EXHIBIT 13
Management's Discussion and Analysis of Financial Condition and Results
of Operation
KU Energy Corporation (KU Energy or the Company), a holding company, has
two wholly owned subsidiaries, Kentucky Utilities Company (Kentucky
Utilities), an electric utility, and KU Capital Corporation (KU Capital),
a nonutility subsidiary. Kentucky Utilities is KU Energy's principal
subsidiary.
RESULTS OF OPERATIONS
Earnings
Earnings per average common share were $2.11 in 1993 compared to $1.96 in
1992 and $2.13 in 1991. The increase in 1993 earnings was primarily due
to weather-related growth in sales and lower interest charges
attributable to debt refinancings and redemptions. Earnings in 1993 were
negatively impacted by an increase in other operating expenses and a
decline in interest and dividend income. The decline in 1992 earnings
was due to unusually mild weather, increases in operating and maintenance
costs, and an increase in interest charges attributed to a $35 million
increase in long-term debt.
Sales & Revenues
Increase (Decrease)
From Prior Years
1993 1992
kWh Revenues kWh Revenues
(%) (000's) (%) (000's)
Residential 10 $ 15,942 (2) $ (8,068)
Commercial 4 4,752 (1) (4,134)
Industrial 10 9,049 8 4,213
Mine Power & Public
Authorities 2 853 1 (1,159)
Total Retail Sales 7 30,596 1 (9,148)
Other Electric Utilities 1 3,484 2 (2,563)
Provision for Refund -
Litigation Settlement - (3,309) - -
Miscellaneous Revenues
and Other - (423) - 311
Total 6 $ 30,348 1 $ (11,400)
Sales increased 6% to 15.8 billion kilowatt-hours (kWh) in 1993. The
increase resulted primarily from increases in sales to residential and
industrial customers. The rise in residential sales reflects cooler
weather in the first and fourth quarters of 1993 and warmer weather
during the second and third quarters of 1993 as compared to the
corresponding periods of 1992. Due to the exceptionally warm weather in
the third quarter of 1993, Kentucky Utilities set an all-time peak demand
for electricity on July 28, 1993, of 3,176 megawatts. The increase in
industrial sales reflects the general strength of the service area
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economy as well as an increase in the number of industrial customers. As
a result of the increase in sales, revenues rose 5% in 1993 to
$606.6 million. Revenues in 1993 were reduced approximately $3.3 million
as a result of refunds to customers of amounts recovered from a
litigation settlement with a former coal supplier. The $3.3 million,
which was charged against revenue, represents $4.1 million of fuel
savings less $.8 million for incurred litigation costs. See Note 2 of
the Notes to the Consolidated Financial Statements.
Despite declines in residential and commercial sales in 1992, total sales
increased due to greater sales to industrial customers. The decline in
residential and commercial sales was the result of cooler than normal
weather in the second and third quarters of 1992, compared to warmer than
normal weather in the corresponding periods of 1991. The decline in 1992
revenues was due primarily to lower average fuel costs passed on to
customers.
Kilowatt-Hour Sales
Year Ended December 31, 1993 1992 1991 1990 1989
kWh Sales (in millions) 15,796 14,859 14,731 13,587 13,135
1993 Kilowatt-Hour Sales by Classification
Year Ended December 31, 1993
Residential 30%
Commercial 20%
Industrial 22%
Mine Power 6%
Public Authorities 8%
Other Electric Utilities 14%
Total 100%
Fuel and Purchased Power Expense
Fuel expense in 1993 totaled $178.9 million, a 6% increase over 1992.
The increase was largely attributable to greater coal consumption. Fuel
expense for 1993 reflects a $4.1 million reduction associated with the
refunding to customers of fuel cost savings resulting from the litigation
settlement with a former coal supplier. See Note 2 of the Notes to
Consolidated Financial Statements. Purchased power expense increased
$2.0 million (6%) in 1993. The increase reflects greater demand charges
associated with a new short-term capacity contract with a neighboring
utility, partially offset by a 5% decline in power purchases. The
decline in power purchases was due to a reduction in the availability of
Owensboro Municipal Utilities' (OMU) generating units during scheduled
maintenance of those units in the second quarter of 1993. A contract
between Kentucky Utilities and OMU allows Kentucky Utilities to purchase,
on an economic basis, surplus power from a 400-megawatt generating
station owned by OMU.
Fuel expense in 1992 declined $14.7 million (8%) to $168.5 million. The
reduction was due to a lower average price per ton of coal consumed (6%)
and to a decline in coal consumption (2%). The decline in the average
price per ton was due to lower cost coal and to the completion in May
1992 of the amortization of buyout costs associated with a terminated
coal contract. Coal consumption in 1992 was reduced as a result of
increases in power purchases. Purchased power expense rose $6.0 million
(22%) in 1992 due to increased power purchases (39%), primarily under the
OMU contract. The increase in purchased power costs resulting from
greater kWh purchases in 1992 was partially offset by a reduction in the
average price per kWh purchased.
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Other Operating Expenses
Other operating expenses for 1993 increased $11.0 million (12%),
$6.3 million of which resulted from the adoption of a new accounting
standard. See Note 4 (Other Postretirement Benefits) of the Notes to
Consolidated Financial Statements.
Other Income and Deductions
Other income and deductions in 1993 declined $1.5 million. A reduction
in interest and dividend income resulted from lower levels of cash
investments. This reduction was partially offset by an increase in
income from nonutility investments.
Other income and deductions in 1992 were comparable to 1991. Additional
interest and dividend income, associated with an increase in the average
amounts available for investment and bond proceeds deposited pending
retirement of existing debt issues, were offset by lower available short-
term investment returns.
Interest and Other Charges
Interest and other charges decreased $8.2 million (19%) in 1993. The
decrease was the result of the redemption of two debt issues near the
beginning of the second quarter of 1993 and the refinancing of several
debt issues during the second half of 1992 and early in the third quarter
of 1993 at significantly lower interest rates. See Note 5 of the Notes
to Consolidated Financial Statements for information pertaining to the
Company's refinancing and redemption activities in 1993.
Interest and other charges in 1992 increased $2.3 million (6%). The
interest expense associated with the issuance of additional debt was
partially offset by the refinancing of higher cost existing debt.
Reduced preferred stock dividend requirements also partially offset the
increase in interest and other charges. The effects of the increase in
interest expense were partially offset by the above mentioned interest
income on bond proceeds deposited.
