UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DCWashington, D. C. 20549
FORM 10-Q
X(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant;Registrant, State of Incorporation;Incorporation, IRS Employer
File Number Address;Address, and Telephone Number Identification No.
1-10944 KU1-10568 LG&E Energy Corporation 61-1141273Corp. 61-1174555
(A Kentucky Corporation)
One Quality220 West Main Street
Lexington,P.O. Box 32030
Louisville, Ky. 40232
(502) 627-2000
2-26720 Louisville Gas and Electric Company 61-0264150
(A Kentucky 40507-1428
(606) 255-2100Corporation)
220 West Main Street
P.O. Box 32010
Louisville, Ky. 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(606) 255-2100
Indicate by check mark whether the Registrantsregistrant (1) havehas filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that such Registrants werethe
registrant was required to file such reports), and (2) havehas been subject to
such filing requirements for the past 90 days. Yes X No
.
Indicate the number of shares outstanding of each of the issuers'issuer's classes
of common stock, as of the latest practicable date:
KULG&E Energy Corporation: Common stock, noCorp.
129,677,030 shares, without par value, none
Kentucky Utilities Company: Common stock, noas of April 30, 1999.
Louisville Gas and Electric Company
21,294,223 shares, without par value, 37,817,878
shares outstanding andas of April 30, 1999,
all held by LG&E Energy Corp.
at May 13, 1998
-1-
KU ENERGY CORPORATION
AND
KENTUCKY UTILITIES COMPANY
FORMKentucky Utilities Company
37,817,878 shares, without par value, as of April 30, 1999,
all held by LG&E Energy Corp.
This combined Form 10-Q FOR THE QUARTER ENDED MARCH 31, 1998*
CONTENTS
PART I. FINANCIAL INFORMATION Page No.
Item 1: Financial Statements
KU ENERGY CORPORATION
Consolidated Statementsis separately filed by LG&E Energy Corp.,
Louisville Gas and Electric Company and Kentucky Utilities Company.
Information contained herein related to any individual registrant is filed
by such registrant on its own behalf. Each registrant makes no
representation as to information relating to the other registrants. In
particular, information contained herein related to LG&E Energy Corp. or
any of Income 3
Consolidated Statements of Cash Flows 4
Consolidated Balance Sheets 5
KENTUCKY UTILITIES COMPANY
Statements of Income 6
Statements of Cash Flows 7
Balance Sheets 8
CONDENSED NOTES TO FINANCIAL STATEMENTS OF KU ENERGY
CORPORATION AND KENTUCKY UTILITIES COMPANY 9-13
Item 2: Managements Discussionits direct or indirect subsidiaries other than Louisville Gas and
Analysis of
Financial Condition and Results of Operations
KU ENERGY CORPORATION AND KENTUCKY
UTILITIES COMPANY 14-21
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 22
Item 5: Other Information 22
Item 6: Exhibits and Reports on Form 8-K 28
Signatures 29
*Information included herein which relates solely to KU Energy CorporationElectric Company or Kentucky Utilities Company is provided solely by KULG&E
Energy CorporationCorp., not Louisville Gas and not byElectric Company or Kentucky Utilities
Company, and shall be deemed not included in the Quarterly ReportForm 10-Q of Louisville
Gas and Electric Company or the Form 10-Q of Kentucky Utilities Company.
-2-
TABLE OF CONTENTS
PART I
Item 1 Financial Statements
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income 1
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 5
Consolidated Statements of Retained Earnings 7
Consolidated Statements of Comprehensive Income 8
Louisville Gas and Electric Company
Statements of Income 9
Balance Sheets 10
Statements of Cash Flows 12
Statements of Retained Earnings 13
Statements of Comprehensive Income 14
Kentucky Utilities Company
Statements of Income 15
Balance Sheets 16
Statements of Cash Flows 18
Statements of Retained Earnings 19
Notes to Financial Statements 20
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 27
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 36
PART II
Item 1 Legal Proceedings 37
Item 6 Exhibits and Reports on Form 8-K 38
Signatures 39
Part I. FINANCIAL INFORMATION
KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except for per share amounts)
For theFinancial Information - Item 1. Financial Statements
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited - Thousands of $ Except Per Share Data)
Three Months
Ended
MarchMar. 31,
1999 1998
1997
Operating Revenues $183,210 $178,908
Operating Expenses:REVENUES:
Electric utility $361,673 $323,795
Gas utility 75,779 92,759
International and non-utility 128,511 34,170
Total revenues 565,963 450,724
OPERATING EXPENSES:
Operation and maintenance:
Fuel principally coal,
used in generation 48,347 44,713
Electricand power purchased 17,989 17,603
Other205,088 115,765
Gas supply expenses 66,619 79,714
Utility operation and
maintenance 103,705 102,983
International and non-utility
operation and maintenance 41,254 13,321
Depreciation and amortization 52,538 50,072
Total operating expenses 30,400 31,156
Maintenance 13,335 12,013
Depreciation 21,533 20,882
Federal and state income taxes 14,738 15,334
Other taxes 4,172 4,071
Total Operating Expenses 150,514 145,772
Net Operating Income 32,696 33,136
Other Income and Deductions:
Interest and dividend income 628 612469,204 361,855
Equity in earnings of uncon-
solidated ventures (Note 4) 21,656 5,981
OPERATING INCOME 118,415 94,850
Other income and deductions(deductions) 6,453 2,703
Interest charges and preferred dividends 30,520 26,057
Minority interest 1,571 1,343
Income before income taxes 92,777 70,153
Income taxes 35,210 23,479
Income from continuing
operations 57,567 46,674
Loss from discontinued
operations, net of income
tax benefit of $1,985 (Note 3) - (3,506)
Income before cumulative
effect of change in
accounting principle $ 57,567 $ 43,168
- 1 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months
Ended
Mar. 31,
1999 1998
Income before cumulative
effect of change in
accounting principle $ 57,567 $ 43,168
Cumulative effect of change
in accounting for start-up
costs, net 2,351 1,555of income tax
benefit of $5,061 - (7,162)
NET INCOME $ 57,567 $ 36,006
Average common shares
outstanding 129,677 129,683
Earnings (loss) per share - basic and diluted:
Continuing operations $ .44 $ .36
Discontinued operations .00 (.02)
Cumulative effect of
accounting change .00 (.06)
Total Other Income and Deductions 2,979 2,167
Income Before Interest and Other Charges 35,675 35,303
Interest and Other Charges 10,270 10,440
Net Income $ 25,405.44 $ 24,863
Average Common Shares Outstanding 37,818 37,818
Basic Earnings Per Common Share $ .67 $ .66.28
The accompanying Condensed Notes to Financial Statementsnotes are an integral part of these financial statements.
-3-- 2 -
KU ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSLG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
(in thousandsMar. 31, Dec. 31,
1999 1998
CURRENT ASSETS:
Cash and temporary cash investments $ 128,548 $ 108,723
Marketable securities 18,253 20,862
Accounts receivable - less reserve 270,105 285,794
Materials and supplies - primarily at average cost:
Fuel (predominantly coal) 85,072 78,855
Gas stored underground 11,895 34,144
Other 74,553 72,457
Net assets of dollars)
For the
Three Months
Ended March 31,
1998 1997
Cash Flows from Operating Activities:
Net Income $ 25,405 $ 24,863
Items not requiring (providing) cash currently:
Depreciation 21,533 20,882
Deferred income taxesdiscontinued opera-
tions (Note 3) 146,613 143,651
Prepayments and investment tax credit 250 3,213
Changes inother 35,390 37,784
Total current assets and liabilities:
Change in fuel inventory 4,907 5,646
Change in accounts receivable (1,802) 7,476
Change in accounts payable (1,509) (3,506)
Change in accrued taxes 15,802 13,517
Change in accrued770,429 782,270
UTILITY PLANT:
At original cost 5,615,225 5,581,667
Less: reserve for depreciation 2,396,575 2,352,306
Net utility revenues 6,576 623
Change in other current assets and liabilities 3,865 4,333
Other--net 369 (4,706)
Net Cash Provided by Operating Activities 75,396 72,341
Cash Flows from Investing Activities:
Construction expendituresplant 3,218,650 3,229,361
OTHER PROPERTY AND INVESTMENTS - utility (15,299) (18,127)LESS RESERVES:
Investment in independent power projects (886) (4,995)
Proceeds from insurance reimbursements 8 4,046
Proceeds from independent power projects 1,356 30unconsolidated
ventures (Notes 2 and 4) 225,695 167,877
Non-utility property and plant, net 298,768 285,899
Other 724 200
Net Cash Used by Investing Activities (14,097) (18,846)
Cash Flows from Financing Activities:
Short-term borrowings - net (33,600) (41,700)
Retirement of long-term debt, incl. premiums (21) (21)
Payment of common stock dividends (17,018) (16,640)
Net Cash Used by Financing Activities (50,639) (58,361)
Net Increase (Decrease) in Cash139,260 117,321
Total other property and Cash Equivalents 10,660 (4,866)
Cash and Cash Equivalents Beginning of Period 21,726 30,270
Cash and Cash Equivalents End of Period $ 32,386 $ 25,404investments 663,723 571,097
DEFERRED DEBITS AND OTHER ASSETS 196,487 190,540
Total assets $4,849,289 $4,773,268
The accompanying Condensed Notes to Financial Statementsnotes are an integral part of these financial statements.
Supplemental Disclosures
Cash paid for:
Interest- 3 -
LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITAL AND LIABILITIES
(Unaudited)
Mar. 31, Dec. 31,
1999 1998
CURRENT LIABILITIES:
Notes payable $ 6,476434,746 $ 6,672
Income365,135
Accounts payable 183,304 237,820
Other 291,055 243,699
Total current liabilities 909,105 846,654
Long-term debt 1,510,816 1,510,775
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 500 $ (320)522,535 520,721
Investment tax credit, in
process of amortization 91,877 93,844
Regulatory liability 107,223 109,411
Other 206,963 206,280
Total deferred credits and other liabilities 928,598 930,256
Minority interests 106,236 107,815
Cumulative preferred stock 135,328 136,530
COMMON EQUITY:
Common stock, without par value -
129,677,030 shares outstanding 778,273 778,273
Other (3,037) (3,314)
Retained earnings 483,970 466,279
Total common equity 1,259,206 1,241,238
Total liabilities and capital $4,849,289 $4,773,268
The accompanying Condensed Notes to Financial Statementsnotes are an integral part of these financial statements.
-4-- 4 -
KU ENERGY CORPORATIONLG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,567 $ 36,006
Items not requiring cash currently:
Depreciation and amortization 52,538 50,072
Deferred income taxes - net 2,185 2,942
Loss from discontinued operations -
net of tax (Note 3) - 3,506
Cumulative effect of change
in accounting principle -
net of tax - 7,162
Other (15,372) (3,885)
Change in net current assets 21,736 65,708
Other (11,172) (19,156)
Net cash flows from operating activities 107,482 142,355
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (223) (3,584)
Proceeds from sales of securities 3,075 961
Construction expenditures (79,002) (36,615)
Investments in unconsolidated
ventures (Note 2) (74,250) (886)
Proceeds from sale of investment
in affiliate (Note 4) 33,821 16,000
Net cash flows from investing activities (116,579) (24,124)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of medium-term notes - 150,000
Retirement of bonds - (21)
Short-term borrowings 416,174 1,222,843
Repayment of short-term borrowings (346,174)(1,410,824)
Redemption of preferred stock (1,202) -
Payment of common dividends (39,876) (36,810)
Net cash flows from financing activities 28,922 (74,812)
CHANGE IN CASH AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSTEMPORARY
CASH INVESTMENTS 19,825 43,419
BEGINNING CASH AND TEMPORARY
CASH INVESTMENTS 108,723 111,003
ENDING CASH AND TEMPORARY
CASH INVESTMENTS $ 128,548 $ 154,422
- 5 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 2,969 $ 2,660
Interest on borrowed money 23,533 22,549
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
- 6 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Retained Earnings
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
Balance at beginning
of period $466,279 $722,584
Net income 57,567 36,006
Cash dividends declared on
common stock ($.30750 and
$.28386 per share) 39,876 36,810
Balance at end of period $483,970 $721,780
The accompanying notes are an integral part of these financial statements.
