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, 2001March 31, 2002
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.
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 XX. No __.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of July 31, 2001,April 30, 2002,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of July 31, 2001,April 30, 2002,
all held by LG&E Energy Corp.
This combined Form 10-Q is separately filed by 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.
TABLE OF CONTENTS
PART I
Item 1 Consolidated 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 Other 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 Other Comprehensive Income 12
Notes to Consolidated Financial Statements 13
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations and Financial Condition 1920
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 2625
PART II
Item 1 Legal Proceedings 2726
Item 6 Exhibits and Reports on Form 8-K 2726
Signatures 28
Part I. Financial Information - Item 1. Financial Statements
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Six Months
Ended
June 30, Ended June 30,March 31,
2002 2001 2000 2001 2000
OPERATING REVENUES:
Electric (Note 8) $196,290 $179,752 $351,664 $341,0797) $166,246 $155,374
Gas(Note 8) 32,551 29,979 190,448 118,2957) 117,119 157,897
Total operating revenues 228,841 209,731 542,112 459,374283,365 313,271
OPERATING EXPENSES:
Fuel for electric generation 41,749 38,650 80,233 78,57644,107 38,484
Power purchased 32,744 24,346 44,085 46,10023,581 11,341
Gas supply expenses 18,822 18,688 144,058 82,08283,467 125,237
Non-recurring charges (Note 4) - - 144,385 8,141
Other operation expenses 36,398 30,547 71,681 67,52248,410 35,283
Maintenance 13,683 17,442 24,238 31,32312,001 10,555
Depreciation and amortization 25,572 23,901 50,840 48,05025,278 25,267
Federal and state
income taxes 17,828 14,397 (20,183) 24,06613,237 (38,011)
Property and other taxes 4,421 4,475 8,883 9,6374,536 4,462
Total operating expenses 191,217 172,446 548,220 395,497254,617 357,003
NET OPERATING INCOME (LOSS) 37,624 37,285 (6,108) 63,87728,748 (43,732)
Other income - net 363 1,850 1,358 3,3691 996
Interest charges (Note 5) 9,520 11,126 20,898 21,8167,806 11,379
NET INCOME (LOSS) 28,467 28,009 (25,648) 45,43020,943 (54,115)
Preferred stock dividends 1,220 1,317 2,518 2,4821,065 1,299
NET INCOME (LOSS) AVAILABLE
FOR COMMON STOCK $ 27,247 $ 26,692 $ (28,166) $ 42,94819,878 $(55,414)
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
(Unaudited)
June 30Mar. 31, Dec. 31,
2002 2001 2000
UTILITY PLANT:
At original cost $3,273,972 $3,186,325$3,444,952 $3,423,037
Less: reserve for depreciation 1,340,414 1,296,8651,404,277 1,381,874
Net utility plant 1,933,558 1,889,4602,040,675 2,041,163
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,062 1,3571,356 1,176
CURRENT ASSETS:
Cash 7,632 2,495
Marketable securities - 4,05616,082 2,112
Accounts receivable - less reserve (Note 6) 87,030 170,852120,576 85,667
Materials and supplies - at average cost:
Fuel (predominantly coal) 14,659 9,32528,715 22,024
Gas stored underground 20,935 54,44115,278 46,395
Other 29,718 31,68528,176 29,050
Prepayments and other 4,393 1,3174,071 4,688
Total current assets 164,367 274,171212,898 189,936
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,635 5,7845,269 5,921
Regulatory assets (Note 9) 80,219 54,4398) 169,544 197,142
Other 1,924 87313,686 13,016
Total deferred debits and other assets 87,778 61,096188,499 216,079
Total assets $2,186,765 $2,226,084$2,443,428 $2,448,354
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30Mar. 31, Dec. 31,
2002 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 286,428 314,594413,514 393,636
Accumulated other comprehensive income (18,994) (19,900)
Other (5,070)(836) (836)
Total common equity 746,528 778,928858,854 838,070
Cumulative preferred stock 95,140 95,140
Long-term debt 360,600 360,600(Note 10) 370,704 370,704
Total capitalization 1,202,268 1,234,6681,324,698 1,303,914
CURRENT LIABILITIES:
Current portion of long-term debt 246,200 246,200
Notes payable to parent 60,753 114,589122,553 94,197
Accounts payable 104,955 136,89287,689 149,070
Dividends declared 1,220 1,3671,065 1,111
Accrued taxes 15,440 8,07338,451 20,257
Accrued interest 6,399 6,3503,819 5,818
Other 15,904 15,82611,708 11,729
Total current liabilities 450,871 529,297511,485 528,382
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 251,249 289,232299,366 298,143
Investment tax credit, in
process of amortization 60,846 62,97957,635 58,689
Accumulated provision for pensions
and related benefits (Note 4) 127,894 31,257168,043 167,526
Customer advances for construction 9,600 9,5789,758 9,745
Regulatory liabilities (Note 9) 69,251 61,0138) 57,419 65,349
Other 14,786 8,06015,024 16,606
Total deferred credits and other liabilities 533,626 462,119607,245 616,058
Total capital and liabilities $2,186,765 $2,226,084$2,443,428 $2,448,354
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of $)
SixThree Months
Ended
June 30,Mar. 31,
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) income $ (25,648)20,943 $ 45,430(54,115)
Items not requiring cash currently:
Depreciation and amortization 50,840 48,05025,278 25,267
Deferred income taxes - net (41,833) 246290 (50,358)
Investment tax credit - net (2,133) (2,142)
Non-recurring charges (Note 4) 113,645 -(1,054) (1,067)
Other 7,466 4,26410,893 5,074
Changes in current assets and liabilities 16,670 8,036
Sale of(32,199) 12,199
Changes in accounts receivable securitization-net
(Note 6) 52,900 -22,000) 74,550
Other (18,568) (4,508)9,775 79,455
Net cash flows from operating activities 153,339 99,37611,926 91,005
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (180) - (194)
Proceeds from sales of securities 4,350 1,520- 4,225
Construction expenditures (96,050) (64,560)(24,947) (66,227)
Net cash flows from investing activities (91,700) (63,234)(25,127) (62,002)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of pollution control bonds 119,926 - 25,000
Retirement of first mortgage and pollution control bonds (120,000) - (46,083)
Short-term borrowings 35,763 1,432,25658,300 -
Repayment of short-term borrowings (89,600)(1,420,596)(29,944) (23,136)
Payment of dividends (2,665) (41,901)(1,111) (1,367)
Net cash flows from financing activities (56,502) (51,324)27,171 (24,503)
CHANGE IN CASH AND TEMPORARY13,970 4,500
CASH INVESTMENTS 5,137 (15,182)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 2,112 2,495
54,761
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 7,63216,082 $ 39,5796,995
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 15,882- $ 4,396(4,226)
Interest on borrowed money 16,090 17,8768,356 9,963
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 consolidated financial
statements.