LIQUIDITY & RESOURCES
Capital Structure
KU Energy continues to maintain a strong capital structure. At the end
of 1993, common stock equity represented 55.5% of total capitalization
while long-term debt stood at 40.8%, and preferred stock was 3.7%.
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Total Capitalization
As of December 31, 1993 1992 1991 1990 1989
Capitalization (in millions) $1,085 $1,067 $1,016 $ 995 $ 995
Long-Term Debt 40.8% 41.6% 40.2% 41.1% 39.9%
Preferred Stock 3.7% 3.7% 3.9% 4.0% 7.1%
Common Stock Equity 55.5% 54.7% 55.9% 54.9% 53.0%
Cash Flow
In 1993, cash provided by operating activities accounted for 69% of total
cash requirements as compared to 87% in 1992 and 105% for 1991. Cash
requirements included in the above percentages exclude optional debt
refinancings and redemptions. At the end of 1993, cash and cash
equivalents totaled $32.5 million. Cash and cash equivalents were
$122.8 million at the end of 1992 and $125.6 million at year-end 1991.
Cash and cash equivalents were utilized to redeem $55 million of first
mortgage bonds and to help meet expenditures for compliance with the 1990
Clean Air Act Amendments, peaking unit construction and leveraged lease
investments, thus lowering cash levels at the end of 1993.
Financing
During 1993, Kentucky Utilities continued to take advantage of
opportunities to reduce its embedded cost of long-term debt through
refinancings. A total of $120 million of first mortgage bonds was
refinanced in 1993 at significantly lower interest rates. Kentucky
Utilities has refinanced over $300 million of long-term debt over the
past year and a half. The reduction of interest expense on an annual
basis from these refinancings will total about $5.4 million. In 1992,
Kentucky Utilities refinanced $53 million of first mortgage bonds
(including a $3 million redemption premium) and $133.9 million of
pollution control bonds at significantly lower interest rates. As a
result of the foregoing activities, Kentucky Utilities' embedded cost of
long-term debt declined to 7.23% in 1993 as compared to 8.00% in 1992 and
8.94% in 1991.
In December 1993, $50 million of 5 3/4% Collateralized Solid Waste
Disposal Facility Revenue Bonds were issued to finance a portion of the
costs of environmental compliance facilities currently under
construction.
Kentucky Utilities also issued $20 million of 6.53% preferred stock in
December 1993. Proceeds from the sale of this issue were used to redeem
the utility's 7.84% Preferred Stock on February 1, 1994. See Note 5 of
the Notes to Consolidated Financial Statements for additional information
on 1993 financing activities.
Embedded Cost of Long-Term Debt
As of December 31, 1993 1992 1991 1990 1989
Embedded Cost of Long-Term Debt 7.23% 8.00% 8.94% 8.93% 8.97%
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Nonutility Investments
KU Energy has adopted a core energy strategy for its nonutility
investments. Under this strategy, targeted investments that build on the
Company's knowledge and expertise will be made in energy-related areas.
In particular, the Company is focusing its attention on independent power
projects (including qualifying facilities and exempt wholesale
generators) and equipment leased to other utilities.
In 1993, KU Capital purchased, for about $10 million, equity interests in
leveraged leases of six combustion turbine generating units, which are
leased to utility companies. Other nonutility investments include a
hedged utility preferred stock portfolio totaling $16.0 million and
short-term money market investments which totaled $23.2 million at the
end of 1993.
Construction
Construction expenditures totaled $177.1 million in 1993 as compared to
$86.1 million in 1992 and $65.6 million in 1991. The 1993 increase was
largely attributable to $48.7 million expended for compliance with the
1990 Clean Air Act Amendments and $55.5 million expended for construction
of peaking units.
Projected construction requirements for the 1994-1998 period are
$631.6 million. Included in this amount are $152.3 million for
environmental compliance measures of which $128.6 million is for
compliance with the 1990 Clean Air Act Amendments. Also included in the
1994-1998 construction total is $137.8 million for peaking units.
Kentucky Utilities expects to provide about 79% of its 1994-1998
construction requirements through internal sources of funds with the
balance primarily from long-term debt.
Construction Expenditures by Function - Actual
(in millions of dollars) 1989 1990 1991 1992 1993
Total Construction Expenditures $ 52.2 $ 59.2 $ 65.6 $ 86.1 $177.1
Generation 12.0% 25.7% 33.7% 42.1% 69.7%
Distribution 59.1% 53.6% 47.6% 36.3% 21.5%
Transmission and Other 28.9% 20.7% 18.7% 21.6% 8.8%
Construction Expenditures by Function - Projected
(in millions of dollars) 1994 1995 1996 1997 1998
Total Construction Expenditures $183.6 $109.1 $128.6 $125.0 $ 85.3
Generation 70.9% 46.6% 53.9% 48.1% 18.5%
Distribution 19.6% 33.6% 29.3% 33.0% 51.2%
Transmission and Other 9.5% 19.8% 16.8% 18.9% 30.3%
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Providing for Customer Growth
Kentucky Utilities utilizes a least cost planning strategy to ensure that
growth in customer demand is provided for in the most efficient and cost-
effective manner. The Kentucky Public Service Commission (PSC) requires
filing of an Integrated Resource Plan every two years. Kentucky
Utilities filed its 1993 Integrated Resource Plan in October 1993. This
plan includes a 15-year load forecast and description of existing and
planned conservation programs, load management programs and generation
facilities to meet forecasted requirements in a reliable manner at the
lowest reasonable costs. The PSC has initiated an informal review of the
plan according to existing regulations.
As outlined in Kentucky Utilities' 1993 Integrated Resource Plan, annual
growth in sales and customer peak demand is forecast at 1.8% and 1.9%,
respectively, over the next 15 years. The utility plans to provide for
customer growth in the '90s through purchased power and the addition of
combustion turbine peaking units. Three 110-megawatt peaking units are
currently under construction. Two of the units will be installed in 1994
and the other in 1995. An additional peaking unit may be required in
each year from 1996-1998. There are no plans for additional baseload
capacity before 2010.
ENVIRONMENTAL MATTERS
Clean Air Act Compliance
Kentucky Utilities' compliance strategy for the 1990 Clean Air Act
Amendments includes installing flue gas desulfurization systems
(scrubbers), low nitrogen oxide burners and continuous emission
monitoring devices as well as fuel switching to lower sulfur coal. The
key component of the utility's compliance plan for Phase I requirements,
which are effective January 1, 1995, is a scrubber under construction at
Ghent Unit 1. The flexible design of the Ghent Unit 1 scrubber provides
the option of installing equipment to scrub flue gas from Ghent Unit 2 at
an economical cost. Anticipated costs of implementing this option are
included in the total estimated 1994-1998 construction expenditures shown
above.