- 7 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
Net income $57,567 $36,006
Unrealized holding gains (losses)
on available-for-sale securities
arising during the period 192 (14)
Reclassification adjustment for realized
gains and losses on available-for-sale
securities included in net income 5 111
Other comprehensive income, before tax 197 97
Income tax expense related to items
of other comprehensive income (64) (37)
Comprehensive income $57,700 $36,066
The accompanying notes are an integral part of these financial statements.
- 8 -
Louisville Gas and Electric Company
Statements of Income
(Unaudited)
(in thousands(Thousands of dollars)
As$)
Three Months
Ended
Mar. 31,
1999 1998
REVENUES:
Electric $152,721 $140,585
Gas 75,779 92,759
Rate refund (Note 10) (1,881) -
Total operating revenues 226,619 233,344
OPERATING EXPENSES:
Fuel for electric generation 32,457 36,041
Power purchased 23,026 9,600
Gas supply expenses 50,492 64,076
Other operation expenses 40,192 40,368
Maintenance 14,702 10,266
Depreciation and amortization 24,144 23,294
Federal and state
income taxes 9,556 12,417
Property and other taxes 5,036 4,956
Total operating expenses 199,605 201,018
NET OPERATING INCOME 27,014 32,326
Other income and (deductions) 1,080 311
Interest charges 9,178 9,238
NET INCOME 18,916 23,399
Preferred stock dividends 1,089 1,123
NET INCOME AVAILABLE
FOR COMMON STOCK $ 17,827 $ 22,276
The accompanying notes are an integral part of Asthese financial statements.
- 9 -
Louisville Gas and Electric Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Mar. 31, Dec. 31,
ASSETS1999 1998
1997
Utility Plant:
Plant in service, atUTILITY PLANT:
At original cost $ 2,561,149 $ 2,552,695$2,913,378 $2,896,139
Less: Accumulatedreserve for depreciation 1,149,284 1,128,282
1,411,865 1,424,413
Construction work in progress 64,079 58,939
1,475,944 1,483,352
Current Assets:1,168,270 1,144,123
Net utility plant 1,745,108 1,752,016
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,347 1,154
CURRENT ASSETS:
Cash and temporary cash equivalents 32,386 21,726investments 38,859 31,730
Marketable securities 15,093 17,851
Accounts receivable 47,071 45,269
Accrued utility revenues 23,092 29,668
Fuel, principally coal,- less reserve 151,972 142,580
Materials and supplies - at average cost 22,892 27,799
Plant materials and operating supplies,
at average cost 24,147 23,648cost:
Fuel (predominantly coal) 21,596 23,993
Gas stored underground 11,215 33,485
Other 6,360 5,769
155,948 153,879
Other Assets:
Investment in leveraged leases 28,477 28,152
Investment in independent power projects 9,079 8,73034,097 33,103
Prepayments 2,438 2,285
Total current assets 275,270 285,027
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,841 5,919
Regulatory assets 15,291 14,77336,467 37,643
Other 51,478 48,376
104,325 100,03117,988 22,878
Total Assets $ 1,736,217 $ 1,737,262deferred debits and other assets 60,296 66,440
Total assets $2,082,021 $2,104,637
The accompanying notes are an integral part of these financial statements.
- 10 -
Louisville Gas and Electric Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
Capitalization:(Unaudited)
Mar. 31, Dec. 31,
1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Retained earnings 243,289 247,462
Other (736) (786)
Total common equity 667,723 671,846
Cumulative preferred stock 95,328 95,328
Long-term debt 626,800 626,800
Total capitalization 1,389,851 1,393,974
CURRENT LIABILITIES:
Accounts payable 114,208 133,673
Provision for rate refunds 13,401 13,261
Dividends declared 23,090 23,168
Accrued taxes 27,020 31,929
Accrued interest 7,615 8,038
Other 18,436 15,242
Total current liabilities 203,770 225,311
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 259,117 254,589
Investment tax credit, in
process of amortization 70,470 71,542
Accumulated provision for pensions
and related benefits 60,177 59,529
Regulatory liability 62,685 63,529
Other 35,951 36,163
Total deferred credits and other liabilities 488,400 485,352
Total capital and liabilities $2,082,021 $2,104,637
The accompanying notes are an integral part of these financial statements.
- 11 -
Louisville Gas and Electric Company
Statements of Cash Flows
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 672,50918,916 $ 664,12223,399
Items not requiring cash currently:
Depreciation and amortization 24,143 23,294
Deferred income taxes - net 3,650 2,547
Investment tax credit - net (1,072) (1,078)
Other 1,772 1,000
Changes in net current assets:
Accounts receivable (9,392) 22,202
Materials and supplies 23,673 22,185
Provision for rate refunds 140 (1,706)
Accounts payable (19,465) (26,547)
Accrued taxes (4,909) 9,180
Accrued interest (423) 114
Prepayments and other 3,041 2,111
Other 4,704 4,710
Net cash flows from operating activities 44,778 81,411
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (223) (3,096)
Proceeds from sales of securities 3,065 444
Construction expenditures (17,323) (19,064)
Net cash flows from investing activities (14,481) (21,716)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (23,168) (21,152)
Net cash flows from financing activities (23,168) (21,152)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS 7,129 38,543
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 31,730 50,472
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 38,859 $ 89,015
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 11,288 $ 4,276
Interest on borrowed money 8,811 8,705
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
- 12 -
Louisville Gas and Electric Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
Balance at beginning
of period $247,462 $258,910
Net income 18,916 23,399
Subtotal 266,378 282,309
Cash dividends declared on stock:
5% cumulative preferred 269 269
Auction rate cumulative
preferred 453 487
$5.875 cumulative preferred 367 367
Common 22,000 19,800
Subtotal 23,089 20,923
Balance at end of period $243,289 $261,386
The accompanying notes are an integral part of these financial statements.
- 13 -
Louisville Gas and Electric Company
Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
Net income available for common stock $17,827 $22,276
Unrealized holding gains (losses) on
available-for-sale securities arising
during the period 84 (27)
Reclassification adjustment for realized
gains on available-for-sale securities
included in net income - 66
Other comprehensive income, before tax 84 39
Income tax expense related to items
of other comprehensive income (34) (16)
Comprehensive income $17,877 $22,299
The accompanying notes are an integral part of these financial statements.
- 14 -
Kentucky Utilities Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
OPERATING REVENUES $217,349 $183,219
OPERATING EXPENSES:
Fuel for electric generation 58,155 48,347
Power purchased 39,317 17,989
Other operation expenses 27,142 29,973
Maintenance 12,520 13,333
Depreciation and amortization 21,991 21,486
Federal and state
income taxes 17,144 14,968
Property and other taxes 4,113 4,088
Total operating expenses 180,382 150,184
NET OPERATING INCOME 36,967 33,035
Other income and (deductions) 2,168 1,714
Interest charges 9,507 9,700
NET INCOME 29,628 25,049
Preferred stock dividends 564 564
NET INCOME AVAILABLE
FOR COMMON STOCK $ 29,064 $ 24,485
The accompanying notes are an integral part of these financial statements.
- 15 -
Kentucky Utilities Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Mar. 31, Dec. 31,
1999 1998
UTILITY PLANT:
At original cost $2,701,846 $2,685,528
Less: reserve for depreciation 1,228,305 1,208,183
Net utility plant 1,473,541 1,477,345
OTHER PROPERTY AND INVESTMENTS -
less reserve 14,408 14,238
CURRENT ASSETS:
Cash and temporary cash investments 56,838 59,071
Accounts receivable - less reserve 104,163 106,003
Materials and supplies - at average cost:
Fuel (predominantly coal) 21,993 23,927
Other 26,050 24,877
Prepayments 3,783 2,427
Total current assets 212,827 216,305
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,127 5,227
Regulatory assets 26,972 28,228
Other 25,356 19,859
Total deferred debits and other assets 57,455 53,314
Total assets $1,758,231 $1,761,202
The accompanying notes are an integral part of these financial statements.
- 16 -
Kentucky Utilities Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Mar. 31, Dec. 31,
1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Retained earnings 310,231 299,168
Other (595) (595)
Total common equity 617,776 606,713
Cumulative preferred stock 40,000 40,000
Long-term debt 546,330 546,351
1,258,839 1,250,473
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings - 33,600546,330
Total capitalization 1,204,106 1,193,043
CURRENT LIABILITIES:
Accounts payable 28,052 29,56156,497 100,012
Provision for rate refunds 21,500 21,500
Dividends declared 18,188 18,188
Accrued taxes 39,523 16,733
Accrued interest 10,576 8,283
Accrued taxes 23,512 7,710
Customer deposits 9,754 9,841
Accrued payroll and vacations 12,256 10,40710,559 8,110
Other 7,370 6,492
91,541 105,915
Other Liabilities:35,319 31,226
Total current liabilities 181,586 195,769
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 255,037 252,492243,443 244,493
Investment tax credit, in
process of amortization 21,407 22,302
Accumulated provision for pensions
and related benefits 52,736 50,044
Regulatory liability 44,537 45,882
Other 10,416 9,669
Total deferred investment tax credits 25,163 26,131
Regulatory tax liability - net 49,598 50,904
Other 56,039 51,347
385,837 380,874and other liabilities 372,539 372,390
Total Capitalizationcapital and Liabilities $ 1,736,217 $ 1,737,262liabilities $1,758,231 $1,761,202
The accompanying Condensed Notes to Financial Statementsnotes are an integral part of these financial statements.
-5-- 17 -
KENTUCKY UTILITIES COMPANY
STATEMENTS OF INCOME
(Unaudited)
(in thousandsKentucky Utilities Company
Statements of dollars)
For theCash Flows
(Unaudited - Thousands of $)
Three Months
Ended
MarchMar. 31,
1999 1998
1997
Operating Revenues $183,219 $178,914
Operating Expenses:
Fuel, principally coal,
used in generation 48,347 44,713
Electric power purchased 17,989 17,603
Other operating expenses 29,973 30,788
Maintenance 13,333 12,011CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,628 $ 25,049
Items not requiring cash currently:
Depreciation and amortization 21,991 21,486
20,835
Federal and stateDeferred income taxes 14,968 15,527
Other taxes 4,088 4,013
Total Operating Expenses 150,184 145,490
Net Operating Income 33,035 33,424
Other Income and Deductions:
Interest and dividend income 419 366
Other income and deductions - net 1,295 1,046
Total(2,396) 847
Investment tax credit - net (895) (968)
Changes in net current assets:
Accounts receivable 1,840 4,600
Materials and supplies 1,934 4,907
Provision for rate refunds (1,173) (456)
Accounts payable (43,515) (5,269)
Accrued taxes 22,790 18,475
Accrued interest 2,449 (87)
Prepayments and other (1,356) 1,803
Other 3,215 2,169
Net cash flows from operating activities 34,512 72,556
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from insurance reimbursement 59 8
Construction expenditures (18,240) (15,299)
Net cash flows from investing activities (18,181) (15,291)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings - 381,500
Repayments of short-term borrowings - (415,100)
Retirement of debt - (21)
Payment of dividends (18,564) (17,582)
Net cash flows from financing activities (18,564) (51,203)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (2,233) 6,062
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 59,071 5,453
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 56,838 $ 11,515
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income and Deductions 1,714 1,412
Income Beforetaxes $ - $ 138
Interest Charges 34,749 34,836
Interest Charges 9,700 9,875
Net Income 25,049 24,961
Preferred Stock Dividend Requirements 564 564
Net Income Applicable to Common Stock $ 24,485 $ 24,397on borrowed money 6,079 6,476
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying Condensed Notes to Financial Statementsnotes are an integral part of these financial statements.