-4-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Six Months
Ended
June 30, Ended June 30,March 31,
2002 2001 2000 2001 2000
Balance at beginning
of period $259,181 $258,987$393,636 $314,594 $259,231
Net income (loss) 28,467 28,009 (25,648) 45,43020,943 (54,115)
Subtotal 287,648 286,996 288,946 304,661414,579 260,479
Cash dividends declared on stock:
5% cumulative preferred 269 269
538 538
Auction rate cumulative
preferred 584 681 1,246 1,210429 663
$5.875 cumulative preferred 367 367
734 734
Common - 16,500 - 33,000
Subtotal 1,220 17,817 2,518 35,4821,065 1,299
Balance at end of period $286,428 $269,179 $286,428 $269,179$413,514 $259,180
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months
Six Months
Ended
June 30, Ended June 30,March 31,
2002 2001 2000 2001 2000
Net income (loss) $28,467 $28,009 $(25,648) $45,430$20,943 $(54,115)
Cumulative effect of change in accounting principle-Accounting forprinciple -
Accounting For Derivative Instruments and
Hedging Activities (Note 5) - - (5,998)
-
Gains (losses)(Losses) on derivative instruments
and hedging activities 977 - (1,058) -
Unrealized holding (losses) on
available-for-sale securities
arising during the period - (107) - (266)(Note 5) 1,509 (2,035)
Other comprehensive income (loss),
before tax 977 (107) (7,056) (266)1,509 (8,033)
Income tax benefit (expense) benefit
related to items of other
comprehensive income (loss) (391) 43 2,822 107
Comprehensive(603) 3,213
Other comprehensive income (loss) $29,053 $27,945 $(29,882) $45,271$ 21,849 $ (58,935)
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Six Months
Ended
Ended
June 30, June 30,March 31,
2002 2001 2000 2001 2000
OPERATING REVENUES (Note 8) $219,360 $205,324 $431,153 $423,1027) $215,168 $211,793
OPERATING EXPENSES:
Fuel for electric generation 55,523 51,466 111,451 107,08158,271 55,928
Power purchased 52,023 43,464 84,908 82,30841,060 32,885
Non-recurring charges (Note 4) - - 63,788 11,030
Other operation expenses 27,343 24,167 53,961 53,01534,522 26,618
Maintenance 15,549 17,078 27,519 31,22811,559 11,970
Depreciation and amortization 23,818 24,493 47,646 48,82523,059 23,828
Federal and state
income taxes 11,821 11,368 5,371 22,73414,383 (6,450)
Property and other taxes 4,277 4,376 8,432 9,2164,114 4,155
Total operating expenses 190,354 176,412 403,076 365,437186,968 212,722
NET OPERATING INCOME 29,006 28,912 28,077 57,665(LOSS) 28,200 (929)
Other income - net 2,621 2,654 4,414 3,9791,639 1,793
Interest charges (Note 5) 10,425 10,034 18,542 19,9385,482 8,117
NET INCOME (LOSS)before Cumulative Effect
of Accounting Change 21,202 21,532 13,949 41,70624,357 (7,253)
Cumulative Effect of Change in
Accounting for Derivative Instruments
and Hedging Activities, net of tax (Note 5) - - 136
-
NET INCOME 21,202 21,532 14,085 41,706(LOSS) 24,357 (7,117)
Preferred stock dividends 564 564
1,128 1,128
NET INCOME (LOSS) AVAILABLE
FOR COMMON STOCK $ 20,63823,793 $ 20,968 $ 12,957 $ 40,578(7,681)
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
(Unaudited)
June 30,Mar. 31, Dec. 31,
2002 2001 2000
UTILITY PLANT:
At original cost $3,012,157 $2,932,763$3,087,542 $3,064,220
Less: reserve for depreciation 1,419,880 1,378,2831,481,695 1,457,754
Net utility plant 1,592,277 1,554,4801,605,847 1,606,466
OTHER PROPERTY AND INVESTMENTS -
less reserve 10,017 14,5389,859 9,629
CURRENT ASSETS:
Cash 184 314and temporary cash investments 5,292 3,295
Accounts receivable - less reserve (Note 6) 72,352 90,41979,070 45,291
Materials and supplies - at average cost:
Fuel (predominantly coal) 38,503 12,49546,034 43,382
Other 25,866 25,81226,729 26,188
Prepayments and other 4,528 1,8996,057 4,942
Total current assets 141,433 130,939163,182 123,098
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,492 4,6514,233 4,316
Regulatory assets (Note 9) 22,055 26,4418) 61,511 66,467
Other 15,522 8,46915,701 16,926
Total deferred debits and other assets 42,069 39,56181,445 87,709
Total assets $1,785,796 $1,739,518$1,860,333 $1,826,902
The accompanying notes are an integral part of these consolidated financial
statements.
-8-
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30,Mar. 31, Dec. 31,
2002 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 360,195 347,238434,689 410,896
Accumulated other comprehensive income 1,588 1,588
Other 994(595) (595)
Total common equity 684,329 669,783758,822 735,029
Cumulative preferred stock 40,000 40,000
Long-term debt 431,938 430,830(Note 5) 432,892 434,506
Total capitalization 1,156,267 1,140,6131,231,714 1,209,535
CURRENT LIABILITIES:
Current portion of long-term debt 54,000 54,000
Notes payable to parent 39,790 61,23964,190 47,790
Accounts payable 110,640 76,339
Dividends declared 188 18864,132 85,149
Accrued taxes 22,625 19,62236,249 20,520
Accrued interest 6,144 6,3734,947 5,668
Other 18,118 18,57916,458 16,482
Total current liabilities 251,505 236,340239,976 229,609
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 221,368 246,680237,723 239,204
Investment tax credit, in
process of amortization 13,178 14,90110,716 11,455
Accumulated provision for pensions
and related benefits (Note 4) 88,173 47,49591,824 91,235
Customer advances for construction 1,643 1,5401,498 1,526
Regulatory liabilities (Note 9) 35,679 38,3928) 32,972 33,889
Other 17,983 13,55713,910 10,449
Total deferred credits and other liabilities 378,024 362,565388,643 387,758
Total capital and liabilities $1,785,796 $1,739,518$1,860,333 $1,826,902
The accompanying notes are an integral part of these consolidated financial
statements.
-9-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of $)
SixThree Months
Ended
June 30,March 31,
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,08524,357 $ 41,706(7,117)
Items not requiring cash currently:
Depreciation and amortization 47,646 48,82523,059 23,828
Deferred income taxes - net (28,061) (7,478)(2,406) (28,166)
Investment tax credit - net (1,723) (1,837)
Non-recurring charges (Note 4) 50,078 -(739) (862)
Other 5,169 (910)1,233 1,654
Changes in current assets and liabilities (23,032) 38,445
Sale of(19,020) (1,502)
Changes in accounts receivable securitization-net
(Note 6) 40,000 -(25,100) 50,000
Other (1,545) (139)8,388 41,947
Net cash flows from operating activities 102,617 118,6129,772 79,782
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (80,170) (48,403)(23,611) (60,302)
Net cash flows from investing activities (80,170) (48,403)(23,611) (60,302)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 229,094 69,773174,869 99,325
Repayment of short-term borrowings (250,543) (39,842)
Issuance of pollution control bonds - 12,900
Retirement of pollution control bonds - (74,785)(158,469) (114,375)
Payment of dividends (1,128) (44,564)(564) (564)
Net cash flows from financing activities (22,577) (76,518)15,836 (15,614)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (130) (6,309)1,997 3,866
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 3,295 314 6,793
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 1845,292 $ 4844,180
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 34,994- $ 19,9493,894
Interest on borrowed money 16,735 18,6546,101 7,116
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 consolidated financial
statements.