In 1993, Kentucky Utilities revised its previous cost estimates for
compliance to reflect lower than expected costs for construction of the
Ghent Unit 1 scrubber. Kentucky Utilities also deferred, until the 2005
time frame, an additional scrubber originally planned at Brown Unit 3 for
compliance with Phase II requirements, which are effective January 1,
2000. The utility had anticipated capital spending of about $359 million
through 2000 for the 1990 Clean Air Act Amendments ($166 million for
Phase I and $193 million for Phase II). With the above mentioned
revisions and the anticipated additional equipment to scrub Ghent Unit 2,
current estimates of the capital costs for compliance through the year
2000 are about $200 million (over two-thirds of which should be incurred
by January 1, 1995). Through December 31, 1993, about $70 million had
been spent for compliance.
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Kentucky Utilities has purchased 12,900 Phase I emission allowances and
has been awarded about 114,000 additional allowances through
participation in the Environmental Protection Agency's Phase I Extension
Plan Program. The allowances give the utility additional flexibility in
implementing its compliance plans and will be incorporated into its
strategy to achieve the most economical means of compliance.
Kentucky Utilities will continue to review and revise its compliance
plans to ensure that its obligations are most effectively met.
Environmental Surcharge
In January 1994, Kentucky Utilities filed plans with the PSC to implement
an environmental surcharge. The surcharge will permit the utility to
recover certain ongoing operating and capital costs of compliance with
any federal, state or local environmental requirements associated with
the production of energy from coal, including the 1990 Clean Air Act
Amendments. Upon PSC approval, the proposed environmental surcharge
would begin August 1, 1994. Kentucky Utilities estimates that under the
proposed surcharge, it would recover about $15.5 million in environmental
costs during the first twelve months and about $23 million during the
second twelve months.
Other
In 1990, the Company received a letter from the Environmental Protection
Agency (EPA) identifying Kentucky Utilities 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 Kentucky Utilities) originally named as potentially
responsible parties. Kentucky Utilities has entered into an agreement
with the group as to the portion of the investigation and development
costs to be borne by Kentucky Utilities in connection with the site. Any
remediation plan would be subject to approval of the EPA. Although a
final, approved plan has yet to be developed, Kentucky Utilities does not
believe that any liability with respect to the site will have a material
impact on its financial position or results of operations.
NATIONAL ENERGY POLICY ACT
The National Energy Policy Act of 1992 (Energy Act) promotes energy
efficiency, environmental protection and increased competition.
Provisions of the Energy Act of most importance to electric utilities are
those that promote competition in the generation and transmission of
electricity. The Energy Act removes long-standing constraints on the
development of wholesale power generation by establishing a new class of
independent power producers which are exempt from traditional utility
regulation. The Energy Act also makes it easier for nonutility power
producers to gain access to utility-owned transmission networks by
allowing the Federal Energy Regulatory Commission to order wholesale
"wheeling" by public utilities. While the final impact of the Energy Act
is yet to be determined, the Company believes that it will increase
competition and may affect the traditional business strategies of the
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utility industry. The Company further believes it is well positioned for
increased competition because Kentucky Utilities' rates continue to be
among the lowest in the nation.
IMPACT OF ACCOUNTING STANDARDS
Refer to Note 8 of the Notes to Consolidated Financial Statements for
information concerning a new standard for accounting for investments in
debt and equity securities.
INFLATION
Kentucky Utilities' rates are designed to recover operating and
historical plant costs. Financial statements, which are prepared in
accordance with generally accepted accounting principles, report
operating results in terms of historic costs and do not evaluate the
impact of inflation. Inflation affects Kentucky Utilities' construction
costs, operating expenses and interest charges. Inflation can also
impact Kentucky Utilities' financial performance if rate relief is not
granted on a timely basis for increased operating costs.
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Consolidated Statements
of Income and
Retained Earnings
KU Energy Corporation
& Subsidiaries
Year Ended December 31, 1993 1992 1991
(in thousands of dollars, except for per share amounts)
Operating Revenues $ 606,608 $ 576,260 $ 587,660
Operating Expenses:
Fuel, principally coal, used in generation 178,910 168,470 183,167
Electric power purchased 34,711 32,753 26,744
Other operating expenses 106,124 95,109 93,648
Maintenance 59,458 61,270 58,590
Depreciation 60,811 58,931 57,337
Federal and state income taxes 47,752 40,992 45,837
Other taxes 14,357 13,401 12,858
502,123 470,926 478,181
Net Operating Income 104,485 105,334 109,479
Other Income and Deductions:
Interest and dividend income 4,737 7,866 8,744
Other income and deductions - net 6,033 4,415 3,503
10,770 12,281 12,247
Income Before Interest and Other Charges 115,255 117,615 121,726
Interest and Other Charges:
Interest on long-term debt 31,650 39,571 36,559
Preferred stock dividend requirements of Subsidiary 2,558 2,518 3,031
Other interest charges 1,064 1,344 1,549
35,272 43,433 41,139
Net Income $ 79,983 $ 74,182 $ 80,587
Earnings per Average Common Share, based on average
shares outstanding of 37,817,878 $ 2.11 $ 1.96 $ 2.13
Retained Earnings Beginning of Year $ 275,475 $ 260,289 $ 238,614
Add Net Income 79,983 74,182 80,587
355,458 334,471 319,201
Deduct:
Dividends on common stock, $1.60, $1.56 and $1.50
per share during 1993, 1992 and 1991, respectively 60,509 58,996 56,727
Preferred stock redemption expense and other - - 2,185
60,509 58,996 58,912
Retained Earnings End of Year $ 294,949 $ 275,475 $ 260,289
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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Consolidated Statements
of Cash Flows
KU Energy Corporation
& Subsidiaries
Year Ended December 31, (in thousands of dollars) 1993 1992 1991
Cash Flows from Operating Activities:
Net income $ 79,983 $ 74,182 $ 80,587
Items not requiring (providing) cash currently:
Depreciation 60,811 58,931 57,337
Deferred income taxes 6,064 3,262 272
