UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.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, 2002
or
[ ]2003
Or
[_] TRANSITION REPORT PURSUANT TO1TO SECTION 13 OR 15(d)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.KY 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, KentuckyKY 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)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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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, 2002,2003,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of July 31, 2002,2003,
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 relatingrelated
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 FlowsFlow 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 FlowsFlow 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 20
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 2830
Item 4 Controls and Procedures 32
PART II
Item 1 Legal Proceedings 3033
Item 6 Exhibits and Reports on Form 8-K 3033
Signatures 31
35
Exhibits 36
- - New Page -
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 Ended
June 30, June 30,
2003 2002 20012003 2002
2001
OPERATING REVENUES:REVENUES (Note 5 and Note 8):
Electric (Note 7) $191,813 $196,290 $358,059 $351,664$173,917 $185,225 $360,936 $346,111
Gas (Note 7)41,456 30,938 32,551181,280 148,056 190,448
Total operating revenues 222,751 228,841 506,115 542,112215,373 216,163 542,216 494,167
OPERATING EXPENSES:
Fuel for electric generation 46,277 50,550 41,74995,754 94,657 80,233
Power purchased 22,064 32,744 45,645 44,085(Note 8) 17,313 15,476 41,440 33,697
Gas supply expenses 25,963 18,346 18,822132,070 101,813 144,058
Non-recurring charges (Note 4) - - - 144,385
Other operation expenses 53,379 54,807 36,398106,907 103,216
71,681
Maintenance 17,690 15,572 13,68329,583 27,573 24,238
Depreciation and amortization
(Note 8) 30,293 25,889 25,57257,437 51,167 50,840
Federal and state income taxes 4,714 8,335 17,82821,355
21,572 (20,183)
Property and other taxes 3,454 4,778 4,4218,189 9,314 8,883
Total operating expenses 200,341 191,217 454,957 548,220199,083 193,753 492,735 443,009
NET OPERATING INCOME (LOSS)16,290 22,410 37,62449,481 51,158
(6,108)
Other income (deduction)expense - net (1,394) (67) 363(330) (66) 1,358
Interest charges (Note 5)3) 7,141 7,087 9,52014,131 14,893 20,898
NET INCOME (LOSS)$ 7,755 $ 15,256 28,467$ 35,020 $ 36,199 (25,648)
Preferred stock dividends 1,049 1,220 2,114 2,518
NET INCOME (LOSS) AVAILABLE
FOR COMMON STOCK $ 14,207 $ 27,247 $ 34,085 $ (28,166)
The accompanying notes are an integral part of these consolidated financial
statements.
-1-- - Page 1 -
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
June 30, Dec.December 31,
2003 2002 2001
UTILITY PLANT:
At original cost $3,486,441 $3,423,037$3,730,273 $3,622,985
Less: reserve for depreciation 1,426,609 1,381,8741,507,498 1,463,674
Net utility plant 2,059,832 2,041,163(Note 7) 2,222,775 2,159,311
OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of June 30, 2003
and December 31, 2002 and Dec. 31, 2001 1,277 1,176602 764
CURRENT ASSETS:
Cash 20,454 2,1123,073 17,015
Accounts receivable - less reserve of $1,575$2,125 as of
June 30, 2003 and December 31, 2002 and Dec. 31, 2001 (Note 6) 61,856 85,6674) 71,045
68,440
Materials and supplies - at average cost:
Fuel (predominantly coal) 34,974 22,02435,953 36,600
Gas stored underground 16,226 46,39521,745 50,266
Other 28,896 29,05023,493 25,651
Prepayments and other 4,119 4,6886,235 5,298
Total current assets 166,525 189,936161,544 203,270
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 6,042 5,9216,385 6,532
Regulatory assets (Note 8) 161,949 197,1426) 154,520 153,446
Other 13,996 13,01633,079 37,755
Total deferred debits and other assets 181,987 216,079193,984 197,733
Total assets $2,409,621 $2,448,354$2,578,905 $2,561,078
The accompanying notes are an integral part of these consolidated financial
statements.
-2-- - Page 2 -
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
June 30, Dec.December 31,
2003 2002 2001
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Common stock expense (836) (836)
Additional paid-in capital 40,000 40,000
Retained earnings 404,721 393,636442,498 409,319
Accumulated other comprehensive income (21,357) (19,900)
Other (836) (836)loss (42,063) (40,512)
Total common equity 847,698 838,070864,769 833,141
Cumulative preferred stock 95,140 95,140
Long-term debt (Notes 10 and 11) 370,704 370,704328,104 328,104
Long-term debt to associated company (Note 9) 100,000 -
Total capitalization 1,313,542 1,303,9141,388,013 1,256,385
CURRENT LIABILITIES:
Current portion of long-term debt 246,200 246,200288,800 288,800
Notes payable to parent 91,553 94,197(Note 9) 171,732 193,053
Accounts payable 100,446 149,07096,699 122,771
Accrued taxes 21,105 20,257
Accrued interest 5,421 5,818- 1,450
Other 13,380 12,84020,077 19,536
Total current liabilities 478,105 528,382577,308 625,610
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 308,769 298,143- net 329,833 313,225
Investment tax credit, in process of amortization 56,581 58,68952,431 54,536
Accumulated provision for pensions
and related benefits 165,364 167,526134,096 224,703
Customer advances for construction 10,072 9,7459,835 10,260
Asset retirement obligation (Note 8) 9,639 -
Regulatory liabilities (Note 8) 54,720 65,3496) 44,719 52,424
Long-term derivative liability 19,700 17,115
Other 22,468 16,60613,331 6,820
Total deferred credits and other liabilities 617,974 616,058613,584 679,083
Total capital and liabilities $2,409,621 $2,448,354$2,578,905 $2,561,078
The accompanying notes are an integral part of these consolidated financial
statements.
-3-- - Page 3 -
Louisville Gas and Electric Company and Subsidiary
Consolidated StatementsStatement of Cash Flows
(Unaudited)
(Thousands of $)
Six Months
Ended
June 30,
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$ 35,020 $ 36,199 $ (25,648)
Items not requiring cash currently:
Depreciation and amortization 57,437 51,167 50,840
Deferred income taxes - net 12,876 9,507 (41,833)
Investment tax credit - net (2,105) (2,108)
(2,133)
Non-recurring chargesAsset retirement obligations (Note 4)8) 4,108 -
113,645
Other 22,332 20,917 7,466
Changes in current assets and liabilities 14,956 (21,917) 16,670
Changes in accounts receivable
securitization-net(Note 6)securitization-net (Note 4) (14,000) 16,100
52,900Pension funding (83,100) -
Gas supply clause (18,386) 13,793
Other 6,855 (18,568)(501) (6,938)
Net cash flows from operating activities 28,637 116,720 153,339
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities - (101) -
Proceeds from sales of securities 163 - 4,350
Construction expenditures (119,412) (69,524) (96,050)
Net cash flows from investing activities (119,249) (69,625) (91,700)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowing from
associated company (Note 9) 100,000 -
Short-term borrowings from parent (Note 9) 349,400 278,100
Repayment of short-term borrowings from parent (370,737) (280,744)
Issuance of pollution control bonds - 119,067 -
Retirement of pollution control bonds (120,000) - Short-term borrowings 278,100 35,763
Repayment of short-term borrowings (280,744) (89,600)(120,000)
Payment of dividends (1,993) (25,176) (2,665)
Net cash flows from financing activities 76,670 (28,753) (56,502)
CHANGE IN CASH (13,942) 18,342 5,137
CASH AT BEGINNING OF PERIOD 17,015 2,112 2,495
CASH AT END OF PERIOD $ 20,4543,073 $ 7,63220,454
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $15,947 $ 16,681 $ 15,882
Interest on borrowed money $10,705 13,019 $ 16,090
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-- - Page 4 -
Louisville Gas and Electric Company and Subsidiary
Consolidated StatementsStatement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended June 30, Ended
June 30, June 30,
2003 2002 20012003 2002 2001
Balance at beginning of period $435,647 $413,514 $259,181$409,319 $393,636 $314,594
Net income (loss)7,755 15,256 28,46735,020 36,199
(25,648)
Subtotal 443,402 428,770 287,648444,339 429,835 288,946
Cash dividends declared on stock:
5% cumulative preferred 269 269 538 538
Auction rate cumulative preferred 268 413 584569 842 1,246
$5.875 cumulative preferred 367 367 734 734
Common - 23,000 - 23,000
-
Subtotal 904 24,049 1,2201,841 25,114 2,518
Balance at end of period $442,498 $404,721 $286,428$442,498 $404,721 $286,428
The accompanying notes are an integral part of these consolidated financial
statements.
-5-- - Page 5 -
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 20012003 2002 2001
Net income (loss)$ 7,755 $15,256 $28,467$35,020 $36,199
$(25,648)
Cumulative effect of change in
Accounting principle - Accounting
For Derivative Instruments and
Hedging Activities (Note 5) - - - (5,998)
Gains (losses)Losses on derivative instruments
and hedging activities (Note 5)3) (2,552) (3,939) 977(2,585) (2,430) (1,058)
Other comprehensive income (loss)
before tax 11,317 29,444 33,769 (32,704)
Income tax benefit (expense) related to items
of other comprehensive income (loss)loss 1,021 1,576 (391)1,034 973
2,822Other comprehensive loss,
net of tax (1,531) (2,363) (1,551) (1,457)
Other comprehensive income (loss)$ 6,224 $12,893 $29,053 $ 34,742$ (29,882)$33,469 $34,742
The accompanying notes are an integral part of these consolidated financial
statements.
-6-- - Page 6 -
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 20012003 2002 2001
OPERATING REVENUES
(Note 7) $203,555 $219,360 $418,723 $431,1535 and Note 8) $197,174 $196,020 $422,157 $405,044
OPERATING EXPENSES:
Fuel for electric generation 59,641 57,368 55,523125,964 115,639 111,451
Power purchased 39,911 52,023 80,971 84,908
Non-recurring charges (Note 4) - - - 63,7888) 33,648 32,376 74,848 67,292
Other operation expenses 38,130 36,201 27,34377,019 70,723
53,961
Maintenance 7,403 15,386 15,54936,369 26,945 27,519
Depreciation and amortization
(Note 8) 27,762 23,515 23,81851,912 46,574 47,646
Federal and state income taxes 7,467 7,365 11,82114,067 21,748 5,371
Property and other taxes 3,968 3,762 4,2778,163 7,876 8,432
Total operating expenses 183,508 190,354 370,476 403,076178,019 175,973 388,342 356,797
NET OPERATING INCOME 19,155 20,047 29,00633,815 48,247 28,077
Other income - net 2,694 1,685 2,6214,803 3,324 4,414
Interest charges (Note 5)3) 7,690 8,980 10,42512,598 14,462 18,542
NET INCOME before Cumulative Effect
of Accounting Change$ 14,159 $ 12,752 21,202$ 26,020 $ 37,109 13,949
Cumulative Effect of Change in
Accounting for Derivative Instruments
and Hedging Activities, net of tax - - - 136
NET INCOME 12,752 21,202 37,109 14,085
Preferred stock dividends 564 564 1,128 1,128
NET INCOME AVAILABLE
FOR COMMON STOCK $ 12,188 $ 20,638 $ 35,981 $ 12,957
The accompanying notes are an integral part of these consolidated financial
statements.
