UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000MARCH 31, 2001
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification No.
1-10568 LG&E Energy Corp. 61-1174555
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32030
Louisville, Ky. 40232
(502) 627-2000
2-26720 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
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)
Commission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification No.
- ----------- ----------------------------- ------------------
2-26720 LOUISVILLE GAS AND ELECTRIC COMPANY 61-0264150
(A Kentucky Corporation)
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
(859) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
LG&E Energy Corp.
129,677,030 shares, without par value, as of July 31, 2000.
Louisville Gas and Electric Company
-----------------------------------
21,294,223 shares, without par value, as of July 31, 2000,April 30, 2001,
all held by LG&E Energy Corp.
Kentucky Utilities Company
--------------------------
37,817,878 shares, without par value, as of July 31, 2000,April 30, 2001,
all held by LG&E Energy Corp.
This combined Form 10-Q is 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 its direct or indirect subsidiaries other than Louisville Gas and
Electric Company or Kentucky Utilities Company is provided solely by LG&E
Energy Corp., not Louisville Gas and Electric Company or Kentucky Utilities
Company, and shall be deemed not included in the Form 10-Q of Louisville
Gas and Electric Company or the Form 10-Q of Kentucky Utilities Company.
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 37
PART II
Item 1 Legal Proceedings 38
Item 4 Submission of Matters to a Vote of Security Holders 39
Item 6 Exhibits and Reports on Form 8-K 40
Signatures 41
Item 1 Financial Statements
Louisville Gas and Electric Company and Subsidiary
Statements of Income................................................................ 1
Balance Sheets...................................................................... 2
Statements of Cash Flows............................................................ 4
Statements of Retained Earnings..................................................... 5
Statements of Comprehensive Income.................................................. 6
Kentucky Utilities Company and Subsidiary
Statements of Income................................................................ 7
Balance Sheets...................................................................... 8
Statements of Cash Flows............................................................ 10
Statements of Retained Earnings..................................................... 11
Statements of Comprehensive Income.................................................. 12
Notes to Financial Statements........................................................... 13
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition...................................................... 17
Item 3 Quantitative and Qualitative Disclosures About
Market Risk............................................................................. 21
PART II
Item 1 Legal Proceedings........................................................................... 22
Item 6 Exhibits and Reports on Form 8-K............................................................ 22
Signatures ............................................................................... 23
Part I. Financial Information - Item 1. Financial Statements
LG&E Energy Corp. and SubsidiariesLOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited - Thousands(Unaudited)
(Thousands of $ Except Per Share Data)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
REVENUES:
Electric utility $ 376,606 $ 406,258 $ 742,496 $ 767,931
Gas utility 29,979 23,652 118,295 99,431
International and
non-utility 199,706 193,747 370,890 355,560
Net revenues 606,291 623,657 1,231,681 1,222,922
OPERATING EXPENSES:
Fuel and power purchased 206,509 250,994 409,705 456,082
Gas supply expenses 88,675 56,920 207,903 151,984
Utility operation and
maintenance 98,257 115,192 202,115 218,897
International and non-
utility operation
and maintenance 56,210 47,434 104,748 92,398
Depreciation and
amortization 56,802 53,479 115,175 108,215
Asset impairment charge
(Note 4) 45,000 - 45,000 -
Non-recurring charges
(Notes 2 and 3) 14,676 - 35,389 -
Total operating expenses 566,129 524,019 1,120,035 1,027,576
Equity in earnings
of unconsolidated
ventures (Note 6) 10,760 12,051 16,690 33,707
OPERATING INCOME 50,922 111,689 128,336 229,053
Other income 5,707 2,611 10,716 8,999
Interest charges and
preferred dividends 36,919 32,243 71,884 62,763
Minority interest 4,520 3,842 6,014 5,413
Income before income taxes 15,190 78,215 61,154 169,876
Income taxes 3,841 28,250 19,923 63,132
Income from continuing
operations $ 11,349 $ 49,965 $ 41,231 $ 106,744
- 1 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Income from continuing
operations $ 11,349 $ 49,965 $ 41,231 $ 106,744
(Loss) income from disposal of
discontinued operations, net of
income tax benefit (expense)
of $94,476 and ($328)
(Note 5) (155,000) - (155,000) 788
NET INCOME (LOSS) $(143,651) $ 49,965 $ (113,769)$ 107,532
Average common shares
outstanding 129,677 129,677 129,677 129,677
Earnings (loss) per share -
basic and diluted:
Continuing operations $ .09 $ .39 $ .32 $ .82
(Loss) income from dis-
posal of discontinued
operations (1.20) .00 (1.20) .01
Total $ (1.11) $ .39 $ (.88) $ .83$)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
OPERATING REVENUES:
Electric (Note 8)....................................................................... $155,374 $161,326
Gas (Note 8)......................................................................... 157,897 88,316
-------- --------
Total operating revenues............................................................. 313,271 249,642
-------- --------
OPERATING EXPENSES:
Fuel for electric generation............................................................ 38,484 39,926
Power purchased......................................................................... 11,341 21,753
Gas supply expenses..................................................................... 125,237 63,394
Non-recurring charges (Note 4).......................................................... 144,385 8,141
Other operation expenses................................................................ 35,283 36,975
Maintenance............................................................................. 10,555 13,881
Depreciation and amortization........................................................... 25,267 24,149
Federal and state
income taxes......................................................................... (38,011) 9,668
Property and other taxes................................................................ 4,462 5,163
-------- --------
Total operating expenses............................................................. 357,003 223,050
-------- --------
NET OPERATING (LOSS) INCOME............................................................. (43,732) 26,592
Other income - net...................................................................... 996 1,519
Interest charges........................................................................ 11,379 10,690
-------- --------
NET (LOSS) INCOME....................................................................... (54,115) 17,421
Preferred stock dividends............................................................... 1,299 1,165
-------- --------
NET (LOSS) INCOME AVAILABLE
FOR COMMON STOCK..................................................................... $(55,414) $ 16,256
======== ========
The accompanying notes are an integral part of these financial statements.
- 2 -1
LG&E Energy Corp. and SubsidiariesLOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
June 30, Dec. 31,
2000 1999
CURRENT ASSETS:
Cash and temporary cash investments $ 57,291 $ 91,413
Marketable securities 8,558 10,126
Accounts receivable - less reserve 313,139 318,914
Materials and supplies - primarily at average cost:
Fuel (predominantly coal) 82,669 91,931
Gas stored underground 25,340 49,038
Other 96,186 90,259
Prepayments and other 46,955 54,038
Total current assets 630,138 705,719
UTILITY PLANT:
At original cost 6,021,543 5,916,905
Less: reserve for depreciation 2,603,334 2,503,851
Net utility plant 3,418,209 3,413,054
OTHER PROPERTY AND INVESTMENTS - LESS RESERVES:
Investment in unconsolidated
ventures (Note 6) 243,948 249,455
Non-utility property and plant, net 430,336 477,442
Other 50,926 25,596
Total other property and investments 725,210 752,493
DEFERRED DEBITS AND OTHER ASSETS 263,805 262,491
Total assets $5,037,362 $5,133,757
(Unaudited)
Mar. 31, Dec. 31,
2001 2000
---- ----
UTILITY PLANT:
At original cost........................................................................ $3,246,026 $3,186,325
Less: reserve for depreciation......................................................... 1,315,833 1,296,865
---------- ----------
Net utility plant.................................................................... 1,930,193 1,889,460
---------- ----------
OTHER PROPERTY AND INVESTMENTS -
less reserve......................................................................... 1,188 1,357
---------- ----------
CURRENT ASSETS:
Cash ................................................................................. 6,995 2,495
Marketable securities................................................................... - 4,056
Accounts receivable - less reserve (Note 6)............................................. 89,724 170,852
Materials and supplies - at average cost:
Fuel (predominantly coal)............................................................ 16,860 9,325
Gas stored underground............................................................... 20,980 54,441
Other................................................................................ 30,823 31,685
Prepayments and other................................................................... 4,942 1,317
---------- ----------
Total current assets................................................................. 170,324 274,171
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense................................................................ 5,709 5,784
Regulatory assets....................................................................... 34,849 36,808
Other ................................................................................. 48,792 18,504
---------- ----------
Total deferred debits and other assets............................................... 89,350 61,096
---------- ----------
Total assets............................................................................ $2,191,055 $2,226,084
========== ==========
The accompanying notes are an integral part of these financial statements.
- 3 -2
LG&E Energy Corp. and SubsidiariesLOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITALCAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, Dec. 31,
2000 1999
CURRENT LIABILITIES:
Current portion of long-term debt $ 375,506 $ 411,810
Notes payable 413,660 449,578
Accounts payable 192,382 220,460
Net liabilities of discontinued opera-
tions (Note 5) 291,905 158,222
Other 226,031 248,841
Total current liabilities 1,499,484 1,488,911
Long-term debt 1,404,441 1,299,415
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 587,722 585,880
Investment tax credit, in
process of amortization 81,849 85,828
Regulatory liability 96,799 104,795
Other 172,840 182,357
Total deferred credits and other liabilities 939,210 958,860
Minority interests 106,379 109,952
Cumulative preferred stock 142,640 135,328
COMMON EQUITY:
Common stock, without par value -
129,677,030 shares outstanding 777,013 777,013
Other (1,926) (1,956)
Retained earnings 170,121 366,234
Total common equity 945,208 1,141,291
Total liabilities and capital $5,037,362 $5,133,757
(Unaudited)
Mar. 31, Dec. 31,
2001 2000
---- ----
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares........................................................ $ 425,170 $ 425,170
Additional paid-in capital.............................................................. 40,000 40,000
Retained earnings....................................................................... 259,180 314,594
Other ................................................................................. (5,655) (836)
---------- ----------
Total common equity.................................................................. 718,695 778,928
Cumulative preferred stock.............................................................. 95,140 95,140
Long-term debt.......................................................................... 360,600 360,600
---------- ----------
Total capitalization................................................................. 1,174,435 1,234,668
---------- ----------
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... 246,200 246,200
Notes payable........................................................................... 91,453 114,589
Accounts payable........................................................................ 106,214 136,892
Dividends declared...................................................................... 1,299 1,367
Accrued taxes........................................................................... 22,430 8,073
Accrued interest........................................................................ 4,720 6,350
Other ................................................................................. 16,235 15,826
---------- ----------
Total current liabilities............................................................ 488,551 529,297
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes................................................................................ 241,667 289,232
Investment tax credit, in
process of amortization.............................................................. 61,912 62,979
Accumulated provision for pensions
and related benefits (Note 4)........................................................ 127,894 31,257
Customer advances for construction...................................................... 9,489 9,578
Regulatory liabilities.................................................................. 52,359 55,152
Other ................................................................................. 34,748 13,921
---------- ----------
Total deferred credits and other liabilities......................................... 528,069 462,119
---------- ----------
Total capital and liabilities........................................................... $2,191,055 $2,226,084
========== ==========
The accompanying notes are an integral part of these financial statements.