Investment tax credit deferred (4,131) (4,149) (4,377)
Change in fuel inventory 7,694 (642) 15,836
Change in accounts receivable (9,243) 5,443 25
Change in accounts payable 22,660 (1,823) 5,495
Change in accrued utility revenues (2,019) (1,970) 883
Change in liability to ratepayers 36,867 - -
Change in escrow funds (37,752) - -
Other - net 2,688 (1,253) 7,765
Net Cash Provided by Operating Activities 163,622 131,981 163,823
Cash Flows from Investing Activities:
Construction expenditures - utility (177,069) (86,077) (65,649)
Nonutility property (17) (5,037) (135)
Purchase of long-term investments (944) (15,160) -
Investment in leveraged leases (10,320) - -
Other 380 801 504
Net Cash Used by Investing Activities (187,970) (105,473) (65,280)
Cash Flows from Financing Activities:
Issuance of long-term debt 173,500 219,930 -
Funds deposited with trustee - net (18,268) 528 6,311
Retirement of long-term debt, including premiums (180,677) (190,756) (711)
Retirement of preferred stock - - (32,732)
Issuance of preferred stock 20,000 - -
Payment of common stock dividends (60,509) (58,996) (56,727)
Net Cash Used by Financing Activities (65,954) (29,294) (83,859)
Net Increase (Decrease) in Cash and Cash Equivalents (90,302) (2,786) 14,684
Cash and Cash Equivalents Beginning of Year 122,802 125,588 110,904
Cash and Cash Equivalents End of Year $ 32,500 $122,802 $125,588
Supplemental Disclosures
Cash paid for:
Interest on long-term debt $ 33,860 $ 41,912 $ 36,441
Federal and state income taxes $ 42,190 $ 38,696 $ 48,080
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
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Consolidated
Balance Sheets
KU Energy Corporation
& Subsidiaries
As of December 31, (in thousands of dollars) 1993 1992
Assets
Utility Plant:
Plant in service, at cost $2,004,688 $1,955,164
Less: Accumulated depreciation 879,960 823,502
1,124,728 1,131,662
Construction work in progress 158,829 37,422
1,283,557 1,169,084
Current Assets:
Cash and cash equivalents 32,500 122,802
Escrow funds - coal contract litigation 37,752 -
Construction funds held by trustee 18,268 -
Accounts receivable, net of allowance for doubtful accounts 41,394 32,151
Accrued utility revenues 25,575 23,556
Fuel, principally coal, at average cost 31,073 38,767
Plant materials and operating supplies, at average cost 17,261 11,932
Other 7,808 1,970
211,631 231,178
Investments, Deferred Charges and Other Assets:
Investment in marketable securities 16,397 16,067
Investment in leveraged leases 10,320 -
Accumulated deferred income taxes 36,418 16,566
Unamortized loss on reacquired debt 13,295 8,613
Other 37,994 32,158
114,424 73,404
$1,609,612 $1,473,666
Capitalization and Liabilities
Capitalization: (See Consolidated Statements of Capitalization)
Common stock equity $ 602,503 $ 583,319
Preferred stock 40,000 40,000
Long-term debt 442,045 443,977
1,084,548 1,067,296
Current Liabilities:
Preferred stock and long-term debt due within one year 20,021 21
Accounts payable 43,894 21,234
Accrued interest 7,302 10,621
Accrued taxes 4,456 4,060
Customers' deposits 10,803 10,605
Accrued payroll and vacations 7,719 6,762
Liability to ratepayers - coal contract litigation 36,867 -
Other 6,444 6,003
137,506 59,306
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 248,369 280,642
Accumulated deferred investment tax credits 42,385 46,516
Regulatory liabilities 69,689 5,090
Other 27,115 14,816
387,558 347,064
$1,609,612 $1,473,666
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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Consolidated
Statements of
Capitalization
KU Energy Corporation
& Subsidiaries
As of December 31, (in thousands of dollars) 1993 1992
Common Stock Equity:
Common stock, without par value, authorized 160,000,000
shares, outstanding 37,817,878 shares $ 308,140 $ 308,140
Capital stock expense and other (586) (296)
Retained earnings 294,949 275,475
602,503 583,319
Preferred Stock, Kentucky Utilities 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 -
7.84%, outstanding 200,000 shares 20,000 20,000
Less: Amounts to be redeemed within one year 20,000 -
40,000 40,000
Long-Term Debt:
First mortgage bonds, substantially all of Kentucky Utilities'
utility plant is pledged as security for these bonds 441,830 443,330
Unamortized premium 108 519
441,938 443,849
8% secured note, due January 5, 1999 128 149
Less: Amounts to be redeemed within one year 21 21
442,045 443,977
$1,084,548 $ 1,067,296
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of KU Energy
Corporation (KU Energy or the Company), a holding company, and its wholly
owned subsidiaries, Kentucky Utilities Company (Kentucky Utilities), an
electric utility, and KU Capital Corporation (KU Capital), which
currently invests in marketable securities and leveraged leases.
Kentucky Utilities is the principal subsidiary of KU Energy. All
significant intercompany balances and transactions have been eliminated.
Regulation
Kentucky Utilities is a public utility subject to regulation by the
Kentucky Public Service Commission (PSC), the Virginia State Corporation
Commission (SCC) and the Federal Energy Regulatory Commission (FERC).
With respect to accounting matters, Kentucky Utilities maintains its
accounts in accordance with the Uniform System of Accounts as defined by
these agencies. Its accounting policies conform to generally accepted
accounting principles applicable to rate regulated enterprises and
reflect the effects of the ratemaking process.
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 3.3% in 1993, 1992 and 1991.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers highly liquid
investments with a maturity of three months or less from the date of
purchase to be cash equivalents.
The Company utilizes a cash management mechanism that funds certain bank
accounts for checks as they are presented to those banks. The Company
classified checks written but not presented to those banks, which
amounted to $9.9 million at December 31, 1993, in accounts payable.
Marketable Securities
Investments in marketable securities are stated at the lower of aggregate
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Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
cost or market. The investment portfolio includes preferred stocks which
are hedged with Treasury futures contracts. Gains and losses on
purchased hedges of the equity securities are deferred as an adjustment
to the carrying amount of the hedged equity securities.
Unamortized Loss on Reacquired Debt
Kentucky Utilities defers costs (primarily call premiums) arising from
the reacquisition or retirement of long-term debt. Costs related to
refinanced debt are amortized over the lives of the new debt issues.
Costs related to retired debt not refinanced are amortized over the
period to the scheduled maturity of the retired debt.