-10-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Six Months
Ended Ended
June 30, June 30,March 31,
2002 2001 2000 2001 2000
Balance at beginning
of period $339,557 $324,080$410,896 $347,238 $329,470
Net income 21,202 21,532 14,085 41,706(loss) 24,357 (7,117)
Subtotal 360,759 345,612 361,323 371,176435,253 340,121
Cash dividends declared on stock:
4.75% preferred 237 237
475 475
6.53% preferred 327 327
653 653
Common - 25,000 - 50,000
Subtotal 564 25,564 1,128 51,128564
Balance at end of period $360,195 $320,048 $360,195 $320,048$434,689 $339,557
The accompanying notes are an integral part of these consolidated financial
statements.
-11-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months
Six Months
Ended
Ended
June 30, June 30,March 31,
2002 2001 2000 2001 2000
Net income $21,202 $21,532 $14,085 $41,706(loss) $24,357 $(7,117)
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)
-
ComprehensiveOther comprehensive income $21,202 $21,532 $15,673 $41,706(loss) $24,357 $(5,529)
The accompanying notes are an integral part of these consolidated financial
statements.
-12-
Louisville Gas and Electric Company and Subsidiary
Kentucky Utilities Company and Subsidiary
Notes to Consolidated 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").
The common stock of each of LG&E and KU is wholly owned by LG&E Energy
Corp. ("LG&E Energy"). In the opinion of management, the unaudited
interim data includes all adjustments, including thoseconsisting only of a normal
recurring nature, have been made to present
fairly theadjustments, necessary for a fair statement of consolidated
financial position, results of operations, comprehensive income 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 Companies respectively believe that the disclosures are adequate to make the
information presented not misleading.
See LG&E's and KU's Reports on Form 10-K for 20002001 for information
relevant to the accompanying financial statements, including
information as to the significant accounting policies of the Companies.
2. EffectiveOn December 11, 2000, LG&E Energy Corp. was acquired by Powergen plc
("Powergen"). LG&E Energy had announced on February 28, 2000 the offer
to be acquired by Powergen
for cash of approximately $3.2 billion or $24.85 per share and the
assumption of all of LG&E Energy's debt. Pursuant toAs a result of the acquisition, agreement,
among other things, LG&E Energy became a wholly ownedwholly-owned indirect subsidiary
of Powergen and, as a result, LG&E and KU became indirect subsidiaries of
Powergen. The utility operations (LG&E and KU) of LG&E Energy have
continued their separate identities and continue to serve customers in
Kentucky and Virginia under their existing names. The preferred stock and
debt securities of the utility operations were not affected by this
transaction andresulting in the utilitiesutility operations' obligations to continue to
file SEC reports. Following the acquisition, Powergen became a registered
holding company under the Public Utility Holding Company Act of 1935 ("PUHCA")(PUHCA), and
LG&E and KU, as subsidiaries of a registered holding company, became
subject to additional regulation under PUHCA.
As a result of the Powergen acquisition and in order to comply with
PUHCA, LG&E Energy Services Inc. ("LG&E Services") was formed and
became operational on January 1, 2001. LG&E Services provides certain
services to affiliated entities, including LG&E and KU, at cost, as
required under PUHCA. On January 1, 2001, approximately 1,000
employees, mainlyprimarily from LG&E Energy, LG&E and KU, were moved to LG&E
Services.
3. On April 9, 2001, a German power company, E.ON AG ("E.ON"), announced
a pre-conditional cash offer of 5.1 billion pounds sterling ($7.3 billion)
for Powergen. The offer is subject to a number of conditions, including the
receipt of certain European and United States regulatory approvals. On
August 6, 2001,theThe
Kentucky Public Service Commission ("Kentucky Commission"), the Federal
Regulatory Energy Commission ("FERC"), the Virginia State Corporation
Commission, and the Tennessee Regulatory Authority have all approved the
acquisition of Powergen and LG&E Energy by E.ON. The parties expect to
obtain the remaining regulatory approvals by earlyduring the first half of 2002
and they expect to complete the transaction during this time frame.
On April 19, 2002, Powergen plc shareholders voted in favor of the
springacquisition of 2002. See Powergen's schedule
14D-9 and associated schedulesPowergen by E.ON. The vote in favor of such resolutions
enables the deal to such filing, filed with the Securities
and Exchange Commission on April 9, 2001.proceed by way of a scheme of arrangement. Such
procedure is anticipated to allow E.ON to obtain full equity in
Powergen upon completion.
-13-
4. During the first quarter 2001, the Companies tookLG&E recorded a $124.1$144 million after tax charge (LG&E $86.1 million, and
KU $38 million)recorded a $64 million charge for a workforce reduction program.
Primary components of the chargescharge were separation benefits, enhanced
early retirement benefits, and health care benefits. The result of
this workforce reduction was the elimination of approximately 1,000over 1,100 positions,
most of which was
accomplished primarily through the Companies' voluntary enhanced severance
program. During the first quarter 2000, the Companies' took an $11.4
million after-tax charge for the continued integration of the
operations of LG&E and KU including their customer service centers and
-13-
their retail electric and gas operations. The result of this
consolidation was the elimination of approximately 400 positions most
of which was accomplished through the Companies'a voluntary enhanced severance program.
On June 1, 2001, LG&E and KU filed an application (VDT case) with the
Kentucky Commission to create a regulatory assets totaling $144 million (pretax)
for LG&E ($114.5 million and $29.5 million attributable to electric and
gas businesses, respectively) and $56 million (pretax) for KUasset relating to these
first quarter 2001 charges. The application seeksrequested permission to
amortize these costs over a four-year period. IfThe Kentucky Commission
also opened a case to review the application were granted,new depreciation study and resulting
depreciation rates implemented in 2001.
LG&E and KU reached a settlement in the allowed portion ofVDT case as well as the non-recurring charges would be reversed
throughother
cases involving depreciation rates and the income statement to create the regulatory assets. To date
no procedural schedule has been establishedEarnings Sharing Mechanism
with all intervening parties. The settlement agreement was approved by
the Kentucky Commission on December 3, 2001.
The Kentucky Commission December 3, 2001 order allowed LG&E to set up
a regulatory asset of $141 million for the workforce reduction costs
and begin amortizing these costs over a five year period starting in
this matter.April 2001. The first quarter charge of $144 million represented all
employees who had accepted a voluntary enhanced severance program.
Between the time of the original filing and the December 3, 2001 order,
some employees rescinded their participation in the voluntary enhanced
severance program, thereby decreasing the original charge from $144
million to $141 million. The settlement will also reduce revenues by
approximately $26 million through a surcredit on future bills to
customers over the same five year period. The surcredit represents
stipulated net savings LG&E is expected to realize from implementation
of best practices through the value delivery process. The agreement
also established LG&E's new depreciation rates in effect retroactive to
January 1, 2001. The new depreciation rates decreased depreciation
expense by $5.6 million in 2001.
The Kentucky Commission December 3, 2001, order allowed KU to set up a
regulatory asset of $54 million for the workforce reduction costs and begin
amortizing these costs over a five year period starting in April 2001. The
first quarter charge of $64 million represented all employees who had
accepted a voluntary enhanced severance program. Some employees rescinded
their participation in the voluntary enhanced severance program and, along
with the non-recurring charge of $6.9 million for FERC and Virginia
jurisdictions, thereby decreasing the original charge from $64 million to
$54 million. The settlement will also reduce revenues by approximately $11
million through a surcredit on future bills to customers over the same five
year period. The surcredit represents stipulated net savings KU is
expected to realize from implementation of best practices through the value
delivery process. The agreement also established KU's new depreciation
rates in effect December 2001, retroactive to January 1, 2001. The new
depreciation rates decreased depreciation expense by $6.0 million in 2001.