-7-- - Page 7 -
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
June 30, Dec.December 31,
2003 2002 2001
UTILITY PLANT:
At original cost $3,108,339 $3,064,220$3,450,964 $3,280,762
Less: reserve for depreciation 1,501,947 1,457,7541,581,895 1,536,658
Net utility plant 1,606,392 1,606,466(Note 7) 1,869,069 1,744,104
OTHER PROPERTY AND INVESTMENTS -
less reserve of $129$130 as of June 30, 2003 and
December 31, 2002 and Dec. 31, 2001 10,089 9,62916,144 14,358
CURRENT ASSETS:
Cash and temporary cash investments 3,513 3,2956,698 5,391
Accounts receivable - less reserve of $520$939 and $800
as of June 30, 2003 and December 31, 2002,
and Dec. 31, 2001respectively (Note 6) 54,047 45,2914) 46,251 49,588
Materials and supplies - at average cost:
Fuel (predominantly coal) 42,238 43,38241,438 46,090
Other 27,060 26,18827,888 26,408
Prepayments and other 6,522 4,9426,132 6,584
Total current assets 133,380 123,098128,407 134,061
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 3,843 4,3164,868 4,991
Regulatory assets (Note 8) 57,768 66,4676) 61,398 65,404
Long-term derivative asset 17,108 16,928
Other 17,162 16,92616,973 18,537
Total deferred debits and other assets 78,773 87,709100,347 105,860
Total assets $1,828,634 $1,826,902$2,113,967 $1,998,383
The accompanying notes are an integral part of these consolidated financial
statements.
-8-- - Page 8 -
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
June 30, Dec.December 31,
2003 2002 2001
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Common stock expense (322) (322)
Additional paid-in capital 15,000 15,000
Retained earnings 446,877 410,896526,916 502,024
Accumulated other comprehensive income 2,685 1,588
Other (595) (595)loss (10,462) (10,462)
Total common equity 772,107 735,029839,272 814,380
Cumulative preferred stock 40,000 40,00039,727 39,727
Long-term debt (Notes 10 and 11) 336,323 434,506348,758 346,562
Long-term debt to associated company (Note 9) 100,000 -
Total capitalization 1,148,430 1,209,5351,327,757 1,200,669
CURRENT LIABILITIES:
Current portion of long-term debt 91,930 153,930 54,000
Notes payable to parent 19,590 47,790(Note 9) 146,430 119,490
Accounts payable 77,502 85,14985,963 95,374
Accrued taxes 16,868 20,520
Accrued interest 4,452 5,6688,696 4,955
Other 16,810 16,48224,779 21,442
Total current liabilities 289,152 229,609357,798 395,191
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 238,680 239,204- net 250,948 241,184
Investment tax credit, in process of amortization 9,977 11,4557,179 8,500
Accumulated provision for pensions and
related benefits 91,827 91,235
Customer advances for construction 1,511 1,526104,376 110,927
Asset retirement obligation (Note 8) 19,087 -
Regulatory liabilities (Note 8) 33,475 33,8896) 21,623 29,876
Other 15,582 10,44925,199 12,036
Total deferred credits and other liabilities 391,052 387,758428,412 402,523
Total capital and liabilities $1,828,634 $1,826,902$2,113,967 $1,998,383
The accompanying notes are an integral part of these consolidated financial
statements.
-9-- - Page 9 -
Kentucky Utilities Company and Subsidiary
Consolidated StatementsStatement of Cash Flows
(Unaudited)
(Thousands of $)
Six Months
Ended
June 30,
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,10926,020 $ 14,08537,109
Items not requiring cash currently:
Depreciation and amortization 51,912 46,574 47,646
Deferred income taxes - net 1,485 (3,106) (28,061)
Investment tax credit - net (1,321) (1,478)
(1,723)
Non-recurring chargesAsset retirement obligations (Note 4)8) 9,460 -
50,078
Other 13,257 13,237 5,169
Changes in current assets and liabilities 4,628 (24,551) (23,032)
Changes in accounts receivable securitization-net
(Note 6)4) - 2,300
40,000Pension funding (3,515) -
Other 12,862 8,208 (1,545)
Net cash flows fromprovided by operating activities 114,788 78,293 102,617
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (1,786) -
Construction expenditures (175,507) (47,844) (80,170)
Net cash flows from investing activities (177,293) (47,844) (80,170)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from associated company
(Note 9) 100,000 -
Short-term borrowings from parent (Note 9) 360,640 505,938 229,094
Repayment of short-term borrowings from parent (333,700) (534,138) (250,543)
Issuance of pollution control bonds - 37,027 -
Retirement of pollution control bonds (62,000) (37,930) -
Payment of dividends (1,128) (1,128)
Net cash flows from financing activities 63,812 (30,231) (22,577)
CHANGE IN CASH AND TEMPORARY1,307 218
CASH INVESTMENTS 218 (130)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 5,391 3,295
314
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 3,5136,698 $ 1843,513
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 27,905 $ 34,994$13,763 $27,905
Interest on borrowed money $ 16,120 $ 16,735
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.$11,045 $16,120
The accompanying notes are an integral part of these consolidated financial
statements.
-10-- - Page 10 -
Kentucky Utilities Company and Subsidiary
Consolidated StatementsStatement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended June 30, Ended
June 30, June 30,
2003 2002 20012003 2002 2001
Balance at beginning of period $513,321 $434,689 $339,557$502,024 $410,896 $347,238
Net income 14,159 12,752 21,20226,020 37,109
14,085
Subtotal 527,480 447,441 360,759528,044 448,005 361,323
Cash dividends declared on stock:
4.75% cumulative preferred 237 237 475 475
6.53% cumulative preferred 327 327 653 653
Subtotal 564 564 1,128 1,128
Balance at end of period $526,916 $446,877 $360,195$526,916 $446,877 $360,195
The accompanying notes are an integral part of these consolidated financial
statements.
-11-- - Page 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,
2003 2002 20012003 2002 2001
Net income $14,159 $12,752 $21,202$26,020 $37,109 $14,085
Cumulative effect of change in
accounting principle-Accounting
for Derivative Instruments and
Hedging activities (Note 5) - - - 2,647
Gains on derivative instruments and
hedging activities (Note 3) - 1,828 - 1,828
-
Other comprehensive income, before tax 14,580 21,202 38,937 16,732
Income tax (expense)expense related to items of
other comprehensive income - (731) - (731)
(1,059)Other comprehensive gain,
net of tax - 1,097 - 1,097
Other comprehensive income $14,159 $13,849 $21,202$26,020 $38,206 $15,673
The accompanying notes are an integral part of these consolidated financial
statements.
-12-- - Page 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, consisting only of normal
recurring adjustments, 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 Securities and Exchange Commission
("SEC") rules and regulations, although the Companies believe that the
disclosures are adequate to make the information presented not
misleading.
See LG&E's and KU's Annual Reports on Form 10-K for the year ended
December 31, 20012002 for information relevant to the accompanying
financial statements, including information as to the significant
accounting policies of the Companies.
The accompanying financial statements for the three months and six
months ended June 30, 2002, have been revised to conform with certain
reclassifications in the current three months and six months ended June
30, 2003. These reclassifications had no effect on net income, total
assets, or total capital and liabilities as previously reported.
2. On December 11, 2000, LG&E Energy was acquired by Powergen plc, now
known as Powergen Limited, ("Powergen") for cash of approximately $3.2
billion or $24.85 per share and the assumption of all of LG&E Energy's
debt. As a result of the acquisition, 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, Virginia and VirginiaTennessee under their existing
names. The preferred stock and debt securities of the utility
operations were not affected by this transaction resulting in the
utility 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"), 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 as a
subsidiary of LG&E Energy 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, primarily from LG&E Energy, LG&E
and KU, were moved to LG&E Services.
3. On April 9, 2001,July 1, 2002, a German company, E.ON AG ("E.ON"), completed its
acquisition of Powergen. E.ON had announced a pre-
conditionalits pre-conditional cash
offer of 5.1 billion pounds sterling ($7.3 billion) to
acquire Powergen. The final regulatory approval needed was receivedfor Powergen on
June 14, 2002 from the SEC. Effective July 1, 2002,April 9, 2001. Following the acquisition, LG&E and KU became indirect
subsidiaries of Powergen was completed by E.ON. Following this acquisition,E.ON and E.ON became a registered holding company under
PUHCAPUHCA. As contemplated in their regulatory filings in connection with
the E.ON acquisition, E.ON, Powergen and subjectLG&E Energy have completed an
administrative reorganization to regulation
thereunder.
4. Duringmove the first quarter 2001, LG&E recorded a $144 million charge and
KU recorded a $64 million charge for a workforce reduction program.
Primary componentsEnergy group from an
indirect Powergen subsidiary to an indirect E.ON subsidiary. This
reorganization was effective March 2003.
- Page 13 -
No costs associated with the Powergen acquisition or the E.ON
acquisition nor any of the charge were separation benefits, enhanced
early retirement benefits, and health care benefits. The resulteffects of this workforce reduction was the net elimination of approximately 950
positions, accomplished primarily through a voluntary enhanced
severance program.
On June 1, 2001, LG&E and KU filed an application ("VDT case") with the
Kentucky Public Service Commission (the "Kentucky Commission") to
create a regulatory asset relating to these first quarter 2001 charges.
The application requested permission to amortize these costs over a
four-year period. The Kentucky Commission also opened a case to review
a depreciation study and resulting depreciation rates implemented in
2001.
-13-
LG&E and KU reached a settlementpurchase accounting have been
reflected in the VDT case as well as the other
cases involving depreciation rates and the Earnings Sharing Mechanism
with all intervening parties. The settlement agreement was approved by
the Kentucky Commission on December 3, 2001.
The Kentucky Commission's December 3, 2001 order allowedfinancial statements of 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
April 2001. The first quarter charge of $144 million represented all
employees who had accepted the 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 bills to customers
over the same five year period. The surcredit represents stipulated
net savings LG&E anticipates realizing 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's 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 the 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, decreased the original
charge from $64 million to $54 million. The settlement will also reduce
revenues by approximately $11 million through a surcredit on bills to
customers over the same five year period. The surcredit represents
stipulated net savings KU anticipates realizing from implementation of
best practices through the value delivery process. The agreement also
established KU's new depreciation rates in effect retroactive to
January 1, 2001. The new depreciation rates decreased depreciation
expense by $6.0 million in 2001.