Operating Revenues and Fuel Costs
Revenues are recorded based on services rendered to customers. Kentucky
Utilities accrues an estimate of revenues for electric service furnished
from the meter reading dates to the end of each accounting period. Cost
of fuel used in electric generation is charged to expense as the fuel is
consumed. The cost of fuel for 1991 and 1992 included an amortization of
buyout costs associated with the termination of a coal supply contract.
A fuel adjustment clause adjusts operating revenues for changes in the
level of fuel costs charged to expense.
2. Fuel Litigation Refund
Kentucky Utilities had been involved in litigation which began in 1984
with a former coal supplier over the price and other terms of the
parties' long-term contract for Ghent Unit 3. Pursuant to an order of
the Fayette (KY) Circuit Court, Kentucky Utilities deposited part of the
disputed coal prices with the Fayette Circuit Court pending a final
decision. During the course of the proceedings, the supplier filed for
relief under the Federal Bankruptcy Code. On February 1, 1993, the
Bankruptcy Court for the Eastern District of Kentucky approved a
settlement agreement disposing of all litigation and claims between
Kentucky Utilities and the supplier. All other actions and appeals
involving the various parties and claimants have been dismissed.
In March 1993, the deposited funds (totaling approximately $44 million,
including interest through that date) were released by the Fayette
Circuit Court to Kentucky Utilities and have been held by Kentucky
Utilities in a segregated escrow account pending disposition in
accordance with appropriate orders of regulatory agencies.
During 1993, Kentucky Utilities submitted plans to the FERC, PSC and SCC
for distributing a portion of the deposited funds to customers.
Kentucky Utilities' plan was approved by the SCC, as submitted, and
refunds of the Virginia retail portion of the deposited funds
(approximately $2.3 million), plus interest, are being made to Virginia
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Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
retail customers over 12 months beginning August 1, 1993. Kentucky
Utilities' plan was approved by the FERC, as submitted, and a refund of
that portion of the deposited funds (approximately $3.9 million) relating
to wholesale customers was made in lump sum payments in September 1993.
In an order which became final in February 1994, the PSC ordered Kentucky
Utilities to refund that portion of the deposited funds relating to
Kentucky retail customers (approximately $35.5 million), plus interest,
to customers on its system from April 1985 through December 1990. The
order allows Kentucky Utilities to retain $.8 million of incurred
litigation costs and $2.4 million for savings attributable to off-system
sales. The PSC order also allows Kentucky Utilities recovery of its
costs incurred in administering an approved refund plan. A refund plan
in accordance with the PSC order has been filed by Kentucky Utilities for
PSC approval.
The total escrow funds remaining after the above mentioned FERC and SCC
refunds and the withdrawals for savings attributable to off-system sales
($2.4 million) and incurred litigation costs ($.8 million) resulting from
the FERC and SCC orders are reflected on the Balance Sheet under the
caption "Escrow funds - coal contract litigation." The "Liability to
ratepayers - coal contract litigation" represents the fuel cost savings
(including interest) that will be credited to Kentucky and Virginia
retail customers. Approximately $3.2 million of "Other Deferred Credits"
represents the portion of savings attributable to off-system sales and
the Kentucky jurisdictional allowed litigation costs. Kentucky Utilities
will record a $3.2 million reduction of expense (for the off-system sales
and allowed litigation costs) in 1994.
3. Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
This statement requires an asset and liability approach for financial
accounting and reporting for income taxes rather than the deferred
method. It requires the Company to establish deferred tax assets and
liabilities, as appropriate, for all temporary differences, and to adjust
deferred tax balances to reflect changes in tax rates expected to be in
effect during the periods the temporary differences reverse. At the
date of adoption, because of the effects of rate regulation, the Company
recorded an increase of $22 million in deferred tax assets and a decrease
of $53 million in deferred tax liabilities, and established a
corresponding regulatory liability of $75 million, primarily to recognize
the probable future reduction in rates to flowback to customers amounts
previously collected for deferred taxes in excess of current statutory
tax rates. The adoption of this standard did not have a material impact
on results of operation, cash flows or financial position.
-97-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Investment tax credits result from provisions of the tax law which
permitted a reduction of the Company'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.
The accumulated deferred income taxes as set forth below and in the
Consolidated Balance Sheets arise from the following temporary
differences at December 31 and January 1, 1993:
December 31 January 1
(in thousands of dollars) Deferred Deferred Deferred Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
Accelerated depreciation
and other property
related differences $ 28,529 $ 241,893 $ 27,820 $ 224,452
Other 13,786 6,476 10,732 2,631
Total accumulated
deferred income taxes $ 42,315 $ 248,369 $ 38,552 $ 227,083
Of the $3.8 million increase in deferred tax assets and the $21.3 million
increase in deferred tax liabilities, approximately $1.3 million and $9.6
million, respectively, resulted from an increase in the federal statutory
corporate income tax rate from 34% to 35% effective January 1, 1993. This
resulted in a net decrease of $8.3 million in the regulatory liability.
-98-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
The components of income tax expense are as follows:
Year Ended December 31, (in thousands of dollars) 1993 1992 1991
Income taxes charged to Operating Income:
Current - federal $ 35,579 $ 30,460 $ 36,656
- state 9,403 7,851 9,105
44,982 38,311 45,761
Deferred - federal 2,812 2,254 570
- state 65 557 160
2,877 2,811 730
Deferred investment tax credit (107) (130) (654)
47,752 40,992 45,837
Income taxes charged to Other Income
and Deductions:
Current - federal (2,060) 807 1,581
- state (577) (12) 504
(2,637) 795 2,085
Deferred - federal 2,591 361 (362)
- state 596 90 (96)
3,187 451 (458)
Amortization of deferred investment tax credit (4,024) (4,019) (3,723)
(3,474) (2,773) (2,096)
Total income tax expense $ 44,278 $ 38,219 $ 43,741
The provisions for deferred income taxes relate to the following items:
Year Ended December 31, (in thousands of dollars) 1993 1992 1991
Accelerated depreciation and other
property related differences $ 5,596 $ 6,817 $ 5,658
Power plant inventory 418 (10) (3,564)
Loss on reacquired debt 3,459 1,165 (39)
Other (3,409) (4,710) (1,783)
Total provisions for deferred income taxes $ 6,064 $ 3,262 $ 272
The Company's effective income tax rate, determined by dividing income
taxes by the sum of such taxes and net income, was 35.6% in 1993, 34.0% in
1992 and 35.2% in 1991. 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) 1993 1992 1991
Federal income tax computed at
35%, 34% and 34%, respectively $ 43,491 $ 38,216 $ 42,272
Add (Deduct):
State income taxes, net of federal income tax benefit 6,167 5,601 6,384
Amortization of deferred investment tax credit (4,131) (4,140) (3,857)
Other, net (1,249) (1,458) (1,058)
Total income tax expense $ 44,278 $ 38,219 $ 43,741
-99-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
4. Retirement and Postemployment Benefits
Pensions
The Company 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. The
Company's funding policy is to make such contributions as are necessary
to finance the benefits provided under the plan. The Company's
contributions meet the funding standards set forth in the Employee
Retirement Income Security Act of 1974. The plan assets consist
primarily of equity and fixed income investments.