- 4 -3
LG&E Energy Corp. and SubsidiariesLOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited - Thousands(Unaudited)
(Thousands of $)
Six Months
Ended
June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (113,769)$ 107,532
Items not requiring cash currently:
Depreciation and amortization 115,175 108,215
Deferred income taxes - net (7,288) (2,157)
Asset impairment charge (Note 4) 45,000 -
Non-recurring charges (Notes 2 and 3) 35,389 -
Loss (income) from disposal of dis-
continued operations (Note 5) 155,000 (788)
Other (5,530) (24,170)
Change in net current assets (35,224) 40,018
Other (40,973) 26,223
Net cash flows from operating activities 147,780 254,873
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (339) (652)
Proceeds from sales of securities 1,635 7,871
Construction expenditures (157,273) (199,770)
Investments in unconsolidated
ventures (Note 6) (2,125) (74,498)
Proceeds from sales of investments
in affiliates (Note 6) 22,507 33,821
Net cash flows from investing activities (135,595) (233,228)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 187,900 150,000
Retirement of debt (120,913) -
Short-term borrowings 5,031,905 756,132
Repayment of short-term borrowings (5,070,355) (813,132)
Issuance of preferred stock 7,500 -
Redemption of preferred stock - (1,202)
Payment of common dividends (82,344) (79,752)
Net cash flows from financing activities (46,307) 12,046
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (34,122) 33,691
BEGINNING CASH AND TEMPORARY
CASH INVESTMENTS 91,413 105,604
ENDING CASH AND TEMPORARY
CASH INVESTMENTS $ 57,291 $ 139,295
- 5 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Six Months
Ended
June 30,
2000 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 31,985 $ 9,375
Interest on borrowed money 52,650 53,857
Three Months
Ended
Mar. 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................................... $(54,115) $ 17,421
Items not requiring cash currently:
Depreciation and amortization........................................................ 25,267 24,149
Deferred income taxes - net.......................................................... (50,358) (3,498)
Investment tax credit - net.......................................................... (1,067) (1,071)
Other................................................................................ 5,074 1,677
Changes in net current assets and liabilities........................................... 86,749 5,399
Other ................................................................................. 79,455 4,156
--------- ---------
Net cash flows from operating activities............................................. 91,005 48,233
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities................................................................. - (124)
Proceeds from sales of securities....................................................... 4,225 -
Construction expenditures............................................................... (66,227) (21,269)
--------- ---------
Net cash flows from investing activities............................................. (62,002) (21,393)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings................................................................... (23,136) 11,694
Retirement of first mortgage bonds...................................................... - (20,000)
Payment of dividends.................................................................... (1,367) (24,236)
-------- ---------
Net cash flows from financing activities............................................. (24,503) (32,542)
--------- ---------
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS..................................................................... 4,500 (5,702)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD.................................................................. 2,495 54,761
-------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD........................................................................ $ 6,995 $ 49,059
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Income taxes....................................................................... $ (4,226) $ 3,184
Interest on borrowed money......................................................... 9,963 8,743
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 -4
LG&E Energy Corp. and SubsidiariesLOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
Consolidated Statements of Retained Earnings
(Unaudited - Thousands(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Balance at beginning
of period $ 354,944 $ 483,970 $ 366,234 $ 466,279
Net income (loss) (143,651) 49,965 (113,769) 107,532
Cash dividends declared on
common stock ($.3175, $.3075,
$.6350 and $.6150 per share) 41,172 39,876 82,344 79,752
Balance at end of period $ 170,121 $ 494,059 $ 170,121 $ 494,059
Three Months
Ended
Mar. 31,
2001 2000
---- ----
Balance at beginning
of period............................................................................ $314,594 $259,231
Net (loss) income....................................................................... (54,115) 17,421
-------- --------
Subtotal............................................................................. 260,479 276,652
-------- --------
Cash dividends declared on stock:
5% cumulative preferred................................................................. 269 269
Auction rate cumulative
preferred............................................................................ 663 529
$5.875 cumulative preferred............................................................. 367 367
Common ................................................................................. - 16,500
-------- --------
Subtotal............................................................................. 1,299 17,665
-------- --------
Balance at end of period................................................................ $259,180 $258,987
======== ========
The accompanying notes are an integral part of these financial statements.
- 7 -5
LG&E Energy Corp. and SubsidiariesLOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited - Thousands(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Net income (loss) $(143,651) $ 49,965 $(113,769) $107,532
Unrealized holding gains (losses)
on available-for-sale securities
arising during the period (205) (155) (517) 37
Reclassification adjustment for
realized gains and (losses) on
available-for-sale securities
included in net income 26 (163) 40 (158)
Other comprehensive loss,
before tax (179) (318) (477) (121)
Income tax benefit related to
items of other comprehensive
income 38 110 151 46
Comprehensive income (loss) $(143,792) $ 49,757 $(114,095) $107,457
Three Months
Ended
Mar. 31,
2001 2000
---- ----
Net (loss) income available for common stock............................................ $(55,414) $16,256
Cumulative effect of change in accounting principle -
Accounting for Derivative Instruments and
Hedging Activities (Note 5).......................................................... (5,998) -
(Losses) on Derivative Instruments and Hedging Activities
(Note 5)............................................................................... (2,035) -
Unrealized holding (losses) on
available-for-sale securities arising
during the period.................................................................... - (159)
-------- -------
Other comprehensive (loss),
before tax........................................................................... (8,033) (159)
Income tax benefit related to items
of other comprehensive (loss)........................................................ 3,213 64
-------- -------
Comprehensive (loss) income............................................................. $(60,234) $16,161
======== =======
The accompanying notes are an integral part of these financial statements.
- 8 -6
Louisville Gas and Electric CompanyKENTUCKY UTILITIES COMPANY AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
OPERATING REVENUES:
Electric $179,752 $190,445 $341,079 $341,286
Gas 29,979 23,652 118,295 99,431
Total operating revenues 209,731 214,097 459,374 440,717
OPERATING EXPENSES:
Fuel for electric generation 38,650 39,380 78,576 71,838
Power purchased 24,346 30,858 46,100 53,884
Gas supply expenses 18,688 13,395 82,082 63,887
Non-recurring charges (Note 3) - - 8,141 -
Other operation expenses 30,547 39,457 67,522 79,649
Maintenance 17,442 20,227 31,323 34,930
Depreciation and amortization 23,901 24,143 48,050 48,285
Federal and state
income taxes 14,397 12,079 24,066 21,634
Property and other taxes 4,475 3,962 9,637 8,998
Total operating expenses 172,446 183,501 395,497 383,105
NET OPERATING INCOME 37,285 30,596 63,877 57,612
Other income 1,850 234 3,369 1,312
Interest charges 11,126 8,790 21,816 17,968
NET INCOME 28,009 22,040 45,430 40,956
Preferred stock dividends 1,317 1,086 2,482 2,176
NET INCOME AVAILABLE
FOR COMMON STOCK $ 26,692 $ 20,954 $ 42,948 $ 38,780
Three Months
Ended
Mar. 31,
2001 2000
---- ----
OPERATING REVENUES (Note 8)............................................................. $211,793 $217,778
-------- --------
OPERATING EXPENSES:
Fuel for electric generation............................................................ 55,928 55,615
Power purchased......................................................................... 32,885 38,845
Non-recurring charges (Note 4).......................................................... 63,788 11,030
Other operation expenses................................................................ 26,618 28,848
Maintenance............................................................................. 11,970 14,150
Depreciation and amortization........................................................... 23,828 24,331
Federal and state
income taxes......................................................................... (6,450) 11,366
Property and other taxes................................................................ 4,155 4,840
-------- --------
Total operating expenses............................................................. 212,722 189,025
-------- --------
NET OPERATING (LOSS) INCOME............................................................. (929) 28,753
Other income - net...................................................................... 1,793 1,325
Interest charges........................................................................ 8,117 9,904
-------- --------
NET (LOSS) INCOME before Cumulative Effect of Accounting
Change............................................................................... (7,253) 20,174
Cumulative Effect of Change in Accounting for Derivative
Instruments and Hedging Activities, net of tax (Note 5).............................. 136 -
-------- --------
NET (LOSS) INCOME....................................................................... (7,117) 20,174
Preferred stock dividends............................................................... 564 564
-------- --------
NET (LOSS) INCOME AVAILABLE
FOR COMMON STOCK..................................................................... $ (7,681) $ 19,610
======== ========
The accompanying notes are an integral part of these financial statements.
- 9 -7
Louisville Gas and Electric CompanyKENTUCKY UTILITIES COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
June 30, Dec. 31,
2000 1999
UTILITY PLANT:
At original cost $3,125,138 $3,065,839
Less: reserve for depreciation 1,267,106 1,215,032
Net utility plant 1,858,032 1,850,807
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,161 1,224
CURRENT ASSETS:
Cash and temporary cash investments 39,579 54,761
Marketable securities 5,527 6,936
Accounts receivable - less reserve 107,534 113,859
Materials and supplies - at average cost:
Fuel (predominantly coal) 15,964 17,350
Gas stored underground 14,648 38,780
Other 34,919 35,010
Prepayments and other 2,996 2,775
Total current assets 221,167 269,471
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,607 5,607
Regulatory assets 29,999 31,443
Other 18,682 12,900
Total deferred debits and other assets 54,288 49,950
Total assets $2,134,648 $2,171,452
(Unaudited)
Mar. 31, Dec. 31,
2001 2000
---- ----
UTILITY PLANT:
At original cost........................................................................ $2,989,937 $2,932,763
Less: reserve for depreciation......................................................... 1,399,851 1,378,283
---------- ----------
Net utility plant.................................................................... 1,590,086 1,554,480
---------- ----------
OTHER PROPERTY AND INVESTMENTS -
less reserve......................................................................... 12,731 14,538
---------- ----------
CURRENT ASSETS:
Cash and temporary cash investments..................................................... 4,180 314
Accounts receivable - less reserve (Note 6)............................................. 52,485 90,419
Materials and supplies - at average cost:
Fuel (predominantly coal)............................................................ 27,022 12,495
Other................................................................................ 25,995 25,812
Prepayments and other................................................................... 6,190 1,899
---------- ----------
Total current assets................................................................. 115,872 130,939
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense................................................................ 4,576 4,651
Regulatory assets....................................................................... 24,243 26,441
Other ................................................................................. 16,930 8,469
---------- ----------
Total deferred debits and other assets............................................... 45,749 39,561
---------- ----------
Total assets............................................................................ $1,764,438 $1,739,518
========== ==========
The accompanying notes are an integral part of these financial statements.
- 10 -8
Louisville Gas and Electric CompanyKENTUCKY UTILITIES COMPANY AND SUBSIDIARY
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, Dec. 31,
2000 1999
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Retained earnings 269,179 259,231
Other (1,184) (1,025)
Total common equity 693,165 683,376
Cumulative preferred stock 95,140 95,328
Long-term debt 335,600 380,600
Total capitalization 1,123,905 1,159,304
CURRENT LIABILITIES:
Current portion of long-term debt 271,200 246,200
Notes payable 131,757 120,097
Accounts payable 83,784 113,008
Provision for rate refunds - 8,962
Dividends declared 17,817 24,236
Accrued taxes 39,632 23,759
Accrued interest 6,798 9,265
Other 16,830 15,725
Total current liabilities 567,818 561,252
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 261,967 255,910
Investment tax credit, in
process of amortization 65,111 67,253
Accumulated provision for pensions
and related benefits 39,454 38,431
Customer advances for construction 9,965 11,104
Regulatory liability 55,080 58,726
Other 11,348 19,472
Total deferred credits and other liabilities 442,925 450,896
Total capital and liabilities $2,134,648 $2,171,452
(Unaudited)
Mar. 31, Dec. 31,
2001 2000
---- ----
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares........................................................ $ 308,140 $ 308,140
Additional paid-in capital.............................................................. 15,000 15,000
Retained earnings....................................................................... 339,557 347,238
Other ................................................................................. 994 (595)
---------- ----------
Total common equity.................................................................. 663,691 669,783
Cumulative preferred stock.............................................................. 40,000 40,000
Long-term debt.......................................................................... 432,496 430,830
---------- ----------
Total capitalization................................................................. 1,136,187 1,140,613
---------- ----------
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... 54,000 54,000
Notes payable........................................................................... 46,190 61,239
Accounts payable........................................................................ 87,294 76,339
Dividends declared...................................................................... 188 188
Accrued taxes........................................................................... 38,534 19,622
Accrued interest........................................................................ 6,874 6,373
Other ................................................................................. 17,776 18,579
---------- ----------
Total current liabilities............................................................ 250,856 236,340
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes................................................................................ 219,888 246,680
Investment tax credit, in
process of amortization.............................................................. 14,039 14,901
Accumulated provision for pensions
and related benefits (Note 4)........................................................ 87,862 47,495
Customers' advances for construction.................................................... 1,517 1,540
Regulatory liabilities.................................................................. 37,033 38,392
Other ................................................................................. 17,056 13,557
---------- ----------
Total deferred credits and other liabilities......................................... 377,395 362,565
---------- ----------
Total capital and liabilities........................................................... $1,764,438 $1,739,518
========== ==========
The accompanying notes are an integral part of these financial statements.
