UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003March 31, 2004
Or
[_] TRANSITION REPORT PURSUANT 1TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation IRS Employer
File Number Address, and Telephone Number Identification No.
2-267201-2893 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, KY 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, KY 40507-1428
(859) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No _.
Indicate 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 October 31, 2003,April 30, 2004,
all held by LG&E Energy Corp.LLC
Kentucky Utilities Company
37,817,878 shares, without par value, as of October 31, 2003,April 30, 2004,
all held by LG&E Energy Corp.LLC
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 related
to the other registrants.
- - New Page -
TABLE OF CONTENTS
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
STATEMENTS OF INCOME 1
STATEMENT OF RETAINED EARNINGS 1
BALANCE SHEETS 2
STATEMENT OF CASH FLOWS 4
STATEMENT OF RETAINED EARNINGS 5
STATEMENTS OF OTHER COMPREHENSIVE INCOME 65
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY
STATEMENTS OF INCOME 76
STATEMENT OF RETAINED EARNINGS 6
BALANCE SHEETS 87
STATEMENT OF CASH FLOWS 10
STATEMENT OF RETAINED EARNINGS 119
STATEMENTS OF OTHER COMPREHENSIVE INCOME 1210
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1311
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. 2119
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 3128
ITEM 4 CONTROLS AND PROCEDURES. 3330
PART II
ITEM 1 LEGAL PROCEEDINGS. 3631
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 3631
SIGNATURES 38
EXHIBITS 3933
- New Page -
Part I. Financial Information - Item 1. Consolidated Financial Statements
(Unaudited)
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended
Ended
September 30, September 30,March 31,
2004 2003 2002 2003
2002
OPERATING REVENUES (Note 5 and Note 8)5):
Electric $230,174 $220,274 $591,110 $566,385$198,249 $187,020
Gas 32,659 22,800 213,939 170,856163,714 139,824
Total operating revenues 262,833 243,074 805,049 737,241361,963 326,844
OPERATING EXPENSES:
Fuel for electric generation 55,628 52,827 151,382 147,48452,524 49,477
Power purchased (Note 8) 18,805 12,579 60,245 46,27628,888 24,128
Gas supply expenses 19,509 11,098 151,579 112,911130,756 106,107
Other operation expenses 51,890 51,269 158,797 154,48658,061 53,528
Maintenance 12,526 18,869 42,109 46,44111,541 11,893
Depreciation and amortization (Note 8) 28,429 28,196 85,866 79,36327,499 27,145
Federal and state income taxes 23,707 22,083 45,062 43,65515,025 16,641
Property and other taxes 4,659 4,501 12,848 13,8155,071 4,735
Total operating expenses 215,153 201,422 707,888 644,431329,365 293,654
NET OPERATING INCOME 47,680 41,652 97,161 92,81032,598 33,190
Other income (expense) - net 287 156 (43) 90(461) 1,060
Other income from affiliated company (Note 10) - 4
Interest chargesexpense (Note 3) 8,096 7,604 22,227 22,4974,777 6,255
Interest expense to affiliated companies (Note 10) 3,141
735
NET INCOME $ 39,87124,219 $ 34,204 $ 74,891 $ 70,40327,264
Consolidated Statement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Ended
March 31,
2004 2003
Balance at beginning of period $497,441 $409,319
Net income 24,219 27,264
Subtotal 521,660 436,583
Cash dividends declared on stock:
5% cumulative preferred 269 269
Auction rate cumulative preferred 187 300
$5.875 cumulative preferred - 367
Subtotal 456 936
Balance at end of period $521,204 $435,647
The accompanying notes are an integral part of these consolidated financial
statements.
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Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
September 30,March 31, December 31,
2004 2003 2002
UTILITY PLANT:
At original cost $3,752,179 $3,622,985$3,826,311 $3,804,183
Less: reserve for depreciation 1,522,825 1,463,6741,339,855 1,319,768
Net utility plant (Note 7) 2,229,354 2,159,3112,486,456 2,484,415
OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of September 30, 2003March 31, 2004
and December 31, 20022003 507 611 764
CURRENT ASSETS:
Cash 3,400 17,015and cash equivalents 28,629 1,706
Accounts receivable -
less reserve of $1,415$3,515 as of September 30, 2003March 31, 2004
and $2,125 as of December 31, 20022003 (Note 4) 55,241 68,440128,986 84,585
Notes receivable from affiliated companies 6,600 -
Materials and supplies - at average cost:
Fuel (predominantly coal) 25,099 36,60022,081 25,260
Gas stored underground 69,634 50,26624,756 69,884
Other 24,342 25,65125,583 24,971
Prepayments and other 2,662 5,2984,661 5,281
Total current assets 180,378 203,270241,296 211,687
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 6,334 6,5328,718 8,468
Regulatory assets (Note 6) 139,829 153,446122,534 142,772
Other 33,164 37,75537,506 40,975
Total deferred debits and other assets 179,327 197,733168,758 192,215
Total assets $2,589,670 $2,561,078$2,897,017 $2,888,928
The accompanying notes are an integral part of these consolidated financial
statements.