5. Statement of Financial Accounting Standards ("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 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. LG&E and KU adopted
SFAS No. 133 on January 1, 2001. The effect of adopting this statement in
2001 resulted in a $3.6 million (net of tax of $2.4 million) decrease in
other comprehensive income from a cumulative effect of change in accounting
principle for LG&E and a $1.6 million (net of tax of $1.1 million) increase
in other comprehensive income from a cumulative effect of change in
accounting principle for KU.
3. The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to Company
policy,the
Companies' policies, 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.
As of June 30, 2002,2003, LG&E had fixed rate swaps covering $117,335,000$100.3 million
in notional amounts of variable rate debt and with fixed rates ranging
from 4.184%4.309% to 5.495%. The average variable rate on the debt during
-14-
the quarterthree months and six months ended June 30, 20022003 was 1.53%1.13% and
1.47%.1.16%, respectively. The swaps have been designated as cash flow hedges
and expire on various dates from September 2003February 2005 through November 2020.
The hedges were deemed to be fully effective resulting in a pretax loss
for the quarterthree months and six months ended June 30, 20022003 of $3.9$2.6 million
and $2.4$2.6 million, respectively, recorded in Other Comprehensive Income.other comprehensive income.
Upon expiration of these hedges, the amount recorded in Other Comprehensive Incomeother
comprehensive income will be reclassified into earnings. The amount
expected to be reclassified from Other Comprehensive Incomeother comprehensive income to earnings
in the next twelve months is immaterial.immaterial due to the long-term nature of
the swaps.
As of June 30, 2002,2003, KU had variable rate swaps covering $153,000,000$153
million in notional amounts of fixed rate debt. The average variable
rate on these swaps during both the quarterthree months and six months ended June
30, 20022003 was 2.43%.1.93% and 1.94%, respectively. The underlying debt has
fixed rates ranging from 5.75% to 7.92%. The swaps have been
designated as fair value hedges and expire on various dates from May
2007 through June 2025. During the quarterthree months and six months ended
June 30, 2002,2003, the effect of marking these financial instruments and
the underlying debt to market resulted in a pretax lossesloss of $2.2 million
and $0.4$2.0 million, respectively, recorded as an increase in interest
expense.
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 of the Companies. 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 was effective in the second quarter
of 2002. The adoption of DIG Issue C16 did 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. KU recorded a mark to
market asset and corresponding regulatory liability of $1.4 million in
the second quarter of 2002.
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, when4. LG&E and KU entered intoparticipate in accounts receivable securitization programs.
On February 6, 2001, LG&E and KU implemented an accounts receivable
securitization program. The purpose of this programthese programs 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 allowsprograms allow 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,programs, the programprograms may terminate at the election of
the financial institutions. In this case, payments from retail customers
would first be used to repay the financial institutions participating in
the program,programs, and would then be available for use by the Companies.
As part of the program,these programs, LG&E and KU sold retail accounts receivables
to wholly owned subsidiaries, LG&E Receivables LLC ("LG&E R") and KU
Receivables LLC ("KU R"). Simultaneously, LG&E R and KU R entered into
two separate three-year accounts receivable securitization facilities
with two financial institutions and their affiliates whereby LG&E R and
- - Page 14 -
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,especttively, from an unrelated third party purchaser. The effective
cost of the receivables programs is comparable to the Companies' lowest -15-
cost source of capital, and is based on prime rated commercial paper.
LG&E and KU retain servicing rights of the sold receivables through
separate servicing agreements with the third party purchasers. LG&E
and KU have obtained opinions from independent legal counsel indicating
these transactions qualify as true sales of receivables. As of June
30, 20022003 and December 31, 2001,2002, LG&E's outstanding program balances
were $58.1$49.2 million and $42.0$63.2 million, respectively, and KU's balances
were $47.4 million and $45.1 million, respectively.
Management expects to renew these facilities when they expire.balance
for both periods was $49.3 million.
The allowance for doubtful accounts associated with the eligible
securitized receivables was $1.6$2.1 million and $1.8 million for LG&E at
June 30, 2003 and December 31, 2002 and $0.7 million and $0.5 million
for KU for bothat June 30, 20022003 and December 31, 2001, respectively.2002. Charge offs were
immaterial for LG&E and KU. TheManagement believes that the risk of
uncollectibility associated with the sold receivables is minimal.
7.5. External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and six months
ended June 30, 2003, follow (in thousands of $):
Three Months Ended June 30, 2003
External Intersegment
Revenues Revenues Net Income (Loss)
LG&E electric $163,067 $10,850 $ 9,457
LG&E gas 41,456 - (1,682)
Total $204,523 $10,850 $ 7,775
KU electric $187,963 $ 9,211 $14,159
Six Months Ended June 30, 2003
External Intersegment
Revenues Revenues Net Income
LG&E electric $333,116 $27,820 $27,489
LG&E gas 181,280 - 7,531
Total $514,396 $27,820 $35,020
KU electric $398,482 $23,675 $26,020
External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and six
months ended June 30, 2002, follow (in thousands of $):
Three Months Ended June 30, 2002
Net
Income/
(Loss)
Inter- Avail.
External segment For-Intersegment
Revenues Revenues Common StockNet Income (Loss)
LG&E electric $ 181,963$175,375 $ 9,850 $ 16,893$17,658
LG&E gas 30,938 - (2,686)(2,402)
Total $ 212,901$206,313 $ 9,850 $ 14,207$15,256
KU electric $ 195,460$187,925 $ 8,095 $ 12,188$12,752
- - Page 15 -
Six Months Ended June 30, 2002
Net
Income/
(Loss)
Inter- Avail.
External segment ForIntersegment
Revenues Revenues Common StockNet Income
LG&E electric $ 335,156 $ 22,903 $ 27,071$323,208 $22,903 $28,750
LG&E gas 148,056 - 7,0147,449
Total $ 483,212 $ 22,903 $ 34,085$471,264 $22,903 $36,199
KU electric $ 395,847 $ 22,876 $ 35,981
External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and six
months ended June 30, 2001, follow (in thousands of $):
Three Months Ended June 30, 2001
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common Stock
LG&E electric $ 187,472 $ 8,818 $ 27,867
LG&E gas 32,551 - (620)
Total $ 220,023 $ 8,818 $ 27,247
KU electric $ 209,507 $ 9,853 $ 20,638
-16-
Six Months Ended June 30, 2001
Net
Income/
(Loss)
Inter- Avail.
External segment For-
Revenues Revenues Common Stock
LG&E electric $ 335,833 $ 15,831 $ (16,575)
LG&E gas 190,448 - (11,591)
Total $ 526,281 $ 15,831 $ (28,166)
KU electric $ 415,618 $ 15,535 $ 12,957
8.The$382,168 $22,876 $37,109
6. The following regulatory assets and liabilities were included in the
balance sheet of LG&E and KU as of June 30, 20022003 and December 31, 20012002 (in
thousands of $):
Louisville Gas and Electric
(Unaudited)
Jun.June 30, Dec.December 31,
2003 2002 2001
REGULATORY ASSETS:
VDT costs $ 112,52982,870 $ 127,52998,044
Unamortized loss on bonds 17,972 17,90218,267 18,843
Gas supply adjustments due from customers 16,342 30,13532,100 13,714
Earnings sharing mechanism provision 10,728 12,500
Asset retirement obligation 5,589 -
LG&E/KU merger costs 3,629 5,444- 1,815
One utility costs 2,299 3,643141 954
Manufactured gas sites 1,911 2,0621,605 1,757
Other 7,267 10,4273,220 5,819
Total 161,949 197,142$154,520 $153,446
REGULATORY LIABILITIES:
Deferred income taxes - net 47,584 48,703$ 41,804 $ 45,536
Gas supply adjustments due to customers 6,207 15,7021,555 3,154
Other 929 9441,360 3,734
Total $ 54,72044,719 $ 65,34952,424
Kentucky Utilities
(Unaudited)
Jun.June 30, Dec.December 31,
2003 2002 2001
REGULATORY ASSETS:
VDT costs $ 43,061 $ 48,81132,322 $38,375
Unamortized loss on bonds 6,916 6,1429,018 9,456
Earnings sharing mechanism provision 9,036 13,500
Asset retirement obligation 9,714 -
LG&E/KU merger costs 4,093 6,139- 2,046
One utility costs 2,619 4,365- 873
Other 1,079 1,0101,308 1,154
Total 57,768 66,467$ 61,398 65,404
REGULATORY LIABILITIES:
Deferred income taxes - net 31,021 32,872
Mark to market coal supply option contracts 1,419 -$ 20,575 28,854
Other 1,035 1,0171,048 1,022
Total $ 33,475 $ 33,889
-17-
9. SFAS No. 141, Business Combinations and No. 142, Goodwill and Other
Intangible Assets were issued in21,623 $29,876
- - Page 16 -
7. The following data represent shares of jointly owned additions to the
second quarterTrimble County plant for four combustion turbines as 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.2003:
LG&E and KU have no recorded goodwill and
have no merger or acquisitions in progress. Accordingly, the Companies
experienced no impact on the financial position or resultsTotal
Ownership % 37% 63% 100%
Mw capacity 237 403 640
Plant under construction $52 $92 $144
Depreciation - - -
Net book value $52 $92 $144
8. Statement of operation
as a result of adopting these standards.
SFASFinancial Accounting Standard (SFAS) No. 143, Accounting
for Asset Retirement Obligations, and SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets,
were alsowas issued duringin 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 is143 was January 1, 2003.
Management has calculated the impact of SFAS No. 143 and the recently
released FERC final rule, Accounting, Financial Reporting, and Rate
Filing Requirements for Asset Retirement Obligations. As of June 30,
2003, LG&E recorded asset retirement obligation (ARO) assets in the
amount of $4.5 million and liabilities of $9.6 million. LG&E recorded
offsetting regulatory assets of $5.6 million, pursuant to regulatory
treatment prescribed under SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation. As of June 30, 2003, KU recorded ARO
assets in the amount of $8.6 million and liabilities of $19.1 million.
KU recorded offsetting regulatory assets of $9.7 million, pursuant to
regulatory treatment prescribed under SFAS No. 71. LG&E and KU AROs
are primarily related to final retirement of generating units. Assets
with associated AROs will no longer include a cost of removal component
within their depreciation rate. Assets without associated AROs will
continue to be depreciated including a cost of removal component
within the depreciation rate.