-6-- 18 -
KENTUCKY UTILITIES COMPANY
STATEMENTS OF CASH FLOWSKentucky Utilities Company
Statements of Retained Earnings
(Unaudited)
(in thousands(Thousands of dollars)
For the$)
Three Months
Ended
MarchMar. 31,
1999 1998
1997Balance at beginning
of period $299,167 $304,750
Net income 29,628 25,049
Subtotal 328,795 329,799
Cash Flows from Operating Activities:
Net Income $ 25,049 $ 24,961
Items not requiring (providing) cash currently:
Depreciation 21,486 20,835
Deferred income taxes
and investment tax credit (121) 1,154
Changes in current assets and liabilities:
Change in fuel inventory 4,907 5,646
Change in accounts receivable (1,975) 7,525
Change in accounts payable (5,270) (4,320)
Change in accrued taxes 15,873 15,231
Change in accrued utility revenues 6,576 623
Change in other current assets and
liabilities 3,861 4,486
Other--net 2,170 (3,412)
Net Cash Provided by Operating Activities 72,556 72,729
Cash Flows from Investing Activities:
Construction expenditures - utility (15,299) (18,127)
Proceeds from insurance reimbursements 8 4,046
Net Cash Used by Investing Activities (15,291) (14,081)
Cash Flows from Financing Activities:
Short-term borrowings - net (33,600) (41,700)
Retirementdividends declared on stock:
4.75% preferred 237 237
6.53% preferred 327 327
Common 18,000 17,018
Subtotal 18,564 17,582
Balance at end of long-term debt, incl. premiums (21) (21)
Payment of dividends (17,582) (17,204)
Net Cash Used by Financing Activities (51,203) (58,925)
Net Increase (Decrease) in Cash and
Cash Equivalents 6,062 (277)
Cash and Cash Equivalents Beginning of Period 5,453 5,719
Cash and Cash Equivalents End of Period $ 11,515 $ 5,442
Supplemental Disclosures
Cash paid for:
Interest $ 6,476 $ 6,672
Income taxes $ 138 $ (320)period $310,231 $312,217
The accompanying Condensed Notes to Financial Statementsnotes are an integral part of these financial statements.
-7-- 19 -
KENTUCKY UTILITIES COMPANY
BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
As of As of
Mar. 31, Dec. 31,
1998 1997
ASSETS
Utility Plant:
Plant in service, at cost $2,561,149 $2,552,695
Less: Accumulated depreciation 1,149,284 1,128,282
1,411,865 1,424,413
Construction work in progress 64,079 58,939
1,475,944 1,483,352
Current Assets:
CashLG&E Energy Corp. and cash equivalents 11,515 5,453
Accounts receivable 46,831 44,856
Accrued utility revenues 23,092 29,668
Fuel, principally coal, at average cost 22,892 27,799
Plant materialsSubsidiaries
Louisville Gas and operating supplies,
at average cost 24,147 23,648
Other 6,360 5,769
134,837 137,193
Other Assets:
Regulatory assets 15,291 14,773
Other 47,664 44,562
62,955 59,335
Total Assets $1,673,736 $1,679,880
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity $ 619,762 $ 612,295
Preferred stock 40,000 40,000
Long-term debt 546,330 546,351
1,206,092 1,198,646
Current Liabilities:
Long-term debt due within one year 21 21
Short-term borrowings - 33,600
Accounts payable 28,116 33,386
Accrued interest 10,576 8,283
Accrued taxes 23,346 7,473
Customer deposits 9,754 9,841
Accrued payroll and vacations 12,197 10,348
Other 7,090 6,215
91,100 109,167
Other Liabilities:
Accumulated deferred income taxes 247,325 245,150
Accumulated deferred investment tax credits 25,163 26,131
Regulatory tax liability - net 49,598 50,904
Other 54,458 49,882
376,544 372,067
Total Capitalization and Liabilities $1,673,736 $1,679,880
The accompanying CondensedElectric Company
Kentucky Utilities Company
Notes to Financial Statements
are an
integral part of these statements.
-8-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. PRESENTATION OF CONDENSED INFORMATION
The unaudited interim financial statements presented herein
includeEffective May 4, 1998, following the consolidated statementsreceipt of KU Energy Corporationall required state and
Subsidiaries (KU Energy or the Company) as well as separate financial
statements for Kentucky Utilities Company (KU). Pursuant to an
Agreement and Plan of Merger dated May 20, 1997, between KU Energy andfederal regulatory approvals, LG&E Energy Corp. (LG&E Energy),Energy or the
Company) and KU Energy Corporation (KU Energy) merged, with and into LG&E
Energy, with LG&E Energy
as the surviving corporation effective
May 4, 1998. As(the Merger). The accompanying unaudited
consolidated financial statements reflect the accounting for the merger
as a pooling of interests and are presented as if the companies were
combined as of the earliest period presented. However, the financial
information is not necessarily indicative of the results of operations,
financial position or cash flows that date,would have occurred had the
merger been consummated for the periods for which it is given effect,
nor is it necessarily indicative of future results of operations,
financial position, or cash flows. The financial statements reflect
the conversion of each outstanding share of KU Energy's separate corporate
existence ceased.Energy common stock into
1.67 shares of LG&E Energy is a holding company organized under
the lawscommon stock. The outstanding preferred
stock of Kentucky. As of May 4, 1998, LG&E Energy's subsidiaries
include KU Capital Corporation (KU Capital)Louisville Gas and Electric Company (LG&E), a non-utility subsidiary and KU, an electric utility, formerly subsidiaries of KU Energy. KU
Energy Corporation owned, and as of May 4, 1998, LG&E Energy owns
100 percent of the common equity of KU Capital and KU. This Form 10-Q
is the last report to be made by KU Energy under the Securities
Exchange Act of 1934 (Exchange Act). KU will continue to be subject
to Exchange Act reporting requirements.
LG&E Energy, and its otherKentucky Utilities Company (KU), a subsidiary of KU
Energy, were not affected by the Merger.
KU Capital Corporation, a subsidiary of KU Energy, was merged into LG&E
Capital Corp. (Capital Corp.) on July 24, 1998, with the latter as the
surviving corporation. The consolidated financial statements include
the accounts of LG&E Energy, LG&E, Capital Corp., and KU and their
respective wholly-owned subsidiaries, will file separate reportscollectively referred to herein
as the "Company." All significant intercompany items and transactions
have been eliminated from the unaudited consolidated financial
statements.
In the opinion of management, all adjustments, including those of a
normal recurring nature, have been made to present fairly the
consolidated financial position, results of operations and cash flows
for the quarter ended
March 31, 1998.
The unaudited statements have been prepared by the Company and
KU, respectively, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC).periods indicated. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to suchSEC rules and regulations, -9-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
although
the Company and KU believebelieves that the disclosures are adequate to make the
information presented not misleading.
TheSee the Company's, consolidated financial statements should be read in conjunction with
the financial statementsLG&E's and notes thereto incorporated by reference
in the Annual ReportKU's Reports on Form 10-K for 1998 for
information relevant to the accompanying financial statements,
including information as to the significant accounting policies of KU Energy and KUthe
Company.
2. On March 30, 1999, the Company acquired an indirect 19.6% ownership
interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution
company that serves 1.1 million customers in the northern portion of
the province of Buenos Aires, Argentina. The purchase price totaled
$74.3 million, including transaction costs, which has been reflected in
investments in unconsolidated ventures in the accompanying balance
sheet. The Company accounted for the year
ended December 31, 1997;acquisition using the purchase
method, and will record its share of earnings using the equity method.
The purchase price exceeded the underlying equity in BAN by $13.0
million. The Company allocated this difference to the assets and
liabilities acquired based on their estimated fair values.
3. Effective June 30, 1998, the Company discontinued its merchant energy
trading and sales business. This business consisted primarily of a
portfolio of energy marketing contracts entered into in 1996 and early
1997, nationwide deal origination and some level of speculative trading
activities, which were not directly supported by the Company's physical
assets. The Company's decision to discontinue these operations was
primarily based on the impact that volatility and rising prices in the
power mar
- 20 -
ket had on its portfolio of energy marketing contracts. Exiting the
merchant energy trading and sales business enables the Company to focus
on optimizing the value of physical assets it owns or controls, and to
reduce the earnings impact on continuing operations of extreme market
volatility in its portfolio of energy marketing contracts. The Company
is in the process of settling commitments that obligate it to buy and
sell natural gas and electric power. It also plans to sell its natural
gas gathering and processing business. If the Company is unable to
dispose of these commitments or assets it will continue to meet its
obligations under the contracts. The Company, however, has maintained
sufficient market knowledge, risk management skills, technical systems
and experienced personnel to maximize the value of power sales from
physical assets it owns or controls, including LG&E, KU and those of
the Big Rivers Electric Corporation (Big Rivers).
As a result of the Company's decision to discontinue its merchant
energy trading and sales activity, and the KU financial statements should be
readdecision to sell the
associated gas gathering and processing business, the Company recorded
an after-tax loss on disposal of discontinued operations of $225
million in conjunctionthe second quarter of 1998. The loss on disposal of
discontinued operations results primarily from several fixed-price
energy marketing contracts entered into in 1996 and early 1997,
including the Company's long-term contract with Oglethorpe Power
Corporation (OPC). Other components of the write-off include costs
relating to certain peaking options, goodwill associated with the
financial statementsCompany's 1995 purchase of merchant energy trading and notes theretosales operations
and exit costs, including labor and related benefits, severance and
retention payments, and other general and administrative expenses.
Although the Company used what it believes to be appropriate estimates
for future energy prices, among other factors, to calculate the net
realizable value of discontinued operations, it also recognizes that
there are inherent limitations in models to accurately predict future
events. As a result, there is no guarantee that higher-than-
anticipated future commodity prices or load demands, lower-than-
estimated asset sales prices or other factors could not result in
additional losses. The Company has been successful in settling
portions of its discontinued operations, but significant assets,
operations and obligations remain. As of March 31, 1999, the Company
estimates that a $1 change in electricity prices and a 10 cents change
in natural gas prices across all geographic areas and time periods
could change the value of the Company's remaining energy portfolio by
approximately $7.5 million. In addition to price risk, the value of
the Company's remaining energy portfolio is subject to operational and
event risks including, among others, increases in load demand,
regulatory changes, and forced outages at units providing supply for
the Company. As of March 31, 1999, the Company estimates that a 1%
change in the forecasted load demand could change the value of the
Company's remaining energy portfolio by $8.3 million.
- 21 -
Operating results for discontinued operations follow. The Company
charged its loss from discontinued operations for the three months
ended March 31, 1999, to accrued loss on disposal of discontinued
operations.
Three Months
Ended
Mar. 31,
1999 1998
Revenues $166,739 $940,699
Income (loss) before taxes (6,054) (5,491)
Income (loss) from dis-
continued operations,
net of income taxes (3,709) (3,506)
Net assets of discontinued operations at March 31, 1999, follow.
Cash and temporary cash
investments $ 4,317
Accounts receivable 56,637
Price risk management assets 86,611
Non-utility property and
plant, net 161,839
Accounts payable (58,032)
Price risk management
liabilities (27,733)
Goodwill and other assets
and liabilities, net 38,567
Net assets before accrued
loss on disposal of dis-
continued operations 262,206
Accrued loss on disposal
of discontinued operations,
net of income tax benefit
of $66,009 (115,593)
Net assets of discon-
tinued operations $146,613
Total charges against the accrued loss on disposal of discontinued
operations through March 31, 1999, include $85.3 million for
commitments prior to disposal, $51.2 million for transaction
settlements, $11.1 million for goodwill, and $20.8 million for other
exit costs. The reserve as of March 31, 1999, represents management's
best estimate of the loss from remaining discontinued operations until
disposal and the costs of disposing of these operations.
As of March 31, 1999, the Company's discontinued operations were under
various contracts to buy and sell power and gas with net notional
amounts of 28.1 million MWh's of power and 22.0 million MMBTU's of
natural gas with a volumetric weighted-average period of approximately
42 and 60 months, respectively. These notional amounts are based on
estimated loads since various commitments do not include specified firm
volumes. The Company is also under contract to buy or sell immaterial
amounts of coal and SO2 allowances in support of its power contracts.
Notional amounts reflect the nominal volume of transactions included in
the Annual Report on Form 10-KCompany's price risk management commitments, but do not reflect
actual amounts of KU Energycash, financial instruments, or quan
- 22 -
tities of the underlying commodity which may ultimately be exchanged
between the parties.