- - Page 2 -
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
September 30,March 31, December 31,
2004 2003 2002
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 481,926 409,319
Accumulated other comprehensive loss (39,939) (40,512)(41,743) (38,111)
Retained earnings 521,204 497,441
Total common equity 906,321 833,141943,795 923,664
Cumulative preferred stock 70,425 70,140
70,140
ManditorilyMandatorily redeemable preferred stock (Note 8) 22,500 23,75022,500
Long-term debt (Note 9) 328,104 328,104
Long-term debt to associatedaffiliated company (Note 9) 225,000 200,000
- -
Total capitalization 1,527,065 1,255,1351,589,824 1,544,408
CURRENT LIABILITIES:
Current portion of manditorilymandatorily
redeemable preferred stock (Note 8) 1,250 1,250
Current portion of long-term debt 246,200 288,800246,200
Current portion of long-term debt to
affiliated company (Note 9) 100,000 -
Notes payable to parentaffiliated companies (Note 9) 75,132 193,053- 80,332
Accounts payable 84,252 122,77172,171 93,118
Accounts payable to affiliated companies (Note 10) 19,875 38,343
Accrued taxes 12,940 1,45023,617 18,615
Customer deposits 10,578 10,493
Other 20,245 19,53610,519 9,308
Total current liabilities 440,019 626,860484,210 497,659
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 344,281 313,225338,843 337,704
Investment tax credit, in process of amortization 51,380 54,53649,278 50,329
Accumulated provision for pensions
and related benefits 127,496 224,703100,937 140,598
Customer advances for construction 9,700 10,26010,020 9,890
Asset retirement obligation (Note 8) 9,793 -9,911 9,747
Regulatory liabilities (Note 6) 43,715 52,424:
Accumulated cost of removal of utility plant 227,187 223,622
Other 50,584 51,822
Long-term derivative liability 16,464 17,11522,041 15,966
Other 19,757 6,82014,182 7,183
Total deferred credits and other liabilities 622,586 679,083822,983 846,861
Total capital and liabilities $2,589,670 $2,561,078$2,897,017 $2,888,928
The accompanying notes are an integral part of these consolidated financial
statements.
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Louisville Gas and Electric Company and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
(Thousands of $)
NineThree Months Ended
September 30,March 31,
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,89124,219 $ 70,40327,264
Items not requiring cash currently:
Depreciation and amortization 85,866 79,36327,499 27,145
Deferred income taxes - net 24,589 7,748276 5,510
Investment tax credit - net (3,156) (3,100)
Asset retirement obligations (Note 8) 4,108 -(1,051) (1,052)
VDT amortization 7,534 7,696
Marked-to-market financial instruments 6,075 33
Other 26,104 33,595(2,992) 5,573
Changes in current assets and liabilities (28,028) (63,348)(29,225) 22,413
Changes in accounts receivable securitization-netsecuritization
-net (Note 4) 11,600 32,200- 11,800
Pension funding (Note 9) (89,125) -(34,492) (83,125)
Provision for post-retirement benefits (5,169) (1,425)
Gas supply clause (14,970) 5,3317,773 (19,353)
Earnings sharing mechanism (ESM) 3,032 (1,147)
Other 12,086 8,33112,864 4,122
Net cash flows from operating activities $103,965 170,52316,343 5,454
CASH FLOWS FROMUSED IN INVESTING ACTIVITIES:
Long-term investments 153 (239)Proceeds from sales of securities 103 162
Construction expenditures (153,064) (141,855)(27,061) (71,255)
Net cash flows fromused in investing activities (152,911) (142,094)(26,958) (71,093)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from
associatedaffiliated company (Note 9) 200,000125,000 -
Short-term borrowings from
parentaffiliated company (Note 9) 478,800 896,456131,200 229,200
Repayment of short-term borrowings
from parent (596,721) (861,500)
Retirement of preferred stock (1,250) -
Retirement of first mortgage bonds (42,600) -affiliated company (218,132) (173,741)
Issuance expense of pollution control bonds (96) - 118,876
Retirement of pollution control bonds - (120,000)
Payment of dividends (2,898) (49,225)(434) (1,057)
Net cash flows from financing activities 35,331 (15,393)37,538 54,402
CHANGE IN CASH (13,615) 13,036AND CASH EQUIVALENTS 26,923 (11,237)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,706 17,015
2,112
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,40028,629 $ 15,1485,778
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 12,9685,241 $ 46,925(1,739)
Interest on borrowed money $ 17,2043,917 $ 22,5236,700
Interest to affiliated companies
on borrowed money $ 2,777 $ 698
The accompanying notes are an integral part of these consolidated financial
statements.