5. SFASStatement of Financial Accounting Standards 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 fair
value. SFAS No. 133 requires that changes in the derivative'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 offset related results on the hedged item
in the income statement, and requires that LG&E and KU must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 could increase the volatility in
earnings and other comprehensive 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
-14-
on January 1, 2001. The effect of adopting this statement wasin 2001 resulted
in a charge to
LG&E of $3.6 million and(net of tax of $2.4 million) decrease in other
comprehensive income from a credit to KU of $1.6 million to cumulative effect of change in accounting
principle for LG&E and a $1.6 million (net of tax)tax of $1.1 million) increase
in other comprehensive income.income from a cumulative effect of change in
accounting principle for KU.
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of itstheir debt instruments. Pursuant to Company
policy, use of these financial instruments is intended to mitigate risk
and earnings volatility and is not speculative in nature. Management
has designated all of the Companies' interest rate swaps as hedge
instruments. Financial instruments designated as cash flow hedges have
resulting gains and 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-marketmarked 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 June 30, 2001,March 31, 2002, LG&E had fixed rate swaps covering $217,335,000$117,335,000
in notional amounts of variable rate debt and with fixed rates ranging
from 3.560%4.184% to 5.495%. The average variable rate on the debt during
the quarter was 3.85%1.41%. The swaps have been designated as cash flow
hedges and expire on various dates from September 20012003 through November
2020. The hedges were deemed to be fully effective resulting in pretax
incomegain for the quarter ended June 30, 2001March 31, 2002 of $977,000, and a pretax
loss of $1,058,000 for the six months ended June 30, 2001,$1.5 million, recorded in
Other Comprehensive Income. Upon expiration of these hedges, the amount
recorded in Other Comprehensive Income will be reclassified into
earnings. The amount expected to be reclassified from Other
Comprehensive Income to earnings in the next twelve months is
immaterial.
As of June 30, 2001,March 31, 2002, 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 5.05%2.42%. The
underlying debt has fixed rates ranging from 5.873%5.75% to 7.920%7.92%. The swaps
have been designated as fair value hedges and expire on various dates
from May 2007 through June 2025. During the quarter ended June
30, 2001,March 31,
2002, the effect of marking these financial instruments and the
underlying debt to market resulted in pretax lossesgains of $1,242,000
recorded as an increase in interest expense. The effect for the six
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months was a pretax gain of $221,000$1.8 million,
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. 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 eachimplemented an accounts receivable
securitization program. The purpose of this program is to enable the
utilities to accelerate the receipt of cash from the collection of
retail accounts receivable, thereby reducing dependence upon more
costly sources of working capital. The securitization program allows
for a percentage of eligible receivables to be sold. Eligible
receivables are generally all receivables associated with retail sales
that have standard terms and are not past due. LG&E and KU are able to
terminate these programs at any time without penalty. If there is a
significant deterioration in the payment record of the receivables by
retail customers or if the Companies fail to meet certain covenants of
the program, the program may terminate at the election of the financial
institutions. In this case, payments from retail customers would first
-15-
be used to repay the financial institutions participating in the
program, and would then be available for use by the Companies.
As part of the program, LG&E and KU sold retail accounts receivables to
two
wholly-ownedwholly owned subsidiaries, LG&E Receivables LLC ("LGE-R"LG&E R") and KU
Receivables LLC ("KU-R"KU R"), respectively.. Simultaneously, LGE-RLG&E R and KU-RKU R entered into
two separate three-year accounts receivablesreceivable securitization facilities
with two financial institutions and their affiliates whereby LGE-RLG&E R and
KU-RKU 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 apurchaser. The effective
cost of funds linkedthe receivables programs is comparable to LG&E and KU's lowest
cost source of capital, and is based on prime rated commercial paper rates
plus a charge for administrative and credit support services.
Furthermore,paper.
LG&E and KU retain the servicing rights of the sold receivables through
two separate servicing agreements betweenwith the third party purchaser and each utility. Under these agreements,purchasers. LG&E
and KU receive a fee for servicing the sold receivables on behalfhave obtained opinions from independent legal counsel indicating
these transactions qualify as true sales of the third
party purchaser.receivables. As of June 30,March
31, 2002 and December 31, 2001, LG&E's outstanding program balance was
$52.9$20.0 million and $42.0 million, respectively, and KU's balance at
March 31, 2002 and December 31, 2001 was $40.0 million.$20.0 million and $45.1
million, respectively.
Management expects to renew these facilities when they expire.
The allowance for doubtful accounts associated with the eligible
securitized receivables was $.8$1.6 million and $1.3 million for LG&E and $.4$0.5
million and $0.5 million for KU at June 30, 2001.March 31, 2002 and December 31, 2001,
respectively. Charge offs were immaterial for LG&E and KU. The risk of
uncollectibility associated with the sold receivables is minimal.
Through June 30, 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 October 2000, LG&E and KU each filed an application with the
Kentucky Commission to amend their respective Environmental Compliance
Plans to reflect the addition of Nitrogen Oxide ("NOx") reduction
technology projects and to amend their respective Environmental Cost
Recovery Tariffs ("ECR") to include an overall rate of return on
capital investments. The NOx reduction technology is anticipated to
allow LG&E and KU to 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 amended
environmental compliance plan and the use of an overall rate of 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 approval by the Kentucky
Commission in periodic regulatory reviews.
8. External and intersegment revenues (related parties transactions
between LG&E and KU) and income by business segment for the three
months ended June 30, 2001,March 31, 2002, follow (in thousands of $):
-15-
-16-
Net
Income/
(Loss)
Inter- Avail.
