 24,227
Fuel, principally coal, at average cost 29,438 35,652
Plant materials and operating supplies, at average cost 23,064 20,081
Other 8,121 10,616
Total Current Assets 154,033 160,863
Investments, Deferred Charges and Other Assets:
Unamortized loss on reacquired debt 11,304 12,324
Other 36,589 34,996
Total Investments, Deferred Charges and Other Assets 47,893 47,320
Total Assets $ 1,659,988 $ 1,618,100
Capitalization and Liabilities
Capitalization: (See Statements of Capitalization)
Common stock equity $ 576,537 $ 565,201
Preferred stock 40,000 40,000
Long-term debt 545,980 496,012
Total Capitalization 1,162,517 1,101,213
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings 55,600 76,300
Accounts payable 38,000 49,517
Accrued interest 7,556 7,328
Accrued taxes 5,201 9,422
Customers' deposits 6,876 6,423
Accrued payroll and vacations 8,706 8,207
Liability to ratepayers - coal contract litigation 6,599 6,909
Other 6,752 6,275
Total Current Liabilities 135,311 170,402
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 231,717 214,892
Accumulated deferred investment tax credits 34,180 38,275
Regulatory tax liability 57,726 60,788
Other 38,537 32,530
Total Deferred Credits and Other Liabilities 362,160 346,485
Total Capitalization and Liabilities $ 1,659,988 $ 1,618,100
The accompanying Notes to Financial Statements are an integral part of these
statements.
-27-
Statements of
Capitalization
Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1995 1994
Common Stock Equity:
Common stock, without par value,
outstanding 37,817,878 shares $ 308,140 $ 308,140
Capital stock expense and other (595) (595)
Retained earnings 268,992 257,656
Total Common Stock Equity 576,537 565,201
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
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
7.55% Series R, due June 1, 2025 50,000 -
8.55% Series P, due May 15, 2027 33,000 33,000
295,000 245,000
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 50,000
Variable Rate Pollution Control Series 10, due
November 1, 2024 50,800 35,700
Variable Rate County of Carroll, Kentucky, Collateralized
Solid Waste Disposal Facility Revenue Bonds, due
November 1, 2024 3,200 18,300
250,830 250,830
Total First Mortgage Bonds 545,830 495,830
Unamortized premium 86 96
8% secured note, due January 5, 1999 (net of current maturity) 64 86
Total Long-Term Debt 545,980 496,012
Total Capitalization $1,162,517 $1,101,213
The accompanying Notes to Financial Statements are an integral part of these
statements.
-28-
Notes to
Financial
Statements
Kentucky Utilities Company
1. Summary of Significant Accounting Policies
General
Kentucky Utilities Company (KU) is the principal subsidiary of KU Energy
Corporation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Certain amounts from prior periods have been
reclassified to conform with the current year presentation.
KU is a public utility engaged in producing and selling electric energy.
KU provides electric service to about 425,500 customers in over 600
communities and adjacent suburban and rural areas in 77 counties in
central, southeastern and western Kentucky and to about 28,600 customers
in 5 counties in southwestern Virginia.
Regulation
KU is 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,
KU maintains its accounts in accordance with the Uniform System of
Accounts as defined by these agencies. KU's 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, KU's 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 3.5% in 1995, 3.4% in 1994, and 3.3% in 1993.
Cash and Cash Equivalents
For purposes of reporting cash flows, KU considers highly liquid
investments with a maturity of three months or less from the date of
purchase to be cash equivalents.
-29-
Notes to
Financial
Statements
Kentucky Utilities Company
KU utilizes a cash management mechanism that funds certain bank accounts
for checks as they are presented to those banks. KU classified checks
written but not presented to those banks, which amounted to $10.5 million
and $11.5 million at December 31, 1995 and 1994, respectively, in
accounts payable.
Financial Instruments
KU's temporary cash investments are classified as held-to-maturity and
are reported under the caption "Cash and cash equivalents" on the Balance
Sheet.