Had SFAS No. 143 been in effect for the 2002 reporting period, the
Companies would have established asset retirement obligations as
described in the following table (in thousands of $):
LG&E KU
Provision at January 1, 2002 $8,752 $17,331
Accretion expense 578 1,146
Provision at December 31, 2002 $9,330 $18,477
For the three months and six months ended June 30, 2003, LG&E recorded
ARO accretion expense of $154,000 and $308,000, respectively, ARO
depreciation expense of $29,000 and $58,000, respectively, and an
offsetting regulatory credit in the income statement of $183,000 and
$366,000, respectively. For the three months and six months ended June
30, 2003, KU recorded ARO accretion expense of $306,000 and $612,000,
respectively, ARO depreciation expense of $44,000 and $88,000,
respectively, and an offsetting regulatory credit in the income
statement of $350,000 and $700,000, respectively. The recording of the
regulatory credit is pursuant to regulatory treatment prescribed under
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.
SFAS No. 143 is January 1, 2003. SFAS No. 144 hadhas no impact on the financial position or results of operations of LG&E or KU. Management
is currently conducting an analysis and has not determined what impact
SFAS No. 143 will have on the financial position or results of
operationsoperation of the
Companies.
The Companies adopted EITF No. 98-10, Accounting for Energy Trading and
Risk Management Activities, effective January 1, 1999. This
pronouncement required that energy trading contracts be marked to
market on the balance sheet, with the gains and losses shown net in the
income statement.
Effective January 1, 2003, the Companies adopted EITF No. 02-03, Issues
Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities. EITF No. 02-03 established the following:
- Rescinded EITF No. 98-10,
- Contracts that do not meet the definition of a derivative under
SFAS No.133 should not be marked to fair market value, and
- - Page 17 -
- Revenues should be shown in the income statement net of costs
associated with trading activities, whether or not the trades
are physically settled.
With the rescission of EITF No. 98-10, energy trading contracts that do
not also meet the definition of a derivative under SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, amendment of133 must be
accounted for as executory contracts. Contracts previously recorded at
fair value under EITF No. 98-10 that are not also derivatives under
SFAS No. 13,133, Accounting for Derivative Instruments and technical corrections was issued in the second quarter
2002.Hedging
Activities, must be restated to historical cost through a cumulative
effect adjustment. The provisions related to SFAS No. 13 were effective for fiscal
years beginning after May 15, 2002. All other provisions of SFAS No.
145 shall be effective for financial statements issued on or after May
15, 2002. The adoptionrescission of this standard will not have a materialhad no impact on
financial position or results of operations of the Companies.Companies since all
contracts marked to market under EITF No. 98-10 are also within the
scope of SFAS No. 146,133.
As a result of EITF No. 02-03, the Companies have netted the power
purchased expense for trading activities against electric operating
revenue to reflect this accounting change. The Companies applied this
guidance to all prior periods, which had no impact on previously
reported net income or common equity.
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross electric operating revenues $180,637 $191,813 $375,930 $358,059
Less costs reclassified
from power purchased 6,720 6,588 14,994 11,948
Net electric operating
revenues reported $173,917 $185,225 $360,936 $346,111
KU:
Gross electric operating revenues $204,675 $203,555 $438,822 $418,723
Less costs reclassified
from power purchased 7,501 7,535 16,665 13,679
Net electric operating
revenues reported $197,174 $196,020 $422,157 $405,044
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross power purchased $ 24,033 $ 22,064 $ 56,434 $ 45,645
Less costs reclassified to revenues 6,720 6,588 14,994 11,948
Net power purchased reported $ 17,313 $ 15,476 $ 41,440 $ 33,697
KU:
Gross power purchased $ 41,149 $ 39,911 $ 91,513 $ 80,971
Less costs reclassified to revenues 7,501 7,535 16,665 13,679
Net power purchased reported $ 33,648 $ 32,376 $ 74,848 $ 67,292
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, Accounting for Costs AssociatedCertain Financial Instruments with Exit or Disposal
Activities, was issued in July 2002.Characteristics
of both Liabilities and Equity. SFAS No. 146 requires companies
to recognize costs associated with exit150 is effective immediately
for financial instruments entered into or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. The provisions of this Statement aremodified after May 31, 2003,
and otherwise is effective for exit
or disposal activitiesinterim reporting periods beginning
after June 15, 2003.
- - Page 18 -
LG&E has existing $5.875 series mandatorily redeemable preferred stock
with 250,000 shares outstanding having a current redemption price of
$100 per share. The preferred stock has a sinking fund requirement
sufficient to retire a minimum of 12,500 shares on July 15th of each
year commencing with July 15, 2003, and a minimum of 187,500 shares on
July 15, 2008 at $100 per share. LG&E redeemed 12,500 shares in
accordance with these provisions on July 15, 2003. Beginning with the
three months ended September 30, 2003, LG&E will reclassify, at fair
value, its $5.875 series preferred stock as long-term debt with the
minimum shares mandatorily redeemable within one year classified as
current portion of long-term debt. Dividends accrued beginning July 1,
2003 will be charged as interest expense.
KU has no financial instruments that are initiated after December 31, 2002.fall within the scope of SFAS No.
150.
9. On April 30, 2003, LG&E and KU each borrowed $100 million from an E.ON
affiliate. The term of each loan is ten years and the interest rate is
4.55%. KU had a first mortgage bond of $62 million that matured in
June 2003 and LG&E has a first mortgage bond of $42.6 million maturing
in August 2003. The Companies do not expect the adoption of this standard to haverefinance these bonds, along
with a material impact on financial position or results of operationsportion of the Companies.
10.On May 23, 2002 KU refinanced its pollution control series 1B, 2B, 3B,notes payable to parent, with additional long-
term intercompany loans.
The Companies participate in a money pool whereby LG&E Energy can make
funds available up to $400 million at market-based rates for each of
LG&E and 4B bonds, totaling $37.9 million. The new bonds, series 12, 13, 14KU. LG&E Energy maintains facilities of $200 million with a
Powergen subsidiary and 15 are due in February 2032$150 million with an E.ON affiliate to ensure
funding availability for the money pool. There was $82 million
outstanding under the Powergen line of credit and bear interest at a variable rate.
The new bonds are secured by first mortgage bonds and have the same
principal amountbalance under
E.ON affiliates' line totaled $74.9 million as the prior bonds. The variable rate will be
established by the remarketing agent based on conditions in the tax-
exempt debt market.
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.
-18-
11.As of June 30, 2002,2003. LG&E
Energy owned $104.6has provided loans to LG&E and KU through the money pool that
total $171.7 million in varying
portionsand $146.4 million, respectively, as of LG&E's outstanding variableJune 30,
2003. These borrowings carried an interest rate pollution control bonds.
The bonds were acquired during May 2002 by LG&E Energybased on an index of
highly rated commercial paper issuers as an investment
and were sold in their entirety duringof the first halfprior month end of
July 2002 to
unaffiliated third parties.
12.In1.21% at June 30, 2003.
10.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, and based
upon the present status of these items, 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 operations.
LG&E Employment Discrimination Case
As previously reported, in October 2001, approximately 30 employees or
former employees filed a complaint against LG&E claiming past and
current instances of employment discrimination against LG&E. LG&E has
removed the case to the U.S. District Court for the Western District of
Kentucky and filed an answer denying all plaintiffs' claims. Discovery
has commenced in the matter. The court has ordered mediation and
certain plaintiffs have settled for non-material amounts as a result of
that process. In addition, certain other plaintiffs have sought
administrative review before the U.S. Equal Employment Opportunity
Commission which has, to date, declined to proceed to litigation on any
claims reviewed. Previously amended pleadings, while reducing the size
of the plaintiff and defendant groups and eliminating certain prior
demands, contain a claimed damage amount of $100 million as well as
requests for injunctive relief. During mediation in the first quarter
2003, additional settlements were reached with a number of plaintiffs,
including a settlement with the lead plaintiff, which reduced the
number of remaining plaintiffs to approximately nine. LG&E intends to
continue to defend itself vigorously in the action and management does
not anticipate that the outcome will have a material impact on LG&E's
operations respectively.
-19-or financial condition.
- - Page 19 -
Combustion Turbine Litigation
LG&E and KU have filed a lawsuit in the U.S. District Court for the
Eastern District of Kentucky against Alstom Power, Inc. (formerly ABB
Power Generation, Inc.) ("Alstom") regarding two combustion turbines
supplied by Alstom during 1999. These units are installed at KU's E.W.
Brown generating plant and beneficial ownership of the combustion
turbines is jointly vested in LG&E and KU. The original purchase price
for the turbines was approximately $91.8 million. The suit presents
warranty, negligence, misrepresentation, fraud and other claims
relating to numerous operational defects or deficiencies of the
turbines. LG&E and KU have requested rescission of the contract and
recovery of all expenditures relating to the turbines. Recently, the
court ruled that LG&E and KU cannot pursue rescission on the breach of
contract claim, but has not ruled on whether they can seek rescission
on the fraud count. In addition, LG&E and KU seek punitive damages.
As an alternative to rescission, LG&E and KU have requested relief for
amounts incurred or expended to date in connection with operational
repairs, cover damages or liquidated damages and other costs, with
possible further damages and interest to be proven at trial. The
matter is currently in discovery with a trial re-scheduled for the
fourth quarter of 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of 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 month periods
ended June 30, 20022003, 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 and fuel industry or markets;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 their Annual Reportthe report on Form 10-K for year ended
December 31, 2001.2002.
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, 2002,2003, Compared to
Three Months Ended June 30, 20012002
LG&E Results:
LG&E's net income decreased $13.2$7.5 million (49%) for the quarterthree months ended
June 30, 2003, as compared to the three months ended June 30, 2002,
as comparedprimarily because of a decrease in sales to the quarter ended June 30, 2001, primarilyelectric retail consumers due
to amortization expenses associated with LG&E's workforce reduction program
(See Note 4)milder weather experienced in 2003 and a decrease in the price of retail
electric sales and higher employee benefit-related costs caused by lower
investment returns.depreciation and maintenance expenses.
- - Page 20 -
A comparison of LG&E's revenues for the quarterthree months ended June 30, 2003,
with the three months ended June 30, 2002, with
the quarter ended June 30, 2001, reflects increases and
decreases(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 $ 5,972$ (17,227)(5,438) $ 8,733
Environmental cost recovery surcharge 2,039(89) -
Demand side management cost recovery 151 253279 (51)
LG&E/KU merger surcredit (830)227 -
Value delivery surcredit (274) (48)(731) (186)
Weather normalization - 588
Variation in sales volume etc. 10,547 15,643and other (8,286) 1,944
Total retail sales 17,605 (1,379)(14,038) 11,028
Wholesale sales (23,925) (44)1,527 (428)
Gas transportation - net - (114)(28)
Other 1,843 (76)1,203 (54)
Total $ (4,477)$ (1,613)$(11,308) $10,518
Electric revenues decreased primarily because of a decrease in wholesale
sales, partially offset by increased retail sales. The decrease in
wholesale sales is attributabledue to lower sales volumes ($12.5 million)fuel costs billed to
customers and a decrease in retail volumes sold due to a 42% decrease in
cooling degree days. These decreases were partially offset by an increase
in wholesale sales prices ($11.4 million). The retail sales
-20-
increase was due in part to warmer weather experienced this period.
