Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
General
Kentucky Utilities Company (Kentucky Utilities) is a wholly owned subsidiary of KU Energy Corporation (KU Energy). Kentucky Utilities is a public utility engaged in producing and selling electric energy. Kentucky Utilities provides electric service to about 418,100 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky, and to about 28,300 customers in 5 counties in southwestern Virginia. In Virginia, Kentucky Utilities operates under the name Old Dominion Power Company. Of the Kentucky communities, 160 are incorporated municipalities served under unexpired municipal franchises and the rest are unincorporated communities where no franchises are required. Service has been provided in Virginia without franchises for a number of years. This lack of Virginia franchises is not expected to have a material adverse effect on Kentucky Utilities' operations. Kentucky Utilities also sells electric energy at wholesale for resale in 12 municipalities.
The territory served by Kentucky Utilities has an aggregate population estimated at about 1,000,000. The largest city served is Lexington, Kentucky. The population of the metropolitan Lexington area is estimated at about 225,000. The populations of the next 10 largest cities served at retail range from about 21,000 to 9,000. The territory served includes most of the Blue Grass Region of central Kentucky and parts of the coal mining areas in southeastern and western Kentucky and southwestern Virginia. Lexington is the center of the Blue Grass Region, in which thoroughbred horse, burley tobacco and bourbon whiskey distilling industries are located. Among the principal industries in the territory served are coal mining, automotive and related industries, the manufacture of paper and paper products and of electrical and other machinery and primary metals processing.
Revenues
Kentucky Utilities' sources of electric revenues and the respective percentages of total revenues for the three years 1992-1994 were as follows:
The electric utility business is affected by varying seasonal weather patterns. As a result, operating revenues (and associated operating expenses) are not generated evenly throughout the year. See Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations - Sales and Revenues for information related to revenues from sales to Other Electric Utilities.
Operations
Kentucky Utilities' net generating capability was 3,265 megawatts at December 31, 1994. An additional 110-megawatt combustion turbine peaking unit was placed into commercial operation in February 1995. The net generating capability available for operation at any time may be lower because of periodic outages of generating units due to inspection, maintenance, fuel restrictions, or modifications required by regulatory agencies. Kentucky Utilities obtains power from other utilities under bulk power purchase and interchange contracts. At December 31, 1994, Kentucky Utilities' system capability, including purchases from others, was 3,805 megawatts. The all-time system peak demand, on a one-hour integrated basis, occurred on July 28, 1993 and was 3,176 megawatts.
The percentage of Kentucky Utilities' system output which was internally generated and purchased for the periods indicated was as follows:
1994 1993 1992 Internally Generated 83% 89% 87% Purchased 17% 11% 13%
Kentucky Utilities is one of 28 members of the East Central Area Reliability Coordination Agreement, the purpose of which is to augment the reliability of the members' bulk power supply through coordination of planning and operation of generation and transmission facilities. The members are engaged in the generation, transmission and sale of electric power and energy in the east central area of the United States, which covers all or portions of Michigan, Indiana, Ohio, Kentucky, Pennsylvania, Virginia, West Virginia and Maryland. Kentucky Utilities also has interconnections and contractually established operating arrangements with neighboring utilities and cooperatives.
Under a contract with Owensboro Municipal Utilities (OMU), Kentucky Utilities has agreed to purchase from OMU the surplus output of the 150- megawatt and 250-megawatt generating units at OMU's Elmer Smith station. Purchases under the contract are made under a contractual formula which has resulted in costs which were and are expected to be comparable to the cost of other power purchased or generated by Kentucky Utilities. Such power constituted about 8% of Kentucky Utilities' net system output during 1994. See Note 4 of the Notes to Financial Statements.
Kentucky Utilities owns 20% of the common stock of Electric Energy, Inc. (EEI), which owns and operates a 1,000-megawatt station in southern Illinois. Kentucky Utilities' entitlement is 20% of the available capacity of the station. Such power constituted about 8% of Kentucky Utilities' net system output in 1994. See Note 4 of the Notes to Financial Statements.
Kentucky Utilities had approximately 2,240 employees at December 31, 1994, of which about 300 are covered by union contracts expiring August 1995.
Fuel Matters
Coal-burning generating units provided more than 99% of Kentucky Utilities' net kilowatt-hour generation for 1994. The remainder of Kentucky Utilities' net generation for 1994 was provided by hydroelectric plants, oil and/or natural gas burning units. The average delivered cost of coal purchased, per ton and per million BTU (MBTU), and the percentage of spot coal purchases for the periods indicated were as follows:
1994 1993 1992
Per ton - all sources $ 28.91 $ 27.92 $ 27.94 Per MBTU - all sources $ 1.19 $ 1.15 $ 1.16
Per ton - spot purchases only $ 28.33 $ 26.23 $ 25.32 Per MBTU - spot purchases only $ 1.16 $ 1.08 $ 1.07 Spot purchases as % of all sources 46 % 44 % 42 %
Kentucky Utilities maintains its fuel inventory at levels estimated to be necessary to avoid operational disruptions at its coal-fired generating units. Reliability of coal deliveries can be affected from time to time by a number of factors, including coal mine labor strikes and other supplier or transporter operating difficulties.
Kentucky Utilities believes there are adequate reserves available to supply its existing base-load generating units with the quantity and quality of coal required for those units throughout their useful lives. Kentucky Utilities intends to meet a substantial portion of its coal requirements with 5 year contracts. Kentucky Utilities anticipates that coal supplied under such agreements will represent about two-thirds of the requirements over the next several years. As part of this strategy, Kentucky Utilities is currently and will continue to negotiate replacement contracts as contracts expire. Kentucky Utilities does not anticipate any problems negotiating new contracts for future coal needs. The balance of coal requirements will be met through spot purchases. See Note 4 of the Notes to Financial Statements for the estimated obligations under fuel contracts for each of the years 1995 through 1999.
Kentucky Utilities has no long-term contracts in place for the purchase of natural gas for its combustion turbine peaking units. Kentucky Utilities does not anticipate encountering any significant problems acquiring an adequate supply of fuel necessary to operate its new peaking units. See "Construction" for a discussion of Kentucky Utilities' plans to add peaking capacity.
Environmental Matters
Federal and state agencies have adopted environmental protection standards which apply to the electric operations of Kentucky Utilities. Capital expenditures to comply with these standards amounted to about $185 million during the 1990-1994 time period.
Kentucky Utilities' generating units are operated in compliance with the Kentucky Natural Resources and Environmental Protection Cabinet's (the "Cabinet") State Implementation Plan (the "KYSIP") and New Source Performance Standards developed under the Clean Air Act. The KYSIP is a federally-approved plan for the attainment of the national ambient air quality standards. The KYSIP contains standards relating to the emissions of various pollutants (sulfur dioxide, particulates and
nitrogen oxides) from Kentucky Utilities' fossil-fuel fired steam electric generating units. These emission standards are of varying stringencies and compliance with these standards is attained through a variety of air pollution control technologies (scrubbers, electrostatic precipitators, and low NOx burners) and the use of low sulfur coal. Kentucky Utilities' operations are in substantial compliance with current emission standards.