Unamortized Loss on Reacquired Debt
KU 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. KU
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. Fuel adjustment clauses adjust operating revenues for changes
in the level of fuel costs charged to expense. An environmental
surcharge for Kentucky retail customers, 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 Federal Clean Air Act as amended. See Note 9 of the Notes
to Financial Statements, "Environmental Cost Recovery," for an update of
environmental surcharge legal proceedings.
Pursuant to regulatory orders, KU has been refunding fuel cost savings
related to the resolution of a coal contract dispute. 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 FERC in lump sum payments in September 1993. Refunds
to Kentucky retail customers commenced in July 1994. A portion remains
to be refunded to Kentucky customers who have not filed claims. Any
amounts not claimed within seven years of the initial refunds will
escheat to the state.
Operating revenues and fuel expense for 1994 were reduced by
$19.4 million and $23.1 million, respectively, resulting from the above-
mentioned refunds. Operating revenues and fuel expense were reduced by
$3.3 million and $4.1 million, respectively, in 1993. The refunding had
no impact on operating revenues or fuel expense for 1995. The difference
between the reduction in operating revenues and the reduction in fuel
-30-
Notes to
Financial
Statements
Kentucky Utilities Company
expense is attributed to incurred litigation costs, fuel cost savings
related to opportunity sales and costs incurred to administer the refund
plan. These amounts were allowed to be retained by KU pursuant to
regulatory orders.
Income Taxes
KU 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 KU's 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
KU is included in the consolidated federal tax return of its parent
company, KU Energy. Income taxes are allocated to the individual
companies, including KU, based on their respective taxable income or
loss.
The accumulated deferred income taxes as set forth in the Balance Sheet
arise from the following temporary differences:
As of December 31, (in thousands of dollars) 1995 1994
Deferred Tax Assets:
Unamortized investment tax credit and other property
related differences $ 31,667 $ 31,805
Other 15,990 17,363
Less: Amounts included in current assets 4,985 6,726
42,672 42,442
Deferred Tax Liabilities:
Accelerated depreciation and other property
related differences 268,203 251,282
Other 6,186 6,052
274,389 257,334
Net accumulated deferred income tax liability $231,717 $214,892
-31-
Notes to
Financial
Statements
Kentucky Utilities Company
The components of income tax expense are as follows:
Year Ended December 31, (in thousands of dollars) 1995 1994 1993
Income taxes charged to Operating Income:
Current - federal $ 23,597 $ 37,058 $ 35,893
- state 5,134 8,812 9,484
28,731 45,870 45,377
Deferred - federal 12,165 (1,114) 2,837
- state 3,845 13 71
16,010 (1,101) 2,908
Deferred investment tax credit (71) (86) (107)
44,670 44,683 48,178
Income taxes charged to Other Income and Deductions:
Current - federal 854 1,537 (2,056)
- state 190 344 (560)
1,044 1,881 (2,616)
Deferred - federal (406) (365) 2,261
- state (102) (93) 556
(508) (458) 2,817
Amortization of deferred investment tax credit (4,024) (4,024) (4,024)
(3,488) (2,601) (3,823)
Total income tax expense $ 41,182 $ 42,082 $ 44,355
KU's effective income tax rate, determined by dividing income taxes by
the sum of such taxes and net income, was 34.9% in 1995, 35.2% in 1994,
and 35.3% in 1993. 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) 1995 1994 1993
Federal income tax computed at 35% $ 41,308 $ 41,858 $ 43,974
Add (Deduct):
State income taxes, net of federal
income tax benefit 5,894 5,899 6,208
Amortization of deferred investment tax credit (4,095) (4,110) (4,131)
Other, net (1,925) (1,565) (1,696)
Total income tax expense $ 41,182 $ 42,082 $ 44,355
3. Retirement Benefits
Pensions
KU 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 retirement. KU's
funding policy is to make such contributions as are necessary to finance
the benefits provided under the plan. KU's contributions meet the
-32-
Notes to
Financial
Statements
Kentucky Utilities Company
funding standards set forth in the Employee Retirement Income Security
Act of 1974. The plan assets consist primarily of common stocks,
corporate bonds and U.S. Government Securities.