Cooling degree days increased 8% for the three months ended June 2002 as
compared to three months ended June 2001.volumes. Gas revenues decreasedincreased primarily as a result of
lowerhigher gas supply costs billed to customers through the gas supply clause
and increased volumes sold, partially offset by an increasea decrease in gas sales volume.volume of
wholesale sales.
Fuel for electric generation and gas supply expenses comprise a large
portioncomponent of LG&E's total operating expenses. LG&E's electric and gas
rates contain a Fuel Adjustment Clausefuel adjustment clause and a Gas Supply Clause,gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply may beare reflected in retail rates, subject to the approval of the
Kentucky Commission.Public Service Commission (Kentucky Commission). Fuel for
electric generation increased $8.8decreased $4.3 million (21%(8%) for the quarter because of an increasethree months ended
due to a decrease in generation ($2.5 million) and a decrease in the cost
of coal burned ($10.41.8 million). Gas supply expenses increased $7.6 million
(42%) due to an increase in net gas supply cost ($9.7 million), partially
offset by a decrease in quantity of coal burned ($1.6
million). Gas supply expenses decreased $0.5 million (3%) due to a
decrease in net gas supply cost ($4.4 million), partially offset by an
increase in the volume of retail gas delivered to the
distribution system ($3.92.1 million).
Power purchased decreased $10.7increased $1.8 million (33%(12%) primarily because of a
decreasedue to an increase in volume of purchases to support wholesale sales ($4.0 million)
and a decrease in costthe
price of power purchased ($6.7 million).purchased.
Other operationoperations expenses increased $18.4decreased $1.4 million (51%(3%) in 2002,, as compared to 2001, primarily due to amortization expenses associated with LG&E's
workforce reduction program ($7.5 million), increased costs for pension
expenses ($2.2 million), electric transmission expenses ($3.8 million),
post-retirement medical expenses ($1.3 million), and steam operation
expenses ($1.8 million).
Maintenance expenses increased $1.9 million (14%) in 2002,
primarily due to lower injury and damage liability claims from third
parties, $1.9 million.
Maintenance expenses increased repairs$2.1 million (14%) primarily due to
steam production ($0.7 million)increased maintenance of gas distribution mains and maintenance to theof electric
distribution lines, $1.9 million.
Depreciation and amortization increased $4.4 million (17%) because of
additional utility plant ($0.8 million).
A reconciliation of differences between the U.S. statutory federalin service.
- - Page 21 -
Variations in income tax rate and effective incomeexpense are largely attributable to changes in pre-
tax rate for the three months endedincome.
Three Months Three Months
Ended Ended
June follows:30, 2003 June June30, 2002
Effective Rate 2002 2001
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 4.3% 5.5%6.5 4.3
Amortization of investment tax credit & R&D -4.5% -2.3%(9.5) (4.5)
Other differences -0.4% -0.5%(2.2) (0.4)
Effective Income Tax Rateincome tax rate 29.8% 34.4%
37.7%
Interest charges decreased $2.4 million (26%) due toThe amortization of investment tax credit and other differences were
approximately the same in both periods, but lower interest rates
on variable rate long-term debt ($1.7 million) and a decrease in interest
associated with the accounts receivable securitization program ($0.5
million). The weighted average interest rate on variable-rate tax-exempt
debtpretax income for the
three months ended June 30, 2002 was 1.63%, compared2003, caused the percentage changes to 3.96%
forbe
greater in the comparable period in 2001.2003 period.
KU Results:
KU's net income decreased $8.4increased $1.4 million (11%) for the quarterthree months ended
June 30, 2002,2003, as compared to the quarterthree months ended June 30, 2001.2002. The
decreaseincrease was primarilymainly due to increased other operation expense and decreased electric revenuesmaintenance expenses due to insurance
recovery for expenses associated with a severe ice storm experienced in
February 2003 partially offset by decreased interest expense.increases in depreciation, other
operation expenses, power purchased, and fuel.
A comparison of KU's revenues for the quarterthree months ended June 30, 2003,
with the three months ended June 30, 2002, with the
quarter ended June 30, 2001, reflects increases and
decreases(decreases) which have been segregated by the following principal causes
(in thousands of $):
-21-
Retail sales:
Fuel supply adjustments $ 4,226(116)
Environmental cost recovery surcharge 1,033
Demand side management cost recovery 512(826)
LG&E/KU merger surcredit (1,136)76
Value delivery surcredit (149)(403)
Earnings sharing mechanism 1,109
Variation in sales volume etc. 8,595and other 282
Total retail sales 13,081122
Wholesale sales (30,745)2,962
Other 1,859(1,930)
Total $ (15,805)1,154
Electric revenues decreasedrevenue increased primarily due to a decreasean increase in volume ($25.3
million) and price ($5.4 million) of wholesale sales
partially offset by
increased retail sales.volume.
Fuel for electric generation comprises a large portioncomponent of KU's total
operating expenses. KU's electric rates contain a Fuel Adjustment Clause,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 $1.8$2.3 million (3%(4%) for the quarter
due tobecause of an increase in the cost of coal burned ($7.14.4 million) partially
offset by a decrease in generation ($2.1 million) due to temporary plant
outages.
Power purchased increased $1.3 million (4%) due to an increase in the price
of power purchased ($.3 million) and an increase in the volume burnedpurchased
($5.31.0 million).
Power purchased decreased $12.1 million (23%) in 2002 primarily because of
a decrease in volumes purchased ($7.6 million) and a decrease in unit cost
of purchases ($4.5 million).- - Page 22 -
Other operation expenses increased $8.9$1.9 million (32%(5%) as compared to 2001,2002,
due to increased pension (the market value of plan assets has been affected
by declines in the equity market) and post-retirement medical expenses
($1.2 million), and increased property insurance ($.5 million).
Maintenance expenses decreased $8.0 million (52%) primarily due to amortization expenses associated with KU's workforce
reduction programan
insurance reimbursement of costs incurred in the first quarter of 2003 for
repairs to electric distribution equipment due to an ice storm in February
2003 ($2.9 million), higher pension expenses ($0.9 million),
outside services ($0.8 million), property insurance ($0.5 million), post-
retirement medical expenses ($0.5 million), and increased operation of the
electric transmission system ($2.0 million) and distribution system ($0.78.9 million).
A reconciliationDepreciation and amortization increased $4.3 million (18%) because of
differences between the U.S. statutory federaladditional utility plant in service.
Variations in income tax rate and effective income tax rate for the three months endedexpense are largely attributable to changes in
pretax income.
Three Months Three Months
Ended Ended
June follows:30, 2003 June June30, 2002
Effective Rate 2002 2001
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 6.8% 5.9%6.5 6.8
Amortization of investementinvestment tax credit & R&D -3.9% -2.5%(3.1) (3.9)
Other differences -4.5% -3.3%(4.6) (4.5)
Effective Income Tax Rateincome tax rate 33.8% 33.4%
35.1%Other income - net increased $1.0 million (60%) in 2003 primarily due to an
increase in subsidiary earnings, $.6 million, and a decrease in benefit
costs, $0.2 million, partially offset by taxes.
Interest charges decreased $1.4$1.3 million (14%) for the second quarter 2002three months ended
June 30, 2003 as compared to the second quarter 2001three months ended 2002 due primarily to
lower interest rates on variable rate debt ($0.8 million) and a decrease in interest associated with the accounts
receivable securitization program ($0.6 million).debt. The weighted average interest
rate on variable-rate tax-exempt debtbonds for the three months ended June 30, 2003, was
1.14% and the corresponding rate for the three months ended June 30, 2002,
was 1.64%, compared to 3.55% for the comparable period in
2001.
-22-.
- - Page 23 -
Six Months Ended June 30, 2002,2003, Compared to
Six Months Ended June 30, 20012002
LG&E Results:
LG&E's net income increased $61.8decreased $1.2 million (3%) for the six months ended June
30, 2002,2003, as compared to the six months ended June 30, 2001,2002, primarily
because of a non-recurring charge of $86.1 million, net of tax, for LG&E's
workforce reduction program incurredan increase in 2001. Excluding this one-time
charge, LG&E's net income would have decreased $24.3 million primarily due
to amortizationoperations, maintenance, and depreciation
expenses associated with LG&E's workforce reduction program
(See Note 4), lower wholesale margins expenses and higher pension expenses
caused by lower investment returns partially offset by lower interest
expense.an increase in sales to gas retail consumers,
due to the colder winter experienced in 2003, and increased electric
wholesale sales.
A comparison of LG&E's revenues for the six months ended June 30, 2002,2003,
with the six months ended June 30, 2001,2002, reflects increases and decreases(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 $ 3,704 $ (58,158)611 $24,834
Environmental cost recovery surcharge 3,6851,278 -
Demand side management cost recovery 203 675671 397
LG&E/KU merger surcredit (1,035)(449) -
Value delivery surcredit (510) (169)(1,517) (830)
Weather normalization - (2,262)
Variation in sales volume etc. 9,776 5,345and other (825) 17,374
Total retail sales 15,823 (52,307)(231) 39,513
Wholesale sales (10,825) 9,97913,596 (6,141)
Gas transportation - net - 75(12)
Other 1,397 (139)1,460 (136)
Total $ 6,395 $ (42,392)$14,825 $33,224
Electric revenues increased primarily because of an increase in wholesale
sales to
retail customers,prices ($14.4 million), partially offset by decreaseda decrease in wholesale
sales. The
increase in retail sales was due in part to warmer weather experienced in
the period. Cooling degree days increased 8% for the six months ended June
2002 as compared to the six months ended June 2001. Wholesale sales
decreased due to lower unit pricesvolumes ($29.1 million) partially offset by
increased volume sold ($18.3.8 million). Gas revenues decreasedincreased primarily as a result
of lowerhigher gas supply costs billed to customers through the gas supply
clause.clause and increased volumes sold due to an increase in heating degree days
(19%), partially offset by a decrease in volume of wholesale sales.
Fuel for electric generation increased $14.4$1.1 million (18%(1%) for the six months
because of an increase in the cost of coal burned ($12.9 million)
and an increase in quantity of coal burned ($1.51.1 million). Gas
supply expenses decreased $42.2increased $30.3 million (29%(30%) due to a decreasean increase in net gas
supply cost ($44.021.5 million), and a decreasean increase in the volume of retail gas
delivered to the distribution system ($6.413.6 million), partially offset by
increaseddecreased wholesale gas expenses ($8.24.8 million).