The acid rain control provisions of the 1990 Clean Air Act Amendments, which are effective in two phases, require Kentucky Utilities to further decrease the emissions of sulfur dioxide and nitrogen oxides from its fossil-fuel fired steam electric generating units. Ghent Unit 1, E. W. Brown Units 1, 2 and 3, and Green River Unit 4 have been designated as Phase I affected units which are required to comply with sulfur dioxide emission reduction obligations beginning January 1, 1995. In order to comply with these sulfur dioxide emission limitations, Kentucky Utilities has installed a scrubber and related facilities on Ghent Unit 1 (which was declared commercial December 20, 1994) and switched to lower sulfur coal on some other Phase I affected units. In addition, the retrofit of low NOx burners on these units is required in order to comply with nitrogen oxide limitations and is expected to be complete in the Spring of 1995, which is in compliance with applicable requirements of the United States Environmental Protection Agency (EPA). The EPA issued final acid rain permits for each of Kentucky Utilities' Phase I affected units. The EPA's approval of Kentucky Utilities acid rain compliance plan was accompanied by bonus allowances awarded for the installation of the scrubber on Ghent Unit 1 and an extension of the Phase I effective date to January 1, 1997, for certain portions of the sulfur dioxide emission limitations. Kentucky Utilities' current emission allowance strategy is to bank unused sulfur dioxide emission allowances. These unused allowances result from the bonus allowances received from the EPA and the expected reduced sulfur dioxide emissions from the installation of the Ghent Unit 1 scrubber. These banked allowances are expected to allow Kentucky Utilities to delay capital expenditures associated with Kentucky Utilities' Phase II acid rain compliance obligations, which are effective January 1, 2000. Kentucky Utilities' Phase II compliance strategy, in addition to utilizing banked allowances, may include additional fuel switching or the installation of additional scrubbers. However, Kentucky Utilities will continue to reassess its options for complying with Phase II emission reduction requirements to determine an overall least cost strategy. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Construction Requirements and - Environmental Matters for additional discussion.
During 1990, each of Kentucky Utilities' five fossil-fuel fired steam electric generating stations was re-issued a wastewater discharge permit by the Cabinet under the Clean Water Act's National Pollutant Discharge Elimination System. These 5-year permits place water quality-based effluent limitations (i.e., thermal and chemical limits) on each of the power plant's discharges. Kentucky Utilities' operations are in substantial compliance with the conditions in the permits. Kentucky Utilities does not anticipate any difficulties in renewing the required permits which are expiring in 1995.
Pursuant to the Resource Conservation and Recovery Act, utility wastes (fly ash, bottom ash and scrubber sludge) have been categorized as special wastes (i.e., wastes of large volume, but low environmental hazard). The EPA has concluded that the disposal of coal combustion by- products by practices common to the utility industry are adequate for the protection of human health and the environment. The Cabinet also regulates utility wastes as special wastes under its waste management
program.
Under the Toxic Substances Control Act, the EPA regulates the use, servicing, repair, storage and disposal of electrical equipment containing polychlorinated biphenyls (PCB). To comply with these regulations, Kentucky Utilities has implemented procedures to be followed in the handling, storage and disposal of PCBs. In addition, Kentucky Utilities has completed the mandated phase out of all of its pole-class PCB capacitors and has no vault-type PCB transformers in use, in or near commercial buildings.
On February 13, 1990, Kentucky Utilities received a letter from the EPA identifying Kentucky Utilities and others as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA or "Superfund") for a disposal site in Daviess County, Kentucky. The letter also asked Kentucky Utilities, and the other persons or entities named, to proceed voluntarily with a remediation program at the site. Under Superfund, a responsible party may be liable for all or a portion of all monies expended by the government to take corrective action at the site. The EPA has turned over responsibility for investigation of the site and development of a remediation plan to a group (not including Kentucky Utilities) originally named as potentially responsible parties. Kentucky Utilities has entered into an agreement with the group as to the portion of the investigation and development costs to be borne by Kentucky Utilities in connection with the site. The agreement does not cover costs which may be incurred in connection with any remediation plan. Any remediation plan would be subject to approval of the EPA. Although a final plan has yet to be developed or approved, Kentucky Utilities does not believe that any liability with respect to the site will have a material impact on its financial position or results of operations.
Regulation
Kentucky Utilities is subject to the jurisdiction of the Kentucky Public Service Commission (PSC) and the Virginia State Corporation Commission (SCC) as to rates, service, accounts, issuance of securities and in other respects. By reason of owning and operating a small amount of electric utility property in one county in Tennessee (having a gross book value of about $212,000), Kentucky Utilities may also be subject to the jurisdiction of the Tennessee Public Service Commission as to rates, accounts, issuance of securities and in other respects. Since 1992, utilities in Kentucky have been allowed to use either a historical test period or a forward-looking test period in rate filings.
Kentucky Utilities' fuel adjustment clause for Kentucky customers, which operates to reflect changes in the cost of fuel in billings to customers, is designed to conform to a general regulation providing for a uniform monthly fuel adjustment clause for all electric utilities in Kentucky subject to the jurisdiction of the PSC. The clause is based on a formula approved by the Federal Energy Regulatory Commission (FERC) but with certain modifications, including the exclusion of excess fuel expense attributable to certain forced outages, the filing of fuel procurement documentation, a procedure for billing over and under recoveries of fuel cost fluctuations from the base rate level and provision for periodic public hearings to review past adjustments, to make allowance for any past adjustments found not justified, to disallow any improper expenses and to re-index base rates to include current fuel costs.
The fuel adjustment clause mechanism for Virginia customers, which is
adjusted annually, uses an average fuel cost factor based primarily on projected test year fuel costs. The fuel cost factor is adjusted for the over or under collection of fuel costs from the previous year.
Rate regulation in Kentucky allows each utility, with a PSC-approved environmental compliance plan and environmental surcharge rider, to recover on a current basis the cost of complying with federal, state or local environmental requirements, including the 1990 Clean Air Act Amendments, which apply to coal combustion wastes and by-products from facilities utilized for the production of energy from coal. During 1994, the PSC approved Kentucky Utilities' environmental surcharge, which is designed to allow Kentucky Utilities to recover any compliance related operating expenses and to earn a return on compliance related capital expenditures on costs not already included in existing rates through the application of the surcharge each month to customers' bills. Surcharge billings are subject to periodic PSC review of the level of environmental expenditures and reconciliation of previous surcharge billings with actual costs. For additional information regarding the environmental surcharge, see Item 3, Legal Proceedings.
Integrated resource planning regulations in Kentucky require Kentucky Utilities and the other major utilities to make biennial filings with the PSC, of various historical and forecasted information relating to forecasted load, capacity margins and demand-side management techniques.
Pursuant to Kentucky law, the PSC has established the boundaries of the service territory or area of each supplier of retail electric service in Kentucky (including Kentucky Utilities), other than municipal corporations, within which each such supplier shall have the exclusive right to render retail electric service.
The SCC requires each Virginia utility to make annual filings of either a base rate change or an Annual Informational Filing consisting of a set of standard financial schedules. These filings are subject to review by the SCC Staff. The SCC issues a Staff Report, which includes any findings or recommendations to the SCC relating to the individual utility's financial performance during the historic 12 month period, including previously accepted adjustments.
The FERC has jurisdiction under the Federal Power Act over certain of the electric utility facilities and operations and accounting practices of Kentucky Utilities, and in certain other respects as provided in the Act.
The FERC has classified Kentucky Utilities as a "public utility" as defined in the Act.
Kentucky Utilities is presently exempt from all the provisions of the Public Utility Holding Company Act of 1935, except Section 9(a)(2) thereof (which relates to the acquisition of securities of public utility companies), by virtue of the exemption granted by an order of the Securities and Exchange Commission dated April 19, 1949 and, absent further action by the Commission, by virtue of annual exemption statements filed by Kentucky Utilities with the Commission pursuant to Rule 2 prescribed under the Act.
National Energy Policy Act
See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation - Utility Issues - Competition.