KU 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 KU.
The reconciliation of the funded status of the retirement plans and the
pension liability recorded by KU is as follows:
As of December 31, (in thousands of dollars) 1995 1994
Fair value of plan assets $ 179,203 $ 154,314
Projected benefit obligation (183,795) (169,599)
Plan assets less than projected benefit obligation (4,592) (15,285)
Unrecognized net (gain)/loss from past
experience different than that assumed (5,907) 5,246
Unrecognized prior service cost 4,344 4,705
Unrecognized net asset (1,649) (1,799)
Regulatory effect recorded (1,634) (3,229)
Pension liability $ (9,438) $ (10,362)
Accumulated benefit obligation (including vested benefits
of $139,250 and $124,094, respectively) $ 141,531 $ 126,146
Components of Net Pension Cost:
Year Ended December 31, (in thousands of dollars) 1995 1994 1993
Service cost (benefits earned during the period) $ 6,060 $ 6,017 $ 5,036
Interest cost on projected benefit obligation 13,560 12,366 12,311
Actual return on plan assets (27,064) (3,723) (13,229)
Net amortization and deferral 14,608 (8,765) 1,785
Regulatory effect recorded (1,595) (1,916) 56
Net pension cost $ 5,569 $ 3,979 $ 5,959
Assumptions Used in Determining Actuarial Valuations:
1995 1994 1993
Weighted average discount rate used to
determine the projected benefit obligation 7 3/4 % 8 1/4 % 7 1/2%
Rate of increase for compensation levels (1) 4 3/4 % 5 1/2 % 4 3/4%
Weighted average expected long-term rate
of return on assets 8 1/4 % 8 1/4 % 8 1/4%
(1)4 3/4%, 6% and 5 1/4%, respectively, used for the Supplemental Security Plan valuation.
-33-
Notes to
Financial
Statements
Kentucky Utilities Company
Other Postretirement Benefits
KU provides certain health care and life insurance benefits to eligible
retired employees and their dependents. KU 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 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. KU's 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, KU began funding, in addition to current requirements for
benefit payments, the maximum tax-favored amount allowed through certain
tax deductible funding vehicles. KU 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 KU is as follows:
As of December 31, (in thousands of dollars) 1995 1994
Accumulated postretirement benefit obligation:
Retirees $ (28,575) $ (31,992)
Fully eligible active plan participants (8,250) (8,287)
Other active plan participants (26,831) (25,578)
(63,656) (65,857)
Plan assets at fair value 10,427 5,341
Accumulated postretirement benefit obligation
in excess of plan assets (53,229) (60,516)
Unrecognized net (gain)/loss from past
experience different from that assumed (18,773) (11,353)
Unrecognized transition obligation 56,801 60,142
Accrued postretirement benefit liability $ (15,201) $ (11,727)
Components of the net periodic postretirement benefit cost are as follows:
Year Ended December 31, (in thousands of dollars) 1995 1994 1993
Service cost (benefits attributed to service
during the period) $ 1,918 $ 2,105 $ 2,048
Interest cost on accumulated postretirement
benefit obligation 4,926 4,926 5,730
Actual return on plan assets (1,722) (80) -
Net amortization and deferral 792 (118) -
Amortization of transition obligation 3,341 3,341 3,341
Regulatory effect recorded - 689 (689)
Net periodic postretirement benefit cost $ 9,255 $ 10,863 $ 10,430
-34-
Notes to
Financial
Statements
Kentucky Utilities Company
Assumptions Used in Determining Actuarial Valuations: 1995 1994 1993
Weighted average discount rate used to
determine the projected benefit obligation 7 3/4% 8 1/4% 7 1/2%
Rate of increase for compensation levels 4 3/4% 5 1/2% 4 3/4%
Weighted average expected long-term rate of
return on assets 8 % 8 1/4% -
For measurement purposes, a 7.5% annual rate of increase in the per
capita cost of covered health care benefits is assumed for 1996. The
health care cost trend rate is assumed to decrease gradually to 4.75%
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 one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1995, by
$10.6 million (17%) and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for the year
by $1.4 million (20%).