The Company 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 the Company.
The reconciliation of the funded status of the retirement plans and the
pension liability recorded by the Company is as follows:
As of December 31, (in thousands of dollars) 1993 1992
Fair value of plan assets $ 157,137 $ 147,235
Projected benefit obligation (169,309) (144,380)
Plan assets in excess of (less than)
projected benefit obligation (12,172) 2,855
Unrecognized net (gain)/loss from past
experience different than that assumed 6,361 (7,628)
Unrecognized prior service cost 4,966 5,334
Unrecognized net asset (1,949) (2,099)
Regulatory effect recorded (5,146) (5,090)
Pension liability $ (7,940) $ (6,628)
Accumulated benefit obligation (including vested benefits
of $128,779 and $105,442, respectively) $ 130,758 $ 107,503
Components of Net Pension Cost:
Year Ended December 31, (in thousands of dollars) 1993 1992 1991
Service cost (benefits earned during the period) $ 5,036 $ 4,774 $ 4,307
Interest cost on projected benefit obligation 12,311 11,482 10,473
Actual return on plan assets (13,229) (11,384) (20,158)
Net amortization and deferral 1,785 350 10,941
Regulatory effect based on funding 56 705 1,139
Net pension cost $ 5,959 $ 5,927 $ 6,702
Assumptions Used in Determining Actuarial Valuations:
1993 1992 1991
Weighted average discount rate used to
determine the projected benefit obligation 7 1/2% 8 3/4% 8 3/4%
Rate of increase for compensation levels (1) 4 3/4% 6% 6%
Weighted average expected long-term rate
of return on assets 8 1/4% 8 3/4% 8 3/4%
(1) 5 1/4%, 6 1/2% and 6 1/2%, respectively, used for the Supplemental Security Plan
valuation.
-100-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Other Postretirement Benefits
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106). This standard provides
accounting and disclosure requirements associated with the Company's
obligation to provide postretirement benefits other than pensions to
present and future retirees. In accordance with this standard, the
Company will accrue, during the years that the employee renders service,
the expected cost of providing these benefits for retired employees,
their beneficiaries and covered dependents. The Company previously
recognized these costs on a pay-as-you-go (cash) basis. Amounts paid for
retirees for 1992 and 1991 amounted to $2.3 million and $2.4 million,
respectively.
The Company provides certain health care and life insurance benefits to
eligible retired employees and their dependents. The postretirement
health care plan is contributory for employees who retired after
December 31, 1992, with retiree contributions indexed annually based upon
the experience of retiree medical expenses for the preceding year. Pre-
1993 retirees are not required to contribute to the plan. The Company'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.
Employees may purchase additional life insurance equal to the amount
provided by the Company.
In 1993, the Company began funding, in addition to current requirements
for benefit payments, the maximum tax-favored amount allowed through
certain tax deductible funding vehicles. The Company 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 PSC issued a decision in December 1992 stating that the rate
treatment resulting from the adoption of SFAS 106 will be considered on a
case-by-case basis in the context of a general rate case. Based on
management's interpretation of this PSC Order, the Company is not
deferring the Kentucky jurisdictional portion of these costs. The FERC
and the SCC both have approved accrual of these costs for ratemaking
purposes in accordance with SFAS 106. The Company is deferring, in
accordance with the SCC and FERC Orders, the difference between costs
determined in accordance with SFAS 106 and the level currently reflected
in rates for the portion of costs associated with the Virginia and FERC
jurisdictions until the next general rate cases in the respective
jurisdictions as a result of the above mentioned Orders. The impact on
results of operations, after giving effect to the regulatory treatment
discussed above, is an increase in pre-tax expense for the year ended
December 31, 1993 of $6.3 million (net of capitalized payroll benefits).
-101-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
The reconciliation of the funded status of the plans and the
postretirement benefit liability recorded by the Company is as follows:
As of December 31, (in thousands of dollars) 1993
Accumulated postretirement benefit obligation:
Retirees $( 38,331)
Fully eligible active plan participants (8,448)
Other active plan participants (28,813)
(75,592)
Plan assets at fair value 2,440
Accumulated postretirement benefit obligation
in excess of plan assets (73,152)
Unrecognized net loss from past
experience different from that assumed 3,230
Unrecognized transition obligation 63,483
Regulatory effect recorded 689
Accrued postretirement benefit liability $ (5,750)
Components of the net periodic postretirement benefit cost are as follows:
Year Ended December 31, (in thousands of dollars) 1993
Service cost (benefits attributed to $ 2,048
service during the period)
Interest cost on accumulated postretirement
benefit obligation 5,730
Amortization of transition obligation 3,341
Regulatory deferral (689)
Net periodic postretirement benefit cost $ 10,430
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered health care benefits is assumed for 1994. The health
care cost trend rate is assumed to decrease gradually to 5.25% through
2004 and remain at that level thereafter over the projected payout period
of the benefits. Increasing the assumed health care cost trend rates by
1 percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993, by $12 million
(16%) and the aggregate of the service and interest cost components of
the net periodic postretirement benefit cost for the year by $1.6 million
(20%).
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%. The weighted-average discount
rate used in determining the initial transition amount was 8.75%. The
rate of increase for compensation levels was assumed to be 4.75%.
-102-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Other Postemployment Benefits
In November 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits". This statement establishes
standards of accounting and reporting for the estimated cost of benefits
provided by an employer to former or inactive employees after employment
but before retirement. The Company provides medical and life insurance
benefits to disabled employees that are covered by this statement. The
Company adopted this standard in 1993. The adoption of this standard did
not have a material impact on financial condition or results of
operation.