Transmission Services and Power Services Tariffs
On September 30, 1994, Kentucky Utilities filed an application with the FERC for approval to sell power on a wholesale basis at market-based rates under a proposed Power Services (PS) Tariff. In connection with the PS Tariff filing, Kentucky Utilities also filed a Transmission Service Tariff (TS) under which it would provide firm and nonfirm transmission services to eligible customers. Kentucky Utilities would offer the TS Tariff to customers seeking access to KU's transmission lines, and would use the TS Tariff for its own transmission needs when it makes opportunity sales.
On November 30, 1994, the FERC accepted for filing the Transmission Services Tariff and permitted the tariff to be placed in effect, subject to refund, on December 1, 1994. A procedural schedule was also established, with hearings scheduled for July, 1995. In the same Order, the FERC rejected Kentucky Utilities' proposed market-based PS Tariff, without prejudice, thereby permitting Kentucky Utilities to correct identified deficiencies. On December 13, 1994, Kentucky Utilities filed a response to the FERC's Order seeking clarification of certain aspects of the Order and included in its response certain supplemental information which the FERC deemed necessary for approval of the PS Tariff.
Item 2.



Item 2. Properties
Substantially all properties are subject to the lien of Kentucky Utilities' Mortgage Indenture.
Construction
Construction on two 110-MW combustion turbine peaking units was substantially completed in 1994. The first peaking unit was placed into commercial operation in 1994 and the second unit was placed into commercial operation in February 1995. The total construction expenditures of Kentucky Utilities for the years 1995 through 1999 are estimated at $521 million. Such expenditures include an estimated $182 million for generating facilities, $66 million for transmission facilities and $273 million for distribution and general facilities. Included in total construction expenditures for the 1995-1999 period are $120 million for 440-MW of peak generating capacity, in addition to the units mentioned above, to be added during 1995-1999 (110-MW in each year 1995-1998) and $23 million for environmental compliance (of which $18 million is for compliance with the 1990 Clean Air Act Amendments).
All necessary permits and approvals for the units to go on line in 1995 and 1996 have been obtained. Kentucky Utilities has no plans to install base load generating capacity before 2010. Construction expenditures for the years 1990 through 1994 aggregated about $581 million. See Note 4 of the Notes to Financial Statements for the estimated amounts of construction expenditures for each of the years 1995 through 1999.
Kentucky Utilities frequently reviews its construction program and construction expenditures, which may be affected by numerous factors, including the rate of load growth, changes in construction costs, changes in environmental regulations, least cost planning, the adequacy of rate relief and Kentucky Utilities' ability to raise necessary capital (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations). Kentucky Utilities' planned additions to its electric generating capacity are based on future load projections using estimated load growth rates. Consideration is also given to projections by neighboring utilities of their future loads and capacity. However, forecasts of future loads are subject to numerous uncertainties, including economic conditions and effectiveness of energy conservation measures.
Item 3.

Item 3. Legal Proceedings
By order of July 19, 1994, the PSC approved Kentucky Utilities' plan for environmental surcharge adjustments to customer billings beginning in August 1994. The surcharge, authorized by a Kentucky statute enacted in 1992, is designed to recover certain ongoing operating and capital costs, not already included in existing rates, related to compliance with federal, state or local environmental requirements associated with the production of energy from coal, including the 1990 Clean Air Act Amendments. Surcharge billings are subject to periodic PSC review of the level of environmental expenditures and reconciliation of previous surcharge billings with actual costs.
On September 9, 1994, the Attorney General of the Commonwealth of Kentucky (Attorney General) filed an action in the Franklin County (KY) Circuit Court challenging the constitutionality of the Kentucky surcharge statute and seeking to vacate the PSC order of July 19, 1994 on the ground, among others, that the environmental surcharge approved by the PSC will deprive Kentucky Utilities' customers of their property without due process of law. The Attorney General has been joined by interveners asserting similar claims on behalf of ratepayer groups. In December 1994, the Circuit Court denied a motion by the Attorney General and two interveners seeking to have surcharge collections deposited with the court pending the outcome of the litigation. Management believes that, based on its review of the circumstances, the surcharge statute is constitutional and that the PSC order of July 19, 1994 approving the surcharge will be upheld. In the remote occurrence that the statute is declared unconstitutional, amounts collected pursuant to the PSC order may be subject to refund.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant Current Positions Held During at Least the Name and Age Positions Held Last 5 Years
John T. Newton Chairman and Chairman of the Board of Kentucky Age 64 Director Utilities since November 1987, and President from January 1987 to November 1994. Director of Kentucky Utilities since December 1974. Michael R. Whitley President and President of Kentucky Utilities Age 51 Director since November 1994, and Director since March 1992. Senior Vice- President of Kentucky Utilities from March 1987 to November 1994. Secretary of Kentucky Utilities from July 1978 to November 1992.
James M. Allison Senior Vice- Senior Vice-President of Kentucky Age 41 President Utilities since November 1994. Vice-President of Kentucky Utilities from February 1993 to November 1994. President and Chief Operating Officer of Wheeling Power Company from October 1989 to January 1993.
O. M. Goodlett Senior Vice- Senior Vice-President of Kentucky Age 47 President Utilities since November 1992. Vice-President of Kentucky Utilities from April 1982 to November 1992. Wayne T. Lucas Senior Vice- Senior Vice-President of Kentucky Age 47 President Utilities since November 1994. Vice President of Kentucky Utilities from November 1986 to November 1994.
George S. Brooks II General Corporate Secretary of Kentucky Age 44 Counsel and Utilities since November 1992, and Corporate General Counsel since January Secretary 1988. Gary E. Blake Vice-President Vice-President of Kentucky Age 41 Utilities since November 1992. Western Division Manager of Kentucky Utilities from October 1991 to November 1992. Assistant Western Division Manager of Kentucky Utilities from March 1990 to October 1991. Field Operations Coordinator for Kentucky Utilities from April 1986 to March 1990.
William E. Casebier Vice-President Vice-President of Kentucky Age 52 Utilities since May 1988.
Executive Officers of the Registrant (continued)
Current Positions Held During at Least the Name and Age Positions Held Last 5 Years Linda M. DiMascio Vice-President Vice-President of Kentucky Age 40 Utilities since February 1995. Director of Human Resources of Tucker Housewares from September 1994 to February 1995. Senior Area Coordinator for U.S. Manufacturing Department of Mobil Oil Corporation from April 1992 to September 1994. Assistant Employee Relations Manager, Torrance Refinery of Mobil Oil Corporation from October 1989 to April 1992.
Robert M. Hewett Vice-President Vice-President of Kentucky Age 47 Utilities since January 1982.
Ronald L. Whitmer Vice-President Vice-President of Kentucky Age 62 Utilities since November 1992. Director of Production and Generation Construction of Kentucky Utilities from May 1985 to November 1992. William N. English Treasurer Treasurer of Kentucky Utilities Age 44 since April 1982.
Michael D. Robinson Controller Controller of Kentucky Utilities Age 39 since August 1990. Assistant Controller of Kentucky Utilities from August 1983 to August 1990. John J. Maloy, Jr. Assistant Assistant Treasurer of Kentucky Age 40 Treasurer Utilities since August 1984. (Not an Executive Officer)
Note: Officers are elected annually by the Board of Directors. There is no family relationship between any executive officer and any other executive officer or any director.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
All of the outstanding common stock of Kentucky Utilities is held by KU Energy.
The following table sets forth the cash distributions (in thousands of dollars) on common stock paid by Kentucky Utilities for the periods indicated:
1994 1993 First Quarter $ 15,411 $ 15,127 Second Quarter $ 15,411 $ 15,127 Third Quarter $ 15,411 $ 15,127 Fourth Quarter $ 15,411 $ 15,127
See Note 5 of the Notes to Financial Statements.
Item 7.


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Kentucky Utilities Company (KU), an electric utility, is a wholly owned subsidiary of KU Energy Corporation (KU Energy).