External segment ForFor-
Revenues Revenues Common
LG&E electric $187,472 $ 8,818153,193 $ 27,86713,053 $ 10,178
LG&E gas 32,551117,119 - (620)9,700
Total $220,023 $ 8,818270,312 $ 27,24713,053 $ 19,878
KU electric $209,507 $ 9,853200,387 $ 20,638
External and intersegment revenues (related parties transactions
between LG&E and KU) and income by business segment for the six months
ended June 30, 2001, follow (in thousands of $):
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $335,83314,781 $ 15,831 $ (16,575)
LG&E gas 190,448 - (11,591)
Total $526,281 $ 15,831 $ (28,166)
KU electric $415,618 $ 15,535 $ 12,95723,793
External and intersegment revenues (related parties transactions
between LG&E and KU) and income by business segment for the three
months ended June 30, 2000,March 31, 2001, follow (in thousands of $):
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $175,420 $ 4,332148,361 $ 26,7727,013 $ (44,443)
LG&E gas 29,979157,897 - (80)(10,971)
Total $205,399 $ 4,332306,258 $ 26,6927,013 $ (55,414)
KU electric $201,186 $ 4,138206,111 $ 20,968
External and intersegment revenues (related parties transactions
between LG&E and KU) and income by business segment for the six months
ended June 30, 2000, follow (in thousands of $):
-16-
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $330,5395,682 $ 10,540 $ 43,077
LG&E gas 118,295 - (129)
Total $448,834 $ 10,540 $ 42,948
KU electric $411,957 $ 11,145 $ 40,578
9.(7,681)
8. The following regulatory assets and liabilities were included in the
balance sheet of LG&E and KU as of June 30, 2001March 31, 2002 and December 31, 20002001
(in thousands of $):
Louisville Gas and Electric
(Unaudited)
June 30,Mar. 31, Dec. 31,
2002 2001 2000
REGULATORY ASSETS:
VDT costs $ 120,029 $ 127,529
Unamortized loss on bonds $ 18,469 $ 19,03618,262 17,902
Gas supply adjustments due from customers 39,258 12,324
Merger13,772 30,135
LG&E/KU merger costs 7,259 9,0734,537 5,444
One utility costs 4,987 6,3312,971 3,643
Manufactured gas sites 2,215 2,3681,987 2,062
Other 8,031 5,3077,986 10,427
Total 80,219 54,439169,544 197,142
REGULATORY LIABILITIES:
Deferred income taxes - net 50,743 54,59347,770 48,703
Gas supply adjustments due to customers 14,289 2,0298,879 15,702
Other 4,219 4,391770 944
Total $ 69,25157,419 $ 61,01365,349
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Kentucky Utilities
(Unaudited)
June 30,Mar. 31, Dec. 31,
2002 2001 2000
REGULATORY ASSETS:
VDT costs $ 45,936 $ 48,811
Unamortized loss on bonds $ 6,577 $ 7,011
Merger5,925 6,142
LG&E/KU merger costs 8,185 10,2325,116 6,139
One utility costs 6,434 8,2733,492 4,365
Other 858 9251,042 1,010
Total 22,054 26,44161,511 66,467
REGULATORY LIABILITIES:
Deferred income taxes - net 34,734 37,48431,947 32,872
Other 945 9081,025 1,017
Total $ 35,67932,972 $ 38,392
10.Statements33,889
9. Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets were
issued in the second quarter of 2001. SFAS No. 141 requires all
business combinations initiated after June 30, 2001, to be accounted
-17-
for using the purchase method. SFAS No. 142 requires goodwill to be
recorded, but not amortized. Further, goodwill will now be subject to a
periodic assessment for impairment. LG&E and KU have no recorded
goodwill and have no merger or acquisitions in progress. Therefore,Accordingly,
the provisions of these new pronouncements were effective July 1, 2001,
for LG&E and KU. The Companies experienced no impact on financial
position or results of operations as a result of adopting these
standards.
SFAS No. 143, Accounting for Asset Retirement Obligations and SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets,
were also issued during 2001. SFAS No. 143 establishes accounting and
reporting standards for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and the
accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS No. 144, among other
provisions, eliminates the requirement of SFAS No. 121 to allocate
goodwill to long-lived assets to be tested for impairment. The
effective implementation date as it relates to the Companies for SFAS
No. 144 is January 1, 2002 and SFAS No. 143 is January 1, 2003. SFAS
No. 144 had no current impact on the financial position or results of
operations of LG&E or KU. Management has not determined what impact
SFAS No. 143 will have on the financial position or results of
operations of the Companies.
The Financial Accounting Standards Board created the Derivatives
Implementation Group ("DIG") to provide guidance for implementation of
SFAS No. 133. DIG Issue C15, Normal Purchases and Normal Sales
Exception for Option Type Contracts and Forward Contracts in
Electricity was adopted in 2001 and had no impact on results of
operations and financial position. DIG Issue C16, Applying the Normal
Purchase and Normal Sales Exception to Contracts that Combine a Forward
Contract and a Purchased Option Contract, was cleared in the third
quarter 2001 and stated that option contracts do not meet the normal
purchases and normal sales exception and should follow SFAS No. 133.
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DIG Issue C16 will be effective in the second quarter of 2002. The
Companies have reviewed their contracts for options and determined that
DIG Issue C16 does not expectapply, but the adoption of these standards toDIG Issue C16 will not
have a material impact on the financial position or results of
operations of the Companies pursuant to regulatory treatment prescribed
by SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation.
10.On March 22, 2002, LG&E refinanced two $35 million unsecured pollution
control bonds due November 1, 2027. The replacement variable rate
bonds are secured by first mortgage bonds and will mature November 1,
2027. The variable rate will be established by the remarketing agent
taking into account market conditions in the commercial paper market.
On March 6, 2002, LG&E refinanced $22.5 million and $27.5 million in
unsecured pollution control bonds, both due September 1, 2026. The
replacement bonds, due September 1, 2026, are variable rate bonds and
are secured by first mortgage bonds. The variable rate will be
established by the remarketing agent taking into account market
conditions in the commercial paper market.
11.In the normal course of business, lawsuits, claims, environmental
actions, and various non-ratemaking governmental proceedings arise
against LG&E and KU. To the extent that damages are assessed in any of
these lawsuits, LG&E and KU believe that their insurance coverage is
adequate. Management, after consultation with legal counsel, does not
anticipate that liabilities arising out of other currently pending or
threatened lawsuits and claims of the type referenced above will have a
material adverse effect on LG&E's or KU's consolidated financial
position or results of LG&E or KU.
11.Reference is made to Part II, Legal Proceedings, below and 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.
-18-operations, respectively.
-19-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations and
Financial Condition.Operations.
General
The following discussion and analysis by management focuses on those
factors that had a material effect on LG&E's and KU's financial results of
operations and financial condition during the three and six months periods
described during 2001month period ended
March 31, 2002 and should be read in connection with the financial
statements and notes thereto.
Some of the following discussion may contain forward-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:
general economic conditions; business and competitive conditions in the
energy industry; changes in federal or state legislation; unusual weather;
actions by state or federal regulatory agencies; and other factors
described from time to time in LG&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 year ended December 31, 2000.2001.
Results of Operations
The results of operations for LG&E and KU 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, 2001,March 31, 2002, Compared to
Three Months Ended June 30, 2000March 31, 2001
LG&E Results:
LG&E's net income increased $.5$75.1 million (2%) for the quarter ended June 30,
2001,March 31,
2002, as compared to the quarter ended June 30, 2000.March 31, 2001, primarily because of
a non-recurring charge of $86.1 million, net of tax, for LG&E's workforce
reduction program incurred in 2001. Excluding this one-time charge, LG&E's
net income would have decreased $11.0 million primarily due to amortization
expenses associated with LG&E's workforce reduction program and higher
pension and fuel costs.
A comparison of LG&E's revenues for the quarter ended June 30, 2001,March 31, 2002, with
the quarter ended June 30, 2000, (excluding the reversal in the second
quarter of 2000 of a Fuel Adjustment Clause (FAC) refund of $1 million)March 31, 2001, reflects increases and decreases(decreases) which
have been segregated by the following principal causes (in thousands of $):
-19-
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ (676) (698)$ 20,488
Earnings sharing mechanism (119)(40,932)
Environmental cost recovery surcharge 1,646 -
Performance based rate 1,096Demand side management cost recovery 52 422
LG&E/KU merger surcredit (204) -
MergerValue delivery surcredit (803) -
Gas rate increase - 4,179
Weather normalization - (134)(237) (122)
Variation in sales volume, etc. (1,330) (19,296)(2,341) (10,296)
Total retail sales (1,832) 5,237(1,782) (50,928)
Wholesale sales 19,872 (2,976)13,101 10,022
Gas transportation - net - 57189
Other (502) 254(447) (61)
Total $ 17,53810,872 $ 2,572(40,778)
-20-
Electric revenues increased primarily because of an increase in wholesale
sales volumes ($27.6 million) partially offset by a decrease in wholesale
sales prices ($14.5 million). Gas revenues decreased primarily as a result
of lower gas supply costs billed to customers through the gas supply clause
and decreased volumes sold in the first quarter of 2002 due to increased kWh sales and higher
priced sales to wholesale customers.an 18%
decrease in heating-degree days.