The fair values of discontinued operations' price risk management
assets and KUliabilities as of March 31, 1999, and the averages for the
yearthree months then ended follow (in thousands of $):
Average
Fair Value Fair Value
Liabil- Liabil-
Commodity Assets ities Assets ities
Electricity $ 86,611 $ 27,256 $ 92,367 $ 28,367
Natural gas - - 3,389 -
Totals 86,611 27,256 $ 95,756 $ 28,367
Reserves - 477
Net values $ 86,611 $ 27,733
The table above does not include the fair value of various transactions
not previously recorded using mark to market accounting since these
transactions commit the Company to the sale or purchase of electricity
or natural gas without specified firm volumes.
The fair values above are based on quotes from exchanges and over-the-
counter markets, price volatility factors, the use of established
pricing models and the time value of money. They also reflect
management estimates of counterparty credit risk, location
differentials and the potential impact of liquidating the Company's
position in an orderly manner over a reasonable period of time under
present market conditions. The change in values from December 31,
1997.
In1998, to March 31, 1999, resulted from volatility and risk management
actions taken in connection with discontinuing the opinionmerchant energy
trading and sales business.
If the Company is unable to dispose of its remaining commitments, it
will continue to meet its obligations through the terms of the
Companycontracts. The net fair value of these commitments as of March 31,
1999, are currently estimated to be approximately $63.3 million in
1999, $28.8 million to $37.4 million each year in 2000 through 2004,
and KU, the respective information
furnished herein reflects all adjustments, all$4.7 million for later years.
The Company's discontinued operations maintain policies intended to
minimize credit risk and revalue credit exposures daily to monitor
compliance with those policies. As of which are normal and
recurring, which are necessary to present fairly the resultsMarch 31, 1999, over 78% of the
periods shown,Company's price risk management commitments were with counterparties
rated BBB equivalent or better. As of March 31, 1999, seven
counterparties represented 91% of the Company's price risk management
commitments.
4. On March 15, 1999, LG&E-Westmoreland Rensselaer, a California general
partnership in which the Company owns a 50% interest, sold
substantially all the assets and the disclosures which have been made are adequate
to make the information not misleading. Resultsmajor contracts of interim periods
are not necessarily indicative of results for any twelve-month period
dueits 79 MW gas-fired
cogeneration facility in Rensselaer, New York, with net proceeds to the
seasonal natureCompany of KU's business. Certain prior year
amounts have been reclassified on a basis consistent with the
March 31, 1998 presentation.
2. ENVIRONMENTAL COST RECOVERY
Since August 1994, KU has been collecting an environmental
surcharge from its Kentucky retail customers under a Kentucky statute
which authorizes electric utilities (including KU) to implement,
beginning January 1, 1993, an environmental surcharge. The surcharge
is designed to recover certain operating and capital costs of
compliance with federal, state or local environmental requirements
-10-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
associated with the production of energy from coal, including the
Federal Clean Air Act as amended. KU's environmental surcharge was
approved by the Kentucky Public Service Commission (PSC) in July 1994
and was implemented in August 1994. The total surcharge collections
from August 1, 1994 through March 31, 1998 were approximately $65$34 million. The PSC's order approving the surcharge and the constitutionality
of the surcharge statute were challenged in the Franklin County
(Kentucky) Circuit Court (Circuit Court)sale resulted in an action brought against
KU and the PSC by the Attorney General of Kentucky and joined by
representatives of consumer groups. In July 1995, the Circuit Court
entered a judgment upholding the constitutionality of the surcharge
statute, but vacating that part of the PSC's July 1994 order which the
Circuit Court's judgment described as retroactively applying the
surcharge statute. The Circuit Court further ordered the case
remandedafter-
tax gain to the PSCCompany of approximately $8.9 million.
5. The Company adopted Emerging Issues Task Force Issue No. 98-10,
Accounting for a determination in accordance with the
judgment. KUEnergy Trading and the PSC argued that the PSC's July 1994 order did
not retroactively apply the statute.
The Kentucky Attorney General and other consumer representatives
appealed to the Kentucky Court of Appeals (Court of Appeals) that part
of the Circuit Court judgment upholding the constitutionality of the
surcharge statute. The PSC and KU appealed that part of the judgment
concerning the retroactive application of the surcharge statute. The
PSC previously ordered KU to collect all surcharge revenues beginning
February 1, 1995 subject to refund pending final determination of all
appeals. KU expects the PSC to continue to do so until the appeals
-11-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
are concluded. The total surcharge collections from February 1, 1995
through March 31, 1998 were approximately $61 million.
In December 1997, the Court of Appeals rendered an opinion
upholding the portion of the Circuit Court's judgment regarding the
constitutionality of the surcharge statute but reversing that portion
of the Circuit Court's judgment concerning the claim of retroactive
application of the statute.
The Kentucky Attorney General and other consumer representatives
have filed motions for discretionary review with the Kentucky Supreme
Court (Supreme Court). The Supreme Court has the discretion to grant
or deny the motions. KU and the PSC have asked the Supreme Court to
deny the motions. KU cannot predict whether the Supreme Court will
grant review of the case or when it will act on the matter.
KU continues to believe that the constitutionality of the
surcharge statute will be upheld. Although KU cannot predict the
outcome of the claim of retroactive application of the statute, it is
the position of KU and the PSC that the July 1994 PSC order did not
retroactively apply the statute. If the Court of Appeals opinion
reversing the Circuit Court's judgment on the claim of retroactivity
is overturned and the Circuit Court's judgment, as entered, is upheld,
KU estimates that the amount it could be required to refund for
surcharge collections through March 31, 1998, from the implementation
of the surcharge would be approximately $16 million and from
February 1, 1995, would be approximately $14 million. At this time,
KU has not recorded any reserve for refund.
-12-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. MERGER AGREEMENT WITH LG&E ENERGY CORP.
KU Energy and LG&E Energy Corp. entered into a Merger Agreement
dated May 20, 1997. For information concerning the agreement, see
Management's Discussion and Analysis - Merger Agreement with LG&E
Energy Corp.
-13-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations are for the Company unless otherwise stated.
Material changes in the consolidated financial condition and operating
results of KU Energy are based primarily upon the operations of KU.
FINANCIAL CONDITION
At March 31, 1998, KU had no short-term borrowings compared to
$33.6 million at December 31, 1997. The short-term borrowings have
been used primarily to finance ongoing construction expenditures and
general corporate requirements. The decrease between March 31, 1998
and December 31, 1997 is due primarily to cash provided by operations
exceeding cash required for investing and financing activities
(exclusive of short-term borrowings)Risk Management Activities (EITF No.
98-10) in the first quarter of 1998.
RESULTS OF OPERATIONS
Quarter ended March 31, 1998 compared1999. The task force concluded that
energy trading contracts should be recorded using mark to market
valuation on the Quarter ended March 31, 1997
The Company's basic earnings per common share forbalance sheet, with the three-month
period ended March 31, 1998 were $.67 compared to $.66 for the
corresponding period of 1997. The increase was primarily due to
increases in industrial salesgains and sales for resale during 1998 when
compared to 1997. These increases were offset somewhat by an increase
in maintenance expense.
The changes in operating revenues and kilowatt-hour sales
described below are for the Company. The only difference between
changes in operating revenues for the Company and operating revenues
-14-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for KU is intercompany revenues that are eliminatedlosses shown net in
the income statement. EITF No. 98-10 more broadly defines energy
trading to include cer
- 23 -
tain financial activities related to physical assets which were not
previously marked to market by established industry practice. The
effects of adopting EITF No. 98-10 did not have a material impact on
the Company's consolidated results of operations or financial statements. These intercompany amounts are immaterial.
Increase (Decrease)
From Prior Year
Three Months
Ended Mar. 31, 1998
kWh Revenues
(%) (000's)
Residential (1) $ 407
Commercial 1 508
Industrial 6 1,939
Mine Power (3) (260)position.
6. On April 5, 1999, LG&E and KU filed a joint agreement among the
companies and the Kentucky Attorney General to amend the companies'
previously-filed performance-based ratemaking (PBR) plan. The
amendment requested Kentucky Public Authorities (1) 54
Total Retail Sales 1 2,648
Sales for Resale 12 1,246
Miscellaneous Revenues & Other - 408
Total 3 $ 4,302
In February 1997, pursuant toService Commission (the Commission)
approval of a PSC order, KU made a one-time
refund through the fuel adjustment clause to Kentucky customers
associated with the disposition of KU-owned railroad cars. As a
result of the refund, revenues and fuel expense were reducedfive-year rate reduction plan, which would reduce
electric rates by approximately $3$20 million in the first quarter of 1997. KU had
reservedyear (beginning July 1,
1999), and by $8 million annually for the refund amount in prior periods.
Excluding the effecteach of the refund mentioned above, operating
revenuesnext four years
(through June 30, 2004), for a total five-year savings to customers of
$52 million. The reductions will be distributed between LG&E and KU
customers based on the first quarter of 1998 were flat comparedsame methodology the Commission approved in its
previous merger order for allocating the merger savings to the
first
quarterutilities' customers (53 percent to KU customers; 47 percent to LG&E
customers). The joint agreement includes adoption of 1997, increasing $1 million.the PBR plan as
proposed by the companies.
The increase reflectsamended filing also includes the establishment of a 3%
increase$6 million
program over the five-year period to assist low-income customers in
kilowatt-hour sales, which is primarily attributablepaying their energy bills.
In addition to increases in industrial salesthe rate reductions and salesenergy assistance program, the
amended filing calls for resale. The increase in
industrial sales reflects continued economic growthLG&E and KU to extend for an additional year
(through June 30, 2004) both the rate cap and the merger-savings
surcredit the utilities established as part of their earlier merger
plan. Under the rate cap, the companies agreed, in the manufacturing sectorabsence of
KU's service area. The increase in salesextraordinary circumstances, not to adjust base electric rates for -15-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
resale (937,799 megawatt-hours versus 843,892 megawatt-hours) was
primarily due to increased demand.
Excludingfive
years following the effect of the refund mentioned above, fuel expense
increased $.8 million (2%). The increase was duemerger. They also agreed to a 1% increase in
million British thermal units (MBTU) used. The increased consumption
was primarily caused bymonthly surcredit to
customers' bills reflecting the previously mentioned increase in kilowatt-
hour sales.
Maintenance expense increased $1.3 million (11%). The increase
was primarily due to distribution utility line maintenance costs
incurred as a result of ice storm damage during the first quarter of
1998.
Federal and state income taxes decreased $.6 million (4%). The
decrease was primarily due to a decrease in pretax operating income.
MERGER AGREEMENT WITH LG&E ENERGY CORP.
On May 20, 1997, KU Energy and LG&E Energy Corp. (LG&E Energy)
entered into an Agreement and Plan of Merger (Merger) providing for
a tax-free, stock-for-stock merger of KU Energy and LG&E Energy. As a
result of the Merger which became effective May 4, 1998, LG&E Energy,
the surviving corporation, has become the parent company of KU and will
continue as parent of Louisville Gas and Electric Company (LG&E).
Shareholders of KU Energy common stock received 1.67 shares of LG&E
Energy common stock for each50 percent share of KU Energy common stock held.
The Merger will be accounted for as a pooling-of-interests.
Shareholders of both companies approved the Merger on October 14,
1997. The Merger also has been approved by the Virginia State
Corporation Commission (SCC), the PSC, the Federal Energy Regulatory
-16-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commission (FERC) and the Securities and Exchange Commission.
The PSC order approves a surcredit mechanism which passes one-half
of the potential non-fuel merger
savings (net of costsallocated to achieve) tothe utilities' customers overin the first five years
following the consummationmerger.
As part of the Merger. The credit will be nearly 2% of customers billsamended PBR filing, LG&E also agreed to refrain from
filing for an increase in natural gas rates over the five-year period
(through June 30, 2004).
On April 13, 1999, the Commission issued initial orders implementing
the amended PBR plan, effective July 2, 1999, and will amountsubject to
approximately $63 millionmodification. The Commission has adopted a procedural schedule, which
provides for discovery, hearings and public comment. The Commission
has also consolidated into the continuing PBR proceedings an earlier
March 8, 1999, rate complaint by a group of industrial intervenors, in net non-fuel
savings to KU customers. Similar methods for passing net non-fuel merger
savings have been approved for Virginia customers by the SCC and agreed
to by KU's municipal wholesale customers. The surcredits will become
effective for billings in July 1998.