RESULTS OF OPERATIONS
1994 Compared to 1993
Net Income Applicable to Common Stock
Net income applicable to common stock in 1994 was $75.1 million as compared to $78.7 million in 1993. The decline reflects increases in operating expenses primarily related to purchased power. The benefits of weather in the first half of 1994 were offset by the impact of milder weather in the third and fourth quarters of the year. Net income applicable to common stock for 1994 includes a one-time recovery of about $1.9 million associated with the resolution of a coal contract dispute. For additional detail concerning the refunds resulting from resolution of the dispute, refer to Note 1 of the Notes to Financial Statements, "Operating Revenues and Fuel Costs".
Kilowatt-hour (kWh) sales in 1994 were 11% above sales in 1993. The increase was primarily due to greater sales to neighboring utilities and increased sales to industrial customers. Sales to other electric utilities rose 62% in 1994 due to increased demand for power from neighboring utilities. While management believes the level of sales to other utilities was unusually high in 1994, KU will aggressively pursue future opportunities in the bulk power market. Industrial sales rose 7% in 1994 reflecting a continued trend of growth in the manufacturing sector of KU's service area. About 42% of the industrial sales increase for 1994 was due to greater sales to Toyota Motor Manufacturing, USA, Inc. (TMM), KU's largest customer. In March 1994, TMM completed an $800 million assembly plant expansion. Residential sales were flat as
compared to 1993.
As a result of refunds to customers of fuel costs savings associated with the resolution of a coal contract dispute, operating revenues in 1994 were reduced by about $19.4 million, and fuel expense was reduced by about $23.1 million (refer to Note 1 of the Notes to Financial Statements, "Operating Revenues and Fuel Costs"). Excluding the impact of the refund to customers, revenues in 1994 increased $46.1 million (8%) over 1993 as a result of increased kWh sales.
1994 Kilowatt-Hour Sales by Classification
Year Ended December 31, 1994 Residential 27% Commercial 19% Industrial 21% Mine Power 5% Public Authorities 7% Other Electric Utilities 21% Total 100%
Fuel Expense
Excluding the effect of the above referenced refunds to customers, fuel expense increased $10.7 million (6%) in 1994. This increase was due to a 3% increase in annual coal consumption attributable to greater kWh generation and to a 2% increase in the average price per ton of coal consumed.
Purchased Power Expense
Purchased power expense increased $26.7 million (77%) in 1994 due to higher demand costs ($13.8 million) and increased kWh purchases ($12.9 million). The higher demand costs are related to KU's decision to increase purchased power commitments as part of its strategy to obtain the most economical sources of energy supply, which allows KU to delay the need for additional baseload capacity. Effective January 1, 1994, KU elected to increase from 5% to 20% its entitlement to the available capacity of a 1,000-megawatt generating station owned by Electric Energy, Inc. (EEI). KU is a 20% owner of EEI. The increase in power purchases was primarily from EEI.
Maintenance Expense
Maintenance expense for 1994 was $6.7 million (11%) above 1993. The increase was primarily due to damage from two severe ice storms in the first quarter of 1994 and to scheduled maintenance at KU's generating stations.
1993 Compared to 1992
Net Income Applicable to Common Stock
Net income applicable to common stock was $78.7 million in 1993 compared to $73.8 million in 1992. The increase in 1993 was largely due to weather-related growth in sales and lower interest charges attributable to debt refinancings and redemptions. Earnings in 1993 were negatively impacted by an increase in other operating expenses and a decline in interest and dividend income. Sales and Revenues
Sales in 1993 were 6% above 1992. The increase was the result of greater sales to residential and industrial customers. The increase in residential sales was largely weather-related. KU's customers set an all-time record peak demand for electricity of 3,176 megawatts in July 1993 during a period of unusually warm weather. The increase in industrial sales for 1993 reflected the general strength of the service area economy as well as an increase in the number of industrial customers.
Excluding the effect of refunds to customers associated with the resolution of a coal contract dispute (refer to Note 1 of the Notes to Financial Statements, "Operating Revenues and Fuel Costs"), revenues increased $34.1 million (6%) in 1993. This increase was primarily a result of greater kWh sales.
Fuel and Purchased Power Expenses
Fuel expense, excluding the effect of the above referenced refunds to customers, increased 9% in 1993. The increase was primarily due to a 7% increase in coal consumption attributable to greater kWh generation.
Purchased power expense for 1993 was $2.0 million (6%) above 1992. The increase reflected greater demand charges associated with a new short- term capacity contract with a neighboring utility, partially offset by a 5% decrease in power purchases. The decline in power purchases was due to a reduction in the availability of Owensboro Municipal Utilities' (OMU) generating units during scheduled maintenance of those units in the second quarter of 1993. A contract between KU and OMU allows KU to purchase, on an economic basis, surplus power from a 400-megawatt generating station owned by OMU.
Other Operating Expenses
Other operating expenses for 1993 increased $11.0 million (12%), $6.3 million of which resulted from the adoption of a new accounting standard. (Refer to Note 3 of the Notes to Financial Statements, "Other Postretirement Benefits").
Other Income and Deductions
Other income and deductions in 1993 declined $2.6 million. A reduction in interest and dividend income was the result of lower levels of cash investments.
Interest Charges
Interest charges decreased $8.2 million (20%) in 1993. The decline resulted from the redemption of two debt issues near the beginning of the
second quarter of 1993 and the refinancing of several debt issues during the second half of 1992 and early in the third quarter of 1993 at significantly lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
KU continues to maintain a strong financial position. At the end of 1994, common stock equity represented 51.3% of total capitalization while long-term debt was 45.1%, and preferred stock was 3.6%. KU's financial strength is reflected in excellent credit ratings. Rating agencies are applying stricter standards to utility credits in light of increasing competition in the utility industry. This has resulted in credit downgrades for some utilities. Despite the more stringent standards, KU has maintained high quality bond ratings of AA (Duff & Phelps), Aa2 (Moody's) and AA- (Standard & Poor's).
Cash from operations accounted for 55% of cash requirements in 1994 as compared to 67% in 1993 and 68% for 1992. Cash requirements in the above percentages exclude optional debt refinancings and redemptions and optional preferred stock redemptions.
Financing
On behalf of KU, $54 million of Variable Rate Collateralized Solid Waste Disposal Facility Revenue Bonds was issued in 1994, and $50 million of 5 3/4% Collateralized Solid Waste Disposal Facility Revenue Bonds was issued in 1993. Proceeds from the sale of these tax exempt issues were used to fund a portion of the costs of certain environmental compliance facilities at KU's Ghent Generating Station.
To provide working capital for operations, KU issued commercial paper in 1994. At the end of 1994, KU had $76.3 million outstanding under its commercial paper program.
Taking advantage of favorable market conditions in 1993, KU refinanced $120 million of first mortgage bonds at significantly lower interest rates. KU had refinanced about $180 million of higher cost debt in 1992. These refinancings reduced annual interest expense by about $5.4 million.
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.
Through refinancing activities, KU has lowered its embedded costs of long-term debt and preferred stock as shown below.
Construction Requirements
Construction expenditures were $193 million in 1994. Of that amount, about $62 million related to compliance with the 1990 Clean Air Act Amendments, $21 million to other environmental compliance measures and $38 million to construction of combustion turbine generating units (peaking units).
Projected construction expenditures for the 1995-1999 period are $521 million. Included in this amount is $120 million for peaking units. Also included in the 1995-1999 construction total is $23 million for environmental compliance measures of which $18 million is for compliance with the 1990 Clean Air Act Amendments.
KU expects to provide about 93% of its 1995-1999 construction requirements through internal sources of funds with the balance primarily from long-term debt and/or preferred stock.