4. Commitments and Contingencies
The effects of certain commitments made by KU are estimated below:
(in thousands of dollars) 1996 1997 1998 1999 2000 1996-2000
Estimated Construction
Expenditures $108,000 $143,500 $114,700 $97,200 $ 83,900 $547,300
Estimated Contract
Obligations:
Fuel 152,500 114,800 77,000 39,800 4,600 388,700
Purchased power 27,700 28,900 27,400 26,300 25,600 135,900
Operating leases 2,800 2,800 2,800 2,700 2,700 13,800
Sinking Fund Requirements:
First mortgage bonds $ 376 $ 376 $ 376 $ 376 $ 355 $ 1,859
Construction Program
KU 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 - Construction Requirements for
a discussion of future construction expenditures including those relating
to construction of peaking units and compliance with the Federal Clean
Air Act as amended.
Coal Supply
Obligations under KU's coal purchase contracts are stated at prices
effective January 1, 1996, and are subject to changes as defined by the
terms of the contracts.
-35-
Notes to
Financial
Statements
Kentucky Utilities Company
Purchased Power Agreements
KU has purchase power arrangements with Owensboro Municipal Utilities
(OMU), Electric Energy, Inc. (EEI), and Virginia Electric and Power
Company (Virginia Power). Under the OMU agreement, which expires on
January 1, 2020, KU 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 KU during 1996-2000, which is expected to be
approximately 8% of KU's 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
KU's proportionate share of debt service requirements on $198.8 million
of OMU bonds outstanding at December 31, 1995. The debt service is
allocated to KU based on its annual allocated share of capacity, which
averaged approximately 49% in 1995.
KU has a 20% equity ownership in EEI, which is accounted for on the
equity method of accounting. KU's 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.
KU has contracted to purchase 110-MW of capacity from Virginia Power for
the periods of June 1997 through September 1997 and January 1998 through
February 1998.
Sinking Fund Requirements
Annual sinking fund requirements for KU's first mortgage bonds may be met
with cash or expenditures for bondable property as provided in the
Mortgage Indenture. KU intends to meet the 1996 sinking fund
requirements with expenditures for bondable property.
Lines of Credit
KU has aggregate bank lines of credit of $80 million, all of which
remained unused at December 31, 1995. A portion of these credit lines
($20 million) expires in September 1996, and the balance ($60 million)
expires in December 1997. In support of these lines of credit, KU
compensates the banks by paying a commitment fee.
5. Common Stock
KU 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, 1995, there
were no restricted retained earnings.
6. Preferred Stock
Each series of preferred stock is redeemable at the option of KU upon 30
days' written notice as follows:
-36-
Notes to
Financial
Statements
Kentucky Utilities Company
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, 1995, there were 5.3 million shares of KU preferred
stock, having a maximum aggregate stated value of $200 million,
authorized for issuance.
7. Short-Term and Long-Term Debt
KU's short-term financing requirements are satisfied through the sale of
commercial paper. The weighted average interest rate on the year-end
balance was 5.83% for 1995 and 6.07% for 1994.
In 1994, KU 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 and 1995, KU drew
down $35.7 million and $15.1 million, respectively, relating to these
bonds. Kentucky Utilities Pollution Control Series 10 Bonds are issued
under KU's Mortgage Indenture.
Under the provisions for the variable rate revenue bonds, KU can choose
between various interest rate options. Currently, the daily interest
rate option is being utilized. The average annual interest rate on the
bonds during 1995 was 3.95% and was 4.10% for 1994. 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, KU has available lines of credit
which may be used to repurchase the bonds.
In June 1995, KU issued $50 million of Series R First Mortgage Bonds.
The proceeds were used primarily to refinance short-term indebtedness
incurred to finance ongoing construction expenditures and general
corporate requirements.
Substantially all of KU's utility plant is pledged as security for the
First Mortgage Bonds.