The PSC order also approves recovery from ratepayers of one-half of
merger-related expenses (not to exceed $77.2 million) over a five-year
period. The remaining merger-related expenses will be expensed as
incurred after the effective date of the Merger. Total merger-related
expenses are now expected to be approximately $94 million of
which the Company's shareintervenors have requested significant reductions in the
electric rates of LG&E and KU. The Commission is expected to be approximately $47 million. Merger-
related expenses are higher than earlier estimates primarily asissue a
resultfinal ruling during 1999.
7. On May 7, 1999, Capital Corp. issued $150.0 million of higher than originally estimated separation costs. Amounts in excessmedium-term
notes due May 2004, with a stated interest rate on the notes of $77.2 million6.205%.
After taking into account the forward-starting interest-rate swap
entered into on April 9, 1999, to hedge the entire issuance, the
effective rate will be expensed consistent with6.13%. The proceeds were used to repay a
portion of Capital Corp.'s outstanding commercial paper, which had been
used to fund the approved
regulatory plan as part ofBAN acquisition and other working capital needs.
- 24 -
8. External and intersegment revenues and income from continuing
operations by business segment for the second quarter one-time charge. Throughthree months ended March 31,
1999, follow:
Income
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $148,326 $ 2,514 $ 17,613
LG&E gas 75,779 - 214
KU electric 213,347 4,002 29,064
Independent Power
Operations 6,904 - 14,180
Western Kentucky
Energy 59,978 - (1,024)
Argentine Gas
Distribution 29,797 - 357
Other Capital Corp. 31,832 - 1,676
All Other - (6,516) (4,513)
Consolidated $565,963 $ - $ 57,567
External and intersegment revenues and income from continuing
operations by business segment for the three months ended March 31,
1998, the Company has deferred approximately $9.1 million
pending consummationfollow:
Income
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $140,585 $ - $ 21,421
LG&E gas 92,759 - 855
KU electric 183,210 24 24,485
Independent Power
Operations 5,227 - 3,984
Argentine Gas
Distribution 27,411 - 196
Other Capital Corp. 1,532 - (715)
All Other - (24) (3,552)
Consolidated $450,724 $ - $ 46,674
The assets of the Merger. Of that amount, $4.8Company's Argentine Gas Distribution segment
increased from $346.3 million is
included in regulatory assetsat December 31, 1998, to be recovered following the consummation
of the Merger as described above.
As part of their PSC application, KU and LG&E have proposed a base
rate cap for five years after consummation of the Merger, except in the
event of extraordinary circumstances such as a significant increase in
the federal corporate tax rate. The PSC order notes that the PSC has
the statutory jurisdiction to regulate utility rates including the
authority to investigate and review KU's and LG&E's earnings$418.4 million
at any
time.
-17-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The PSC order also requires KU and LG&E to file by September 14,
1998, detailed plans to address any future rate regulation that may be
adopted in the state. The PSC order further provides that the PSC will
at that time determine, on the basis of the described filings and other
information, whether changes should be made to the existing regulation
of KU and LG&E.
ENVIRONMENTAL MATTERS
Environmental Cost Recovery
In August 1994, KU implemented an environmental cost recovery
mechanism (surcharge) in Kentucky. Authorized by a 1992 state statute
and approved by the PSC in July 1994, the surcharge is designed to
recover certain environmental compliance costs, including costs to
comply with the 1990 Clean Air Act Amendments, through a surcharge on
customers' bills.
The PSC's order approving the surcharge and the constitutionality
of the surcharge were challenged in a Franklin County (Kentucky) Circuit
Court (Circuit Court) action brought against KU and the PSC by the
Attorney General of Kentucky and representatives of consumer groups. In
July 1995, the Circuit Court entered a judgment upholding the
constitutionality of the surcharge statute but vacating that part of the
PSC's order which the Circuit Court's judgment described as
retroactively applying the surcharge statute. All parties (including KU
and the PSC) appealed the Circuit Court's judgment to the Kentucky Court
of Appeals (Court of Appeals). The PSC previously ordered KU to collect
all surcharge revenues beginning February 1, 1995 subject to refund
pending final determination of all appeals. KU expects the PSC
to continue to do so until the appeals are concluded. The total surcharge
collections from February 1, 1995 through March 31, 1998 were
approximately $61 million.
-18-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In December 1997, the Court of Appeals rendered an opinion
upholding the portion of the Circuit Court's judgment regarding
the constitutionality of the surcharge statute but reversing that
portion of the Circuit Court's judgment concerning the claim of
retroactive application of the statute. The Kentucky Attorney General
and other consumer representatives have filed motions for discretionary
review with the Kentucky Supreme Court (Supreme Court). The Supreme
Court has the discretion1999, due mainly to grant or deny the motions. KU and the PSC
have asked the Supreme Court to deny the motions. KU cannot predict
whether the Supreme Court will grant review of the case or when it will
act on the matter.
KU continues to believe that the constitutionality of the surcharge
statute will be upheld. Although KU cannot predict the outcome
of the claim of retroactive application of the statute, it is the
position of KU and the PSC that the July 1994 PSC order did not
retroactively apply the statute. If the Court of Appeals opinion
reversing the Circuit Court's judgment on the claim of retroactivity
is overturned and the Circuit Court's judgment, as entered, is
upheld, KU estimates that the amount it could be required to refund
for surcharge collections through March 31, 1998, from the
implementation of the surcharge would be approximately $16 million,
and from February 1, 1995, would be approximately $14 million. At this
time, KU has not recorded any reserve for refund. Refer to Note 2
of the Condensed Notes to Financial Statements, "Environmental Cost
Recovery."
Nitrogen Oxide Emission Reductions
The Environmental Protection Agency (EPA) issued final rules
revising the National Ambient Air Quality Standards for ozone and
particulate matteracquiring a 19.6% ownership interest
in July 1997. The revised standards would require
significant reductions in sulfur dioxide and nitrogen oxide emissions
-19-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from coal-fired boilers (including those at KU's generating stations)
beginning in 2004. Certain implementation proposals, which are not
yet final, would target coal-fired utilities in the Midwest and South,
including Kentucky, for more substantial reductions than other areas
and other sources of emissions. Final implementation methods will be
set by the EPA as well as state regulatory authorities.
KU believes that the costs relating to compliance with the new
standards, including capital costs as well as associated increases in
operating costs, are likely to be substantial and are dependent upon
the ultimate control program agreed to by the targeted states and EPA.
Such costs are expected to be incurred in the 2004-2007 time period.
KU further believes that such capital and operating costs are the type
of costs that are eligible for recovery from customers under its
environmental surcharge mechanism. However, approval from the PSC is
required. Refer to Note 2 of the Condensed Notes to Financial
Statements, Environmental Cost Recovery. The exact nature of the
impact of the new standards on KU's operations will not likely be
known for some time.
FORWARD LOOKING STATEMENTS
This report includes forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All
statements made herein which are not based on historical facts are
forward looking and, accordingly, involve risks and uncertainties that
could cause actual results to differ materially from those discussed.
Such forward looking statements include those under Managements'
-20-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Discussion and Analysis relating to the anticipated results of
proceedings related to the environmental surcharge, the Company's
share of merger-related expenses, the anticipated amount of customer
savings resulting from the Merger, the anticipated strengthened
competetive position resulting from the Merger, and the impact of the
revisions to the National Ambient Air Quality Standards and recovery
of related costs. Such statements are based on management's belief,
judgment and analysis as well as assumptions made by and information
available to management at the date hereof. In addition to any
assumptions and cautionary factors referred to specifically in this
report in connection with such forward looking statements, factors
that could cause actual results to differ materially from those
contemplated by the forward looking statements include unanticipated
or adverse decisions in regulatory proceedings or litigation and other
matters detailed in Exhibit 99.04, Cautionary Statements, to the 1997
Annual Report on Form 10-K of KU Energy and KU, incorporated herein by
reference.
-21-
KU ENERGY CORPORATION AND SUBSIDIARIES
KENTUCKY UTILITIES COMPANY
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGSBAN. See Note 2 of the Condensed Notes to Financial Statements,
Environmental Cost Recovery, forStatements.
9. On March 15, 1999, Capital Corp. entered into a discussionletter of KU's environmental
surcharge.
ITEM 5. OTHER INFORMATION
Unaudited Supplemental Pro Forma Combined Condensed Consolidated
Financial Informationintent to
lease or acquire three combustion turbines and is currently negotiating
the terms of a definitive agreement. The following supplemental unaudited pro forma financial
information combines the historical balance sheets and statementsaggregate price, including
construction of income of LGrelated facilities, is estimated to be approximately
$175 million. Capital Corp. is considering various financing
alternatives.
10.LG&E Energy and KU Energy, including their respective
subsidiaries, after giving effectemploy a fuel adjustment clause (FAC) mechanism, which
under Kentucky law allows the companies to recover from customers, the
Merger. The unaudited pro
forma combined condensed balance sheet at March 31, 1998 gives effectactual fuel costs associated with retail electric sales. In February
1999, LG&E received orders from the Kentucky Commission requiring a
refund to retail electric customers of approximately $3.9 million
- 25 -
resulting from reviews of the Merger as if it had occurred at March 31,FAC from November 1994 through April
1998. The unaudited
pro forma combined condensed statementsorders changed the Company's method of incomecomputing fuel costs
associated with electric line losses on off-system sales appropriate
for all periods give
effect torecovery through the Merger as if it had occurred at January 1, 1996. These
statements are prepared on the basis of accountingFAC.
The Kentucky Commission has not issued LG&E an order for the Merger as a
pooling of interests and are based onreview
period May 1998 through October 1998, nor have they issued orders
pertaining to KU's FAC for review periods after November 1994.
However, following the assumptionsmethods set forth in the notes thereto. The pro forma financial information does not give
effectLG&E orders the Company
estimates up to an additional $4.8 million could be refundable to LG&E
and KU retail electric customers for open review periods through
December 1998.
On March 11, 1999, the expected synergiesCommission denied LG&E's Petition for Rehearing
for the period November 1994 through October 1996 and directed LG&E to
reduce future fuel expense by $1.9 million in the first billing month
after the Order. LG&E recorded a provision for the rate refund of
$1,881,000 in March and refunded the amount through the fuel adjustment
clause in April 1999. In a separate series of Orders on March 11,
1999, the PSC granted LG&E's Petition for Rehearing for the period
November 1996 through April 1998 and established a procedural schedule
for LG&E and other parties to submit evidence and for a hearing before
the Commission. In the same Orders the PSC granted the Petition for
Rehearing of the transaction.
The following supplemental pro forma financial information has
been prepared from, andKIUC to determine if interest should be read in conjunction with,paid on any
fuel refunds for this latter period.
11.Reference is made to Part II, Legal Proceedings, below and Part I, Item
3, Legal Proceedings, of the historical financial statementsCompany's, KU Energy's, LG&E's and related notes theretoKU's
(and Note 18 of LG&E
Energy and KU Energy as included in their respectivethe Company's Notes to Financial Statements) Annual
Reports on Form 10-K for the year ended December 31, 1997.1998.
- 26 -
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Recent Developments
On April 13, 1999, the Kentucky Public Service Commission (PSC) issued
initial orders in the performance-based ratemaking proceedings for LG&E and
KU. The following
informationPSC orders implement, effective July 2, 1999, the companies'
pending performance-based ratemaking proposals, including a five-year, $52
million rate reduction plan jointly filed by LG&E, KU and the Kentucky
Attorney General's Office with the PSC on April 5, 1999. See Note 6 to the
Notes to Financial Statements of the Company, LG&E and KU contained in Item
1 of this Form 10-Q for further discussion of this matter.
On March 30, 1999, the Company acquired a 19.6% ownership interest in Gas
Natural BAN, S.A. (BAN), a natural gas distribution company that serves 1.1
million customers in the northern portion of the province of Buenos Aires,
Argentina. See Note 2 of Notes to Financial Statements under Item 1 for
more information.
On March 15, 1999, Capital Corp. entered into a letter of intent to lease
or acquire three combustion turbines and is currently negotiating the terms
of a definitive agreement. The aggregate price, including construction of
related facilities, is estimated to be approximately $175 million. Capital
Corp. is considering various financing alternatives.