UTILITY ISSUES
Competition
Increasing competitive pressures continue to challenge the utility industry. Set in motion by the National Energy Policy Act of 1992 (NEPA), these pressures are moving the utility industry to a less regulated and more competitive operating environment. Under NEPA, the Federal Energy Regulatory Commission (FERC) was given authority to order utilities to open their transmission lines to third parties. NEPA also removed long-standing constraints on the development of wholesale power generation by establishing a new class of independent power producers which are generally exempt from traditional utility regulation.
While NEPA prohibits the FERC from ordering utilities to provide transmission access to retail customers (so-called retail wheeling), several states are considering proposals that would allow retail wheeling.
To date, competition from independent power producers has not been a factor in KU's service area largely due to KU's low rates. There are no pending proposals for retail wheeling in Kentucky or Virginia. However, the final impact of NEPA on the utility industry is yet to be determined. KU believes that competition will become more intense and that customers will demand and be given more energy options. With utility rates that are among the lowest in the nation, KU believes it is well-positioned for an increasingly competitive environment.
In September 1994, KU filed for FERC approval of a Power Services Tariff which would allow KU to leverage its low-cost position by selling power at competitive market-based rates. In connection with the Power Services Tariff filing, KU also filed a Transmission Service Tariff. KU would offer the Transmission Service Tariff to customers seeking access to its transmission lines, and would use the transmission tariff for its own transmission needs when it makes opportunity sales.
The Transmission Service Tariff became effective, subject to refund, on December 1, 1994, according to a November 1994 FERC order. In the same order, the FERC rejected, without prejudice, KU's proposed Power Services Tariff. KU has subsequently filed a response seeking clarification of certain aspects of the order. KU's filing included supplemental information which the FERC deemed necessary for approval of the Power Services Tariff.
In addition, KU has launched a series of innovative marketing programs designed to increase market share. KU has also developed strategic initiatives to increase off-system sales and to expand its market through economic development. KU's strong competitive position was confirmed in 1994 by the findings of a management and operations audit by the Kentucky Public Service Commission (PSC).
Management Audit
In August 1994, the PSC released the findings of a comprehensive management and operations audit that found KU to be "one of the better managed electric utilities in the country".
The audit, which began in November 1993, was a part of the PSC's ongoing management audit program. Vantage Consulting, Inc., selected by the PSC to perform the audit, found that "...KU is one of the most cost-effective utilities in the country." The audit findings cited KU's low embedded cost of generation, lean staff ratios, good corporate citizenship and favorable ratings from customers, employees and the financial community.
Included in the audit report was a list of recommendations, accepted by KU, designed to maintain KU's strong position in the future. Most of these are strategic considerations that help position KU as an even stronger energy provider in the increasingly competitive electric utility industry.
ENVIRONMENTAL MATTERS
Clean Air Act
The Clean Air Act Amendments of 1990 require KU to reduce sulfur dioxide and nitrogen oxide emissions in two phases. Phase I requirements, which were effective January 1, 1995, were met primarily through the installation of a flue gas desulfurization system (scrubber) on Unit 1 of KU's Ghent Generating Station. The scrubber became operational in December 1994. KU estimates capital costs for the scrubber and other equipment modifications related to Clean Air Act compliance to be $151 million through the year 1999. About $133 million of this amount had been spent through the end of 1994.
The flexible design of the Ghent Unit 1 scrubber provides an option of installing an additional scrubber on Ghent Unit 2 at a favorable cost. This option, which is not included in the above capital costs, may be considered if it is cost beneficial to the KU system to meet Phase II requirements, which become effective January 1, 2000. KU has purchased 12,900 Phase I emission allowances and has been awarded about 114,000 additional allowances through the Environmental Protection Agency's (EPA) Phase I Extension Plan Program. KU's current emission allowance strategy is to bank unused sulfur dioxide emission allowances. Under the current strategy, allowances accumulated (from the additional allowances received from the EPA and expected reduced emissions from the installation of the scrubber) will begin to be consumed when Phase II requirements become effective.
KU will continue to review and revise its compliance plans accordingly, to ensure that its environmental obligations are met in the most efficient and cost-effective manner.
Environmental Cost Recovery
In July 1994, the PSC approved KU's January 1994 application to implement an environmental surcharge. The surcharge, authorized by a Kentucky statute enacted in 1992, is designed to recover certain operating and capital costs related to compliance with federal, state or local environmental requirements associated with the production of energy from coal, including the 1990 Clean Air Act Amendments. KU's environmental surcharge was implemented in August 1994. KU estimates that it will result in an average increase of about 4% in a customer's monthly bill, leaving KU's rates very competitive. The constitutionality of the surcharge is being challenged in the Franklin County (Kentucky) Circuit Court. Management believes that, based on its review of the circumstances, the surcharge statute is constitutional and the PSC approval of July 1994 will be upheld.
Other
In 1990, KU received a letter from the EPA identifying KU and others as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act of 1980 for a disposal site in Daviess County, Kentucky. The EPA has turned over responsibility for investigation of the site and development of a remediation plan to a group (not including KU) originally named as potentially responsible parties. KU has entered into an agreement with the group as to the portion of the investigation and development costs to be borne by KU in connection with the site. Any remediation plan would be subject to approval of the EPA. Although a final, approved plan has yet to be developed, KU does not believe that any liability with respect to the
site will have a material impact on its financial position or results of operations.
PROVIDING FOR CUSTOMER GROWTH
KU's forecast indicates annual growth in sales and peak demand of 2.1% and 1.7%, respectively, over the next 15 years. KU plans to provide for customer growth in the '90s through purchased power, the addition of combustion turbine peaking units and demand-side management. There are no plans for additional coal-fired baseload capacity before 2010.
INFLATION
KU's rates are designed to recover operating and historical plant costs. Financial statements, which are prepared in accordance with generally accepted accounting principles, report operating results in terms of historic costs and do not evaluate the impact of inflation. Inflation affects KU's construction costs, operating expenses and interest charges. Inflation can also impact KU's financial performance if rate relief is not granted on a timely basis for increased operating costs.
Item 8.


Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kentucky Utilities Company:
We have audited the accompanying balance sheets and statements of capitalization of Kentucky Utilities Company (a Kentucky and Virginia corporation) as of December 31, 1994 and 1993, and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements and the schedule referred to below are the responsibility of Kentucky Utilities' management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kentucky Utilities Company as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As explained in Notes 2 and 3 to the financial statements, effective January 1, 1993, Kentucky Utilities Company changed its method of accounting for income taxes and postretirement benefits other than pensions.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(A)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP Arthur Andersen LLP
Chicago, Illinois January 30, 1995
Notes to Financial Statements Kentucky Utilities Company
1. Summary of Significant Accounting Policies
General
Kentucky Utilities Company (Kentucky Utilities) is the principal subsidiary of KU Energy Corporation. Certain amounts from prior periods have been reclassified to conform with the current year presentation.
Regulation
Kentucky Utilities is a public utility subject to regulation by the Kentucky Public Service Commission (PSC), the Virginia State Corporation Commission (SCC) and the Federal Energy Regulatory Commission (FERC). With respect to accounting matters, Kentucky Utilities maintains its accounts in accordance with the Uniform System of Accounts as defined by these agencies. Its accounting policies conform to generally accepted accounting principles applicable to rate regulated enterprises and reflect the effects of the ratemaking process. Other than the unamortized loss on reacquired debt, Kentucky Utilities' regulatory assets are insignificant.
Utility Plant
Utility plant is stated at the original cost of construction. The cost of repairs and minor renewals is charged to maintenance expense as incurred. Property unit replacements are capitalized and the depreciation reserve is charged with the cost, less net salvage, of units retired.