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:
-37-
Notes to
Financial
Statements
Kentucky Utilities Company
Cash and cash equivalents, escrow funds, construction funds, short-term
borrowings, commercial paper 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 KU's
first mortgage bonds and on current rates available to KU for debt of the
same remaining maturities for KU's pollution control bonds and promissory
note.
KU 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 KU to terminate the swap at the date of
measurement. This agreement expires in early 1996. KU has no downside
interest rate risk associated with this agreement.
The estimated fair values of KU's financial instruments at December 31
are as follows:
1995 1994
Carrying Estimated Carrying Estimated
(in thousands of dollars) Amount Fair Value Amount Fair Value
Interest rate swap $ - $ 600 $ - $ 1,550
Long-term debt $ 546,001 $ 594,395 $ 496,033 $ 475,976
If the difference between fair value and carrying value of KU's long-term
debt were 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 KU's financial position
or results of operations.
-38-
Notes to
Financial
Statements
Kentucky Utilities Company
9. Environmental Cost Recovery
Since August 1994, KU has been collecting an environmental surcharge from
its Kentucky retail customers under a Kentucky statute which authorizes
electric utilities (including KU) to implement, beginning January 1,
1993, an environmental surcharge. The surcharge is designed to recover
certain operating and capital costs of compliance with federal, state or
local environmental requirements associated with the production of energy
from coal, including the Federal Clean Air Act as amended. KU's
environmental surcharge was approved by the PSC in July 1994 and was
implemented in August 1994.
The constitutionality of the surcharge was challenged in the Franklin
County (Kentucky) Circuit Court in an action brought against KU and the
PSC by the Attorney General of Kentucky and joined by representatives of
consumer groups. In July 1995, the Circuit Court entered a judgment
upholding the constitutionality of the statute, but vacating that part of
the PSC's July 1994 order which the judgment describes as allowing KU to
recover, under the surcharge, environmental expenditures incurred before
January 1, 1993, and ordering the case remanded to the PSC for
determination in accordance with the Circuit Court judgment.
The Attorney General and other consumer representatives appealed to the
Kentucky Court of Appeals that part of the Circuit Court judgment
upholding the constitutionality of the surcharge statute. The PSC and KU
appealed that part of the judgment denying recovery of environmental
expenditures incurred before January 1, 1993. On August 22, 1995, the
PSC ordered all surcharge revenues collected by KU from that date subject
to refund pending final determination of all appeals. The total
collections under the surcharge from August 22, 1995 through December 31,
1995 were approximately $7 million.
KU believes the constitutionality of the surcharge statute will be
upheld, but it cannot predict the outcome of that part of the Circuit
Court judgment disallowing recovery of environmental expenditures
incurred before January 1, 1993. If the Circuit Court judgment is
ultimately upheld as entered, KU estimates that the amount it would be
required to refund (which is based solely on costs associated with
environmental expenditures incurred before January 1, 1993) for surcharge
collections through December 31, 1995, from the inception of the
surcharge would be approximately $6 million, and from August 22, 1995
would be approximately $2 million. At this time, KU has not recorded any
reserve for refund.
-39-
Supplementary
Quarterly
Financial
Information
(Unaudited)
Kentucky Utilities Company
Quarterly financial results for 1995 and 1994 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 in 1994 were
insignificantly impacted by the refunds. The refunding had no impact on
operating revenues for 1995. Refer to Note 1 of the Notes to Financial
Statements for additional information.
Quarter 4th 3rd 2nd 1st
(in thousands of dollars)
1995
Operating Revenues $ 170,152 $ 194,373 $ 154,757 $ 167,148
Net Operating Income 30,626 33,073 18,283 26,562
Net Income 22,438 24,915 10,561 18,928
Net Income Applicable
to Common Stock 21,874 24,351 9,997 18,364
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
These quarterly amounts reflect, in KU's opinion, all adjustments
(including only normal recurring adjustments) necessary for a fair
presentation.