- 11 -9
Louisville Gas and Electric CompanyKENTUCKY UTILITIES COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited - Thousands(Unaudited)
(Thousands of $)
Six Months
Ended
June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,430 $ 40,956
Items not requiring cash currently:
Depreciation and amortization 48,050 48,285
Deferred income taxes - net 246 (3,982)
Investment tax credit - net (2,142) (2,145)
Other 4,264 3,585
Changes in current assets and liabilities 8,036 10,050
Other (4,508) 6,319
Net cash flows from operating activities 99,376 103,068
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (194) (495)
Proceeds from sales of securities 1,520 7,861
Construction expenditures (64,560) (59,757)
Net cash flows from investing activities (63,234) (52,391)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of pollution control bonds 25,000 -
Retirement of first mortgage and
pollution control bonds (46,083) -
Short-term borrowings 1,432,256 -
Repayment of short-term borrowings (1,420,596) -
Payment of dividends (41,901) (46,257)
Net cash flows from financing activities (51,324) (46,257)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (15,182) 4,420
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 54,761 31,730
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 39,579 $ 36,150
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 4,396 $ 16,065
Interest on borrowed money 17,876 16,657
Three Months
Ended
Mar. 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................................... $ (7,117) $ 20,174
Items not requiring cash currently:
Depreciation and amortization........................................................ 23,828 24,331
Deferred income taxes - net.......................................................... (28,166) (4,602)
Investment tax credit - net.......................................................... (862) (919)
Other................................................................................ 1,654 (911)
Changes in net current assets and liabilities........................................... 48,498 2,222
Other ................................................................................. 41,947 (2,804)
-------- ---------
Net cash flows from operating activities............................................. 79,782 37,491
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures............................................................... (60,302) (23,530)
-------- --------
Net cash flows from investing activities............................................. (60,302) (23,530)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings................................................................... 99,325 -
Repayment of short-term borrowings...................................................... (114,375) -
Payment of dividends.................................................................... (564) (19,564)
-------- --------
Net cash flows from financing activities............................................. (15,614) (19,564)
-------- --------
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS..................................................................... 3,866 (5,603)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD.................................................................. 314 6,793
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD........................................................................ $ 4,180 $ 1,190
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Income taxes....................................................................... $ 3,894 $ (9,260)
Interest on borrowed money......................................................... 7,116 6,560
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 -10
Louisville Gas and Electric CompanyKENTUCKY UTILITIES COMPANY AND SUBSIDIARY
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Balance at beginning
of period $258,987 $243,288 $259,231 $247,462
Net income 28,009 22,040 45,430 40,956
Subtotal 286,996 265,328 304,661 288,418
Cash dividends declared on stock:
5% cumulative preferred 269 269 538 538
Auction rate cumulative
preferred 681 450 1,210 904
$5.875 cumulative preferred 367 367 734 734
Common 16,500 22,000 33,000 44,000
Subtotal 17,817 23,086 35,482 46,176
Balance at end of period $269,179 $242,242 $269,179 $242,242
Three Months
Ended
Mar. 31,
2001 2000
---- ----
Balance at beginning
of period............................................................................ $347,238 $329,470
Net (loss) income....................................................................... (7,117) 20,174
-------- --------
Subtotal............................................................................. 340,121 349,644
-------- --------
Cash dividends declared on stock:
4.75% preferred......................................................................... 237 237
6.53% preferred......................................................................... 327 327
Common ................................................................................. - 25,000
-------- --------
Subtotal............................................................................. 564 25,564
-------- --------
Balance at end of period................................................................ $339,557 $324,080
======== ========
The accompanying notes are an integral part of these financial statements.
- 13 -11
Louisville Gas and Electric CompanyKENTUCKY UTILITIES COMPANY AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited - Thousands(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Net income available
for common stock $26,692 $20,954 $42,948 $38,780
Unrealized holding losses on
available-for-sale securities
arising during the period (107) (178) (266) (94)
Income tax benefit related
to unrealized holding
gains and losses 43 72 107 38
Comprehensive income $26,628 $20,848 $42,789 $38,724
Three Months
Ended
Mar. 31,
2001 2000
---- ----
Net (loss) income available for common stock............................................ $(7,681) $19,610
Cumulative effect of change in accounting principle -
Accounting for Derivative Instruments and
Hedging Activities (Note 5).......................................................... 2,647 -
------- ------
Other comprehensive income,
before tax........................................................................... 2,647 -
Income tax (expense) related to items
of other comprehensive income........................................................ (1,059) -
-------- ------
Comprehensive (loss) income............................................................. $(6,093) $19,610
======== =======
The accompanying notes are an integral part of these financial statements.
- 14 -12
Kentucky Utilities Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
OPERATING REVENUES $205,324 $225,794 $423,102 $443,143
OPERATING EXPENSES:
Fuel for electric generation 51,466 49,412 107,081 107,567
Power purchased 43,464 51,606 82,308 90,923
Non-recurring charges (Note 3) - - 11,030 -
Other operation expenses 24,167 31,812 53,015 58,955
Maintenance 17,078 15,944 31,228 28,464
Depreciation and amortization 24,493 22,158 48,825 44,149
Federal and state
income taxes 11,368 16,077 22,734 33,221
Property and other taxes 4,376 3,788 9,216 7,901
Total operating expenses 176,412 190,797 365,437 371,180
NET OPERATING INCOME 28,912 34,997 57,665 71,963
Other income 2,654 1,993 3,979 4,162
Interest charges 10,034 9,233 19,938 18,740
NET INCOME 21,532 27,757 41,706 57,385
Preferred stock dividends 564 564 1,128 1,128
NET INCOME AVAILABLE
FOR COMMON STOCK $ 20,968 $ 27,193 $ 40,578 $ 56,257
The accompanying notes are an integral part of these financial statements.
- 15 -
Kentucky Utilities Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
June 30, Dec. 31,
2000 1999
UTILITY PLANT:
At original cost $2,896,405 $2,851,066
Less: reserve for depreciation 1,336,228 1,288,819
Net utility plant 1,560,177 1,562,247
OTHER PROPERTYLOUISVILLE GAS AND INVESTMENTS -
less reserve 14,688 14,349
CURRENT ASSETS:
Cash and temporary cash investments 484 6,793
Accounts receivable - less reserve 96,165 88,549
Materials and supplies - at average cost:
Fuel (predominantly coal) 27,980 30,225
Other 28,015 26,213
Prepayments and other 3,106 3,743
Total current assets 155,750 155,523
DEFERRED DEBITSELECTRIC COMPANY AND OTHER ASSETS:
Unamortized debt expense 4,665 4,827
Regulatory assets 20,787 23,033
Other 26,118 25,111
Total deferred debits and other assets 51,570 52,971
Total assets $1,782,185 $1,785,090
The accompanying notes are an integral part of these financial statements.
- 16 -
Kentucky Utilities Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATIONSUBSIDIARY
KENTUCKY UTILITIES COMPANY AND LIABILITIES
(Unaudited)
June 30, Dec. 31,
2000 1999
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Retained earnings 320,048 329,470
Other (595) (595)
Total common equity 627,593 637,015
Cumulative preferred stock 40,000 40,000
Long-term debt 430,830 430,830
Total capitalization 1,098,423 1,107,845
CURRENT LIABILITIES:
Current portion of long-term debt 54,000 115,500
Notes payable 29,931 -
Accounts payable 144,792 116,546
Provision for rate refunds 7,981 20,567
Dividends declared 25,188 19,150
Accrued taxes 34,319 10,502
Accrued interest 7,127 7,329
Other 18,285 18,617
Total current liabilities 321,623 308,211
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 239,461 243,620
Investment tax credit, in
process of amortization 16,738 18,575
Accumulated provision for pensions
and related benefits 48,369 48,285
Regulatory liability 41,161 46,069
Other 16,410 12,485
Total deferred credits and other liabilities 362,139 369,034
Total capital and liabilities $1,782,185 $1,785,090
The accompanying notes are an integral part of these financial statements.
- 17 -
Kentucky Utilities Company
Statements of Cash Flows
(Unaudited - Thousands of $)
Six Months
Ended
June 30,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,706 $ 57,385
Items not requiring cash currently:
Depreciation and amortization 48,825 44,149
Deferred income taxes - net (7,478) (2,214)
Investment tax credit - net (1,837) (1,839)
Changes in current assets and liabilities 38,445 (23,820)
Other (1,049) 7,658
Net cash flows from operating activities 118,612 81,319
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (48,403) (44,282)
Net cash flows from investing activities (48,403) (44,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 69,773 -
Repayment of short-term borrowings (39,842) -
Issuance of pollution control bonds 12,900 -
Retirement of pollution control bonds (74,785) -
Payment of dividends (44,564) (37,128)
Net cash flows from financing activities (76,518) (37,128)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (6,309) (91)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 6,793 59,071
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 484 $ 58,980
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 19,949 $ 30,273
Interest on borrowed money 18,654 17,632
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.
- 18 -
Kentucky Utilities Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Balance at beginning
of period $324,080 $310,231 $329,470 $299,167
Net income 21,532 27,757 41,706 57,385
Subtotal 345,612 337,988 371,176 356,552
Cash dividends declared on stock:
4 75% preferred 237 237 475 475
6.53% preferred 327 327 653 653
Common 25,000 18,000 50,000 36,000
Subtotal 25,564 18,564 51,128 37,128
Balance at end of period $320,048 $319,424 $320,048 $319,424
The accompanying notes are an integral part of these financial statements.
- 19 -
LG&E Energy Corp. and Subsidiaries
Louisville Gas and Electric Company
Kentucky Utilities CompanySUBSIDIARY
Notes to Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements include the accounts of
Louisville Gas and Electric Company and Subsidiary and Kentucky Utilities
Company and Subsidiary ("LG&E" and "KU" or the Companies). LG&E and KU
are wholly owned subsidiaries of LG&E Energy Corp. and its wholly-owned subsidiaries.Corp ("LG&E Energy"). 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 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 SEC
rules and regulations, although the Company believesCompanies believe that the
disclosures are adequate to make the information presented not
misleading.
See the Company's, LG&E's and KU's Reports on Form 10-K for 19992000 for information
relevant to the accompanying financial statements, including information
as to the significant accounting policies of the Company.Companies.
2. OnEffective December 11, 2000, LG&E Energy was acquired by Powergen plc
("Powergen"). LG&E Energy had announced on February 28, 2000 the Company announced that its
Board of Directors accepted anthe offer to be acquired by Powergen for cash
of approximately $3.2 billion or $24.85 per share and the assumption of
$2.2 billionall of the Company'sLG&E Energy's debt. Pursuant to the acquisition agreement, among
other things, LG&E Energy will becomebecame a wholly owned subsidiary of Powergen
and, its U.S. headquarters.as a result, LG&E and KU became indirect subsidiaries of Powergen.
The Utility Operationsutility operations (LG&E and KU) of the Company will
continueLG&E Energy have continued their
separate identities and continue to serve customers in Kentucky and
Virginia under their presentexisting names. The preferred stock and debt
securities of the Utility Operations willutility operations were not be affected by this
transaction. Thetransaction and the utilities continue to file SEC reports. Following the
acquisition, is expectedPowergen became a registered holding company under Public
Utility Holding Company Act of 1935 ("PUHCA"), and LG&E and KU, as
subsidiaries of a registered holding company, became subject to
close 9 to 12 months from
the announcement, shortly after alladditional regulation under PUHCA.
As a result of the conditionsPowergen acquisition and in order to consummation
of the acquisition are met. It is possible that the remaining
regulatory approvals may be received in timecomply with
PUHCA, LG&E Services Inc. ("LG&E Services") was formed and became
operational on January 1, 2001. LG&E Services provides certain services
to permit a closing during
the fourth quarter of 2000. Those conditions include, without
limitation, the approval of the holders of a majority of the
outstanding shares of common stock of each ofaffiliated entities, including LG&E and KU, at cost, as required under
PUHCA. On January 1, 2001, approximately 1,000 employees, mainly from
LG&E Energy, LG&E and Powergen,KU, were moved to LG&E Services.