5. Commitments and Contingencies
The effects of certain commitments made by the Company are estimated
below:
(in thousands of dollars) 1994 1995 1996 1997 1998
Estimated Construction
Expenditures $183,600 $109,100 $128,600 $125,000 $ 85,300
Estimated Contract
Obligations:
Fuel 153,400 92,500 66,300 54,200 12,500
Purchased power 25,000 23,300 25,500 26,300 26,100
Operating leases 3,100 3,100 3,000 3,000 3,000
Sinking Fund Requirements
and Redemptions:
First mortgage bonds 376 376 376 376 376
Preferred stock $ 20,000 $ - $ - $ - $ -
Construction Program
Kentucky Utilities frequently reviews its construction program and may
revise its projections of related expenditures based on revisions to its
estimated load growth and projections of its future load.
See Management's Discussion and Analysis - Construction for a discussion
of future expenditures relating to compliance with the 1990 Clean Air Act
Amendments and construction of peaking units.
Coal Supply
Obligations under Kentucky Utilities' coal purchase contracts are stated
at prices effective January 1, 1994, and are subject to changes as
defined by the terms of the contracts.
Purchased Power Agreements
Kentucky Utilities has purchase power arrangements with Owensboro
Municipal Utilities (OMU), Electric Energy, Inc. (EEI) and Illinois Power
Company (IP). Under the OMU agreement, which expires on January 1, 2020,
-103-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Kentucky Utilities purchases, on an economic basis, all of the output of
a 400-MW generating station not required by OMU. The amount of purchased
power available to Kentucky Utilities during 1994-1998, which is expected
to be approximately 8% of Kentucky Utilities' total kWh requirements, is
dependent upon a number of factors including the units' availability,
maintenance schedules, fuel costs and OMU requirements. Payments are
based on the total costs of the station allocated per terms of the OMU
agreement, which generally follows delivered kWh. Included in the total
costs is Kentucky Utilities' proportionate share of debt service
requirements on $30.1 million of OMU bonds outstanding at December 31,
1993. The debt service is allocated to Kentucky Utilities based on its
annual allocated share of capacity, which averaged approximately 51% in
1993. In 1995, Kentucky Utilities' total costs will increase to include
Kentucky Utilities' proportionate share of debt service requirements on
approximately $171.5 million of additional OMU bonds issued to finance
capital improvements designed to enable OMU to comply with the 1990 Clean
Air Act Amendments.
Kentucky Utilities has a 20% equity ownership in EEI, which is accounted
for on the equity method of accounting. Through 1993, the equity
ownership permitted Kentucky Utilities to share in the output of a 1,000-
MW station not needed by EEI. Kentucky Utilities' entitlement, beginning
January 1, 1994, will be 20% of the available capacity of the 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.
Kentucky Utilities has contracted to purchase 75-MW of capacity from IP
for the period of January 1993 through March 1994, and 125-MW of capacity
from April 1994 through December 1994.
Sinking Fund Requirements and Redemptions
Annual sinking fund requirements for Kentucky Utilities' first mortgage
bonds may be met with cash or expenditures for bondable property as
provided in the Mortgage Indenture. Kentucky Utilities intends to meet
the 1994 sinking fund requirements with expenditures for bondable
property.
Kentucky Utilities redeemed all of the outstanding shares of its 7.84%
preferred stock on February 1, 1994, at a total price of $20.3 million.
Lines of Credit
Kentucky Utilities has aggregate bank lines of credit of $55 million, all
of which remained unused at December 31, 1993. These lines of credit may
not be withdrawn at the banks' option prior to September 30, 1994. In
support of these lines of credit, Kentucky Utilities compensates the
banks by paying a commitment fee.
Short-Term Borrowings
Kentucky Utilities' short-term financing requirements are satisfied
through the sale of commercial paper. Beginning November 1993, Kentucky
Utilities sold short-term commercial paper at interest rates varying from
3.10 to 3.25 percent. At December 31, 1993, Kentucky Utilities had no
short-term commercial paper borrowings outstanding.
-104-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Long-Term Debt
First Mortgage Bonds of Kentucky Utilities (including those
collateralizing pollution control revenue bonds) outstanding at December
31, 1993 and 1992, were as follows:
(in thousands of dollars) 1993 1992
First Mortgage Bonds:
7 5/8% Series H, due May 1, 1999 $ - $ 25,000
8 3/4% Series I, due April 1, 2000 - 30,000
5.95% Series Q, due June 15, 2000 61,500 -
7 5/8% Series J, due September 1, 2001 - 35,000
7 3/8% Series K, due December 1, 2002 35,500 35,500
6.32% Series Q, due June 15, 2003 62,000 -
9 1/8% Series L, due April 1, 2004 - 25,000
9 1/4% Series M, due June 1, 2006 - 30,000
8 1/2% Series N, due April 1, 2007 - 30,000
7.92% Series P, due May 15, 2007 53,000 53,000
8.55% Series P, due May 15, 2027 33,000 33,000
245,000 296,500
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 31,900 -
5 3/4% County of Carroll, Kentucky, Collateralized Solid
Waste Disposal Facility Revenue Bonds, due December 1, 2023 18,100 -
196,830 146,830
$ 441,830 $ 443,330
Kentucky Utilities redeemed $30 million of Series M and $25 million of
Series L First Mortgage Bonds (including redemption premiums of
$1.4 million and $.9 million, respectively) in March and April of 1993,
respectively.
In June 1993, Kentucky Utilities issued $123.5 million of Series Q First
Mortgage Bonds. Proceeds of the issue were used to redeem $25 million of
Series H, $30 million of Series I, $35 million of Series J and
$30 million of Series N First Mortgage Bonds (plus redemption premiums
aggregating $3.3 million) in July 1993.
In 1993, Kentucky Utilities entered into a loan agreement with the County
of Carroll, Kentucky, to finance the construction of solid waste disposal
facilities. The County issued $50 million of the 5 3/4% revenue bonds,
with the proceeds held in a construction fund by a trustee. As the
construction funds held by the trustee are drawn down, Kentucky Utilities
Pollution Control Series 9 Bonds are delivered to the trustee in an
amount equal to the amount drawn down.
-105-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
6. Common Stock
KU Energy is subject to restrictions applicable to all corporations under
Kentucky law on the use of retained earnings for cash dividends on common
stock. Kentucky Utilities is subject to the same restrictions as well as
those contained in Virginia law, its Mortgage Indenture and Articles of
Incorporation. At December 31, 1993, there were no restricted retained
earnings.