-40-
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 (Proxy Statement) filed
with the Securities and Exchange Commission in connection with its 1996
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 KU 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, 1995,
Statements of Cash Flows for the three years ended
December 31, 1995,
Balance Sheets as of December 31, 1995 and 1994
Statements of Capitalization as of December 31, 1995 and
1994, 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 KU, 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 KU 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 First
Trust of Illinois National Association (successor to
Bank of America Illinois, formerly Continental Bank,
National Association and formerly Continental
Illinois National Bank and Trust Company of Chicago)
and a successor individual co-trustee, as Trustees
(the 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 KU 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 KU for the
year ended December 31, 1984), June 1, 1985
(Exhibit 4 to Form 10-Q Quarterly Report of KU for
the quarter ended June 30, 1985), May 1, 1990
(Exhibit 4 to Form 10-Q Quarterly Report of KU for
the quarter ended June 30, 1990), May 1, 1991
(Exhibit 4 to Form 10-Q Quarterly Report of KU for
the quarter ended June 30, 1991), May 15, 1992
(Exhibit 4.02 to Form 8-K of KU dated May 14, 1992),
August 1, 1992 (Exhibit 4 to form 10-Q Quarterly
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Number Description Page
4.A Report of KU for the quarter ended September 30,
(cont.) 1992), June 15, 1993 (Exhibit 4.02 to Form 8-K of KU
dated June 15, 1993) and December 1, 1993
(Exhibit 4.01 to Form 8-K of KU dated December 10,
1993). Incorporated by reference. -
4.B Supplemental Indenture dated March 1, 1992 between
Kentucky Utilities Company and the Trustees,
providing for the conveyance of properties formerly
held by Old Dominion Power Company (Exhibit 4B to
Form 10-K Annual Report of KU for the year ended
December 31, 1992). Incorporated by reference. -
4.C Supplemental Indenture dated November 1, 1994 between
Kentucky Utilities Company and the Trustees (Exhibit
4C to Form 10-K Annual Report of KU for the year
ended December 31, 1994). Incorporated by reference. -
4.D Supplemental Indenture dated June 1, 1995 between
Kentucky Utilities Company and the Trustees
(Exhibit 4 to Form 10-Q Quarterly Report of KU for
the quarter ended June 30, 1995). Incorporated by
reference. -
4.E Supplemental Indenture dated January 15, 1996 between
Kentucky Utilities Company and the Trustees. 49-72
10.A KU's Amended and Restated Performance Share Plan
(Exhibit 10A to Form 10-Q Quarterly Report of KU for
the quarter ended June 30, 1993). Incorporated by
reference. -
10.B KU's Annual Performance Incentive Plan (Exhibit 10B
to Form 10-K Annual Report of KU for the year ended
December 31, 1990). Incorporated by reference. -
10.C Amendment No. 1 to KU's Annual Performance Incentive
Plan (Exhibit 10D to Form 10-K Annual Report of KU
for the year ended December 31, 1991). Incorporated
by reference. -
10.D Amendment No. 2 to KU's Annual Performance Incentive
Plan (Exhibit 10H to Form 10-K Annual Report of KU
for the year ended December 31, 1993). Incorporated
by reference. -
10.E Amendment No. 3 to KU's Annual Performance Incentive
Plan (Exhibit 10I to Form 10-K Annual Report of KU
for the year ended December 31, 1993). Incorporated
by reference. -
10.F KU's Executive Optional Deferred Compensation Plan
(Exhibit 10C to Form 10-K Annual Report of KU for the
year ended December 31, 1990). Incorporated by
reference. -
10.G Amendment No. 1 to KU's Executive Optional Deferred
Compensation Plan (Exhibit 10F to Form 10-K Annual
Report of KU for the year ended December 31, 1991).
Incorporated by reference. -
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Number Description Page
10.H Amendment No. 2 to KU's Executive Optional Deferred
Compensation Plan (Exhibit 10J to Form 10-K Annual
Report of KU for the year ended December 31, 1993).
Incorporated by reference. -
10.I KU's Supplemental Security Plan (Exhibit 10I to
Form 10-K Annual Report of KU for the year ended
December 31, 1991). Incorporated by reference. -
10.J Amendment No. 1 to KU's Supplemental Security Plan.