ThePower purchased increased $7.7 million (23%) because of an increase in the
price of power purchased ($9.0 million) partially offset by a decrease in
non-recurring chargesthe volume of $144.4 millionthe purchases ($86.1 million
after tax) is due to the costs associated with LG&E's workforce reduction
initiative which were recorded in the first quarter of 2001 (See Note 4)1.3 million).
Other operationoperations expenses increased $31.5$3.7 million (44%(4%) in 2002,2003, as compared
to 2001,2002, primarily due to amortization expenses associated with LG&E's
workforce reduction programhigher costs of customer assistance programs
($15.0 million), increased costs for electric
transmission ($5.9 million), pension expenses ($4.9 million), post-
retirement medical expenses ($1.81.5 million), and property insuranceincreased pension (the market value of plan assets has
been affected by declines in the equity market), post-retirement and
medical benefits ($1.32.2 million).
Maintenance expenses increased $3.3$2.0 million (14%(7%) in 2002 primarily due to increased
repairs to steam production ($1.6 million)maintenance of gas distribution mains and maintenance to theof electric
distribution system ($1.1 million).
Other income(deduction)-net decreased $1.4lines, $1.7 million.
Depreciation and amortization increased $6.3 million (12%) because of
additional utility plant in service.
- -Page 24 -
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
primarily due to
an increase in repairs to non-utility property ($0.6 million), a decrease
in gains recorded on the sale of non-utility property ($.3 million) and an
increase in the tax provision related to other income ($0.6 million).
-23-
A reconciliation of differences between the U.S. statutoryEffective Rate
Statutory federal income tax rate and effective35.0% 35.0%
State income taxes net of federal benefit 5.8 5.0
Amortization of investment tax credit & R&D (3.8) (3.7)
Other differences (0.8) (0.2)
Effective income tax rate 36.2% 36.1%
Interest charges decreased $.8 million (5%) due primarily to lower interest
rates on variable rate debt. The weighted average interest rate on
variable-rate bonds for the six months ended June 30, follows:
June June
Effective Rate 2002 2001
Statutory federal2003 was 1.19%,
compared to 1.61% for the comparable period in 2002.
KU Results:
KU's net income tax rate 35.0% -35.0%
State income taxes net of federal benefit 5.0% -5.5%
Amortization of investment tax credit & R&D -3.7% -4.5%
Other differences -0.2% -1.2%
Effective Income Tax Rate 36.1% -46.2%
The six months ended June 2001 included a net pretax loss because of the
workforce reduction charge.
Interest charges decreased $6.0$11.1 million (29%(30%) due to lower interest rates
on variable rate long term debt ($3.7 million), a decrease in interest on
debt to parent company ($0.9 million), and a decrease in interest
associated with the accounts receivable securitization program ($1.5
million). The weighted average interest rate on variable-rate tax-exempt
debt for the six months ended June
30, 2002 was 1.66%, compared to 4.23%
for the comparable period in 2001.
KU Results:
KU's net income increased $23.0 million for the six months ended June 30,
2002,2003, as compared to the six months ended June 30, 2001.2002. The increasedecrease
was primarilymainly due a non-recurring charge of $38.0 million, net of tax, made in
the first quarter of 2001 for coststo expenses associated with KU's workforce
reduction program. Excluding this one-time charge, net income decreased
$15.0 million, due largely to increased operation expensesa severe ice storm experienced
in February 2003, in excess of insurance reimbursements received in June
2003, timing of the performance of annual steam production maintenance and
lower
electric revenues, partially offset by lower interestdepreciation expense.
A comparison of KU's revenues for the six months ended June 30, 2002,2003, with
the six months ended June 30, 2001,2002, reflects increases and decreases(decreases)
which have been segregated by the following principal causes (in thousands
of $):
Retail sales:
Fuel supply adjustments $ 9,3597,147
Environmental cost recovery surcharge 2,543(889)
Demand side management cost recovery 1,296337
LG&E/KU merger surcredit (2,161)(366)
Value delivery surcredit (338)(860)
Earnings sharing mechanism (1,900)
Variation in sales volume etc. 4,782and other 11,677
Total retail sales 15,48115,146
Wholesale sales (31,050)510
Other 3,1391,457
Total $ (12,430)$17,113
Electric revenues decreasedincreased primarily due to a decreasean increase in wholesale sales,
partially offset by increased sales to retail customers. The decrease in
wholesale sales is primarilyvolumes
sold due to a decrease13% increase in the price of wholesale
sales ($21.4 million)heating degree days and a decrease in volume sold ($9.7 million).higher fuel costs
billed to customers.
Fuel for electric generation increased $4.2$10.3 million (4%(9%) for the six
months due to a $12.6 millionan increase in the cost of coal burned partially($11.5 million),
offset by a decrease of $8.4 million in volume burned.
-24-generation ($1.2 million).
Power purchased decreased $3.9increased $7.6 million (5%(11%) in 2002 primarily because of a
decrease in unit cost ($10.2 million), partially offset bydue to an increase in KWHprice of
power purchased ($6.32.8 million).
Non-recurring charges decreased $63.8 million and an increase in volume purchased ($38.0 million after tax).
These costs were due to KU's workforce reduction program which were
recorded in the first quarter4.8
million) partially as a result of 2001 (See Note 4).temporary plant outages.
- - Page 25 -
Other operation expenses increased $16.8$6.3 million (31%(9%) compared to 2001,, primarily due to
amortization expensescosts associated with KU's workforce
reduction programan ice storm ($5.82.5 million), higherincreased pension (the
market value of plan assets has been affected by declines in the equity
market) and post-retirement medical expenses ($2.12.6 million), increased
property insurance ($1.3.9 million), and outside services ($1.9), higher costs
for electric transmission costs
resulting from increased Midwest Independent System Operator (MISO) costs
($3.4 million) and increases in uncollectible
accounts and customer assistance programs ($1.3.3 million).
Other income-net decreased $1.1Maintenance expenses increased $9.4 million (25%(35%) in 2002 primarily due to a
gain on dispositionrepairs
to electric distribution equipment due to an ice storm ($4.1 million, net
of property$8.9 million in 2001insurance reimbursements), and timing of $1.3 million.
A reconciliationannual
maintenance of differences between the U.S. statutory federalsteam production equipment ($5.7 million).
Depreciation and amortization increased $5.3 million (11%) because of
additional utility plant in service.
Variations in income tax rate and effective income tax rate for the six months endedexpense are largely attributable to changes in
pretax income.
Six Months Ended Six Months Ended
June follows:30, 2003 June June30, 2002
Effective Rate 2002 2001
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 6.3% 7.7%6.7 6.3
Amortization of investment tax credit & R&D -3.5% -9.7%(3.4) (3.5)
Other differences -3.0% -11.4%(4.4) (3.0)
Effective Income Tax Rateincome tax rate 33.9% 34.8%
21.6%Other income - net increased $1.5 million (45%) primarily due to an
increase in subsidiary earnings, $.5 million, decreased benefit costs, $.4
million, and gain on energy trading contracts marked to market $.5 million,
partially offset by an increase in taxes.
Interest charges decreased $1.9 million (13%) due primarily to lower
interest rates on variable rate debt. The amortization of investment tax credit and other differences were
approximately the same in both periods, but lower pretax incomeweighted average interest rate
on variable-rate bonds for the six months ended June 30, 2001 (resulting from2003, was 1.16%
and the workforce reduction charge)
caused the percentage changes to be greater in the 2001 period.
Interest charges decreased $4.1 million (22%) for the first six months of
2002 as compared to the six months of 2001 primarily due to lower rates on
variablecorresponding rate debt ($2.7 million) and a decrease in interest associated
with the accounts receivable securitization program ($1.0 million). The
weighted average interest rate on variable-rate tax-exempt debt for the six months ended June 30, 2002, was
1.66%, compared to 3.76% for the comparable
period in 2001.1.57%.
Liquidity and Capital Resources
LG&E's&E 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. Internal and external lines of credit, the
accounts receivable securitization programs, and commercial paper programs
are maintained to fund short-term capital requirements.
Construction expenditures for the six months ended June 30, 20022003 for LG&E
and KU amounted to $69.5$119.4 million and $47.8$175.5 million, respectively. Such
expenditures related primarily to construction to meet nitrogen oxide (NOx)
emission standards and the acquisition of combustion turbines to meet peak
power demands. LG&E and KU combustion turbine expenditures for the six
months ended June 30, 2003, were $53.3 million and $90.9 million,
respectively. The expenditures were financed with internally generated
funds, intercompany loans from affiliates, and accounts receivable
securitization program funds. Also, a common stock
dividend of $23 million was paid by LG&E. See Note 64 of Notes to Financial Statements
concerning accounts receivable securitization.
LG&E's and KU's cash and temporary cash investment balance increased $18.3decreased $13.9 million and $0.2 million, respectively during the six months ended
June 30, 2002.2003, primarily due to a pension contribution and the purchase of
an interest in four combustion turbines financed with intercompany loans.
KU's cash balance increased $1.3 million during the six months ended June
30, 2003. The increases reflectincrease reflects cash flows from operations and
intercompany loans, partially offset by construction expenditures,
and LG&E's common dividend payment. KU also
reduced notes payable by $28.2 million.including the purchase of an interest in four combustion turbines.
- - Page 26 -
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 seasonal
fluctuations in weather, which have a direct effect on sales of electricity
and natural -25-
gas. The increasesincrease in accounts receivable at LG&E resulted
primarily from timing of payments. The decrease in accounts receivable for
KU resulted primarily from seasonal fluctuations.timing of payments. The decrease in accounts receivable at LG&E
resulted primarily from the increased sale of accounts receivable through
the accounts receivable securitization program. (See Note 6 of Notes to
Financial Statements). The increase in fuel inventory at LG&E and the decrease in LG&E's gas
stored underground relates to seasonal usage of gas. The decrease in the
fuel inventory at LG&E resulted from seasonal fluctuations partially offset
by increased pricing. The decrease in fuel inventory at KU resulted from
seasonal fluctuations.
LG&E and KUThe Companies participate in a money pool whereby LG&E Energy can make
funds available up to $400 million at market-based rates for each of LG&E
and KU at market-based rates up to $200 million each.KU. LG&E Energy maintains a facilityfacilities of $200 million with a Powergen
subsidiary and $150 million with an E.ON affiliate to ensure funding
availability for the money pool. There is no balancewas $82 million outstanding under
the Powergen line of credit and the balance under E.ON affiliates' line
totaled $74.9 million as of June 30, 2002 and no
outstanding commercial paper program balance.2003. LG&E Energy has provided loans
to LG&E and KU through the money pool that total $91.6$171.7 million and $19.6$146.4
million, respectively, as of June 30, 2002.2003. These borrowings carried aan
interest rate based on an index of highly rated commercial paper grade interest rateissuers as
of 1.82%the prior month end of 1.21% at June 30, 2002.2003.
During July 2003, LG&E entered into five 364 day revolving lines of credit
that total $185 million. The facilities mature in June and July 2004.