- - Page 5
Louisville Gas and Electric Company and Subsidiary
Consolidated Statement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2002 2003 2002
Balance at beginning of period $442,498 $404,721 $409,319 $393,636
Net income 39,871 34,204 74,891 70,403
Subtotal 482,369 438,925 484,210 464,039
Cash dividends declared on stock:
5% cumulative preferred 269 269 807 807
Auction rate cumulative preferred 174 439 743 1,281
$5.875 cumulative preferred4 - 367 734 1,101
Common - 23,000 - 46,000
Subtotal 443 24,075 2,284 49,189
Balance at end of period $481,926 $414,850 $481,926 $414,850
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended
Ended
September 30, September 30,March 31,
2004 2003 2002 2003 2002
Net income $39,871 $34,204 $74,891 $70,403
Gains (losses)$24,219 $27,264
Losses on derivative instruments and hedging
activities (Note 3) 3,539 (7,691) 955 (10,121)
Income tax benefit (expense) related
to items of other comprehensive
income (1,416) 3,076 (382) 4,049
Other comprehensive income (loss),- net of tax 2,123 (4,615) 573 (6,072)benefit/(expense) of
$2,417 and $13 for 2004 and 2003,
respectively (Note 3) (3,632) (20)
Other Ccomprehensivecomprehensive loss, net of tax (3,632) (20)
Comprehensive income $41,994 $29,589 $75,464 $64,331$20,587 $27,244
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended
Ended
September 30, September 30,March 31,
2004 2003 2002 2003 2002
OPERATING REVENUES (Note 5 and Note 8) $235,426 $235,059 $657,583 $640,1035) $247,386 $224,983
OPERATING EXPENSES:
Fuel for electric generation 75,300 80,380 201,264 196,01869,884 66,323
Power purchased (Note 8) 31,702 27,912 106,550 95,20341,307 41,199
Other operation expenses 35,603 38,151 112,622 108,87438,454 38,889
Maintenance 13,031 12,439 49,400 39,38511,884
28,966
Depreciation and amortization (Note 8) 24,751 24,449 76,663 71,02325,249 24,150
Federal and state income taxes 18,196 17,011 32,263 38,75921,101 6,601
Property and other taxes 4,067 3,689 12,230 11,5654,253 4,195
Total operating expenses 202,650 204,031 590,992 560,827212,132 210,323
NET OPERATING INCOME 32,776 31,028 66,591 79,27635,254 14,660
Other income - net 2,145 5,466 6,948 8,7891,462 2,106
Other income from affiliated company (Note 10) 10 3
Interest chargesexpense (Note 3) 4,611 5,409 17,209 19,871735 4,531
Interest expense to affiliated companies (Note 10) 3,547 377
NET INCOME $ 30,31032,444 $ 31,085 $ 56,330 $ 68,19411,861
Consolidated Statement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Ended
March 31,
2004 2003
Balance at beginning of period $591,170 $502,024
Net income 32,444 11,861
Subtotal 623,614 513,885
Cash dividends declared on stock:
4.75% cumulative preferred 237 237
6.53% cumulative preferred 327 327
Subtotal 564 564
Balance at end of period $623,050 $513,321
The accompanying notes are an integral part of these consolidated financial
statements.