3. On April 9, 2001, Germany's largest power company, E.ON AG, announced a
pre-conditional cash offer of (pound)5.1 billion ($7.3 billion) for
Powergen. The offer is subject to a number of conditions, including the
receipt of all necessary governmental approvalscertain European and the making of
all necessary governmental filings, including approvals of various
regulators in Kentucky and Virginia under state utility laws, the
approval of the FERC under the FPA, the approval of the SEC under the
PUHCA of 1935, and the filing of requisite notifications with the
Federal Trade Commission and the Department of Justice under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act),
and with the Committee on Foreign Investment in the United States under
the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act
of 1988 (E-F Act) and the expiration of all applicable waiting periods
thereunder. The Company expensed approximately $14.7 million and $15.4
million related to the Powergen transaction during the three- and six-
month periods ended June 30, 2000, respectively. The foregoing
description of the acquisition does not purport to be complete and is
qualified in its entirety by reference to LG&E Energy's current reports
on Form 8-K, filed February 29, 2000, with the SEC.
Through mid-August 2000, a number of approval steps have been completed
by the Company and Powergen. Shareholders of the Company and of
Powergen approved the merger transaction in separate meetings held in
June 2000. Further, approvals were received from the Kentucky
Commission in May 2000, the FERC in June 2000 and the Virginia
Commission in July 2000.regulatory approvals. The
parties submittedexpect to obtain the requisite filings
under the HSR Act and the E-F Act in late July and early August 2000,
respectively, which trigger 30 day waiting periods due to expire in
late August and early September, respectively, absent any further
inquiry or investigation by the applicable regulatory authority.
- 20 -
The parties' joint application for approval to the SEC under PUHCA was
submitted in April 2000. While the Company and Powergen believe that
they will receive the requisitenecessary regulatory approvals for the merger in
sufficient timeby early 2002
and they expect to complete the transaction in the spring of 2002. See
Powergen's schedule 14D-9 and associated schedules to such filing, filed
with the Securities and Exchange Commission on April 9, 2001.
4. During the schedule mentioned
above, there can be no assurance as tofirst quarter 2001, the timingCompanies took a $124.1 million after
tax charge (LG&E $86.1 million, and KU $38 million) for a workforce
reduction program. Primary components of such approvals or
the ability to obtain such approvals on satisfactory terms or
otherwise.
3.charges were separation
benefits, enhanced early retirement benefits, and health care benefits.
The result of this workforce reduction was the elimination of
approximately 950 positions most of which were taken by employees through
the Companies' voluntary enhanced severance program. During the first
quarter 2000,
13
the CompanyCompanies' took a $12.1an $11.4 million ($.09) after-tax charge for the
continued "One Utility" integration of the operations of LG&E and KU including their
customer service centers and certain administrative elements of their retail electric and gas
distribution operations.
The result of this consolidation was the elimination of approximately
400 positions most of which were taken by employees through the
Company'sCompanies' voluntary enhanced severance program.
4. The Company previously announced5. SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either
an asset or a liability measured at its intention to sell its natural
gas gathering and processing businessfair value. SFAS No. 133 requires
that changes in the near term. Information
gatheredderivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to date indicates thatoffset related results on the Company will realize proceeds from
the sale of this business below carrying value. As a result, the
Company recorded a pretax impairment charge of $45 millionhedged item in the second quarterincome statement, and
requires that LG&E and KU must formally document, designate, and assess
the effectiveness of 2000 to reducetransactions that receive hedge accounting. SFAS No.
133 could increase the carrying value of this business to
more appropriately reflect net realizable value.
5. 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 market had on its portfolio of energy marketing contracts.
Exiting the merchant energy trading and sales business enabled the
Company to focus on optimizing the value of physical assets it owns or
controls, and reduced the earnings impact on continuing operations of
extreme market volatility in its portfolio of energy marketing
contracts. The Company continues to settle commitments that obligate
it to buy and sell natural gas and electric power. If the Company is
unable to dispose of these commitments or assets it will continue to
meet its obligations to buy and sell natural gas and electric power
under the terms of the contracts until disposition or expiration. 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 WKE.
As a result of the Company's decision to discontinue its merchant
energy trading and sales activity, and the initial decision 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 the second quarter of 1998. The loss on disposal of
discontinued operations resulted primarily from several fixed-price
energy marketing contracts entered into in 1996 and early 1997,
including the Company's long-term contract with OPC. Other components
of the write-off included costs relating to certain peaking options,
goodwill associated with the Company's 1995 purchase of merchant energy
trading and sales operations and exit costs.
In the fourth quarter of 1999, the Company received an adverse decision
from the arbitration panel considering its contract dispute with OPC,
which was commenced by the Company in April 1998. As a result of this
adverse decision, higher than anticipated commodity prices, increased
load demands,earnings and other factors, the Company increased its after-tax
accrued loss on disposal of discontinued operations by $175 million.
The additional write-off included costs related to the remaining
commitments in its portfolio and exit costs expected to be incurred to
serve those commitments.
- 21 -
In the second quarter of 2000, the Company increased its after-tax
accrued loss on disposal of discontinued operations by an additional
$155 million primarily to reflect the most recent OPC load forecast,
coupled with the increased demand experienced this summer, and new
price forecasts for the OPC and other long-term contracts. 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, there are inherent
limitations in models to accurately predict future commodity prices,
load demands and other events that could impact the amounts recorded by
the Company.
Operating results for the discontinued merchant energy trading and
sales business follow.
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Revenues $106,878 $156,345 $181,576 $289,782
Loss before taxes (32,944) (25,468) (43,559) (37,544)
Income (loss) from
discontinued oper-
ations, net of in-
come taxes (20,469) (16,692) (27,063) (20,480)
Net assets of discontinued operations at June 30, 2000, follow.
Accounts receivable $ 44,249
Price risk management assets 28,346
Accounts payable (77,633)
Other assets and liab-
ilities, net 16,070
Net assets before balance
of reserve for discontinued
operations 11,032
Accrued loss on disposal
of discontinued operations,
net of income tax benefit
of $184,647 (302,937)
Net liabilities of discon-
tinued operations $(291,905)
Total pretax charges against the accrued loss on disposal of
discontinued operations through June 30, 2000, include $288.6 million
for commitments prior to disposal, $69.6 million for transaction
settlements, $11.1 million for goodwill, and $36.5 million for other
exit costs. While the Company has been successful in settling portions
of its discontinued operations, significant assets, operations and
obligations remain. The Company continues to manage the remaining
portfolio and believes it has hedged certain of its future obligations
through various power purchase commitments and planned construction of
physical assets. Management cannot predict the ultimate effectiveness
of these hedges.
The pretax net fair value of the remaining commitments as of June 30,
2000, are currently estimated to be approximately $112 million in 2000,
$61 million to $98 million each year in 2001 through 2004 and $17
million in the aggregate thereafter.
- 22 -
As of June 30, 2000, the Company's discontinued operations were under
various contracts to buy and sell power and gas with net notional
amounts of 24.4 million Mwh's of power and 24.9 million Mmbtu's of
natural gas with a volumetric weighted-average period of approximately
34 and 38 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 coal and
SO2 allowances in support of its power contracts. Notional amounts
reflect the nominal volume of transactions included in the Company's
price risk management commitments, but do not reflect actual amounts of
cash, financial instruments, or quantities of the underlying commodity
which may ultimately be exchanged between the parties.
As of July 27, 2000, the Company estimates that a $1 change in
electricity prices and a 10-cent 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 $10.8 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 July 27,
2000, the Company estimates that a 1% change in the forecasted load
demand could change the value of the Company's remaining energy
portfolio by $11.7 million.
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 June 30, 2000, over 94% of the
Company's price risk management commitments were with counterparties
rated BBB equivalent or better. As of June 30, 2000, six
counterparties represented 76% of the Company's price risk management
commitments.
6. In March 2000, the Company sold its interest in CEC-APL L.P., a
partnership in which the Company owned a 49% interest, for
approximately $18 million. This sale resulted in a pretax gain of
approximately $2 million. In June 2000, the Company sold its interest
in KUCC Cleburne Corporation, through which the Company owned a
minority interest in one of the Tenaska limited partnerships, for $4.6
million. This sale resulted in a pretax gain of approximately $1.3
million.
7. In March 2000, the 2000 Kentucky General Assembly passed House Bill 897
that established requirements for cost allocations, affiliate
transactions and a code of conduct governing the relationship between
utilities and their non-utility operations and affiliates. Management
does not expect this matter to have a material adverse effect on the
Company's financial position or results of operations.
In March 2000, LG&E filed a Notice and Statement with the Kentucky
Commission requesting an adjustment in LG&E's gas rates. LG&E asked
for a general adjustment in gas rates for a test year for the twelve
months ended December 31, 1999. The revenue increase applied for was
$26.4 million. The Commission subsequently suspendedcomprehensive
income. SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES -- DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133, deferred
the effective date of SFAS No. 133 until January 1, 2001. LG&E and KU
adopted SFAS No. 133 on January 1, 2001. The effect of this statement was
a charge to LG&E of $3.6 million and a credit to KU of $1.6 million to
cumulative effect of change in accounting principle (net of tax) in other
comprehensive income.
The companies use interest rate swaps to hedge exposure to market
fluctuations in certain of its debt instruments. Pursuant to company
policy, use of these financial instruments is intended to mitigate risk
and earnings volatility and are not speculative in nature. Management has
designated all of the proposed new tariffs,companies' interest rate swaps as hedge
instruments. Financial instruments designated as cash flow hedges have
resulting gains and held hearings August 2, 2000,losses recorded within other comprehensive income and
stockholders' equity. To the extent a financial instrument or the
underlying item being hedged is prematurely terminated or the hedge
becomes ineffective, the resulting gains or losses are reclassified from
other comprehensive income to net income. Financial instruments
designated as fair value hedges are periodically marked-to-market with
the resulting gains and losses recorded directly into net income to
correspond with income or expense recognized from changes in market value
of the items being hedged.
As of March 31, 2001, LG&E had fixed rate swaps covering $217,335,000 in
notional amounts of variable rate debt and with fixed rates ranging from
3.560% to 5.495%. The average variable rate on the debt during the
quarter was 4.44%. The swaps have been designated as cash flow hedges and
expire on various dates from September 2001 through August 4, 2000.November 2020. During
the quarter ended March 31, 2001, the hedges were deemed to be fully
effective resulting in pretax charges of $2,035,000 recorded in other
comprehensive income.
As of March 31, 2001, KU had variable rate swaps covering $153,000,000 in
notional amounts of fixed rate debt. The average variable rate on these
swaps during the quarter was 5.61%. The underlying debt has fixed rates
ranging from 5.873% to 7.920%. The swaps have been designated as fair
value hedges and expire on various dates from May 2007 through June 2025.
During the quarter ended March 31, 2001, the effect of marking these
financial instruments and the underlying debt to market resulted in
pretax gains of $1,463,000 recorded as a reduction in interest expense.
6. SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES, revises the standards for accounting
for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, and provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The Companies adopted SFAS No.
14
140 in the first quarter of 2001, when LG&E and KU entered into an
accounts receivable securitization transaction.
On February 6, 2001, LG&E and KU each sold accounts receivables to two
wholly-owned subsidiaries, LG&E Receivables LLC (LGE-R) and KU
Receivables LLC (KU-R), respectively. Simultaneously, LGE-R and KU-R
entered into two separate three-year accounts receivables securitization
facilities with two financial institutions and their affiliates whereby
LGE-R and KU-R can sell, on a revolving basis, an undivided interest in
certain of their receivables and receive up to $75 million and $50
million, respectively, from an unrelated third party purchaser at a cost
of funds linked to commercial paper rates plus a charge for
administrative and credit support services. Furthermore, LG&E and KU
retain the servicing rights of the sold receivables through two separate
servicing agreements between the third party purchaser and each utility.
Under Kentucky lawthese agreements, LG&E and KU receive a fee for servicing the Commission must issue a
decisionsold
receivables on behalf of the third party purchaser. As of March 31, 2001,
LG&E's application no later than September 28, 2000.