On March 6, 2002,April 30, 2003, a $250 million line of credit of LG&E refinanced its $22.5Energy with an
E.ON affiliate expired and was not renewed.
On April 30, 2003, LG&E and KU each borrowed $100 million from an E.ON
affiliate. The term of each loan is ten years and $27.5the interest rate is
4.55%. KU had a first mortgage bond of $62 million unsecuredthat matured in June
2003 and LG&E has a first mortgage bond of $42.6 million maturing in August
2003. The Companies expect to refinance these bonds, along with a portion
of the notes payable to parent, with additional long-term intercompany
loans.
Under the provisions of variable-rate pollution control bonds both due September 1, 2026. The
replacement bonds, due September 1, 2026, are variable rate bondstotaling
$246.2 million for LG&E and are
secured by first mortgage bonds.
On March 22, 2002, LG&E refinanced its two $35$91.9 million unsecured pollution
control bonds due November 1, 2027. The replacement variable ratefor KU, the bonds are secured by first mortgagesubject to
tender for purchase at the option of the holder and to mandatory tender for
purchase upon the occurrence of certain events, causing the bonds and will mature November 1, 2027.
On May 23, 2002to be
classified as current portion of long-term debt. Should any of the bonds
be put to LG&E or KU, refinanced its pollution control series 1B, 2B, 3B, and
4B bonds, totaling $37.9 million. The new bonds, series 12, 13, 14 and 15
are due in February 2032 and bear interest at a variable rate. The new
bonds are secured by first mortgage bonds and havefunds from the same principal
amount asmoney pool could be used to reacquire
the prior bonds. The variable rate will be established by the
remarketing agent based on conditions in the tax-exempt debt market.
As of June 30, 2002, LG&E Energy owned $104.6 million in varying portions
of LG&E's outstanding variable rate pollution control bonds. The bonds
were acquired during May 2002 by LG&E Energy as an investment and were sold
in their entirety during the first half of July 2002 to unaffiliated third
parties.
LG&E's security ratings as of June 30, 2002,August 4, 2003, were:
Moody's S&P Fitch
First mortgage bonds A1 A- A+
Preferred stock a2Baa1 BBB- A-
Commercial paper P-1 A-2 F-1
KU's security ratings as of June 30, 2002,August 4, 2003, were:
Moody's S&P Fitch
First mortgage bonds A1 A-A A+
Preferred stock a2Baa1 BBB- A-
Commercial paper P-1 A-2 F-1
The 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 acquisition. Fitch has placed LG&E and
KU on credit watch evolving as a result of the acquisition by E.ON.- - Page 27 -
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.
-26-
LG&E's capitalization ratios at June 30, 2002,2003, and December 31, 2001,2002,
follow:
Jun.June 30, Dec. 31,
2003 2002 2001
Long-term debt (including current portion) 37.4% 37.5%38.8% 35.5%
Notes payable 5.5 5.79.3 11.1
Preferred stock 5.8 5.85.1 5.5
Common equity 51.3 51.046.8 47.9
Total 100.0% 100.0%
KU's capitalization ratios at June 30, 2002,2003, and December 31, 2001,2002, follow:
Jun.June 30, Dec. 31,
2003 2002 2001
Long-term debt (including current portion) 37.1% 37.2%34.5% 34.0%
Notes payable 1.5 3.69.4 8.1
Preferred stock 3.0 3.12.5 2.7
Common equity 58.4 56.153.6 55.2
Total 100.0% 100.0%
New Accounting Pronouncements
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, the Companies experienced no impact on the
financial position or results of operation 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, werewas issued duringin
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 is143 was January 1, 2002 and2003.
Management has calculated the impact of SFAS No. 143 is January 1, 2003. SFAS No. 144 had no impact onand the financial position or resultsrecently
released FERC final rule, Accounting, Financial Reporting, and Rate Filing
Requirements for Asset Retirement Obligations. As of operations ofJune 30, 2003, LG&E
or KU. Management
is currently conducting an analysis and 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 of
the Companies. DIG Issue C16, Applying the Normal Purchase and Normal
Sales Exception to Contracts that Combine a Forward Contract and a
Purchased Option Contract, was clearedrecorded asset retirement obligation (ARO) assets in the third quarter 2001amount of $4.5
million and stated
that option contracts do not meet the normal purchases and normal sales
exception and should follow SFAS No. 133. DIG Issue C16 was effective in
the second quarterliabilities of 2002. The adoption$9.6 million. LG&E recorded offsetting
regulatory assets of DIG Issue C16 did not have a
material impact on the financial position or results of operations of the
Companies$5.6 million, pursuant to regulatory treatment
prescribed byunder SFAS No. 71, Accounting for the Effects of Certain Types
of Regulation. As of June 30, 2003, KU recorded ARO assets in the amount
of $8.6 million and liabilities of $19.1 million. KU recorded offsetting
regulatory assets of $9.7 million, pursuant to regulatory treatment
prescribed under SFAS No. 71. LG&E and KU AROs are primarily related to
final retirement of generating units. Assets with associated AROs will no
longer include a markcost of removal component within their depreciation rate.
Assets without associated AROs will continue to be depreciated including a
cost of removal component within the depreciation rate.
Had SFAS No. 143 been in effect for the 2002 reporting period, the
Companies would have established asset retirement obligations as described
in the following table ($000):
LG&E KU
Provision at January 1, 2002 $8,752 $17,331
Accretion expense 578 1,146
Provision at December 31, 2002 $9,330 $18,477
The Companies adopted EITF No. 98-10, Accounting for Energy Trading and
Risk Management Activities, effective January 1, 1999. This pronouncement
required that energy trading contracts be marked to market asseton the balance
sheet, with the gains and corresponding regulatory liability of $1.4 millionlosses shown net in the second quarterincome statement.
- - Page 28 -
Effective January 1, 2003, the Companies adopted EITF No. 02-03, Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management Activities.
EITF No. 02-03 established the following:
- Rescinded EITF No. 98-10,
- Contracts that do not meet the definition of 2002.
-27-a derivative under
SFAS No. 145, Rescission133 should not be marked to fair market value, and
- Revenues should be shown in the income statement net of SFAS Nos. 4, 44 and 64, amendmentcosts
associated with trading activities, whether or not the trades
are physically settled.
With the rescission of EITF No. 98-10, energy trading contracts that do not
also meet the definition of a derivative under SFAS No. 13, and technical corrections was issued in the second quarter 2002. The
provisions related to133 must be
accounted for as executory contracts. Contracts previously recorded at
fair value under EITF No. 98-10 that are not also derivatives under SFAS
No. 13 were effective133, Accounting for fiscal years beginning
after May 15, 2002. All other provisions of SFAS No. 145 shallDerivative Instruments and Hedging Activities, must
be effective for financial statements issued on or after May 15, 2002.restated to historical cost through a cumulative effect adjustment. The
adoptionrescission of this standard will not have a materialhad no impact on financial position or results
of operations of the Companies.Companies since all contracts marked to market under
EITF No. 98-10 are also within the scope of SFAS No. 146,133.
As a result of EITF No. 02-03, the Companies have netted the power
purchased expense for trading activities against electric operating revenue
to reflect this accounting change. The Companies applied this guidance to
all prior periods, which had no impact on previously reported net income or
shareholders' equity. The following tables present the impact of this
reclassification (in thousands of $):
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross electric operating revenues$180,637 $191,813 $375,930 $358,059
Less costs reclassified 6,720 6,588 14,994 11,948
Net electric operating
revenues reported $173,917 $185,225 $360,936 $346,111
KU:
Gross electric operating revenues$204,675 $203,555 $438,822 $418,723
Less costs reclassified 7,501 7,535 16,665 13,679
Net electric operating
revenues reported $197,174 $196,020 $422,157 $405,044
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross power purchased $ 24,033 $ 22,064 $ 56,434 $ 45,645
Less costs reclassified 6,720 6,588 14,994 11,948
Net power purchased reported $ 17,313 $ 15,476 $ 41,440 $ 33,697
KU:
Gross power purchased $ 41,149 $ 39,911 $ 91,513 $ 80,971
Less costs reclassified 7,501 7,535 16,665 13,679
Net power purchased reported $ 33,648 $ 32,376 $ 74,848 $ 67,292
In May 2003, the Financial Accounting Standards Board issued Statement of
SFAS No. 150, Accounting for Costs AssociatedCertain Financial Instruments with
Exit or Disposal
Activities, was issued in July 2002.Characteristics of both Liabilities and Equity. SFAS No. 146 requires companies to
recognize costs associated with exit150 is effective
immediately for financial instruments entered into or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. The provisions of this Statement aremodified after May
31, 2003, and otherwise is effective for exit or disposal
activitiesinterim reporting periods
beginning after June 15, 2003.
- - Page 29 -
LG&E has existing $5.875 series mandatorily redeemable preferred stock with
250,000 shares outstanding having a current redemption price of $100 per
share. The preferred stock has a sinking fund requirement sufficient to
retire a minimum of 12,500 shares on July 15th of each year commencing with
July 15, 2003, and a minimum of 187,500 shares on July 15, 2008 at $100 per
share. Beginning with the three months ended September 30, 2003, LG&E will
reclassify, at fair value, its $5.875 series preferred stock as long-term
debt with the minimum shares mandatorily redeemable within one year
classified as current portion of long-term debt. Dividends accrued
beginning July 1, 2003 will be charged as interest expense.
KU has no financial instruments that are initiated after December 31, 2002. The Companies do
not expectfall within the adoptionscope of this standard to have a material impact on
financial position or results of operations of the Companies.SFAS No. 150.
Contingencies
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)
andNote 11 (KU) to the
financial statements contained in LG&E's and KU's Annual Reports on Form 10-K10-
K for the year ended December 31, 20012002 and to Part II - Item 1, Legal
Proceedings herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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,the
Companies' policies, 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 changesassociated with a 1% change in
base interest rates of the Companies'LG&E's and KU's unswapped debt did not change materiallyis estimated at $5.3
million and $5.5 million, respectively, at June 30, 2003. LG&E's exposure
to floating interest rates decreased $18.3 million and KU's exposure to
floating interest rates increased $4.3 million during the first six months
of 2002.2003. The potential changes in the fair values of the Company'sCompanies'
interest-rate swaps resulting from changes in interest rates and the yield
curve also did not change materially during the first six months of 2003.
Pension Risk
LG&E's and KU's costs of providing defined-benefit pension retirement plans
are dependent upon a number of factors, such as the rates of return on plan
assets, discount rate, and contributions made to the plans. The market
value of LG&E and KU plan assets has been affected by declines in the
equity market. As a result, at December 31, 2002, LG&E and KU were
required to recognize an additional minimum liability as prescribed by SFAS
No. 87 Employers' Accounting for Pensions. The liability was recorded as a
reduction to other comprehensive income, and did not affect net income for
2002. The Companies' exposure to market risks from
changes in commodity prices remained immaterial during the first six months
of 2002.