Depreciation
Provision for depreciation of utility plant is based on straight-line composite rates applied to the cost of depreciable property. The rates approximated 3.4% in 1994, and 3.3% in 1993 and 1992.
Cash and Cash Equivalents
For purposes of reporting cash flows, Kentucky Utilities considers highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents.
Kentucky Utilities utilizes a cash management mechanism that funds certain bank accounts for checks as they are presented to those banks. Kentucky Utilities classified checks written but not presented to those banks, which amounted to $11.5 million and $9.9 million at December 31, 1994 and 1993, respectively, in accounts payable.
Financial Instruments
Kentucky Utilities' temporary cash investments are classified as held-to- maturity and are reported under the caption "Cash and cash equivalents" on the Balance Sheet.
Notes to Financial Statements Kentucky Utilities Company
Unamortized Loss on Reacquired Debt
Kentucky Utilities defers costs (primarily call premiums) arising from the reacquisition or retirement of long-term debt. Costs related to refinanced debt are amortized over the lives of the new debt issues. Costs related to retired debt not refinanced are amortized over the period to the scheduled maturity of the retired debt.
Operating Revenues and Fuel Costs
Revenues are recorded based on services rendered to customers. Kentucky Utilities accrues an estimate of revenues for electric service furnished from the meter reading dates to the end of each accounting period. Cost of fuel used in electric generation is charged to expense as the fuel is consumed. The cost of fuel for 1992 included an amortization of buyout costs associated with the termination of a coal supply contract. A fuel adjustment clause adjusts operating revenues for changes in the level of fuel costs charged to expense. An environmental surcharge, implemented in August 1994, permits the utility to recover certain ongoing operating and capital costs of compliance with federal, state or local environmental requirements associated with the production of energy from coal, including the 1990 Clean Air Act Amendments.
Pursuant to regulatory orders, Kentucky Utilities has been refunding fuel cost savings related to the resolution of a coal contract dispute. Refunds to Kentucky retail customers commenced in July 1994. Refunds were made to Virginia retail customers during the period August 1993 through June 1994. Refunds were made to wholesale customers under the jurisdiction of the Federal Energy Regulatory Commission in lump sum payments in September 1993.
Operating revenues and fuel expense for the respective periods were reduced by the following amounts resulting from the above-mentioned refunds:
The difference between the reduction in Operating Revenues and the reduction in Fuel Expense is attributed to incurred litigation costs, fuel costs savings related to off-system sales and costs incurred to administer the refund plan. These amounts were allowed to be retained by Kentucky Utilities pursuant to regulatory orders.
Income Taxes
Kentucky Utilities establishes deferred tax assets and liabilities, as appropriate, for all temporary differences, and adjusts deferred tax balances to reflect changes in tax rates expected to be in effect during the periods the temporary differences reverse. Investment tax credits resulted from provisions of the tax law which permitted a reduction of
Notes to Financial Statements Kentucky Utilities Company
Kentucky Utilities' tax liability based on certain construction expenditures. Such credits have been deferred in the accounts and are being amortized as reductions in income tax expense over the life of the related property. Because of rate regulation, changes in tax rates are deferred and amortized as the temporary differences reverse.
2. Income Taxes
Effective January 1, 1993, Kentucky Utilities adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The adoption of this standard did not have a material impact on results of operation, cash flows or financial position.
Kentucky Utilities is included in the consolidated federal tax return of its parent company, KU Energy. Income taxes are allocated to the individual companies, including Kentucky Utilities, based on their respective taxable income or loss.
The accumulated deferred income taxes as set forth below and in the Balance Sheet arise from the following temporary differences:
Notes to Financial Statements Kentucky Utilities Company
The provision for deferred income taxes in 1992 primarily related to accelerated depreciation and other property related differences.
Kentucky Utilities' effective income tax rate, determined by dividing income taxes by the sum of such taxes and net income, was 35.2% in 1994, 35.3% in 1993 and 33.5% in 1992. The difference between the effective rate and the statutory federal income tax rate is attributable to the following factors:
3. Retirement Benefits
Pensions
Kentucky Utilities has a noncontributory defined benefit pension plan covering substantially all of its employees. Benefits under this plan are based on years of service, final average base pay and age at
Notes to Financial Statements Kentucky Utilities Company
retirement. Kentucky Utilities' funding policy is to make such contributions as are necessary to finance the benefits provided under the plan. Kentucky Utilities' contributions meet the funding standards set forth in the Employee Retirement Income Security Act of 1974. The plan assets consist primarily of equity and fixed income investments.
Kentucky Utilities also has a Supplemental Security Plan for certain management personnel. Retirement benefits under this plan are based on years of service, earnings and age at retirement. The plan has no advance funding. Benefit payments are made to retired employees or their beneficiaries from the general assets of Kentucky Utilities.
Notes to Financial Statements Kentucky Utilities Company
Other Postretirement Benefits
Effective January 1, 1993, Kentucky Utilities adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This standard provides accounting and disclosure requirements associated with Kentucky Utilities' obligation to provide postretirement benefits other than pensions to present and future retirees. In accordance with this standard, Kentucky Utilities accrues, during the years that the employee renders service, the expected cost of providing these benefits for retired employees, their beneficiaries and covered dependents. The impact on results of operations was an increase in pre-tax expense for the year ended December 31, 1993 of $6.3 million (net of capitalized payroll benefits). Kentucky Utilities, prior to 1993, recognized these costs on a pay-as-you-go (cash) basis. Amounts paid for retirees for 1992 amounted to $2.3 million.
Kentucky Utilities provides certain health care and life insurance benefits to eligible retired employees and their dependents. The postretirement health care plan is contributory for employees who retired after December 31, 1992, with retiree contributions indexed annually based upon the experience of retiree medical expenses for the preceding year. Pre-1993 retirees are not required to contribute to the plan. Kentucky Utilities' employees become eligible for retiree medical benefits after 15 years of service and attainment of age 55. The life insurance plan is noncontributory and is based on compensation levels prior to retirement.
In 1993, Kentucky Utilities began funding, in addition to current requirements for benefit payments, the maximum tax-favored amount allowed through certain tax deductible funding vehicles. Kentucky Utilities anticipates making similar funding decisions in future years, but will consider and make such funding decisions on the basis of tax, regulatory and other relevant conditions in effect at such times. The plan assets consist primarily of equity investments.
Notes to Financial Statements Kentucky Utilities Company
Notes to Financial Statements Kentucky Utilities Company
For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits is assumed for 1995. The health care cost trend rate is assumed to decrease gradually to 5.5% through 2003 and remain at that level thereafter over the projected payout period of the benefits. Increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994, by $11 million (17%) and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year by $1.5 million (21%).
4. Commitments and Contingencies
Construction Program
Kentucky Utilities frequently reviews its construction program and may revise its projections of related expenditures based on revisions to its estimated load growth and projections of its future load.
See Management's Discussion and Analysis of Financial Condition and Results of Operations - Construction Requirements for a discussion of future expenditures relating to construction of peaking units and compliance with the 1990 Clean Air Act Amendments.
Coal Supply
Obligations under Kentucky Utilities' coal purchase contracts are stated at prices effective January 1, 1995, and are subject to changes as defined by the terms of the contracts.