As of March 31, 1999, Capital Corp. had expended approximately $82.5
million in connection with its October 1998 purchase of two natural gas
combustion turbines. The aggregate purchase price, including costs of
installation, is approximately $125 million, which is expected to be
largely funded through additional borrowing by Capital Corp. Capital Corp.
expects to complete the purchase by August 1999. In addition, LG&E and KU
have filed an application with the PSC requesting approval for the purchase
of these turbines from Capital Corp. at cost. Assuming approval is
granted, the transfer of the turbines is expected to occur in August 1999.
If approval is not necessarily indicativegranted by the PSC, Capital Corp. will operate and
market the power of these gas turbines.
On March 15, 1999, the partnership that owns the Rensselaer cogeneration
facility sold substantially all the assets and major contracts of the
financial position or
operatingfacility. For more information, see "Results of Operations" below, Note 4
of Notes to Financial Statements under Item 1 and the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
General
The Company's principal subsidiaries are LG&E, an electric and gas utility,
KU, an electric utility, and Capital Corp., the holding company for all non-
utility investments. LG&E's and KU's results that would have occurred hadof operations and liquidity
and capital resources are important factors affecting the Merger been
consummated on the date asCompany's
consolidated results of which, or at the beginningoperations and capital resources and liquidity.
Some of the periods for which,matters discussed in the Merger is being given effect, nor is it
necessarily indicativeNotes to Consolidated Financial
Statements and Management's Discussion and Analysis may contain forward-
looking statements that are subject to certain risks, uncertainties and
assumptions. Actual results may vary materially. Factors that could cause
actual results to differ materially include, but are not limited to:
general economic conditions; business and competitive conditions in the
energy industry; future prices of future operating results or financial
position. In addition, duepower and natural gas; unusual weather;
regulatory decisions, including decisions resulting from the combination of
LG&E Energy and KU Energy; the Company's ability to resolve Year 2000
issues in a timely manner and other factors described from time to time in
the Company's reports to the effectSecurities and Exchange Commission, including
Exhibit 99.01 to the Form 10-K for the year ended December 31, 1998.
- 27 -
Results of Operations
The results of operations for LG&E, KU and Capital Corp.'s Argentine gas
distribution and WKE operations are affected by seasonal fluctuations in
temperature and other weather-related factors. Because of these and other
factors, the results of one interim period are not necessarily indicative
of results or trends to be expected for the full year.
Three Months Ended March 31, 1999, Compared to
Three Months Ended March 31, 1998
The Company's diluted earnings per share from continuing operations
increased to $.44 in 1999 from $.36 in 1998. The increase resulted from
higher earnings at KU, an after-tax gain of $8.9 million ($.07) on the operationssale
of the Company's interest in the Rensselaer, New York, project and after-
tax income of $5.3 million ($.04) for fees related to the development of an
independent power project in Gregory, Texas. Lower earnings at LG&E, an
increase in interest expense at Capital Corp. and higher corporate expenses
partially offset these increases.
LG&E Results:
LG&E's net income decreased $4.5 million (19%) for the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998, primarily
because of increased maintenance expenses and lower gas revenues resulting
from a decline in gas prices. These expenses were partially offset by
increased retail and wholesale sales of electricity. Heating degree days
were 17% above 1998.
A comparison of LG&E's revenues for the quarter ended March 31, 1999, with
the quarter ended March 31, 1998, excluding the FAC refund (which reduced
electric revenues by $1.9 million), reflects increases and decreases which
have been segregated by the following principal causes:
Increase or
(Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $ 2,983 $(20,019)
Merger surcredit (1,390) -
Demand side management/revenue
decoupling (2,396) (5,395)
Variation in sales volume, etc. 6,976 9,248
Total retail sales 6,173 (16,166)
Sales for resale 5,925 (411)
Gas transportation - net - (364)
Other 38 (39)
Total $12,136 $(16,980)
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. LG&E's electric and gas
rates contain a fuel adjustment clause and a gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply may be reflected in retail rates, subject to the approval of the
Public Service Commission of Kentucky. Fuel for electric generation
decreased $3.6 million (10%)
- 28 -
for the quarter because of a decrease in generation ($3.6 million). Gas
supply expenses decreased $13.6 million (21%) due to decreases in net gas
supply cost.
Power purchased increased $13.4 million (140%) due to purchases for sales
for resale.
Maintenance expenses increased $4.4 million (43%) in 1999 primarily due to
forced outages at the Mill Creek generating station Units 1, 3, and 4 ($3.5
million) and increased storm related electric distribution expenses ($.4
million) and maintenance of general plant ($.4 million).
Depreciation and amortization increased $.8 million in 1999 because of
additional utility plant in service.
Variations in income tax expense are largely attributable to changes in pre-
tax income.
KU Results:
KU's net income increased $4.6 million (18%) for the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998. The increase
was mainly due to increases in retail electric sales caused by an increase
in heating degree days.
A comparison of KU's revenues for the quarter ended March 31, 1999, with
the quarter ended March 31, 1998, reflects increases and decreases which
have been segregated by the following principal causes:
Sales to ultimate consumers:
Fuel clause adjustments $ (790)
Environmental cost recovery (638)
Merger surcredit (1,867)
Variation in sales volume, etc. 9,415
Total retail sales 6,120
Sales for resale 27,270
Other 740
Total $34,130
Retail sales increased due to a 5% increase in sales volumes in the
quarter, which is primarily the result of a 16% increase in heating degree
days. The increase in sales for resale (1,895,289 megawatt-hours versus
529,472 megawatt-hours) was primarily due to more aggressive marketing
efforts, efficiencies achieved from coordinated dispatch of a larger
available pool of generation following completion of the merger in May 1998
of LG&E Energy and KU Energy, and sales to LG&E of $4 million due to
economic dispatch following the merger.
Fuel for electric generation comprises a large segment of KU's total
operating expenses. KU's electric rates contain a fuel adjustment clause
(FAC), whereby increases or decreases in the cost of fuel are reflected in
retail rates, subject to the approval of the Public Service Commission of
Kentucky, The Virginia State Corporation Commission, and the Federal Energy
Regulatory Commission.
Fuel for electric generation increased $9.8 million (20%) for the quarter
because of an increase in generation ($10.2 million) which was partially
offset by the lower cost of coal burned ($.4 million).
- 29 -
Power purchased expense increased $21 million in 1999 because of a 94%
increase in megawatt-hour purchases which was primarily attributable to
increased sales for resale and economic dispatch purchases from LG&E of
$2.5 million.
Other operating expense decreased by $2.8 million (9%). The decrease was
mainly attributable to a decrease in administrative and general expenses.
Variations in income tax expense are largely attributable to changes in
pretax income.
Capital Corp. Results:
Capital Corp., the holding company for all non-utility investments,
conducts its operations through three principal segments: Independent
Power Operations, WKE and Argentine Gas Distribution. Involvement in these
and other non-utility businesses represents the Company's commitment to
understand, respond to, and capitalize on the opportunities presented by an
emerging competitive energy services industry. Independent Power
Operations develops, operates, maintains and owns interests in domestic and
international power generation facilities that sell electric and steam
energy to utility and industrial customers, and owns equity interests in
combustion turbines which are leased to others. WKE leases and operates
the generating facilities of Big Rivers. Argentine Gas Distribution owns
interests in three natural gas distribution companies in Argentina.
Capital Corp. is also engaged in commercial and retail initiatives designed
to assess the energy and utility needs of large commercial and industrial
entities, provide maintenance and repair services for customers' major
household appliances and provide third party metering and billing services.
Independent Power Operations
Independent Power Operations' revenues increased from $5.2 million in 1998
to $6.9 million in 1999 as a result of recognizing income previously
deferred related to the recently sold Rensselaer project. The project sold
substantially all of its assets and major contracts in March 1999. See
Note 4 of Notes to Financial Statements under Item 1.
Independent Power Operations' equity in earnings of unconsolidated ventures
increased from $5.6 million in 1998 to $21.4 million in 1999. The increase
reflected a pre-tax gain of $14.5 million that resulted from the Rensselaer
project's sale of substantially all of its assets and major contracts in
March 1999.
Independent Power Operations' other income increased by approximately $1.0
million in 1999 due primarily to the recognition of contract breakage
income associated with the Rensselaer sale in March 1999.
Western Kentucky Energy
WKE began operations July 15, 1998, after closing its lease transaction
with Big Rivers. WKE's revenues totaled $60.0 million in 1999. WKE's cost
of revenues, primarily composed of fuel and purchased power expenses,
amounted to $35.7 million. Operation and maintenance expenses of $24.7
million include $7.0 million of rent expense associated with the lease of
Big Rivers' operating facilities. WKE incurred interest expense of
approximately $1.4 million associated with borrowings to fund the initial
purchase of certain materials and supplies from Big Rivers and to prepay
the first two years' lease payments of $55.9 million.
Argentine Gas Distribution
The Argentine Distribution companies' revenues increased 9% or $2.4 million
in 1999 to $29.5 million due to higher consumption per customer and an
increase in the customer base.
- 30 -
Operation and maintenance expenses increased by 4.5% or $1.0 million over
the same period due to higher consumption.
Other
The Company has entered into various commercial and retail initiatives to
position itself for growth in the energy industry. The commercial
initiatives represent new businesses and products designed to leverage the
Company's existing assets and experience, and to gain access to new
markets. Our retail initiatives enhance value for LG&E's and KU's
customers and are designed to help ensure that LG&E and KU remain the
utility of choice within their respective service areas when a fully
competitive industry framework takes shape. These commercial and retail
initiatives have not had a significant impact on the Company's financial
position or required significant capital investment. We remain optimistic
that these non-traditional developing ventures will add to our knowledge
base as well as our financial results in the future.
Capital Corp.'s other revenues increased from $1.5 million in 1998 to $31.8
million in 1999 due to Retail Access Services' starting operations in the
second quarter of 1998 and to Capital Corp.'s selling 50% of its interest
in an independent power project it is developing in Texas.
Capital Corp.'s other income increased $2.6 million in 1999 due mainly to
receiving the initial settlement of a claim related to an undeveloped
independent power project in California.
Interest expense increased by $4.7 million (87%) in 1999 mainly due to
funding discontinued operations and corporate expenses. The Company's
consolidated effective income tax rate increased from 33.5% in 1998 to
38.0% in 1999 due to favorably resolving tax audits in 1998 and to changes
in the provision for state income taxes. A decrease in investment and
other tax credits as a percent of pretax income also contributed to the
increase.
Liquidity and Capital Resources
The Company's need for capital funds is largely related to the construction
of plant and equipment necessary to meet the needs of electric and gas
utility customers and equity investments in connection with independent
power production projects and other energy-related growth or acquisition
opportunities among the non-utility businesses. Capital funds are also
needed for the three-month
periodsCompany's capital obligations under the Big Rivers lease
arrangements, losses incurred in connection with the discontinuance of the
merchant energy trading and sales business, information system
enhancements, and other business development opportunities. Fluctuations
in the Company's discontinued energy marketing and trading activities also
affected liquidity throughout the quarter. Lines of credit and commercial
paper programs are maintained to fund these temporary capital requirements.
Construction expenditures for the three months ended March 31, 19981999, of
$79.0 million were financed with internally generated funds.
The Company's combined cash and 1997marketable securities balance increased
$17.2 million during the three months ended March 31, 1999. The increase
reflects cash flows from operations, a net increase in debt, and the
Company's portion of the proceeds received by the Rensselaer project from
the sale of its assets and major contracts, partially offset by
construction expenditures, the investment in BAN, and dividends paid.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not necessarily indicativesignificant indicators of trends for any twelve-month period.