Fuel for electric generation and gas supply expenses comprise a large
segmentportion 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 increased $3.1$5.6 million (8%(15%) for
the quarter because of an increase in volume of generation ($53.2 million)
partially offset by lowerand an increase in the cost of coal burned ($1.92.4 million). Gas supply
expenses increased $.1decreased $41.8 million (1%(33%) due to an increasea decrease in net gas supply
cost ($4.736.4 million), and a decrease in the volume of retail gas delivered
to the distribution system ($13.6 million), partially offset by increased
wholesale gas expenses ($8.2 million).
Power purchased increased $12.2 million (108%) primarily because of an
increase in volume of purchases to support increased wholesale sales ($14
million) partially offset by a decrease in the volumecost of gas
deliveredpower purchased ($1.8
million).
The decrease in non-recurring charges of $144.4 million, $86.1 million
after tax is due to the distribution system ($4.6 million).
Power purchased increased $8.4 million (35%) primarily because of increased
purchases to support sales to other utilities ($8.1 million)costs associated with LG&E's workforce reduction
initiative. (See Note 4).
Other operations expenses increased $5.9$13.1 million (19%(37%) in 2001,2002, as
compared to 2000, primarily as a result of increased outside services and pension
expense ($7 million) partially offset by decreases in various operating
expenses ($1.1 million). Outside services increased in part due to the
formation of LG&E Services, as required by the Securities and Exchange
Commission to comply with PUHCA.
Maintenance expenses decreased $3.7 million (22%) in 2001 mainly due to
decreases in software and communication equipment maintenance ($2.3
million) and scheduled outages at the Mill Creek and Cane Run generating
stations ($1.9 million) partially offset by other increases in maintenance
expense.
Depreciation and amortization increased $1.7 million (7%) 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 2001. The new rates, as compared to rates in effect
for 2000, are expected to increase LG&E's annual depreciation expense by
about $.9 million in 2001.
Other income and deductions decreased $1.5 million (80%) in 2001, primarily due to decreasesamortization expenses associated with
LG&E's workforce reduction program ($7.5 million), higher pension expenses
($2.7 million), and higher costs for electric transmission ($1.7 million).
Maintenance expenses increased $1.4 million (14%) in 2002 primarily due to
increased repairs to steam production ($0.9 million) and maintenance to
electric distribution plant ($0.3 million).
Other income-net decreased $1 million (100%) in 2002 primarily due to
increases in repairs to non-utility property($0.5 million), and a decrease
in gains recorded on the gain on sale of non-utility property and lower
interest income.($0.4 million).
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Interest charges decreased $1.6$3.6 million (15%(31%) due to lower interest rates
on variable rate long term debt ($.62.0 million) and the retirement of short-term
borrowings ($2.1 million) partially offset by an increase, a decrease in interest on
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debt to parent company ($.80.6 million) and the increasea decrease in interest associated
with LG&E's accounts receivable securitization program ($.31.1 million). -21-
KU Results:
KU's net income decreased $.3increased $31.5 million for the quarter ended June 30, 2001,March 31,
2002, as compared to the quarter ended June 30, 2000.March 31, 2001. The increase was
primarily due to a non-recurring charge of $38.0 million, net of tax, made
in the first quarter of 2001 for costs associated with KU's workforce
reduction program. Excluding this one-time charge, net income decreased
$6.5 million, due largely to increased operations and purchased power
expense, partially offset by decreased interest expense.
A comparison of KU's revenues for the quarter ended June 30, 2001,March 31, 2002, with
the quarter ended June 30, 2000,March 31, 2001, reflects increases and (decreases) which
have been segregated by the following principal causes (thousands(in thousands of $):
Retail sales:
Fuel supply adjustments $ 4,1165,133
Environmental cost recovery surcharge 104
Performance based rate 839
Merger1,510
Demand side management cost recovery 784
LG&E/KU merger surcredit (950)(1,025)
Value delivery surcredit (189)
Variation in sales volume, etc. (3,747)(3,814)
Total retail sales 3622,399
Wholesale sales 13,630(305)
Other 441,281
Total $ 14,0363,375
Electric revenues increased primarily due to increased kWh sales and higher
pricedprice of sales to
wholesaleretail customers.
Fuel for electric generation comprises a large segmentportion of KU's total
operating expenses. KU's electric rates contain a FAC,Fuel Adjustment Clause,
whereby increases or decreases in the cost of fuel are reflected in retail
rates, subject to the approval of the Kentucky Public Service Commission,
the Virginia State Corporation Commission, and the Federal Energy
Regulatory Commission. Fuel for electric generation increased $4.1 million (8%) for the second quarter of 2001 as
compared to the second quarter of 2000, due to a $3.1 million increase in
the cost of coal burned and a $1 million increase in volume burned.
Power purchased increased $8.6 million (20%) in 2001 primarily due to
increased sales for resale activities in the wholesale electric market.
Other operating expenses increased $3.2 million (13%) due to increased
outside services and pension expense. Outside services increased in part
due to the formation of LG&E Services, as required by the Securities and
Exchange Commission to comply with PUHCA.
Maintenance expenses decreased $1.5 million (9%) primarily due to decreases
in steam expenses, $2.5 million, partially offset by increased transmission
maintenance, $.7 million. The decrease in steam expense is due to repairs
during a scheduled outage at the Ghent steam plant during the second
quarter 2000.
Depreciation and amortization decreased $.7 million (3%) due to a decrease
in depreciation rates, partially offset by an increase in plant in service.
A depreciation study was completed in late 2000 with new depreciation rates
going into effect in 2001. The new rates, as compared to rates in effect
for 2000, are expected to decrease KU's annual depreciation expense by
about $6 million in 2001.
Variations in income tax expense are largely attributable to changes in
pretax income.
Interest charges increased $.4$2.3 million
(4%) for the second quarter 2001 as
compared to second quarter 2000 due to implementation of SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. See Note 5 of
Notes to Financial Statements.
-21-
Six Months Ended June 30, 2001, Compared to
Six Months Ended June 30, 2000
LG&E Results:
LG&E's net income decreased $71.1 million for the first six months of 2001,
as compared to the first six months of 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 $10.2 million
primarily due to increased gas sales to retail consumers, increased
electric wholesale sales, and lower maintenance expenses.
A comparison of LG&E's revenues for the six months ended June 30, 2001,
with the six months ended June 30, 2000, excluding the reversal of
provisions for certain rate refunds of $1.8 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 $ 1,263 $ 85,304
Earnings sharing mechanism (119) -
Environmental cost recovery surcharge (66) -
Performance based rate 2,275 -
Electric rate reduction (3,671) -
Merger surcredit (1,636) -
Gas rate increase - 11,788
Weather normalization - (2,329)
Variation in sales volume, etc. 3,708 (12,480)
Total retail sales 1,754 82,283
Wholesale sales 10,799 (10,382)
Gas transportation - net - (337)
Other (124) 589
Total $ 12,429 $ 72,153
Electric revenues increased due to higher priced wholesale sales in 2001.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing LG&E's base electric rates.