In May 2000, the Court upheld the Commission's February 1999 order that
LG&E make FAC refunds, but reversed the Commission's determination that
itoutstanding program balance was not appropriate to require LG&E to pay interest on the amounts
to be refunded. The Court remanded the case to the Commission for a
determination of whether interest should be awarded to compensate
ratepayers for LG&E's use of the money to be refunded. On June 2,
2000, LG&E filed a Notice of Appeal to the Kentucky Court of Appeals
from the Franklin Circuit Court decision.
- 23 -
In June 2000, the Commission acknowledged that the PBR Order issued in
January 2000 contained errors and issued its Orders on rehearing which
revised the rate reductions it had previously ordered. LG&E's rate
reduction was lowered to $26.3$75 million and KU's reductionbalance was
lowered
to $30.4$50 million.
No parties filed appeals fromThe allowance for doubtful accounts associated with the Commission's
orders withineligible
securitized receivables was $1 million for LG&E and $.4 million for KU at
March 31, 2001. Charge offs were immaterial for LG&E and KU. The risk of
uncollectibility associated with the time allowed by statute.
8.sold receivables is minimal. Through
March 31, approximately .15%, or $698,000, of total receivables for LG&E
and KU were uncollectible. Moreover, each securitization facility
contains a fully funded reserve for uncollectible receivables.
7. In MayOctober 2000, LG&E and KU issued new variable-rate pollution-control
bonds for $25 millioneach filed an application with the
Kentucky Public Service Commission ("Kentucky Commission") to amend its
Environmental Compliance Plan to reflect the addition of Nitrogen Oxide
(NOx) reduction technology projects and $12.9 million, respectively. At June 30,
2000, the interest rates paidto amend its Environmental Cost
Recovery Tariff (ECR) to include an overall rate of return on the bonds equaled 4.40% for LG&E and
4.45% for KU.capital
investments. The new bonds replaced LG&E's 7.45% Series P bonds and
KU's 7.375% Series 7 and 7.60% Series 7 bonds.NOx reduction technology will allow LG&E and KU calledto meet
new Environmental Protection Agency NOx requirements that take effect in
2003-2004. The Kentucky Commission issued an order on April 18, 2001 that
approved the old bonds in June 2000.
In June 2000, Capital Corp. issued $150 millionamended environmental compliance plan and the use of floating-rate medium-
term notes due June 2001. The notes bear an
interestoverall rate of 7.4925%
through September 18, 2000,return, including an 11.5% return on equity, effective
May 1, 2001. Costs associated with the amended compliance plan may be
recovered by the Companies as incurred, subject to review and a rate equal toapproval by
the three-month LIBOR
plus 70 basis points thereafter.
In August 2000, LG&E issued $83.3 million of variable-rate pollution-
control bonds. At August 9, 2000, the interest rates paid on the bonds
equaled 4.40%. The new bonds replaced LG&E's 7.625% Series Q bonds.
LG&E fully defeased the Series Q bonds on August 9, 2000.
9.Kentucky Commission in periodic regulatory reviews.
8. External and intersegment revenues and income from continuing operations
by business segment for the three months ended June 30,
2000,March 31, 2001, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $175,420 $ 4,333 $ 26,773
LG&E gas 29,979 - (80)
KU electric 201,186 4,139 20,968
Independent Power
Operations 5,938 - 8,037
Western Kentucky
Energy 66,975 - 3,002
Argentine Gas
Distribution 49,017 - 6,723
Other Capital Corp. 77,776 - (37,073)
All Other - (8,472) (17,001)
Consolidated $606,291 $ - $ 11,349
- 24 -
External and intersegment revenues and income from continuing
operations by business segment for the six months ended June 30, 2000,
follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $ 330,539 $ 10,540 $ 43,078
LG&E gas 118,295 - (129)
KU electric 411,957 11,146 40,578
Independent Power
Operations 10,614 - 14,864
Western Kentucky
Energy 127,729 - 2,501
Argentine Gas
Distribution 79,759 - 5,992
Other Capital Corp. 152,788 - (47,063)
All Other - (21,686) (18,590)
Consolidated $1,231,681 $ - $ 41,231
Net
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $148,361 $ 7,013 $ (44,443)
LG&E gas 157,897 - (10,971)
-------- -------- --------
Total $306,258 $ 7,013 $(55,414)
======== ======== ========
KU electric $206,111 $ 5,682 $ (7,681)
======== ======== ========
External and intersegment revenues and income from continuing operations
by business segment for the three months ended June 30,
1999,March 31, 2000, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $185,519 $ 4,927 $ 20,740
LG&E gas 23,652 - 213
KU electric 220,739 5,055 27,193
Independent Power
Operations 6,197 - 7,097
Western Kentucky
Energy 69,050 - (464)
Argentine Gas
Distribution 45,146 - 4,796
Other Capital Corp. 73,354 - (6,484)
All Other - (9,982) (3,126)
Consolidated $623,657 $ - $ 49,965
- 25 -15
External and intersegment revenues and income from continuing
operations by business segment for the six months ended June 30, 1999,
follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $ 333,845 $ 7,441 $ 38,353
LG&E gas 99,431 - 427
KU electric 434,086 9,057 56,257
Independent Power
Operations 13,101 - 21,277
Western Kentucky
Energy 129,028 - (1,488)
Argentine Gas
Distribution 74,943 - 5,153
Other Capital Corp. 138,488 - (5,596)
All Other - (16,498) (7,639)
Consolidated $1,222,922 $ - $106,744
10.Reference
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $155,119 $ 6,207 $ 16,305
LG&E gas 88,316 - (49)
-------- -------- --------
Total $243,435 $ 6,207 $ 16,256
======== ======== ========
KU electric $210,771 $ 7,007 $ 19,610
======== ======== ========--
9. Reference is made to Part II, Legal Proceedings, below and Part I, Item
3, Legal Proceedings, of the Company's, LG&E's and KU's (and Notes 18
and 22 of the Company's Notes to Financial Statements) Annual Reports on Form 10-K for
the year ended December 31, 1999, and Part II, Item 1,
Legal Proceedings, of the Form 10-Q for the quarter ended March 31,
2000.
- 26 -16
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
GeneralGENERAL
The Company's principal subsidiaries are LG&E, an electricfollowing discussion and gas utility,
KU, an electric utility, LEM and Capital Corp., the holding company for all
non-utility investments other than trading operations.analysis by management focuses on those factors
that had a material effect on LG&E's and KU's financial results of operations
and liquidityfinancial condition during 2001 and capital resources are important
factors affectingshould be read in connection with the
Company's consolidated results of operationsfinancial statements and capital resources and liquidity.
On February 28, 2000, the Company announced that its Board of Directors
accepted an offer to be acquired by Powergen for cash of approximately $3.2
billion or $24.85 per share and the assumption of $2.2 billion of the
Company's debt. For more information, see Note 2 of Notes to Financial
Statements under Item 1.notes thereto.
Some of the matters discussed in the Notes to Consolidated Financial
Statements and Management's Discussion and Analysisfollowing discussion may contain forward-
lookingforward-looking statements that are
subject to certain risks, uncertainties and assumptions. Such forward-looking
statements are intended to be identified in this document by the words
"anticipate," "expect," "estimate," "objective," "possible," "potential" and
similar expressions. Actual results may vary materially. Factors that could
cause actual results to differ materially include, but are not limited to:include: general economic conditions;
business and competitive conditions in the energy industry; future prices of power and natural gas;changes in federal
or state legislation; unusual weather; actions by state or federal regulatory
decisions;agencies; and other factors described from time to time in the
Company'sLG&E's and KU's
reports to the Securities and Exchange Commission, including Exhibit No. 99.01
to the report on Form 10-K for the year ended December 31, 1999.
Results of Operations2000.
RESULTS OF OPERATIONS
The results of operations for LG&E KU and Capital Corp.'s Argentine gas
distribution and WKEKU 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 June 30,THREE MONTHS ENDED MARCH 31, 2001, COMPARED TO
THREE MONTHS ENDED MARCH 31, 2000
Compared to
Three Months Ended June 30, 1999
The Company's primary and diluted earnings per share from continuing
operations decreased to $.09 in 2000 from $.39 in 1999. The decrease
resulted from an asset impairment charge taken on the Company's natural gas
gathering and processing business ($.21) and from recording expenses
related to the Powergen acquisition ($.09). Excluding these nonrecurring
items, earnings per share from continuing operations remained unchanged at
$.39 as higher earnings at LG&E and WKE offset lower earnings at KU, an
increase in corporate expenses, and higher interest expense at Capital
Corp.
Including discontinued operations, the Company incurred a loss of $1.11 per
share in the second quarter of 2000. These results include a $155 million
(after tax) charge related to an adjustment of the Company's reserve for
discontinued operations, primarily reflecting the most recent OPC load
forecast, coupled with the increased demand experienced this summer, and
new price forecasts for the OPC and other long-term contracts.
LG&E Results:RESULTS:
LG&E's net income increased $6.0decreased $71.5 million (27%) for the quarter ended June
30, 2000,March 31, 2001,
as compared to the quarter ended June 30, 1999,March 31, 2000, primarily because of a $86.1
million net of tax one-time charge for LG&E's workforce reduction program. These
expenses were partially offset by a $4.8 million net of tax one-time charge
incurred in the first quarter of 2000 for LG&E's One-Utility Program. See Note 4
of Notes to Financial Statements. Excluding these one-time charges, LG&E's net
income would have increased $9.8 million primarily due to increased gas sales to
retail consumers and lower operations and maintenance expenses. These expense savings were
partially offset by a decrease in electric retail rates ordered by the
Kentucky Commission.
- 27 -
A comparison of LG&E's revenues for the quarter ended June 30, 2000,March 31, 2001, with the
quarter ended June 30, 1999,March 31, 2000, (excluding the reversal of a Fuel Adjustment
Clause ("FAC") refund of $1.1 million which was offset by an additional accrual
for performance-based ratemaking of $.3 million in 2000), reflects increases and
decreases(decreases) which have been segregated by the following principal causes
(in thousands(thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ 664 $4,022
Environmental cost recovery surcharge (310) -
Performance based rate reduction (1,096) -
Electric rate reduction (5,398) -
Merger surcredit (481) -
Variation in sales volume, etc. 3,186 806
Total retail sales (3,435) 4,828
Sales for resale (7,958) 1,733
Gas transportation - net - (26)
Other 700 (208)
Total $(10,693) $6,327
In January 2000, the Kentucky Commission ordered the termination of LG&E's
proposed PBR mechanism. As a result, LG&E refunded certain amounts
collected from its customers during the nine months ended March 31, 2000.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing LG&E's base electric rates.
Electric sales for resale decreased $8 million due to decreases in brokered
sales activities.17
Electric Gas
Cause Revenues Revenues
- ----- -------- ---------
Retail sales:
Fuel and gas supply adjustments...................................................... $ 1,939 $64,815
Merger surcredit..................................................................... (834) -
Performance based rate............................................................... 1,179 -
Environmental cost recovery surcharge................................................ (58) -
Gas rate increase.................................................................... - 7,609
Weather normalization................................................................ - (2,194)
Electric rate reduction.............................................................. (3,671) -
Variation in sales volume, etc....................................................... 5,031 6,815
------- -------
Total retail sales................................................................... 3,586 77,045
Wholesale sales......................................................................... (9,073) (7,406)
Gas transportation - net................................................................ - (395)
Other ................................................................................. 378 337
------- -------
Total ................................................................................. $(5,109) $69,581
======= =======
Fuel for electric generation and gas supply expenses comprise a large segmentcomponent
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 Kentucky Commission.
Fuel for electric generation decreased $.7$1.4 million (2%(4%) for the quarter because
of a lowerdecrease in generation ($2.4 million), partially offset by a higher cost of
coal burned ($.9 million) partially
offset by an increase in volume of generation ($.21 million). Gas supply expenses increased $5.3$61.8 million (40%(98%) due
to an increaseincreases in net gas supply cost ($58.5 million) and increases in the volume
of gas delivered to the distribution system ($2.63.3 million) and an.
Power Purchased decreased $10.4 million (48%) in 2001 primarily due to decreased
brokered sales activity in the wholesale electric market.