-22-the Company's
liquidity. Such variations are primarily attributable to fluctuations in
weather, which have a direct effect on sales of electricity and natural
gas. The decrease in accounts receivable resulted from seasonal fluctua
- 31 -
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
At March 31,1998
(Thousands of Dollars)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
ASSETS
Current assets:
Cash and temporary cash investments $ 134,984 $ 32,386 $ - $ 167,370
Marketable securities 25,048 - - 25,048
Accounts receivable - less reserve 465,114 70,163 (320) 534,957
Materials and supplies - primarily
at average cost:
Fuel (predominately coal) 21,501 22,892 - 44,393
Gas stored underground 13,365 - - 13,365
Other 31,985 24,147 - 56,132
Price risk management assets 182,262 - - 182,262
Prepayments and other 4,340 6,360 - 10,700
Total current assets 878,599 155,948 (320) 1,034,227
Utility plant:
At original cost 2,789,600 2,625,228 - 5,414,828
Less: reserve for depreciation 1,087,647 1,149,284 - 2,236,931
Net utility plant 1,701,953 1,475,944 - 3,177,897
Other property and investments
- less reserve:
Investmentstions in KU's and Centro's businesses, partially offset by an increase
resulting from higher revenues at Retail Access Services. The decrease in
accounts payable resulted from fluctuations in affiliates 153,042 2,081 - 155,123
Non-utility property and plant, net 420,918 2,642 - 423,560
Price risk management assets 57,025 - - 57,025
Other 29,228 43,349 - 72,577
Total other property and
investments 660,213 48,072 - 708,285
Deferred debits and other assets 120,837 56,253 (2,798) 174,292
Total assets $ 3,361,602 $ 1,736,217 $ (3,118) $ 5,094,701
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-23-
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
At March 31, 1998
(Thousands of Dollars)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
CAPITAL AND LIABILITIES
Current liabilities:
Long-term debt due within one year $ 20,000 $ 21 $ - $ 20,021
Notes payable 205,515 - - 205,515
Accounts payable 393,748 28,052 7,573 429,373
Trimble County settlement 11,542 - - 11,542
Price risk management liabilities 177,238 - - 177,238
Other 78,388 63,468 (4,314) 137,542
Total current liabilities 886,431 91,541 3,259 981,231
Long-term debt 814,371 546,330 - 1,360,701
Deferred credits and other liabilities:
Accumulated deferred income taxes 319,633 255,037 - 574,670
Investment tax credit, in process
of amortization 74,722 25,163 - 99,885
Regulatory liability 71,287 50,263 - 121,550
Price risk management liabilities 53,848 - - 53,848
Other 111,064 55,374 - 166,438
Total deferred credits and
other liabilities 630,554 385,837 - 1,016,391
Minority interests 99,173 - - 99,173
Cumulative preferred stock 98,353 40,000 - 138,353
Common equity 832,720 672,509 (6,377) 1,498,852
Total capital and liabilities $ 3,361,602 $ 1,736,217 $ (3,118) $ 5,094,701
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-24-
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Three Months Ended March 31, 1998
(Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
REVENUES
Energy marketing and trading $ 940,714 $ - $ - $ 940,714
Electric utility 140,585 183,210 (24) 323,771
Gas utility 92,759 - - 92,759
Argentine gas distribution and
other 34,170 1,912 - 36,082
Total revenues 1,208,228 185,122 (24) 1,393,326
COST OF REVENUES
Energy marketing and trading 932,479 - - 932,479
Fuel and power purchased 45,640 66,336 (24) 111,952
Gas supply expenses 64,076 - - 64,076
Argentine gas distribution and
other 19,427 - - 19,427
Total cost of revenues 1,061,622 66,336 (24) 1,127,934
Gross profit 146,606 118,786 - 265,392
OPERATING EXPENSES
Operation and maintenance:
Energy marketing and trading 10,506 - - 10,506
Utility 55,590 47,393 - 102,983
Argentine gas distribution and
other 12,781 540 - 13,321
Depreciation and amortization 31,750 21,533 - 53,283
Total operating expenses 110,627 69,466 - 180,093
Equity in earnings of joint ventures 5,119 - - 5,119
OPERATING INCOME 41,098 49,320 - 90,418
Other income and (deductions) 1,531 953 - 2,484
Interest charges and
preferred dividends 16,627 10,270 - 26,897
Minority interest 1,343 - - 1,343
Income before income taxes 24,659 40,003 - 64,662
Income taxes 6,896 14,598 - 21,494
NET INCOME $ 17,763 $ 25,405 $ - $ 43,168
Average common shares outstanding
(Note 4) 66,528 37,818 25,338 129,684
Earnings per share of common
stock - basic and diluted $ 0.27 $ 0.67 $ N/A $ 0.33
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-25-
LG&E ENERGY CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
Three Months Ended March 31, 1997
(Thousands of Dollars Except Per Share Data)
LG&E Energy KU Energy Pro Forma Pro Forma
(As Reported) (As Reported) Adjustment Combined
(Note 1) (Note 2) (Note 3)
REVENUES
Energy marketing and trading $ 1,059,078 $ - $ (4) $ 1,059,074
Electric utility 128,827 178,908 (204) 307,531
Gas utility 96,738 - - 96,738
Argentine gas distribution and
other 18,600 1,177 - 19,777
Total revenues 1,303,243 180,085 (208) 1,483,120
COST OF REVENUES
Energy marketing and trading 1,046,396 - (14) 1,046,382
Fuel and power purchased 35,019 62,316 (194) 97,141
Gas supply expenses 67,825 - - 67,825
Argentine gas distribution and
other 11,394 - - 11,394
Total cost of revenues 1,160,634 62,316 (208) 1,222,742
Gross profit 142,609 117,769 - 260,378
OPERATING EXPENSES
Operation and maintenance:
Energy marketing and trading 11,970 - - 11,970
Utility 53,431 46,812 - 100,243
Argentine gas distribution and
other 7,802 619 - 8,421
Depreciation and amortization 27,887 20,882 - 48,769
Total operating expenses 101,090 68,313 - 169,403
Equity in earnings of joint ventures 3,384 - - 3,384
OPERATING INCOME 44,903 49,456 - 94,359
Other income and (deductions) 3,367 527 - 3,894
Interest charges and
preferred dividends 14,422 10,440 - 24,862
Minority interest 568 - - 568
Income before income taxes 33,280 39,543 - 72,823
Income taxes 12,041 14,680 - 26,721
NET INCOME $ 21,239 $ 24,863 $ - $ 46,102
Average common shares outstanding
(Note 4) 66,383 37,818 25,338 129,539
Earnings per share of common
stock - basic and diluted $ 0.32 $ 0.66 $ - $ 0.36
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
-26-
LG&E Energy&E's and KU's businesses,
and the decrease in gas stored underground resulted from seasonal
fluctuations in LG&E's business. The increase in other current liabilities
resulted from differences in the timing of income tax payments.
The increase in investments in unconsolidated ventures resulted from the
investment in BAN and equity in earnings, partially offset by distributions
received.
The increase in non-utility property and plant resulted mainly from
additions at Centro. The increase in other property and investments
resulted from expenditures related to the purchase of two natural gas
turbines by Capital Corp.
The Company issues commercial paper that has maturity dates ranging between
one and 270 days. Because of the rollover of these maturity dates, total
short-term borrowings during the first three months of 1999 were $416.2
million and total repayments of short-term borrowings were $346.2 million.
See Note 16 of the Company's Notes to Unaudited Supplemental
Pro Forma Combined Condensed Financial Statements 1. Reclassifications have been madecontained in its
Annual Report on Form 10-K for the year ended December 31, 1998.
In October 1998, Capital Corp. entered into a contract to certain as reported account
balances reflected in KU Energy's financial statementspurchase two
natural gas turbines. Capital Corp. anticipates that the turbines or their
electrical output, if operated, would be marketed or sold to conformone or more
affiliated or unaffiliated third parties. The aggregate purchase price,
including costs of installation, for the turbines is approximately $125
million, which is expected to this reporting presentation. All other financial statement
presentationbe largely funded through additional
borrowing by Capital Corp. As of March 31, 1999, Capital Corp. had
expended approximately $82.5 million for the turbines and accounting policy differences are immaterialexpects to
complete the purchase by August 1999.
On March 15, 1999, Capital Corp. entered into a letter of intent to acquire
three combustion turbines and have
not been adjusted inis currently negotiating the supplemental pro forma combined condensed
financial statements.
2. Intercompany transactions (power purchased and power sales
transactions) between LG&E Energy and KU Energy during the periods
presented were eliminated through pro forma adjustments.
3. Merger-related transaction costs are currentlyterms of a
definitive agreement. The aggregate price, including construction of
related facilities, is estimated to be approximately $21.4$175 million. Capital
Corp. is considering various financing alternatives.
At March 31, 1999, unused capacity under the Company's lines of credit
totaled $466.6 million after considering commercial paper support and
approximately $58.7 million in letters of credit securing on- and off-
balance sheet commitments. At December 31, 1998, unused capacity under the
lines of credit totaled $536.8 million. The decrease in unused capacity
resulted from borrowing funds to meet working capital needs.
The Company's capitalization ratios at March 31, 1999, and December 31,
1998, follow:
Mar. 31, Dec. 31,
1999 1998
Long-term debt (including fees for financial advisors,
attorneys, accountants, consultants, filingscurrent portion) 45.2% 46.4%
Notes payable 13.0 11.2
Preferred stock 4.1 4.2
Common equity 37.7 38.2
Total 100.0% 100.0%
- 32 -
LG&E's capitalization ratios at March 31, 1999, and printing)December 31, 1998,
follow:
Mar. 31, Dec. 31,
1999 1998
Long-term debt (including current portion) 45.1% 45.0%
Preferred stock 6.9 6.8
Common equity 48.0 48.2
Total 100.0% 100.0%
KU's capitalization ratios at March 31, 1999, and December 31, 1998,
follow:
Mar. 31, Dec. 31,
1999 1998
Long-term debt (including current portion) 45.4% 45.7%
Preferred stock 3.3 3.4
Common equity 51.3 50.9
Total 100.0% 100.0%
On May 7, 1999, Capital Corp. issued $150.0 million of medium-term notes
due May 2004, with a stated interest rate on the notes of 6.205%. After
taking into account the forward-starting interest-rate swap entered into on
April 9, 1999, to hedge the entire issuance, the effective rate will be
6.13%. The proceeds were used to repay a portion of Capital Corp.'s
outstanding commercial paper, which had been used to fund the BAN
acquisition and other working capital needs.
For a description of significant contingencies that may affect the Company,
LG&E
Energy and KU, Energyreference is made to Part II herein - Item 1, Legal
Proceedings.
Year 2000 Computer Issue
The Company and its subsidiaries, including LG&E and KU, use various
software, systems and technology that may be affected by the "Year 2000
Issue." This concerns the ability of electronic processing equipment
(including microprocessors embedded in other equipment) to properly process
the millennium change to the year 2000 and related issues. A failure to
timely correct any such processing problems could result in material
operational and financial risks if significant systems either cease to
function or produce erroneous data. Such risks are more fully detailed in
the sections that follow, but could include an inability to operate its
generating plants, disruptions in the operation of transmission and
distribution systems and an inability to access interconnections with the
systems of neighboring utilities.
The Company began its project regarding the Year 2000 issue in 1996. The
Board of Directors has approved the general Year 2000 plan and receives
regular updates. In addition, monthly reporting procedures have been
established at senior management levels. Since 1996, a single-purpose Year
2000 team has been established in the Information Technology (IT)
Department. This team, which is headed by an officer of the Company, is
responsible for planning, implementing and documenting the Company's Year
2000 process. The team also provides direct and detailed assistance to the
Company's operational divisions and smaller units, where identified
personnel are responsible for Year 2000 work and remediation in their
specific areas. In many cases, the Company also uses the services of third
parties, including technical consultants, vendor representatives and
auditors.
- 33 -
The Company's Year 2000 effort generally follows a three phase process:
Phase I - inventory and identify potential Year 2000 issues, determine
solutions;
Phase II - survey vendors regarding their Year 2000 readiness, determine
solutions to deal with possible vendor non-compliance, develop work
plans regarding Company and vendors non-compliance issues; and
Phase III - implementation, testing, certification, contingency
planning.
The Company has long recognized the complexity of the Year 2000 issue.
Work has progressed concurrently on (a) replacing or modifying IT systems,
including mainframes, client-server, PCs and software applications, (b)
replacing or modifying non-IT systems, including embedded systems such as
mechanical control units and (c) evaluating the readiness of key third
parties, including customers, suppliers, business partners and neighboring
utilities.