Gas revenues increased primarily as a result of higher gas supply costs
billed to customers through the gas supply clause and the gas rate increase
ordered by the Kentucky Commission in September 2000, partially offset by
decreased wholesale sales.
Fuel for electric generation increased $1.7 million (2%) for the six months
because of an increase in generation ($2.4 million) partially offset by
lower cost of coal burned ($.7 million).
Gas supply expenses increased $62 million (76%) due to an increase in net
gas purchase prices.
-22-
Power purchased decreased $2 million (4%) primarily because of a decrease
in brokered sales activities ($8.1 million), partially offset by increased
sales to other utilities ($6.1 million).
The increase in non-recurring charges of $136.2 million, $81.2 million
after tax, is due to the costs associated with LG&E's workforce reduction
program. See Note 4 of Notes to Financial Statements.
Other operation expenses increased $4.2 million (6%) primarily as a result
of increased outside services and pension expense ($8.3 million) partially
offset by a decrease in steam production costs ($2.7 million) and electric
distribution expenses ($1 million). Outside services increased in part due
to the formation of LG&E Services, as required by the Securities and
Exchange Commission to comply with PUHCA.
Maintenance expenses for the first six months of 2001 decreased $7.1
million (23%) primarily due to decreases in scheduled outages at the Mill
Creek and the Cane Run generating stations ($3.5 million), and software
maintenance costs ($4 million).
Depreciation and amortization increased $2.8 million (6%) due to an
increase in depreciable plant in service and higher depreciation rates.
Other income and deductions increased $2 million (60%) primarily due to
decreases in the gain on sale of non-utility property and lower interest
income.
Variations in income tax expense are largely attributable to changes in pre-
tax income.
KU Results:
KU's net income decreased $27.6 million for the six months ended June 30,
2001, as compared to the six months ended June 30, 2000. Excluding the non-
recurring charges (described in Note 4 of the Notes to Financial
Statements), net income increased approximately $4 million, due largely to
decreased maintenance, depreciation and interest expenses.
A comparison of KU's revenues for the six months ended June 30, 2001, with
the six months ended June 30, 2000, reflects increases and (decreases)
which have been segregated by the following principal causes (thousands of
$):
-23-
Retail sales:
Fuel supply adjustments $ 4,158
Environmental cost recovery surcharge (491)
Performance based rate 1,732
Merger surcredit (2,038)
Electric rate reduction (5,395)
Variation in sales volume, etc. 4,993
Total retail sales 2,959
Wholesale sales 4,548
Other 544
Total $ 8,051
Electric revenues increased mainly due to higher priced wholesale sales in
2001, partially offset by the electric rate reduction order by the Kentucky
Commission in January 2000.
Fuel for electric generation increased $4.4 (4%) million for the six months
ended June 30, 2001 as compared to the comparable period of 2000, due to a $5.3 million increase in the cost of coal
burned partially offset by a $.9decrease of $3.0 million decrease in volume burned.
Power purchased increased $2.6$8.2 million (3%(25%) in 20012002 primarily due to
increased sales for resale activitiesbecause of
an increase in the wholesale electric market.volumes purchased ($11.6 million) partially offset by a
decrease in price ($3.4 million).
Non-recurring charges increased $52.8decreased $63.8 million, $31.4$38.0 million after tax.
These costs arewere due to KU's workforce reduction program. See(See Note 4 of
Notes to Financial Statements.4).
Other operatingoperations expenses increased $.9 million. The increase is attributed
primarily$7.9 million (30%) as compared to increased administrative and general expenses.
Maintenance expenses decreased $3.7 million (12%) due to decreases in steam
expenses, primarily resulting from repairs during a scheduled outage at the
Ghent steam plant during 2000.
Depreciation and amortization decreased $1.2 million (3%) due to a decrease
in depreciation rates partially offset by increased plant in service.
Property and other taxes decreased $.8 million (9%) in 2001,
primarily due to decreases in payroll taxes as a result ofamortization expenses associated with KU's workforce
reductions.reduction program ($2.9 million), higher pension expenses ($1.2 million),
higher costs for electric transmission ($1.4 million) and increases in
uncollectible accounts and customer assistance programs ($1.9 million).
Variations in income tax expense are largely attributable to changes in
pretax income.
Interest charges decreased $1.4$2.6 million (7%(32%) for the first six months 2001quarter 2002 as
compared to the first six months 2000quarter 2001 due to lower interest rates on variable rate debt
($2.2 million) and a decrease in interest rate swaps in effect for 2001, and
implementation of SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. See Note 5 of Notes to Financial Statements.associated with KU's accounts
receivable securitization program ($0.6 million).
-22-
Liquidity and Capital Resources
LG&E's and KU's need for capital funds are largely related to the
construction of plant and equipment necessary to meet the needs of electric
and gas utility customers. Lines of credit, the accounts receivable
securitization programs, and commercial paper programs are maintained to
fund short-term capital requirements.
Construction expenditures for the sixthree months ended June 30, 2001, of $96
millionMarch 31, 2002 for
LG&E and $80KU amounted to $24.9 million for KU,and $23.6 million, respectively.
Such expenditures related primarily for the purchase of two
jointly owned combustion turbines,to construction to meet nitrogen oxide
(NOx) emission standards, and were financed with internally generated funds
and the accounts receivable securitization program.program funds. Also, no common
dividends have been paid by LG&E or KU for the three months ended March 31,
2002. See Note 6 of Notes to Financial Statements concerning accounts
receivable securitization.
-24-
LG&E's and KU's combined cash and temporary cash investment balance
increased $5$16.0 million (LG&E $5.1$14.0 million, KU $(.1)$2.0 million) during the
sixthree months ended June 30, 2001.March 31, 2002. The increase reflects cash flows from
operations and sale of accounts receivables,short term borrowings, partially offset by construction
expenditures and debt repayments.expenditures.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of LG&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 decreasesincreases in accounts receivable resulted mainlyprimarily from seasonal
fluctuations and the reduced sales of accounts receivable through LG&E and
KU's accounts receivable securitization program started at
LG&E and KU.program. See Note 6 of Notes to
Financial Statements. The increase in fuel inventory resulted from seasonal
fluctuations at LG&E and KU, and the decrease in LG&E's gas stored
underground resulted from seasonal fluctuations.
At June 30, 2001, unused capacityLG&E and KU participate in a money pool whereby LG&E Energy can make funds
available to LG&E and KU at market-based rates up to $200 million each.
LG&E Energy maintains a facility of $200 million with a Powergen subsidiary
to ensure funding availability for the money pool. There is no balance
outstanding under LG&E's linesthe Powergen line of credit totaled $200
million.as of March 31, 2002 and no
outstanding commercial paper program balance. LG&E Energy has provided
loans to LG&E and KU had no committed linesthrough the money pool that total $122.6 million and
$64.2 million, respectively, as of creditMarch 31, 2002. These borrowings
carried a commercial paper grade interest rate of 1.80% at June 30, 2001.March 31, 2002.
On March 6, 2002, LG&E refinanced its $22.5 million and $27.5 million
unsecured pollution control bonds, both due September 1, 2026. The
replacement bonds, due September 1, 2026, are variable rate bonds and are
secured by first mortgage bonds.
On March 22, 2002, LG&E refinanced its two $35 million unsecured pollution
control bonds due November 1, 2027. The replacement variable rate bonds
are secured by first mortgage bonds and will mature November 1, 2027.