The increase in net gas supply costnon-recurring charges of $136.2 million, $81.2 million after
tax, is due to the costs associated with LG&E's workforce reduction initiatives.
See Note 4 of Notes to Financial Statements.
Other operation expenses decreased $1.7 million (5%) as compared to 2000. This
decrease resulted from decreased steam power production expenses ($2.7 million).
Power purchased decreased $6.5 million primarily because of a decrease in
brokered sales activities ($10.12.3 million),
partially offset by increased purchases to support sales to other utilitiesadministrative and general expenses, ($3.6.6
million).
Other operationsMaintenance expenses decreased $8.9$3.3 million (22.5%(24%) in 2001 primarily due to
decreases in steam production maintenance of ($1.5 million), and software and
communication equipment maintenance, ($1.6 million).
Depreciation and amortization increased $1.1 million (5%) due to an increase
in depreciable plant in service and higher depreciation rates. A depreciation
study was completed in late 2000 with new depreciation rates going into
effect in the first quarter 2001. The new rates, as compared to 1999,rates in
effect for 2000, are expected to increase LG&E's depreciation expense by
about $.9 million in 2001.
Property and other taxes decreased $.7 million (14%) in 2001 primarily due to
decreases in
18
payroll taxes as a result of lower administrative expenses
($6.8 million) and steam production costs ($2 million).
Maintenance expenses decreased $2.8 million (13.8%)employee head count in 2000 mainly due to
decreases in scheduled outages at the Mill Creek and Cane Run generating
stations ($2.8 million).
Other income and deductions increased $1.6 million (690%) due to gains on
the sale of non-utility property.
- 28 -
conjunction with
LG&E's workforce reductions.
Variations in income tax expense are largely attributable to changes in pre-
taxpretax
income.
Other income - net, decreased $.5 million (34%) in 2001 primarily due to
decreases in the gain on sale of non-utility property, and lower interest
income.
Interest charges increased $2.3$.7 million (27%(6%) in 2001 primarily due to increased
borrowings
through the issuance of commercial paper.interest expense associated with LG&E's accounts receivable securitization
program ($1.6 million), partially offset by a decrease in interest on notes
payable ($1.1 million).
KU Results:RESULTS:
KU's net income decreased $6.2$27.3 million (23%) for the quarter ended June 30,
2000,March 31, 2001, as
compared to the quarter ended June 30, 1999.March 31, 2000. The decrease was mainly due to retail rate reductions ordereda
non-recurring charge of $38 million, net of tax, made in the first quarter of
2001 for costs associated with the KU workforce reduction program. These
expenses were partially offset by a $6.6 million non-recurring net of tax charge
in the Kentucky Commission
early this yearsame period in 2000 for KU's One Utility Program. See Note 4 of Notes to
Financial Statements. Excluding these one-time charges, net income increased
$4.1 million, due largely to decreased operations and lower wholesale sales.maintenance expense.
A comparison of KU's revenues for the quarter ended June 30, 2000,March 31, 2001, with the
quarter ended June 30, 1999,March 31, 2000, reflects increases and (decreases) which have been
segregated by the following principal causes (in thousands(thousands of $):
Sales to ultimate consumers:
Fuel supply adjustments $ (1,707)
Environmental cost recovery surcharge (1,342)
Performance based rate reduction (839)
Merger surcredit (299)
Electric rate reduction (8,061)
Variation in sales volume, etc. 6,846
Total retail sales (5,402)
Wholesale sales (18,060)
Other 2,992
Total $(20,470)
The environmental cost recovery surcharges are costs recovered from retail
customers for investments KU made in facilities for compliance with clean
air regulations. As shown above, KU recovered $1.3 million less as
compared with the same quarter 1999.
In January 2000, the Kentucky Commission ordered the termination of KU's
proposed PBR mechanism. As a result, KU refunded certain amounts collected
from its customers during the nine months ended March 31, 2000.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing KU's base electric rates.
On May 4, 1998, LG&E Energy and KU Energy merged. As a result of merger,
the Kentucky Commission approved a surcredit for savings achieved from the
merger to be passed to the ultimate consumer over a five-year period. The
reduction to retail sales for the merger surcredit is a reflection of that
rate reduction.
The variation in sales volumes for the quarter ended June 30, 2000,
compared with the quarter ended June 30, 1999, is attributable to higher
volumes resulting from cooler weather early in the quarter and warmer
weather at the end of the quarter.
The decrease in wholesale sales is due to fewer brokered sales marketing
opportunities and the reduced availability of power because of planned
outages at the electric generating plants.
Sales to ultimate consumers:
Fuel clause adjustments.............................................................. $ 2,404
Environmental cost recovery surcharge................................................ (729)
Performance based rate .............................................................. 893
Merger surcredit..................................................................... (1,089)
Electric rate reduction.............................................................. (5,395)
Variation in sales volume, etc....................................................... 6,513
------
Total retail sales................................................................... 2,597
Wholesale sales......................................................................... (9,082)
Other ................................................................................. 500
---------
Total ................................................................................. $ (5,985)
==========
Fuel for electric generation comprises a large segment of KU's total operating
expenses. KU's electric rates contain ana FAC, whereby increases or decreases in
the cost of fuel are reflected in retail rates, subject to the approval of the
Kentucky Commission, the Virginia State Corporation Commission, and the FERC.
- 29 -
Federal
Energy Regulatory Commission.
Fuel for electric generation increased $.3 million for the first quarter of 2001
as compared to the first quarter of 2000, with a $2.1 million (4%) for the quarter
because of an increase in generation ($.5 million) and thedue to
higher cost of coal burned ($1.5 million).partially offset by a $1.8 million decrease in volume
burned.
Power purchased decreased $8.1$6 million (16%(15%) because there were fewer
opportunitiesin 2001 primarily due to decreased
brokered sales activities in the brokered sales market as mentioned above.wholesale electric market.
Non-recurring charges increased $52.8 million, $31.4 million after tax. These
costs are due to KU's workforce reduction program. See Note 4 of Notes to
Financial Statements.
19
Other operating expenses decreased by $7.6$2.2 million (24%(8%). The decrease was
mainlyprimarily attributable to lowerdecreased customer accounting and service and
marketing expense ($3.4 million) and steam, transmission and distribution ($.2
million) partially offset by an increase in administrative and general expenses
($4.81.4 million) as well as decreased customer service and information expenses
($1.3 million), which were the result of further integration of customer
functions..
Maintenance expenses increaseddecreased by $1.1$2.2 million (7%(15%) due to increaseddecreased
maintenance at the steam generating plants ($2.5.9 million) offset by decreases in
transmission maintenance, the distribution
system ($1.0.6 million), and distribution maintenancethe general plant ($.3.6 million).
Depreciation and amortization increaseddecreased $.5 million (2%) due to additional utility planta decrease in
service.depreciation rates. A depreciation study was completed in late 2000 with new
depreciation rates going into effect in the first quarter 2001. The new rates,
as compared to rates in effect for 2000, are expected to decrease KU's
depreciation expense by about $6 million in 2001.
Property and other taxes decreased $.7 million (14%) in 2001 primarily due to
decreases in payroll taxes as a result of KU's workforce reductions.
Variations in income tax expense are largely attributable to changes in pretax
income.
LG&E Capital Corp. and Other Results:
Power Operations
Power Operations' equity in earnings of unconsolidated ventures decreased
from $8.6income- net, increased $.5 million in 1999 to $6.5 million in 2000. The decrease reflects
proceeds received from bankruptcy settlements related to the Company's
windpower partnerships in the second quarter of 1999.
Power Operations' other income increased from $.1 million expense in 1999
to $1.4 million income in 2000. The increase resulted from recognizing a
gain on the sale of KUCC Cleburne in the second quarter of 2000. Interest
income increased from $2.4 million in 1999 to $3.7 million in 2000 due to
an increase in cash resulting from asset sales.
Western Kentucky Energy
WKE's revenues decreased from $69.1 million in 1999 to $67.0 million in
2000 due mainly to lower off-system sales. WKE's cost of revenues
decreased from $41.3 million in 1999 to $35.8 million in 20002001 due to a decrease in purchased power.
WKE's operation and maintenance expensesother
income expenses.
Interest charges decreased from $26.6$1.8 million in
1999(18%) for the first quarter 2001 as
compared to $24.3 million infirst quarter 2000 due mainly to a decrease in payroll-related
benefits expenses.
Argentine Gas Distribution
The Argentine Gas Distribution companies' net income increased from $4.8
million in 1999 to $6.7 million in 2000 due mainly to an increase in net
revenuesimplementation of SFAS 133, Accounting for
Derivative Instruments and higher equity in the earnings of Gas BAN.
Other
Other revenues increased from $73.4 million in 1999 to $77.8 million in
2000. The increase resulted from acquiring CRC-Evans in July 1999 and from
increased sales in the Company's natural gas gathering and processing
business, partially offset by a decrease in Retail Access Services'
revenues and lower energy marketing revenues.
Other cost of revenues decreased from $64.8 million in 1999 to $62.3
million in 2000. The decrease resulted from a decrease at Retail Access
Services and lower energy marketing
- 30 -
cost of revenues, partially offset by an increase resulting from acquiring
CRC-Evans in July 1999 and increased sales in the Company's natural gas
gathering and processing business.
The Company recorded asset-impairment and other non-recurring charges
totaling $59.7 million during the second quarter of 2000.Hedging Activities. See Notes 2 and
4Note 5 of Notes to Financial
Statements under Item 1 for more information.
Other income for Capital Corp.Statements.
LIQUIDITY AND CAPITAL RESOURCES
LG&E's and Other increased from $1.3 million in
1999 to $2.7 million in 2000. The increase resulted from recognizing the
gain on the sale of the Company's interest in KUCC Cleburne in the second
quarter of 2000.
Capital Corp. and Other interest expense increased from $13.0 million in
1999 to $14.6 million in 2000. The increase resulted from funding
discontinued operations, corporate operating expenses, and the Gas BAN and
CRC acquisitions. The Company's consolidated effective income tax rate
decreased from 36.1% in 1999 to 25.3% in 2000 due to an increase in
investment and wind tax credits as a percent of pretax income.
Six Months Ended June 30, 2000, Compared to
Six Months Ended June 30, 1999
The Company's primary and diluted earnings per share from continuing
operations decreased to $.32 in 2000 from $.82 in 1999. The decrease
resulted from an asset impairment charge taken on the Company's natural gas
gathering and processing business ($.21), recognizing expenses associated
with the integration of the Company's two utilities ($.09), and from
recording expenses related to the Powergen acquisition ($.09). Excluding
these nonrecurring items, earnings per share from continuing operations
decreased from $.82 in 1999 to $.71 in 2000. This decrease resulted from
lower earnings at KU, decreases resulting from recognizing one-time items
in 1999, a decrease resulting from acquiring CRC-Evans in July 1999, and
higher interest expense at Capital Corp. Higher earnings at LG&E and WKE
partially offset these decreases. The one-time items recognized in 1999
consisted of a gain on the sale of the Company's interest in the Rensselaer
project, proceeds from bankruptcy settlements related to the Company's
windpower partnerships, and fees related to the development of an
independent power project in Gregory, Texas.
LG&E Results:
LG&E's net income increased $4.5 million (11%) for the first six months of
2000, as compared to the first six months of 1999, primarily because of
lower operations and maintenance expenses, a decrease in power purchased
and an increase in electric sales to other utilities. These expenses are
partially offset by a decrease in electric rates, a decline in brokered
sales transactions, a nonrecurring net of tax charge of $4.9 million for
costs associated with further integration of KU and LG&E, and the reversal
of various rate refunds of $1.4 million net of tax. Excluding the one-time
charges for the One-Utility Program and the reversal of provisions for
certain rate refunds, LG&E's net income would have increased $8.0 million.