Purchased Power Agreements
Notes to Financial Statements Kentucky Utilities Company
Kentucky Utilities has purchase power arrangements with Owensboro Municipal Utilities (OMU) and Electric Energy, Inc. (EEI). Under the OMU agreement, which expires on January 1, 2020, Kentucky Utilities purchases, on an economic basis, all of the output of a 400-MW generating station not required by OMU. The amount of purchased power available to Kentucky Utilities during 1995-1999, which is expected to be approximately 9% of Kentucky Utilities' total kWh requirements, is dependent upon a number of factors including the units' availability, maintenance schedules, fuel costs and OMU requirements. Payments are based on the total costs of the station allocated per terms of the OMU agreement, which generally follows delivered kWh. Included in the total costs is Kentucky Utilities' proportionate share of debt service requirements on $27.3 million of OMU bonds outstanding at December 31, 1994. The debt service is allocated to Kentucky Utilities based on its annual allocated share of capacity, which averaged approximately 51% in 1994. In 1995, Kentucky Utilities' total costs will increase to include its proportionate share of debt service requirements on approximately $176.9 million of additional OMU bonds issued to finance capital improvements designed to enable OMU to comply with the 1990 Clean Air Act Amendments.
Kentucky Utilities has a 20% equity ownership in EEI, which is accounted for on the equity method of accounting. Kentucky Utilities' entitlement, beginning January 1, 1994, is 20% of the available capacity of a 1,000-MW station. Payments are based on the total costs of the station allocated per terms of an agreement among the owners, which generally follows delivered kWh.
Sinking Fund Requirements
Annual sinking fund requirements for Kentucky Utilities' first mortgage bonds may be met with cash or expenditures for bondable property as provided in the Mortgage Indenture. Kentucky Utilities intends to meet the 1995 sinking fund requirements with expenditures for bondable property.
Lines of Credit
Kentucky Utilities has aggregate bank lines of credit of $90 million, all of which remained unused at December 31, 1994. A portion of these credit lines ($30 million) expires in September, 1995 and the balance ($60 million) expires in December, 1997. In support of these lines of credit, Kentucky Utilities compensates the banks by paying a commitment fee.
5. Common Stock
Kentucky Utilities is subject to restrictions applicable to all corporations under Kentucky and Virginia law on the use of retained earnings for cash dividends on common stock, as well as those contained in its Mortgage Indenture and Articles of Incorporation. At December 31, 1994, there were no restricted retained earnings.
6. Preferred Stock
Notes to Financial Statements Kentucky Utilities Company
In December 1993, Kentucky Utilities issued 200,000 shares of 6.53% preferred stock. The proceeds were used to redeem 200,000 shares of 7.84% preferred stock on February 1, 1994.
As of December 31, 1994, there were 5.3 million shares of Kentucky Utilities preferred stock, having a maximum aggregate stated value of $200 million, authorized for issuance.
7. Short-Term and Long-Term Debt
Kentucky Utilities' short-term financing requirements are satisfied through the sale of commercial paper. The weighted average interest rate on the year-end balance was 6.07% for 1994.
In 1993, Kentucky Utilities entered into a loan agreement with the County of Carroll, Kentucky to finance the construction of solid waste disposal facilities. The County of Carroll issued $50 million of revenue bonds, with the proceeds held in a construction fund by a trustee. In 1994, Kentucky Utilities completed the draw down of the remaining $18.1 million revenue bond proceeds.
In 1994, Kentucky Utilities entered into a loan agreement with the County of Carroll, Kentucky to finance the construction of solid waste disposal facilities. The County of Carroll issued $54 million of variable rate revenue bonds, with the proceeds held in a construction fund. In 1994, Kentucky Utilities drew down $35.7 million relating to these bonds. Kentucky Utilities Pollution Control Series 10 Bonds are issued under Kentucky Utilities' Mortgage Indenture.
Under the provisions for the variable rate revenue bonds, Kentucky Utilities can choose between various interest rate options. Currently, the daily interest rate mode is being utilized. The average annual interest rate on the bonds during 1994 was 4.10%. The variable rate bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events. If tendered bonds are not remarketed, Kentucky Utilities has available lines of credit which may be used to repurchase the bonds.
Substantially all of Kentucky Utilities' utility plant is pledged as security for the First Mortgage Bonds.
Notes to Financial Statements Kentucky Utilities Company
8. Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents, escrow funds, construction funds, short-term borrowings and customers' deposits carrying values approximate fair value because of the short maturity of these amounts.
Long-term debt fair values are based on quoted market prices for Kentucky Utilities' first mortgage bonds and on current rates available to Kentucky Utilities for debt of the same remaining maturities for Kentucky Utilities' pollution control bonds and promissory note.
Kentucky Utilities has an interest rate swap agreement with a notional amount of $70 million. Fair value of this instrument is the estimated amount the counter-party would pay to Kentucky Utilities to terminate the swap at the date of measurement. This agreement expires in 1996. Kentucky Utilities has no downside interest rate risk associated with this agreement.
If the difference between fair value and carrying value of Kentucky Utilities' long-term debt was settled at amounts approximating those above, the anticipated regulatory treatment would require return of or allow recovery of these amounts in rates over a prescribed amortization period. Accordingly, any settlement would not have a significant impact on Kentucky Utilities' financial position or results of operations.
Supplementary Quarterly Financial Information (Unaudited) Kentucky Utilities Company
Quarterly financial results for 1994 and 1993 are summarized below. Generally, quarterly results may fluctuate due to seasonal variations, changes in fuel costs and other factors. Operating revenues for the third quarter of 1994 were reduced by $17.5 million related to refunds to customers of fuel cost savings associated with the resolution of a coal contract dispute. Operating revenues for other quarters were insignificantly impacted by the refunds. Refer to Note 1 of the Notes to Financial Statements for additional information.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant
Refer to KU Energy's definitive proxy statement (the "Proxy Statement") filed with the Securities and Exchange Commission in connection with its 1995 Annual Shareholder Meeting under the caption "Election of Directors--General" for the information required by this item pertaining to directors. Such information is incorporated herein by reference and is also filed herewith as Exhibit 99B. Information required by this item relating to executive officers of Kentucky Utilities is set forth under a separate caption in Part I hereof.
Item 11.

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.

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.

Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) The following (1) financial statements, (2) schedules, and (3) exhibits, are filed as a part of this Annual Report.
(1) Financial Statements
Report of Independent Public Accountants, Statements of Income and Retained Earnings for the three years ended December 31, 1994, Statements of Cash Flows for the three years ended December 31, 1994, Balance Sheets as of December 31, 1994 and 1993, Statements of Capitalization as of December 31, 1994 and 1993, and Notes to Financial Statements.
(2) Schedules
Schedule II Valuation and qualifying accounts.
The following Schedules are omitted as not applicable or not required under Regulation S-X:
I, III, IV, V.