The Companies have entered into fuel purchase contracts that contain
options which allow the Companies to purchase additional tons of coal, as
needed, or purchase less coal that contractually required, as needed. The
potential change resulting from variations in coal commodity pricesamount of the Companies' coal supply contracts containing option featuresliability depended upon the asset returns
experienced in 2002 and contributions made by LG&E and KU to the plan
during 2002. Also, pension cost and cash contributions to the plans could
increase in future years without a substantial recovery in the equity
markets. If the fair value of the plans assets exceeds the accumulated
benefit obligation, the recorded liability will be reduced and other
comprehensive income will be restored in the consolidated balance sheet.
- - Page 30 -
During 2002, the combination of poor market performance and historically
low corporate bond rates created a divergence in the potential value of the
pension liability and the actual value of the pension assets. However,
year-to-date 2003 market performance has been quite strong. Should poor
market conditions return these conditions could result in an increase in
LG&E's and KU's funded accumulated benefit obligation and future pension
expense. The primary assumptions that drive the value of the unfunded
accumulated benefit obligation are not
material during the first six monthsdiscount rate and expected return on
plan assets.
In January 2003, LG&E and KU made contributions to the pension plan of
2002. The Companies' exposure to
market risks from changes in commodity prices are immaterial during the
first six months of 2002.
-28-$83.1 million and $3.5 million, respectively.
Energy Trading & Risk Management Activities
LG&E and KU conduct energy trading and risk management activities to
maximize the value of power sales from physical assets it owns,they own, in
addition to the wholesale sale of excess asset capacity. Certain energy
trading activities are accounted for on a mark-to-market basis in
accordance with
EITF 98-10 Accounting for Contracts Involved in Energy Trading and Risk
Management Activities, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. Wholesale sales of excess
asset capacity and wholesale purchases are treated as normal sales and
purchases under SFAS No. 133 and SFAS No.
138 and are not marked to market.
The rescission of EITF No. 98-10 for fiscal periods ending after December
15, 2002, had no impact on LG&E's or KU's energy trading and risk
management reporting as all contracts marked to market under EITF No. 98-10
are also within the scope of SFAS No. 133.
The table below summarizes botheach LG&E&E's and KU's energy trading and risk
management activities during January throughfor the three months and six months ended June of 2002 (in30,
2003, and 2002(in thousands of $), as trading. Trading volumes are evenly divided
between the two regulated
utilities.LG&E and KU.
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
Fair value of contracts at 12/31/01,beginning of
period, net liabilityasset/(liability) $ (186)403 $ 12 $ (156) $(186)
Fair value of contracts when entered
into during Jan- Jun 2002the period - 104 2,620 (57)
Contracts realized or otherwise
settled during Jan-
Jun 2002the period (226) (31) (283) 335
Changes in fair valuesvalue due to changes
in assumptions 141 (59) (1,863) (66)
Fair value of contracts at 6/30/02,end of period,
net assetasset/(liability) $ 318 $ 26 $ 318 $ 26
No changes to valuation techniques for energy trading and risk management
activities occurred during January through June of2003 or 2002. Changes in market pricing,
interest rate and volatility assumptions were made during all periods. All
contracts outstanding at June 30, 20022003, have a maturity of less than one
year and are valued using prices actively quoted for proposed or executed
transactions or quoted by brokers.
LG&E and KU maintain policies intended to minimize credit risk and revaluesrevalue
credit exposures daily to monitor compliance with those policies. As of
June 30, 2002,2003, 100% of the trading and risk management commitments were
with counterparties rated BBB-/Baa3 equivalent or better.
-29-- - Page 31 -
Deregulation
The electricity industry in Virginia is currently undergoing deregulation
which will enable customers to choose their own energy suppliers after
January 2004. On March 19, 2003, the Governor of Virginia signed House
Bill 2367, the "Electric Utility Restructuring Suspension," which suspends
Kentucky Utilities/Old Dominion Power from Virginia electric utility
restructuring until such time as retail choice is offered to other
customers in the United States.
Item 4. Controls and Procedures.
LG&E and KU maintain a system of disclosure controls and procedures
designed to ensure that information required to be disclosed by the
Companies in reports they file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission rules and
forms. LG&E and KU conducted an evaluation of such controls and procedures
under the supervision and with the participation of the Companies'
management, including the Chairman, President and Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"). Based upon that
evaluation, the CEO and CFO are of the conclusion that the Companies'
disclosure controls and procedures are effective as of the end of the
period covered by this report. There has been no change in the Companies'
internal control over financial reporting that occurred during the fiscal
quarter ended June 30, 2003, that has materially affected, or is reasonably
likely to materially affect, the Companies' internal control over financial
reporting.
- - Page 32 -
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 (A) respective combined Annual Report on Form
10-K for the year ended December 31, 2001:2002: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations; Notes 3 12 and 1611 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 88; and (B) respective combined Quarterly
Report on Form 10-Q10Q for the quarter ended March 31, 2002:2003: Item I1 of Part II
Legal Proceedings. 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-Powergen Transaction
Effective July 1, 2002, E.ON, a Germany company, completed its acquisition
of Powergen, following receipt of the final necessary regulatory approval
on June 14, 2002 from the Securities and Exchange Commission. E.ON had
announced its pre-conditional cash offer of 5.1 billion pounds sterling
($7.3 billion) for Powergen on April 9, 2001.
LG&E Employment Discrimination Claim
In June 2002, alternative amended complaints were filed against LG&E and
certain related and unrelated parties wherebyCase
As previously reported, in October 2001, approximately 30 employees or
former employees claimedfiled a complaint against LG&E claiming past and current
instances of employment discrimination. The complaints demand various forms of declarative,
injunctive and class action relief, as well as a claim of $150 million in
monetary damages.discrimination against LG&E. LG&E has removed the
case to the U.S. District Court for the Western District of Kentucky and
filed an answer denying all plaintiffs' claims. Certain plaintiffs' claimsDiscovery has commenced in
the matter. The court has ordered mediation and certain plaintiffs have
completedsettled for non-material amounts as a processresult of preliminarythat process. In addition,
certain other plaintiffs have sought administrative review before the U.S.
Equal Employment Opportunity Commission which has, to date, declined to
proceed to litigation on any claims reviewed. Previously amended
pleadings, while reducing the size of the claims reviewed.plaintiff and defendant groups
and eliminating certain prior demands, contain a claimed damage amount of
$100 million as well as requests for injunctive relief. During mediation
in the first quarter 2003, additional settlements were reached with a
number of plaintiffs, including a settlement with the lead plaintiff, which
reduced the number of remaining plaintiffs to approximately nine. LG&E
intends to vigorouslycontinue to defend itself vigorously in the action and
management does not anticipate that the outcome will have a material impact
on LG&E's operations or financial condition.
Fuel Adjustment Clause Proceedings
In May 2002 the Kentucky Commission granted final approval to the December
21, 2001 comprehensive settlement regarding pending fuel adjustment clause
proceedings involvingCombustion Turbine Litigation
LG&E and KU have filed a lawsuit in the U.S. District Court for the Eastern
District of Kentucky against Alstom Power, Inc. (formerly ABB Power
Generation, Inc.) ("Alstom") regarding two combustion turbines supplied by
Alstom during 1999. These units are installed at KU's E.W. Brown generating
plant and beneficial ownership of the combustion turbines is vested in July 2002LG&E
and KU. The original purchase price for the Kentucky Courtturbines was approximately
$91.8 million. The suit presents warranty, negligence, misrepresentation,
fraud and other claims relating to numerous operational defects or
deficiencies of Appeals dismissed the associated appeal. Pursuant to such settlement,turbines. LG&E and KU credited customers approximately $720,000have requested rescission of the
contract and $954,000,
respectively, during Junerecovery of all expenditures relating to the turbines.
Recently, the court ruled that LG&E and July 2002. See Legal Proceedings under Item
3KU cannot pursue rescission on the
breach of contract claim, but has not ruled on whether they can seek
rescission on the fraud count. In addition, LG&E's&E and KU's Annual Report on Form 10-KKU seek punitive
damages. As an alternative to rescission, LG&E and KU have requested
relief for amounts incurred or expended to date in connection with
operational repairs, cover damages or liquidated damages and other costs,
with possible further damages and interest to be proven at trial. The
matter is currently in discovery with a trial re-scheduled for the year ended December
31, 2001.
Other
On April 16, 2002, the LG&E 5% Cumulative Preferred classfourth
quarter of stock was
delisted from the NASDAQ Small Capitalization Market. On June 3, 2002, the
KU 4.75% Cumulative Preferred class of stock was delisted from the
Philadelphia Stock Exchange. Delisting will enable the Companies to
realize certain administrative and corporate governance efficiencies.2003.
- - Page 33 -
Item 6(a). Exhibits.
None.Applicable to Form
10-Q of
Exhibit
No. LG&E KU Description
31 X X Certification - Section 302 of Sarbanes-Oxley Act of 2002
31.1 X Certification of Chairman of the Board, President and
Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.3 X Certification of Chairman of the Board, President and
Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.4 X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 X X Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Item 6(b). Reports on Form 8-K.
None.
-30-On May 14, 2003, LG&E and KU filed a Current Report on Form 8-K, submitting
certifications of the Chairman, President and Chief Executive Officer and
the Chief Financial Officer of each company, respectively, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 regarding the Companies'
Quarterly Reports on Form 10-Q for the period ended March 31, 2003.
- - Page 34 -
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: August 14, 200213, 2003 /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: August 14, 200213, 2003 /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)
-31-- - Page 35 -
Exhibit 31 - CERTIFICATIONS
Exhibit 31.1
Louisville Gas and Electric Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville
Gas and Electric Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
____________________
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
- - Page 36 -
Exhibit 31.2
Louisville Gas and Electric Company
I, Richard Aitken-Davies, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville
Gas and Electric Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
___________________
Richard Aitken-Davies
Chief Financial Officer
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Exhibit 31.3
Kentucky Utilities Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky
Utilities Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
_____________________
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
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Exhibit 31.4
Kentucky Utilities Company
I, Richard Aitken-Davies, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky
Utilities Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
____________________
Richard Aitken-Davies
Chief Financial Officer
- - Page 39 -
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Louisville Gas and
Electric Company and Kentucky Utilities Company (the "Companies") on Form
10-Q for the period ended June 30, 2003, as filed with the Securities and
Exchange Commission (the "Report"), each of the undersigned does hereby
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge,
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Companies as of the dates and for the period expressed in the Report.
August 13, 2003
/s/ Victor A. Staffieri
Chairman of the Board, President
and Chief Executive Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
/s/ Richard Aitken-Davies
Chief Financial Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
- - Page 40 -