- 31 -
A comparison of LG&E's revenues for the six months ended June 30, 2000,
with the six months ended June 30, 1999, excluding the reversal of
provisions for certain rate refunds of $2.3 million, reflects increases and
decreases which have been segregated by the following principal causes (in
thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ (1,820) $14,029
Environmental cost recovery surcharge (724) -
Performance based rate reduction (2,275) -
Electric rate reduction (7,005) -
Merger surcredit (931) -
Variation in sales volume, etc. 1,687 (1,638)
Total retail sales (11,068) 12,391
Sales for resale 7,828 6,453
Gas transportation - net - 163
Other 689 (143)
Total $ (2,551) $18,864
In January 2000, the Kentucky Commission ordered the termination of LG&E's
proposed PBR mechanism. As a result, LG&E refunded certain amounts
collected from its customers during the nine months ended March 31, 2000.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing LG&E's base electric rates.
Sales for resale increased due to increased sales to other utilities.
Fuel for electric generation increased $6.7 million (9%) for the six months
because of an increase in generation ($11 million) partially offset by
lower cost of coal burned ($4.3 million).
Gas supply expenses increased $18.2 million (28%) due to an increase in gas
prices ($19.2 million) partially offset by a decrease in the volume of gas
delivered to the distribution system ($1 million).
Power purchased decreased $7.8 million primarily because of a decrease in
brokered sales activities ($13.1 million), partially offset by increased
sales to other utilities ($5.3 million).
Other operation expenses decreased $4 million (5%) primarily as a result of
lower administrative expenses ($10.3 million) and steam production costs
($1.3 million) partially offset by a one-time expense of $8.1 million for
the Company's One-Utility Program.
Maintenance expenses for the first six months of 2000 decreased $3.6
million (10%) primarily due to decreases in scheduled outages at the Mill
Creek and the Cane Run generating stations ($4.3 million), and electric
distribution maintenance ($1.1 million), partially offset by increased
software maintenance costs ($1.9 million).
Other income and deductions increased $2.1 million (157%) due to gains on
the sale of non-utility property.
- 32 -
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Interest charges increased $3.8 million (21%) due to the issuance of
commercial paper.
KU Results:
KU's net income decreased $15.7 million (28%) for the six months ended June
30, 2000 as compared to the six months ended June 30, 1999. The decrease
was partially due to a non-recurring charge of $6.6 million, after tax,
made in the first quarter of 2000 for costs associated with further
integration of KU and LG&E. Excluding this non-recurring charge, net
income decreased $9.2 million, mainly due to rate reductions ordered by the
Kentucky Commission early in 2000 and lower wholesale sales.
A comparison of KU's revenues for the six months ended June 30, 2000, with
the six months ended June 30, 1999, and reflects increases and (decreases)
which have been segregated by the following principal causes (in thousands
of $):
Sales to ultimate consumers:
Fuel supply adjustments $ (840)
Environmental cost recovery surcharge (2,614)
Performance based rate reduction (1,732)
Merger surcredit (733)
Electric rate reduction (12,140)
Variation in sales volume, etc. 12,119
Total retail sales (5,940)
Wholesale sales (16,751)
Other 2,651
Total $(20,040)
The environmental cost recovery surcharges are costs recovered from retail
customers for investments KU made in facilities for compliance with clean
air regulations. As shown above, KU recovered $2.6 million less for the
six months ended June 30, 2000 as compared with the six months ended June
30, 1999.
In January 2000, the Kentucky Commission ordered the termination of KU's
proposed PBR mechanism. As a result, KU refunded certain amounts collected
from its customers during the nine months ended March 31, 2000.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing KU's base electric rates.
On May 4, 1998, LG&E Energy and KU Energy merged. As a result of merger,
the Kentucky Commission approved a surcredit for savings achieved from the
merger to be passed to the ultimate consumer over a five-year period. The
reduction to retail sales for the merger surcredit is a reflection of that
rate reduction.
Variation in sales volumes is mainly due to higher volumes this year as
compared to the same period last year. The higher volumes (288,137 Mwh)
are attributable to an increase in the number of customers served as well
as warmer weather this period as compared to the same period last year.
The decrease in wholesale sales is due to fewer brokered sales marketing
opportunities and the reduced availability of power because of planned
outages at the electric generating plants.
- 33 -
Fuel for electric generation decreased $0.5 million (.5%) because of a
decrease in generation ($1.0 million) which was partially offset by the
increased cost of coal burned ($.5 million).
Power purchased decreased $8.6 million (9.5%) because there were fewer
opportunities in the brokered sales market as mentioned above.
Non-recurring charges of $6.6 million, after tax, include the costs
associated with the Company's One-Utility Program.
Other operating expenses decreased by $5.9 million (10%). The decrease was
mainly attributable to a decrease in administration and general expenses
($4.2 million) and customer service and information expenses ($1.1
million).
Maintenance expenses increased by $2.7 million (10%) due to increased
maintenance at the steam generating plants ($3.4 million) which was offset
by decreases in transmission ($1.1 million) and distribution ($.5 million)
maintenance.
Depreciation and amortization increased due to additional utility plant in
service.
Variations in income tax expense are largely attributable to changes in
pretax income.
LG&E Capital Corp. and Other Results:
Power Operations
Power Operations' revenues decreased from $13.1 million in 1999 to $10.6
million in 2000. The decrease resulted mainly from recognizing revenues in
1999 related to the Rensselaer project, which the Company sold in March
1999.
Power Operations' operation and maintenance expense decreased from $5.5
million in 1999 to $3.4 million in 2000. The decrease resulted primarily
from writing off assets related to the Rensselaer project in 1999.
Power Operations' equity in earnings of unconsolidated ventures decreased
from $30.0 million in 1999 to $12.2 million in 2000, due to recognizing a
pretax gain of $15.4 million on the sale of the Rensselaer project in 1999
and to receiving proceeds from bankruptcy settlements related to the
Company's windpower partnerships in the second quarter of 1999.
Western Kentucky Energy
WKE's revenues decreased from $129.0 million in 1999 to $127.7 million in
2000 due mainly to lower off-system sales, partially offset by higher sales
to industrial customers. WKE's cost of revenues decreased from $77.0
million in 1999 to $71.0 million in 2000 due to a decrease in purchased
power.
WKE's operation and maintenance expenses decreased from $50.6 million in
1999 to $48.8 million in 2000 due mainly to a decrease in payroll-related
benefits expenses. WKE's depreciation and amortization expense increased
from $1.5 million in 1999 to $2.9 million in 2000 due to increased
expenditures for information systems conversions.
WKE's interest income increased from $.4 million in 1999 to $1.4 million in
2000 due to an increase in the note receivable from Big Rivers.
- 34 -
Argentine Gas Distribution
The Argentine Gas Distribution companies' net income increased from $5.2
million in 1999 to $6.0 million in 2000 due mainly to an increase in net
revenues and higher equity in the earnings of Gas BAN.
Other
Other revenues increased from $138.5 million in 1999 to $152.8 million in
2000. The increase resulted from acquiring CRC-Evans in July 1999 and from
increased sales in the Company's natural gas gathering and processing
business, partially offset by a decrease in Retail Access Services'
revenues and lower energy marketing revenues. Fees received in 1999
related to the development of an independent power project in Gregory,
Texas, partially offset the increases also.
Other cost of revenues increased from $112.7 million in 1999 to $123.0
million in 2000. The increase resulted from acquiring CRC-Evans in July
1999 and from increased sales in the Company's natural gas gathering and
processing business, partially offset by a decrease at Retail Access
Services and lower energy marketing cost of revenues.
The Company recorded asset-impairment and other non-recurring charges
totaling $80.4 million during the six months ended June 30, 2000. See
Notes 2, 3 and 4 of Notes to Financial Statements under Item 1 for more
information.
Other income for Capital Corp. and Other increased from $4.6 million in
1999 to $6.9 million in 2000. The increase resulted from recognizing the
gain on the sale of the Company's interest in KUCC Cleburne in the second
quarter of 2000 and the gain on the sale of the Company's interest in CEC-
APL L.P. in the first quarter of 2000. Higher interest income also
contributed to the increase. Decreases resulting from payments received in
1999 related to the Rensselaer sale and the initial settlement of a claim
on an undeveloped independent power project in California partially offset
the increases.
Capital Corp. and Other interest expense increased from $23.2 million in
1999 to $27.8 million in 2000. The increase resulted from funding
discontinued operations, corporate operating expenses, and the Gas BAN and
CRC acquisitions. The Company's consolidated effective income tax rate
decreased from 37.2% in 1999 to 32.6% in 2000 due to an increase in
investment and wind tax credits as a percent of pretax income.
Liquidity and Capital Resources
The Company's need for capital funds isare 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 Company'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.customers. Lines of credit and commercial paper programs are maintained to fund
these temporary capital requirements.
Construction expenditures for the sixthree months ended June 30, 2000,March 31, 2001, of $157.3$66.3
million for LG&E and $60.3 million for KU, primarily for the purchase of two
jointly owned combustion turbines, were financed with internally generated funds
and commercial paper.
The Company'sthe accounts receivable securitization program. See Note 6 of Notes to
Financial Statements concerning accounts receivable securitization.
LG&E's and KU's combined cash and marketable securitiestemporary cash investment balance decreased
$35.7increased
$8.4 million (LG&E $4.5 million, KU $3.9 million) during the sixthree months ended
June 30, 2000.March 31, 2001. The decreaseincrease reflects construction expenditures
- 35 -
and dividends paid, partially offset by cash flows from operations, proceeds received from sales of investments in affiliates,partially
offset by construction expenditures and a net
increase in debt.debt repayments.
Variations in accounts receivable, accounts payable and materials and supplies
are generally not significant indicators of the Company'sLG&E's and KU's liquidity. Such
variations are primarily attributable to fluctuations in weather, which have a
direct effect on sales of electricity and natural gas. The decreasedecreases in accounts
receivable duringresulted mainly from seasonal fluctuations and the six months ended June
30, 2000,accounts
receivable securitization program started at LG&E and KU. See Note 6 of Notes to
Financial Statements. The increase in fuel resulted mainly from seasonal fluctuations
at LG&E and WKE,KU, and athe decrease in the balance at Retail Access Services, partially offset by
seasonal fluctuations at the Company's natural gas gathering and processing
business and an increase in Centro's balance. The decrease in accounts
payable resulted mainly from seasonal fluctuations at LG&E, KU and WKE, and
a decrease in the balance at Retail Access Services, partially offset by
seasonal fluctuations at the Company's natural gas gathering and processing
business and an increase in Centro's balance. The decrease in&E's gas stored underground resulted from
seasonal fluctuations at LG&E.
The decrease in non-utility property and plant resulted from recording an
impairment charge in the second quarter of 2000. See Note 4 of Notes to
Financial Statements under Item 1 for more information. The increase in
other property and investments resulted from expenditures related to the
purchase of combustion turbines by Capital Corp.
The increase in net liabilities of discontinued operations resulted from an
increase in the Company's accrued loss on disposal of discontinued
operations.
Long-term debt (including current portion) increased by $68.7 million due
to Capital Corp.'s issuing $150 million of medium-term notes in June 2000,
partially offset by LG&E's redeeming its first mortgage bonds 7.5% series
due July 1, 2002, in January 2000, and by KU's redeeming its Series Q 5.95%
bonds due June 15, 2000, in June 2000.fluctuations.
At June 30, 2000,March 31, 2001, unused capacity under the Company'sLG&E's lines of credit totaled $469.3 million after considering commercial paper support and
approximately $47.0 million in letters$200
million. KU had no committed lines of credit securing on- and off-
balance sheet commitments. KU maintains an uncommitted borrowing facility
of $100 million.
Standard and Poor's downgradedat March 31, 2001.
LG&E's KU's and Capital Corp.'s debt ratings on February 28, 2000.as of April 9, 2001, were:
20
MOODY'S S&P FITCH
------- --- -----
First mortgage bonds A1 A- A+
Unsecured debt A2 BBB A
Preferred stock a2 BBB- A-
Commercial paper P-1 A-2 F-1
KU's debt ratings as of April 9, 2001, were:
MOODY'S S&P FITCH
------- --- -----
First mortgage bonds A1 A- A+
Preferred stock a2 BBB- A-
Commercial paper P-1 A-2 F-1
The downgrades reflectMoody's and S&P's opinionratings of LG&E's and KU's debt securities are on Credit
Watch for upgrade as the result of the credit quality of the Companies following the impact of the Kentucky
Commission rate reductionE.ON bid. Fitch has placed LG&E and the OPC decision. S&P, Moody's and Fitch
continue to have the debt of the CompaniesKU on
credit watch pending review
of the financial condition following consummation of the merger of the
Company with Powergen.