(Exhibit 10J to Form 10-K Annual Report of KU for the
year ended December 31, 1994). Incorporated by
reference. -
10.K Amendment No. 2 to KU's Supplemental Security Plan.
(Exhibit 10K to Form 10-K Annual Report of KU for the
year ended December 31, 1994). Incorporated by
reference. -
10.L KU's Director Retirement Retainer Program, and
Amendment No. 1 (Exhibit 10G to Form 10-K Annual
Report of KU for the year ended December 31, 1991).
Incorporated by reference. -
10.M KU's Amended and Restated Director Deferred
Compensation Plan 73-90
12 Computation of Ratio of Earnings to Fixed Charges 91
21 List of Subsidiaries 92
23 Consent of Independent Public Accountants 93
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 94-95
99.B Director and Executive Officer Information 96-106
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 KU 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 KU and the County
of Mercer, Kentucky, in connection with $12,900,000 County of
Mercer, Kentucky, Collateralized Solid Waste Disposal Facility
Revenue Bonds (KU Project) 1990 Series A, due May 1, 2010 and
May 1, 2020.
2. Loan Agreement dated as of May 1, 1991 between KU and the County
of Carroll, Kentucky, in connection with $96,000,000 County of
Carroll, Kentucky, Collateralized Pollution Control Revenue
Bonds (KU Project) 1992 Series A, due September 15, 2016.
3. Loan Agreement dated as of August 1, 1992 between KU and the
County of Carroll, Kentucky, in connection with $2,400,000
County of Carroll, Kentucky, Collateralized Pollution Control
Revenue Bonds (KU Project) 1992 Series C, due February 1, 2018.
4. Loan Agreement dated as of August 1, 1992 between KU and the
County of Muhlenberg, Kentucky, in connection with $7,200,000
County of Muhlenberg, Kentucky, Collateralized Pollution Control
Revenue Bonds (KU Project) 1992 Series A, due February 1, 2018.
5. Loan Agreement dated as of August 1, 1992 between KU and the
County of Mercer, Kentucky, in connection with $7,400,000 County
of Mercer, Kentucky, Collateralized Pollution Control Revenue
Bonds (KU Project) 1992 Series A, due February 1, 2018.
6. Loan Agreement dated as of August 1, 1992 between KU and the
County of Carroll, Kentucky, in connection with $20,930,000
County of Carroll, Kentucky, Collateralized Pollution Control
Revenue Bonds (KU Project) 1992 Series B, due February 1, 2018.
7. Loan Agreement dated as of December 1, 1993, between KU and the
County of Carroll, Kentucky, in connection with $50,000,000
County of Carroll, Kentucky, Collateralized Solid Waste Disposal
Facilities Revenue Bonds (KU Project) 1993 Series A due
December 1, 2023.
8. Loan Agreement dated as of November 1, 1994, between KU and the
County of Carroll, Kentucky, in connection with $54,000,000
County of Carroll, Kentucky, Collateralized Solid Waste
Disposal Facilities Revenue Bonds (KU Project) 1994 Series A due
November 1, 2024.
(B) No reports on Form 8-K were filed by KU during the last quarter of
1995.
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SCHEDULE II
KENTUCKY UTILITIES COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1995 1994 1993
(in thousands)
Accumulated Provision for Uncollectible Accounts Receivable
Balance at beginning of year $ 457 $ 923 $ 1,033
Balance at end of year $ 455 $ 457 $ 923
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 8, 1996.
KENTUCKY UTILITIES COMPANY
/s/ Michael R. Whitley
Michael R. Whitley
Chairman and President
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/ Michael R. Whitley
Michael R. Whitley Chairman and President (Principal Executive
Officer) 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/ Harry M. Hoe
Harry M. Hoe Director
/s/ Milton W. Hudson
Milton W. Hudson Director
/s/ John T. Newton
John T. Newton 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
/s/ Lee T. Todd, Jr.
Lee T. Todd, Jr. Director
March 8, 1996
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