LG&E's debtsecurity ratings as of June 30, 2001, were:
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 June 30, 2001,March 31, 2002, 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
KU's security ratings as of March 31, 2002, 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
-23-
The Moody's and S&P's&P ratings of LG&E's and KU's debt securities are on Credit Watch for
upgrade as the result of the E.ON bid. Fitch has placed LG&E and KU on
credit watch evolving following the E.ON bid. These ratings reflect the
views of Moody's, S&P and Fitch. A security rating is not a recommendation
to buy, sell or hold securities and is subject to revision or withdrawal at
any time by the rating agency.
LG&E's capitalization ratios at June 30, 2001,March 31, 2002, and December 31, 2000,2001,
follow:
June 30,Mar. 31, Dec. 31,
2002 2001 2000
Long-term debt (including current portion) 40.2% 38.0%36.5% 37.5%
Notes payable 4.0 7.2 5.7
Preferred stock 6.3 6.05.6 5.8
Common equity 49.5 48.850.7 51.0
Total 100.0% 100.0%
-25-
KU's capitalization ratios at June 30, 2001,March 31, 2002, and December 31, 2000,2001,
follow:
June 30,Mar. 31, Dec. 31,
2001 20002001
Long-term debt (including current portion) 38.9% 38.6%36.0% 37.2%
Notes payable 3.2 4.94.8 3.6
Preferred stock 3.2 3.23.0 3.1
Common equity 54.7 53.356.2 56.1
Total 100.0% 100.0%
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets were issued
in the second quarter of 2001. Therefore, the provisions of these new
pronouncements were effective July 1, 2001, for LG&E and KU. SFAS No. 141
requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method. SFAS No. 142 requires goodwill to
be recorded, but not amortized. Furthermore, goodwill will now be subject
to a periodic assessment for impairment. LG&E and KU have no recorded
goodwill and have no merger or acquisitions in progress. Accordingly,
these pronouncements have no effect on the financial condition and results
of operations for LG&E or KU. The Companies experienced no impact on the
financial position or results of operation as a result of adopting these
standards.
-24-
SFAS No. 143, Accounting for Asset Retirement Obligations and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, were issued
during 2001. SFAS No. 143 establishes accounting and reporting standards
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144, among other provisions, eliminates the requirement of SFAS
No. 121 to allocate goodwill to long-lived assets to be tested for
impairment. The effective implementation date for SFAS No. 144 is January
1, 2002 and SFAS No. 143 is January 1, 2003. SFAS No. 144 had no current
impact on the financial position or results of operations of LG&E or KU.
Management has not determined what impact SFAS No. 143 will have on the
financial position or results of operations of the Companies.
The Financial Accounting Standards Board created the Derivatives
Implementation Group (DIG) to provide guidance for implementation of SFAS
No. 133. DIG Issue C15, Normal Purchases and Normal Sales Exception for
Option Type Contracts and Forward Contracts in Electricity was adopted in
2001 and had no impact on results of operations or financial condition.
DIG Issue C16, Applying the Normal Purchase and Normal Sales Exception to
Contracts that Combine a Forward Contract and a Purchased Option Contract,
was cleared in the third quarter 2001 and stated that option contracts do
not meet the normal purchases and normal sales exception and should follow
SFAS No. 133. DIG Issue C16 will become effective in the second quarter of
2002. The Companies have reviewed their contracts for options and
determined that DIG Issue C16 does apply, but the adoption of DIG Issue C16
will not have a material impact on the financial position or results of
operations of the Companies pursuant to regulatory treatment prescribed by
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.
For a description of significant contingencies that may affect LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings, and Notes 12 (LG&E)
and 11 (KU) to the financial statements of LG&E's and KU's Annual Reports
on form 10-K10-K. For the year ended December 31, 20002001 and to Part II herein -
Item 1, Legal Proceedings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. -25-
LG&E and KU are exposed to market risks. Both operations are exposed to
market risks from changes in interest rates and commodity prices. To
mitigate changes in cash flows attributable to these exposures, the
Companies have entered into various derivative instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to Company
policy, use of these financial instruments is intended to mitigate risk and
earnings volatility and is not speculative in nature. Management has
designated all of the Companies' interest rate swaps as hedge instruments.
Financial instruments designated as cash flow hedges have resulting gains
and 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.
The potential change in interest expense resulting from changes in base
interest rates of the Companies' unswapped debt did not change materially
in 2001.2002. The potential changes in the fair values of the Company's
interest-rate swaps resulting from changes in interest rates and the yield
curve also did not change materially in 2001.2002. The Company's exposure to
market risks from changes in commodity prices remained immaterial in 2001.2002.
-26-
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving LG&E and
KU, reference is made to the information under the following items and
captions of LG&E's and KU's respective combined Annual Report on Form 10-K
for the year ended December 31, 2000:2001: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Financial Condition;Operations; Notes 3, 11 and 1214 of LG&E's Notes to
Financial Statements under Item 8 and Notes 3, 12 and 1116 of KU's Notes to
Financial Statements under Item 8. Except as described herein, to date,
the proceedings reported in LG&E's and KU's respective combined Annual
Report on Form 10-K have not changed materially.
E.On - PowergenE.ON-Powergen Transaction
On April 9, 2001, E.OnE.ON AG announced a conditional offer to purchase all the
common shares of Powergen plc, the indirect corporate parent of LG&E and
KU. The transaction is subject to a number of conditions precedent,
including the receipt of regulatory approvals from European and United
States governmental bodies, in form satisfactory to the 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 thesethe remaining approvals may be received by early 2002mid-2002
to permit completion of the transaction in early spring 2002. However, there can be no
assurance that such approvals will be obtained in form or timing sufficient
for such dates.
OnRegulatory orders approving the E.ON transaction were received from the
Kentucky Commission on August 6, 2001, from the KentuckyVirginia State Corporation
Commission on October 5, 2001, the Federal Energy Regulatory Commission on
October 11, 2001, and the Tennessee Regulatory Authority on October 23,
voted in an open hearing to approve the transaction with an affirmative
order issued an order approvingshortly thereafter. On November 15, 2001, the applicationCommission of
the European Communities granted E.ON AG and Powergen andplc transaction
approval.
On April 19, 2002, Powergen plc shareholders voted in favor of certain
resolutions to approve the acquisition of Powergen plc by E.ON AG by means
of a scheme of arrangement under United Kingdom law.
Other
On April 16, 2002, the LG&E 5% Cumulative Preferred class of stock was
delisted from the NASDAQ Small Capitalization Market. Delisting will
enable the Companies to proceedrealize certain administrative and corporate
governance efficiencies.
In May 2002, KU filed a request with the transaction. The approval order included certain business and operational
conditions regarding E.ON, Powergen, LG&E Energy, andPhiladelphia Stock Exchange
seeking delisting of its 4.75% Cumulative Preferred class of stock, which
delisting may become effective shortly. Delisting will enable the
Companies which
conditions are under consideration for acceptance by the applicants.to realize certain administrative and corporate governance
efficiencies.
Item 6(a). Exhibits.
None.
Item 6(b). Reports on Form 8-K.
None.
-27-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: AugustMay 14, 20012002 /s/ S. 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 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: AugustMay 14, 20012002 /s/ S. Bradford Rives
S. Bradford Rives
Senior Vice President - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
-28-