In July 2000, Fitch (formerly Duff and Phelps) downgraded the long-term
debt of Capital Corp. to BBB+evolving following the announcementE.ON bid. These ratings reflect the views of
the increase in
the discontinued operations reserve. Also during the second quarter of
2000, Capital Corp.'s commercial paperMoody's, S&P and Fitch. A security rating changed from D-1-is not a recommendation to F-2 as a
result of the merger of Fitch and Duff and Phelps.
Also in July 2000, the Company announced plans to build up to ten natural
gas fired combustion turbines. The Company will build the turbines in
Kentucky and Georgia to meet the native load commitments of its two
utilities and to mitigate its exposure related to the OPC contract. The
Company has not arranged, but has under consideration, several possible
methods of financing the construction of the turbines, including the use of
new short-buy, sell
or long-term credit facilities or the use of project or lease
financing.
Certain of Capital Corp.'s long-term debt agreements require the Company to
maintain a debt-to-capitalization ratio not greater than 65%. The
Company's debt-to-capitalization ratio at June 30, 2000, as defined in
those agreements, equaled an amount just under 65%. Capital Corp. is
pursuing a variety of actions to avoid any event of default under the
- 36 -
agreements, including selling the gas facilities business and certain asset
securitization programs to reduce working capital requirements and debt,hold securities and is working withsubject to revision or withdrawal at any time by the
financial institutions to obtain standstill
agreements or waivers of the 65% debt-to-capitalization limit.
The Company's capitalization ratios follow:
June 30, Dec. 31,
2000 1999
Long-term debt (including current portion) 54.3% 49.8%
Notes payable 12.6 13.1
Preferred stock 4.3 3.9
Common equity 28.8 33.2
Total 100.0% 100.0%rating agency.
LG&E's capitalization ratios follow:
June 30, Dec.at March 31, 2001, and December 31, 2000, 1999
Long-term debt (including current portion) 39.7% 41.1%
Notes payable 8.6 7.9
Preferred stock 6.2 6.2
Common equity 45.5 44.8follow:
Mar. 31, Dec. 31,
2001 2000
---- ----
Long-term debt (including current portion) 40.1% 38.0%
Notes payable 6.0 7.2
Preferred stock 6.3 6.0
Common equity 47.6 48.8
----- -----
Total 100.0% 100.0%
===== =====
KU's capitalization ratios follow:
June 30, Dec.at March 31, 2001, and December 31, 2000, 1999
Long-term debt (including current portion) 41.0% 44.7%
Notes payable 2.5 0.0
Preferred stock 3.4 3.3
Common equity 53.1 52.0follow:
Mar. 31, Dec. 31,
2001 2000
---- ----
Long-term debt (including current portion) 39.4% 38.6%
Notes payable 3.7 4.9
Preferred stock 3.2 3.2
Common equity 53.7 53.3
----- -----
Total 100.0% 100.0%
===== =====
For a description of certainsignificant contingencies that may affect the Company, LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings of LG&E's and KU's Annual
Reports on form 10-K For the year ended December 31, 2000 and to Part II herein
- - Item 1, Legal Proceedings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E Energy isand KU are exposed to market risks in both its regulated and non-
utility operations.risks. 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.prices. To mitigate changes
in cash flows attributable
21
to these exposures, the Company
hasCompanies have entered into various derivative
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'sCompanies' unswapped debt did not change materially duringin the three- and six-month periods ended June 30, 2000.first
quarter of 2001. 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 three- and six-month periods ended June 30, 2000.in the first quarter of 2001. The Company's
exposure to market risks from changes in commodity prices and foreign
exchange rates remained immaterial three- and six-month periods ended June
30, 2000.
- 37 -
in
the first quarter of 2001.
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
(a) the Company's, LG&E's and KU's respective combined Annual Report on Form 10-K for the year
ended December 31, 1999:2000: Item 1, Business; Item 3, Legal Proceedings; Item 7,
Management's Discussion and Analysis of Results of Operations and Financial
Condition; Notes 2, 6, 183 and 22 of the Company's Notes to Financial
Statements under Item 8; Notes 3, 12 and 16 of LG&E's Notes to Financial Statements under Item 8
and Notes 3 11 and 1411 of KU's Notes to Financial Statements under Item 8 and (b) the Company's, LG&E's and KU's respective
combined Quarterly Report on Form 10-Q for the quarter ended March 31,
2000: Part III, Item 1, Legal Proceedings.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.
Powergen Merger Regulatory FilingsE.ON - POWERGEN TRANSACTION
On February 28, 2000,April 9, 2001, E.On AG announced a conditional offer to purchase all the
Company announced the signingcommon shares of a definitive
merger agreement with Powergen plc, the indirect corporate parent of the United Kingdom, wherein, upon
closing, the Company will become a wholly-owned subsidiary of PowergenLG&E and shareholders of the Company will receive $24.85 per share of Company common
stock.KU. The
transaction is expected to be completed 9 to 12 months from
announcement, subject to a number of conditions precedent, including the
receipt of required regulatory approvals from European and other
conditionsUnited States governmental
bodies, in form satisfactory to consummation. It is possiblethe parties. Among the primary United States
regulatory approvals are: the Kentucky Public Service Commission, the Virginia
State Corporation Commission, the Securities and Exchange Commission, and the
Federal Energy Regulatory Commission. The parties anticipate that the remaining regulatorythese
approvals may be received in timeby early 2002 to permit a closing during the fourth
quarter of 2000 Applications for approval were filed with the Kentucky
Commission, the Virginia Commission and the FERC (under the Federal Power
Act) in March 2000, and with the SEC (under the Public Utility Holding
Company Act of 1935) in April 2000. Notice filings were made to the
Tennessee Regulatory Authority in the second quarter of 2000, to the
Department of Justice and the Federal Trade Commission (under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act)) in July 2000
and as required under the "Exon-Florio" US Omnibus Trade and
Competitiveness Act of 1988 (the E-F Act) in August 2000. Powergen has
made standard filings with the United Kingdom Office of Fair Trading under
the Fair Trading Act of 1973, which implements a voluntary regulatory
regime.
Through mid-August 2000, a number of approval steps have been completed by
the Company and Powergen. Shareholderscompletion of the Company and of Powergen
approved the merger transaction
in separate meetings held in June 2000.
Further, approvals were received from the Kentucky Commission in May 2000,
the FERC in June 2000 and the Virginia Commission in July 2000. The
parties submitted the requisite filings under the HSR Act and the E-F Act
in late July and early August 2000, respectively, which trigger 30 day
waiting periods due to expire in late August and early September,
respectively, absent any further inquiry or investigation by the applicable
regulatory authority. The parties joint application for approval to the
SEC under PUHCA was submitted in April 2000. While the Company and
Powergen believe that they will receive the requisite regulatory approvals
for the merger in sufficient time to complete the transaction on the
schedule mentioned above,spring 2002. However, there can be no assurance as to the timing ofthat such approvals
will be obtained in form or the ability to obtaintiming sufficient for such approvals on satisfactory
terms or otherwise. See Item 1, Powergen Merger and Note 22 to the
Company's Notes to Financial Statements under Item 8 of its Annual Report
on Form 10-K for the year ended December 31, 1999 for further discussion of
this matter.
Gas Rate Increase Proceeding
In August 2000, hearings were held before the Kentucky Commission regarding
LG&E's March 2000 application for an general adjustment in gas rates. The
requested increase of approximately $26.4 million, the first major non-fuel-
related adjustment requested by LG&E
- 38 -
to gas rates in 10 years, is designed to reflect higher service and
distribution costs to natural gas customers. A final decision in the
matter is expected in late September 2000 from the Kentucky Commission,
whose decision may include possible changes to the amount of any approved
increases. An October 2000 effective date for the new rates has been
suspended.
Item 4. Submission of Matters to a Vote of Security Holders.
a) LG&E Energy's, LG&E's and KU's Annual Meetings of Shareholders were
held on June 7, 2000.
b) Not applicable.
c) The matters voted upon and the results of the voting at the Annual
Meetings are set forth below:
1. LG&E Energy:
i) The shareholders voted 85,066,839 common shares in favor of and
8,118,348 shares against the Merger Agreement and related transactions
with Powergen. Holders of 2,154,339 common shares abstained from
voting on this matter.
ii) The shareholders voted to elect LG&E Energy's nominees for election to
the Board of Directors as follows:
William C. Ballard, Jr. - 106,760,854 common shares cast in favor of
election and 4,442,532 shares withheld.
T. Ballard Morton, Jr. - 106,719,738 common shares cast in favor of
election and 4,483,648 shares withheld.
William L. Rouse, Jr. - 106,617,016 common shares cast in favor of
election and 4,586,370 shares withheld.
Charles L. Shearer - 106,735,367 common shares cast in favor of
election and 4,468,019 shares withheld.
Holders of 3,725,775 common shares abstained from voting on this
matter.
iii) The shareholders voted 108,358,737 common shares in favor of and
1,440,846 shares against the approval of Arthur Andersen LLP as
independent auditors for 2000. Holders of 1,403,803 common shares
abstained from voting on this matter.
2. LG&E:
i) The shareholders voted to elect LG&E's nominees for election to the
Board of Directors as follows:
William C. Ballard, Jr. - 21,294,223 common shares and 582,318
preferred shares cast in favor of election and 17,408 preferred shares
withheld.
T. Ballard Morton, Jr. - 21,294,223 common shares and 586,296 preferred
shares cast in favor of election and 13,430 preferred shares withheld.
William L. Rouse, Jr. - 21,294,223 common shares and 586,105 preferred
shares cast in favor of election and 13,621 preferred shares withheld.
- 39 -
Charles L. Shearer - 21,294,223 common shares and 586,832 preferred
shares cast in favor of election and 12,894 preferred shares withheld.
Holders of no common or preferred shares abstained from voting on this
matter.
ii) The shareholders voted 21,294,223 common shares and 587,072 preferred
shares in favor of and 2,373 preferred shares against the approval of
Arthur Andersen LLP as independent auditors for 2000. Holders of
10,281 preferred shares abstained from voting on this matter.
3. KU:
i) The sole shareholder voted to elect KU's nominees for election to the
Board of Directors as follows:
37,817,878 common shares cast in favor of election and no shares
withheld for each of William C. Ballard, Jr., T. Ballard Morton, Jr.,
William L. Rouse, Jr., and Charles L. Shearer, respectively.
ii) The sole shareholder voted 37,817,878 common shares in favor of and no
shares against the approval of Arthur Andersen LLP as independent
auditors for 2000.
Holders of no common shares abstained from voting on these matters.
d) Not applicable.dates.
Item 6(a). Exhibits.
Exhibit
Number Description
27 Financial Data Schedules for LG&E Energy Corp.,
Louisville Gas and Electric Company, and Kentucky
Utilities Company.None.
Item 6(b). Reports on Form 8-K.
On August 14, 2000, the CompanyApril 30, 2001, LG&E and KU filed a reportCurrent Report on Form 8-K stating that on
July 28, 2000, it announced that it had increased its after-tax loss on
disposal of discontinued operations by an additional $155 million.
- 40 -announcing a
change in the companies certifying accountants.
22
SIGNATURES
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.
LG&E Energy Corp.
Registrant
Date: August 14, 2000 /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.
Louisville Gas and Electric Company
- -----------------------------------
Registrant
Date: August 14, 2000May 15, 2001 /s/ Michael D. Robinson
Michael D. RobinsonS. Bradford Rives
---------------------
S. Bradford Rives
Senior Vice President - Finance
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: August 14, 2000May 15, 2001 /s/ Michael D. Robinson
Michael D. RobinsonS. Bradford Rives
---------------------
S. Bradford Rives
Senior Vice President - Finance
and Controller (On behalf of the registrant in
his capacity as Principal Accounting Officer)
- 41 -
23