(3) Exhibits
Number Description Page
3.A Amended and Restated Articles of Incorporation of Kentucky Utilities Company. (Exhibits 4.03 and 4.04 to Form 8-K Current Report of Kentucky Utilities Company, dated December 10, 1993). Incorporated by reference. - 3.B By-laws of Kentucky Utilities Company dated December 14, 1992. (Exhibit 3B to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1992). Incorporated by reference. -
4.A Indenture of Mortgage or Deed of Trust dated May 1, 1947 between Kentucky Utilities Company and Continental Illinois National Bank and Trust Company of Chicago and Edmond B. Stofft, as Trustees (Amended Exhibit 7(a) in File No. 2-7061), and Supplemental Indentures thereto dated, respectively, January 1, 1949 (Second Amended Exhibit 7.02 in File No. 2-7802), July 1, 1950 (Amended Exhibit 7.02 in File No. 2-8499), June 15, 1951 (Exhibit 7.02(a) in File No. 2-8499), June 1, 1952 (Amended Exhibit 4.02 in File No. 2-9658), April 1, 1953 (Amended Exhibit 4.02 in File No. 2-10120), April 1, 1955 (Amended Exhibit 4.02 in File No. 2-11476), April 1, 1956 (Amended Exhibit 2.02 in File No. 2-12322), May 1, 1969 (Amended Exhibit 2.02 in File No. 2- 32602), April 1, 1970 (Amended Exhibit 2.02 in File No. 2-36410), September 1, 1971 (Amended Exhibit 2.02 in File No. 2-41467), December 1, 1972 (Amended Exhibit 2.02 in File No. 2-46161), April 1, 1974 (Amended Exhibit 2.02 in File No. 2-50344), September 1, 1974 (Exhibit 2.04 in File No. 2-59328), July 1, 1975 (Exhibit 2.05 in File No. 2-59328), May 15, 1976 (Amended Exhibit 2.02 in File No. 2- 56126), April 15, 1977 (Exhibit 2.06 in File No. 2- 59328), August 1, 1979 (Exhibit 2.04 in File No. 2- 64969), May 1, 1980 (Exhibit 2 to Form 10-Q Quarterly Report of Kentucky Utilities for the quarter ended June 30, 1980), September 15, 1982 (Exhibit 4.04 in File No. 2-79891), August 1, 1984 (Exhibit 4B to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1984), June 1, 1985 (Exhibit 4 to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended June 30, 1985), May 1, 1990 (Exhibit 4 to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended June 30, 1990), May 1, 1991 (Exhibit 4 to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended June 30, 1991), May 15, 1992 (Exhibit 4.02 to Form 8-K of Kentucky Utilities
Number Description Page
4.A Company dated May 14, 1992), August 1, 1992 (Exhibit (cont.) 4 to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended September 30, 1992), June 15, 1993 (Exhibit 4.02 to Form 8-K of Kentucky Utilities Company dated June 15, 1993) and December 1, 1993 (Exhibit 4.01 to Form 8-K of Kentucky Utilities Company dated December 10, 1993). Incorporated by reference. - 4.B Supplemental Indenture dated March 1, 1992 between Kentucky Utilities and Continental Bank, National Association and M. J. Kruger, as Trustees, providing for the conveyance of properties formerly held by Old Dominion Power Company. (Exhibit 4B to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1992). Incorporated by reference. -
4.C Supplemental Indenture dated November 1, 1994 between Kentucky Utilities Company and Bank of America Illinois, as Trustee. 48-65 10.A Kentucky Utilities' Amended and Restated Performance Share Plan (Exhibit 10A to Form 10-Q Quarterly Report of Kentucky Utilities Company for the quarter ended June 30, 1993). Incorporated by reference. -
10.B Kentucky Utilities' Annual Performance Incentive Plan (Exhibit 10B to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1990). Incorporated by reference. -
10.C Amendment No. 1 to Kentucky Utilities' Annual Performance Incentive Plan (Exhibit 10D to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1991). Incorporated by reference. - 10.D Amendment No. 2 to Kentucky Utilities' Annual Performance Incentive Plan (Exhibit 10H to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1993). Incorporated by reference. -
10.E Amendment No. 3 to Kentucky Utilities' Annual Performance Incentive Plan (Exhibit 10I to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1993). Incorporated by reference. - 10.F Kentucky Utilities' Executive Optional Deferred Compensation Plan (Exhibit 10C to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1990). Incorporated by reference. -
10.G Amendment No. 1 to Kentucky Utilities' Executive Optional Deferred Compensation Plan (Exhibit 10F to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1991). Incorporated by reference. -
Number Description Page
10.H Amendment No. 2 to Kentucky Utilities' Executive Optional Deferred Compensation Plan (Exhibit 10J to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1993). Incorporated by reference. - 10.I Kentucky Utilities' Supplemental Security Plan (Exhibit 10I to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1991). Incorporated by reference. -
10.J Amendment No. 1 to Kentucky Utilities' Supplemental Security Plan. 66-67 10.K Amendment No. 2 to Kentucky Utilities' Supplemental Security Plan. 68-70
10.L Kentucky Utilities' Director Retirement Retainer Program, and Amendment No. 1 (Exhibit 10G to Form 10-K Annual Report of Kentucky Utilities Company for the year ended December 31, 1991). Incorporated by reference. -
10.M Kentucky Utilities' Amended and Restated Director Deferred Compensation Plan 71-87 12 Computation of Ratio of Earnings to Fixed Charges 88
21 List of Subsidiaries 89 23 Consent of Independent Public Accountants 90
27 Financial Data Schedule (required for electronic filing only in accordance with Item 601(c)(1) of Regulation S-K). -
99.A Description of Common Stock 91-92 99.B Director and Executive Officer Information 93-101
Note - Exhibit numbers 10.A through 10.M are management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K.
The following instruments defining the rights of holders of certain long- term debt of Kentucky Utilities Company have not been filed with the Securities and Exchange Commission but will be furnished to the Commission upon request.
1. Loan Agreement dated as of May 1, 1990 between Kentucky Utili- ties and the County of Mercer, Kentucky, in connection with $12,900,000 County of Mercer, Kentucky, Collateralized Solid Waste Disposal Facility Revenue Bonds (Kentucky Utilities Company Project) 1990 Series A, due May 1, 2010 and May 1, 2020.
2. Loan Agreement dated as of May 1, 1991 between Kentucky Utili- ties and the County of Carroll, Kentucky, in connection with $96,000,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series A, due September 15, 2016.
3. Loan Agreement dated as of August 1, 1992 between Kentucky Utilities and the County of Carroll, Kentucky, in connection with $2,400,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series C, due February 1, 2018.
4. Loan Agreement dated as of August 1, 1992 between Kentucky Utilities and the County of Muhlenberg, Kentucky, in connection with $7,200,000 County of Muhlenberg, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series A, due February 1, 2018.
5. Loan Agreement dated as of August 1, 1992 between Kentucky Utilities and the County of Mercer, Kentucky, in connection with $7,400,000 County of Mercer, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series A, due February 1, 2018.
6. Loan Agreement dated as of August 1, 1992 between Kentucky Utilities and the County of Carroll, Kentucky, in connection with $20,930,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (Kentucky Utilities Company Project) 1992 Series B, due February 1, 2018.
7. Loan Agreement dated as of December 1, 1993, between Kentucky Utilities and the County of Carroll, Kentucky, in connection with $50,000,000 County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities Revenue Bonds (Kentucky Utilities Company Project) 1993 Series A due December 1, 2023.
8. Loan Agreement dated as of November 1, 1994, between Kentucky Utilities and the County of Carroll, Kentucky, in connection with $54,000,000 County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities Revenue Bonds (Kentucky Utilities Company Project) 1994 Series A due November 1, 2024.
(B) No reports on Form 8-K were filed by Kentucky Utilities during the last quarter of 1994.
Note-Other valuation and qualifying accounts are not significant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 9, 1995.
KENTUCKY UTILITIES COMPANY
/s/ John T. Newton John T. Newton Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
Signature Title
/s/ John T. Newton John T. Newton Chairman and Director (Principal Executive Officer) /s/ Michael R. Whitley Michael R. Whitley President and Director
/s/ O. M. Goodlett O. M. Goodlett Senior Vice-President (Principal Financial Officer) /s/ Michael D. Robinson Michael D. Robinson Controller (Principal Accounting Officer)
/s/ Mira S. Ball Mira S. Ball Director
/s/ W. B. Bechanan W. B. Bechanan Director
/s/ Harry M Hoe Harry M. Hoe Director
/s/ Milton W. Hudson Milton W. Hudson Director
/s/ Frank V. Ramsey, Jr. Frank V. Ramsey, Jr. Director
/s/ Warren W. Rosenthal Warren W. Rosenthal Director
/s/ William L. Rouse, Jr. William L. Rouse, Jr. Director
/s/ Charles L. Shearer Charles L. Shearer Director
March 9, 1995