State of Readiness
As of March 1999, the Company and its subsidiaries have substantially
completed the internal inventory, vendor survey and compliance assessment
portions (Phases I and II) of their Year 2000 plan for mission critical
mainframe and PC hardware and software. Remediation efforts (Phase III) in
these areas are approximately 75% complete. With respect to non-IT
embedded systems, the Company, LG&E and KU also have substantially
completed their Phase I and Phase II efforts and Phase III remediation
efforts are in progress. Testing has commenced and will continue as
remediation efforts are implemented and are expected to run until July
1999. Contingency planning has been initiated for all IT and non-IT
mission critical systems and will continue throughout 1999.
As a general matter, corrective action for major IT systems, including
customer information, financial and trading systems, are in process or have
been completed. For smaller or more isolated systems, including embedded
and plant operational systems, the Company has completed much of the
evaluative process and is commencing corrective plans. The Company has
communicated with its key suppliers, customers and business partners
regarding their Year 2000 progress, particularly in the IT software and
embedded component areas, to determine the areas in which the Company's
operations are vulnerable to those parties' failure to complete their
remediation efforts. The Company is currently evaluating and, in certain
cases, initiating follow-up actions regarding the responses from these
parties. The Company regularly attends and participates in trade group
efforts focusing on Year 2000 issues in the energy industry.
Costs of Year 2000 Issues
The Company's, LG&E's and KU's system modification costs related to the
Year 2000 issue are being expensed as incurred. Through March 1999, the
Company has incurred transactionapproximately $22.1 million in capital and operating
costs in connection with the Year 2000 issue. Based upon studies and
projections to date, the Company expects to spend an additional $10.0
million to complete its Year 2000 efforts.
Through March 1999, LG&E has incurred approximately $17.0 million in
capital and operating costs in connection with the Year 2000 issue. Based
upon studies and projections to date, LG&E expects to spend an additional
$3.6 million to complete its Year 2000 efforts.
Through March 1999, KU has incurred approximately $3.3 million in capital
and operating costs in connection with the Year 2000 issue. Based upon
studies and projections to date, KU expects to spend an additional $3.6
million to complete its Year 2000 efforts.
- 34 -
It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect.
Additionally, many costs are not incremental costs but constitute
redeployment of existing IT and other resources. These costs represent
management's current estimates; however, there can be no assurance that
actual costs associated with the Company's Year 2000 issues will not be
higher.
Risks of Year 2000 Issues
As described above, the Company has made significant progress in the
implementation of its Year 2000 plan. Based upon the information currently
known regarding its internal operations and assuming successful and timely
completion of its remediation plan, the Company does not anticipate
material business disruptions from its internal systems due to the Year
2000 issue. However, the Company may possibly experience limited
interruptions to some aspects of its activities, whether IT, generation,
transmission or distribution, operational, administrative functions or
otherwise, and the Company is considering such potential occurrences in
planning for the most reasonably likely worst-case scenarios.
Additionally, risk exists regarding the non-compliance of third parties
with key business or operational importance to the Company. Year 2000
problems affecting key customers, interconnected utilities, fuel suppliers
and transporters, telecommunications providers or financial institutions
could result in lost power or gas sales, reduced power production or
transmission capabilities or internal operational or administrative
difficulties on the part of the Company. The Company is not presently
aware of any such situations; however, severe occurrences of this type
could have material adverse impacts upon the business, operating results or
financial condition of the Company. There can be no assurance that the
Company will be able to identify and correct all aspects of the Year 2000
problem among these third parties that affect it in sufficient time, that
it will develop adequate contingency plans or that the costs of $13.5 million
through March 31, 1998,achieving
Year 2000 readiness will not be material.
Contingency planning is under way for material areas of Year 2000 risk.
This effort will address certain areas, including the most reasonably
likely worst-case scenarios and delays in completion in the Company's
remediation plans, failure or incomplete remediation results and failure of
key third parties to be Year 2000 compliant. Contingency plans will
include provisions for extra staffing, back-up communications, review of
unit dispatch and load shedding procedures, carrying of additional energy
reserves and manual energy accounting procedures. Completion of
contingency plan formulation is scheduled for June 1999.
Forward Looking Statements
The foregoing discussion regarding the timing, effectiveness,
implementation, and cost of the Company's Year 2000 efforts, contains
forward-looking statements, which are included in deferred debitsbased on management's best estimates
derived using assumptions. These forward-looking statements involve
inherent risks and uncertainties, and actual results could differ
materially from those contemplated by such statements. Factors that might
cause material differences include, but are not limited to, the
availability of key Year 2000 personnel, the Company's ability to locate
and correct all relevant computer codes, the readiness of third parties,
and the Company's ability to respond to unforeseen Year 2000 complications
and other assetsfactors described from time to time in the supplemental pro forma combined condensed balance sheet.
None ofCompany's reports to
the estimated cost savings resulting fromSecurities and Exchange Commission, including Exhibit 99.01 to the Merger or costs
to achieve such savings have been reflected in the supplemental pro
forma combined condensed statements of income. A charge of $6.4
million ($10.7 million, net of income taxes of $4.3 million) as a pro
forma adjustment to retained earnings and a credit of $2.8 million
($10.7 million less $13.5 million actual charges incurred through
March 31, 1998) as a pro forma adjustment to deferred debits and other
assets have been made in the supplemental pro forma combined condensed
balance sheet to recognize such estimated transaction costs and the
proposed treatment following the consummation of the Merger.
4. The supplemental pro forma combined condensed financial statements
reflect the conversion of each share of KU Energy Common Stock (no par
value) outstanding into 1.67 shares of LG&E Energy Common Stock (no par
value) as provided in the Merger Agreement. The supplemental pro forma
combined condensed financial statements are presented as if the
companies were combined during all periods included therein.
-27-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this report:
Exhibit Number Description
27.01 Financial Data Schedule for KU Energy
(required for electronic filing only in
accordance with Item 601 (c)(1) of
Regulation S-K.)
27.02 Financial Data Schedule for KU (required
for electronic filing only in accordance
with Item 601(c)(1) of Regulation S-K.)
99.01 Cautionary Statements - KU Energy and KU.
(Exhibit 99.04 to Form
10-K Annual Report
of KU Energy and KU for the year ended D e cemberDecember 31, 1997)1998. Such material differences could
result in, among other things, business disruption, operational problems,
financial loss, legal liability and similar risks.
- 35 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E Energy is exposed to market risks in both its regulated and non-
utility operations. Both operations are exposed to market risks from
changes in interest rates and commodity prices, while the non-utility
operations are also exposed to changes in foreign exchange rates. To
mitigate changes in cash flows attributable to these exposures, the Company
has entered into various derivative financial instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
The potential change in interest expense resulting from changes in base
interest rates of the Company's unswapped debt did not change materially in
the first quarter of 1999. The potential changes in the fair values of the
Company's interest-rate swaps resulting from changes in interest rates and
the yield curve also did not change materially in the first quarter of
1999. The Company's exposure to market risks from changes in commodity
prices and foreign exchange rates remained immaterial in the first quarter
of 1999.
- 36 -
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving the
Company, LG&E and KU, reference is made to the information under the
following items and captions of the Company's, LG&E's and KU's respective
combined Annual Report on Form 10-K for the year ended December 31, 1998:
Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's
Discussion and Analysis of Results of Operations and Financial Condition;
Notes 2, 5, 18 and 22 of the Company's Notes to Financial Statements under
Item 8; Notes 3, 12, 16 and 18 of LG&E's Notes to Financial Statements
under Item 8 and Notes 3, 11 and 13 of KU's Notes to Financial Statements
under Item 8. Except as described herein, to date, the proceedings
reported in the Company's, LG&E's and KU's respective combined Annual
Report on Form 10-K have not changed materially.
Certain Fuel Adjustment Clause Proceedings
On April 1, 1999, LG&E filed a notice of appeal in the Circuit Court of
Franklin County, Kentucky appealing certain rulings of the Kentucky Public
Service Commission (PSC) requiring refunds of approximately $3.9 million
(as of February 1999) in costs previously recovered from customers under
the fuel adjustment clause mechanism. See Item 3, Legal Proceedings, and
Notes 5 and 22 to the Company's and Notes 3 and 16 of LG&E's respective
Notes to Financial Statements under Item 8 of the Company's and LG&E's
combined Annual Report on Form 10-K for the year ended December 31, 1998,
for further discussion of this matter.
Kenetech Bankruptcy
In April 1999, the Windpower Partners 1993, Windpower Partners 1994 and KW
Tarifa, S.A. projects in which the Company owns certain interests received
initial distributions aggregating approximately $12.7 million, as well as
certain other assets, in connection with these projects' claims in the
bankruptcy proceeding of Kenetech Windpower, Inc. The funds are currently
held in trust and will be used to pay legal fees and unpaid interest on
debt of the projects, as appropriate. The Company expects to record a pre-
tax gain of approximately $2.5 million during the second quarter of 1999 in
connection with these initial distributions. See Item 3, Legal
Proceedings, and Note 18 of the Company's Notes to Financial Statements
under Item 8 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, for further discussion of this matter.
Performance-Based Ratemaking
On April 13, 1999, the PSC issued initial orders in the performance-based
ratemaking proceedings (PBR) for LG&E and KU. The PSC orders implement,
effective July 2, 1999, and subject to modification, the companies' pending
PBR proposals, including a five-year, $52 million rate reduction plan
agreed upon by LG&E, KU and the Kentucky Attorney General's Office and
previously filed with the PSC on April 5, 1999. Further proceedings in the
PBR case, including consideration of rate reductions requested by certain
intervenors, are scheduled for the second and third quarters of 1999. See
Note 6 to the Notes to Financial Statements of the Company, LG&E and KU
contained in Item 1 of this Form 10-Q and Item 3, Legal Proceedings, to the
Company's, LG&E's and KU's combined Annual Report on Form 10-K for further
discussion of this matter.
- 37 -
Item 6(a). Incorporated by
reference.
(b)Exhibits.
Exhibit
Number Description
27 Financial Data Schedules for LG&E Energy Corp.,
Louisville Gas and Electric Company, and Kentucky
Utilities Company.
Item 6(b). Reports on Form 8-K.
None.
-28-On February 11, 1999, the Company filed a report on Form 8-K announcing
that it had realigned its management structure to support its strategy of
aggressively growing the company as the energy services industry moves
toward deregulation.
On March 23, 1999, the Company filed a report on Form 8-K announcing that
on March 15, 1999, LG&E-Westmoreland Rensselaer, a California general
partnership in which LG&E Energy owns a 50% interest, completed the sale of
substantially all the assets and major contracts of its 79 MW gas-fired
cogeneration facility in Rensselaer, New York to Fulton Cogeneration
Associates, L.P., an affiliate of The Coastal Corporation.
On April 7, 1999, the Company, LG&E and KU filed reports on Form 8-K
announcing that on April 5, 1999, LG&E and KU had reached an agreement with
the Kentucky Attorney General's Office regarding LG&E's and KU's pending
performance-based ratemaking (PBR) proposal. In a filing with the PSC, the
parties amended the companies' PBR proposal to request approval of an
agreed-upon five-year rate reduction plan. In the same filing, the Company
announced that on March 30, 1999, it had acquired an indirect ownership
interest of approximately 20 percent in Gas Natural BAN, S.A.
On April 20, 1999, the Company, LG&E and KU filed reports on Form 8-K
announcing orders of the PSC dated April 13, 1999, regarding LG&E and KU.
The PSC orders implement, effective July 2, 1999, the companies' pending
performance-based ratemaking proposal, including a five-year rate reduction
plan agreed upon earlier by the companies and the Kentucky Attorney
General's Office.
- 38 -
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
KU Energy Corporation (by its successor LG&E Energy Corp.) and Kentucky
Utilities Company have eachthe registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KU ENERGY CORPORATION
(By its successor LG&E Energy Corp.)
(Registrant)
Date
Registrant
Date: May 13, 1998 /s/ Victor A. Staffieri
Victor A. Staffieri
Chief Financial Officer
Date May 13, 1998 /s/ Michael R. Whitley
Michael R. Whitley
Vice Chairman, President and
Chief Operating Officer
KENTUCKY UTILITIES COMPANY
(Registrant)
Date May 13, 199814, 1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(on(On behalf of the registrant in his
capacity as Principal Accounting Officer)
-29-Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: May 14, 1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Kentucky Utilities Company
Registrant
Date: May 14, 1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
- 39 -