The Company has a shareholder rights plan designed to provide protection
to shareholders in the event of an unsolicited attempt to acquire the
Company. Under the shareholder rights plan, KU Energy shareholders will
receive as a dividend one right for each share of KU Energy common stock.
Should certain events occur (for instance, an acquirer becomes the
beneficial owner of 20 percent or more of the Company's outstanding
voting stock without approval by the Company, or certain transactions
occur following an acquirer becoming the beneficial owner of 10 percent
or more of such voting stock without Company approval), each right would
entitle the holder, other than the acquirer, to purchase common shares of
KU Energy or shares of any company that acquires KU Energy at a discount
from the market value. In certain circumstances, the Company may redeem
the rights at a price of $.01 per right. The rights expire in February
2002.
7. Preferred Stock
KU Energy
As of December 31, 1993, there were 20 million shares of KU Energy
preferred stock, without par value, authorized for issuance.
Kentucky Utilities
Kentucky Utilities redeemed all 120,000 shares of its 8.65% preferred
stock and 180,000 shares of its 9.96% preferred stock on March 1, 1991,
and the remaining 10,000 shares of its 9.96% preferred stock on June 1,
1991 at a total price of $32.7 million.
In December 1993, Kentucky Utilities issued 200,000 shares of 6.53%
preferred stock. The proceeds were used to redeem 200,000 shares of
7.84% preferred stock on February 1, 1994.
-106-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
Each series of preferred stock is redeemable at the option of Kentucky
Utilities upon 30 days' written notice as follows:
Redemption Price per Share
Series (plus accrued and unpaid dividends, if any)
4 3/4% $101.00
6.53% (Not redeemable prior to December 1, 2003.)
$103.265 through November 30, 2004, decreasing
approximately $.33 each twelve months
thereafter to $100 on or after December 1, 2013.
7.84% $101.50
As of December 31, 1993, there were 5.3 million shares of Kentucky
Utilities preferred stock, having a maximum aggregate stated value of
$200 million, authorized for issuance.
8. Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash and cash equivalents, escrow funds, construction funds and
customers' deposits carrying values approximate fair value because of the
short maturity of these amounts.
Investment in marketable securities are based on quoted market prices.
Long-term debt fair values are based on quoted market prices for Kentucky
Utilities' first mortgage bonds and on current rates available to
Kentucky Utilities for debt of the same remaining maturities for Kentucky
Utilities' pollution control bonds and promissory note.
Kentucky Utilities has an interest rate swap agreement with a notional
amount of $70 million. Fair value of this instrument is the estimated
amount the counterparty would pay to Kentucky Utilities to terminate the
swap at the date of measurement.
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
1993 1992
Carrying Estimated Carrying Estimated
(in thousands of dollars) Amount Fair Value Amount Fair Value
Investment in marketable securities $ 16,397 $ 16,483 $ 16,067 $ 16,181
Interest rate swap - 2,550 - 3,260
Long-term debt $ 442,066 $489,042 $ 443,998 $ 471,278
-107-
Notes to Consolidated
Financial Statements
KU Energy Corporation
& Subsidiaries
If the excess of fair value over carrying value of Kentucky Utilities'
long-term debt were settled at amounts approximating those above, the
anticipated regulatory treatment would allow recovery of these amounts in
rates over a prescribed amortization period. Accordingly, any settlement
would not have a significant impact on the Company's financial position
or results of operations.
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". This statement, which must be adopted on January 1, 1994,
addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and all investments
in debt securities. The Company does not anticipate that the new
standard will have a material impact on its financial condition or
results of operations.
9. Leveraged Leases
KU Capital purchased equity interests in three existing leveraged lease
arrangements from a third party in 1993. KU Capital is co-lessor on each
of these leases involving combustion turbine generating units. The
leases expire in 1999. The residual values are estimated to be between
131% to 152% of the cost. KU Capital's equity investment represents 73%
of the aggregate purchase price of the leases. The remaining 27%
represents the nonrecourse debt provided by lenders at the inception of
the leases in 1974. The lenders have been granted, as their sole remedy
in the event of default by the lessees, an assignment of rentals due
under the leases and a security interest in the leased properties.
The following is a summary of the components of KU Capital's net
investment in leveraged leases:
As of December 31, (in thousands of dollars) 1993
Rentals receivable (net of nonrecourse debt) $ 3,032
Estimated residual value of leased property 19,661
Less: Unearned and deferred income 12,373
Investment in leveraged leases 10,320
Less: Accumulated deferred income taxes 239
Net investment in leveraged leases $ 10,081
The following is a summary of the components of income from leveraged
leases:
Year Ended December 31, (in thousands of dollars) 1993
Income before income taxes $ 565
Income tax expense 228
Income from leveraged leases $ 337
-108-
Financial
Information
(Unaudited)
KU Energy Corporation
& Subsidiaries
Quarterly financial results for 1993 and 1992 are summarized below.
Generally, quarterly results may fluctuate due to seasonal variations,
changes in fuel costs and other factors.
Quarter 4th 3rd 2nd 1st
(in thousands of dollars, except for per share amounts)
1993
Operating Revenues $ 151,823 $ 160,609 $ 139,903 $ 154,273
Net Operating Income 20,951 30,440 22,069 31,025
Net Income 15,251 24,447 16,436 23,849
Earnings per Average
Common Share .40 .64 .44 .63
1992
Operating Revenues $ 139,831 $ 152,024 $ 137,911 $ 146,494
Net Operating Income 20,817 31,084 24,112 29,321
Net Income 13,953 22,258 16,057 21,914
Earnings per Average
Common Share .37 .59 .42 .58
These quarterly amounts reflect, in the Company's opinion, all adjustments
(including only normal recurring adjustments) necessary for a fair
presentation.
-109-
Report of
Independent
Public
Accountants
KU Energy Corporation
& Subsidiaries
To the Shareholders of
KU Energy Corporation:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of KU Energy Corporation (a Kentucky
corporation) and Subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income and retained earnings, and cash
flows for each of the three years in the period ended December 31, 1993.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements 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 KU Energy
Corporation and Subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As explained in Notes 3 and 4 to the financial statements, effective
January 1, 1993, the Company changed its method of accounting for income
taxes and postretirement benefits other than pensions.
/s/ Arthur Andersen & Co.
Arthur Andersen & Co.
Chicago, Illinois
January 26, 1994
-110-