- - Page 76 -
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
September 30,March 31, December 31,
2004 2003 2002
UTILITY PLANT:
At original cost $3,527,901 $3,280,762$3,612,033 $3,596,657
Less: reserve for depreciation 1,600,258 1,536,6581,351,851 1,350,165
Net utility plant (Note 7) 1,927,643 1,744,1042,260,182 2,246,492
OTHER PROPERTY AND INVESTMENTS -
less reserve of $131 and $130 as of September 30, 2003March 31,
2004 and December 31, 2002 17,176 14,3582003, respectively 18,564 17,862
CURRENT ASSETS:
Cash 9,332 5,391and cash equivalents 8,072 4,869
Accounts receivable - less reserve of $953$673
and $800$672 as of September 30, 2003March 31, 2004 and
December 31, 2002,2003, respectively (Note 4) 51,082 49,58883,596 49,289
Materials and supplies - at average cost:
Fuel (predominantly coal) 33,560 46,09038,125 45,538
Other 27,230 26,40827,235 27,094
Prepayments and other 3,432 6,58413,045 13,100
Total current assets 124,636 134,061170,073 139,890
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,832 4,9914,410 4,481
Regulatory assets (Note 6) 53,676 63,77663,556 70,785
Long-term derivative asset 15,917 16,92812,163 12,223
Other 18,499 23,449 20,165
Total deferred debits and other assets 97,874 105,86098,628 110,938
Total assets $2,167,329 $1,998,383$2,547,447 $2,515,182
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
September 30,March 31, December 31,
2004 2003 2002
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 556,662 502,024
Accumulated other comprehensive loss (10,280) (10,462)(6,018) (6,031)
Retained earnings 623,050 591,170
Total common equity 869,200 814,380939,850 907,957
Cumulative preferred stock 39,727 39,727
Long-term debt (Note 9) 346,782 346,562312,027 312,646
Long-term debt to associatedaffiliated company (Note 9) 175,000 -333,000 283,000
Total capitalization 1,430,709 1,200,6691,624,604 1,543,330
CURRENT LIABILITIES:
Current portion of long-term debt 91,930 153,93091,930
Notes payable to parentaffiliated company (Note 9) 98,730 119,49040,731 43,231
Accounts payable 68,193 95,37453,545 69,947
Accounts payable to affiliated companies (Note 10) 9,601 26,426
Accrued taxes 10,558 4,95524,198 8,809
Customer deposits 13,672 13,453
Other 24,765 21,44214,521 11,654
Total current liabilities 294,176 395,191248,198 265,450
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 260,488 241,184267,908 261,258
Investment tax credit, in process of amortization 6,519 8,5005,345 5,859
Accumulated provision for pensions and
related benefits 96,995 110,92757,629 103,101
Customer advances for construction 1,576 1,564
Asset retirement obligation (Note 8) 19,393 -20,023 19,698
Regulatory liabilities (Note 6) 21,003 29,876:
Accumulated cost of removal of utility plant 269,127 266,832
Other 38,046 12,03634,157 38,027
Other 18,880 10,063
Total deferred credits and other liabilities 442,444 402,523674,645 706,402
Total capital and liabilities $2,167,329 $1,998,383$2,547,447 $2,515,182
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
(Thousands of $)
NineThree Months Ended
September 30,March 31,
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,33032,444 $ 68,19411,861
Items not requiring cash currently:
Depreciation and amortization 76,663 71,02325,249 24,150
Deferred income taxes - net 10,277 (2,180)6,022 913
Investment tax credit - net (1,981) (2,216)
Asset retirement obligations (Note 8) 9,460 -(513) (660)
VDT amortization 2,938 3,106
Marked-to-market financial instruments (560) 726
Other 16,074 18,358842 14,324
Changes in current assets and liabilities (4,888) (23,631)
Changes in accounts receivable
securitization-net (Note 4) - 4,900(41,734) (6,371)
Pension funding (Note 9) (9,515) (16,011)(43,409) (3,503)
Provision for post-retirement benefits (2,062) (1,311)
ESM 3,318 3,010
Other 27,690 16,87013,008 4,866
Net cash flows from operating activities 180,110 135,307(4,457) 51,111
CASH FLOWS FROMUSED IN INVESTING ACTIVITIES:
Long-term investments (2,818) (4,137)(702) (485)
Construction expenditures (263,899) (164,766)(38,582) (103,317)
Net cash flows fromused in investing activities (266,717) (168,903)(39,284) (103,802)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from
associatedaffiliated company (Note 9) 175,00050,000 -
Short-term borrowings from
parentaffiliated company (Note 9) 520,840 390,200128,000 444,011
Repayment of short-term borrowings
from parent (541,600) (350,300)
Retirement of first mortgage bonds (62,000) -
Issuanceaffiliated company (130,500) (388,970)
Refund on issuance expense of
pollution control bonds 8 - 36,813
Retirement of pollution control bonds - (37,930)
Payment of dividends (1,692) (1,692)(564) (564)
Net cash flows from financing activities 90,548 37,09146,944 54,477
CHANGE IN CASH 3,941 3,495AND CASH EQUIVALENTS 3,203 1,786
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,869 5,391
3,295
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,3328,072 $ 6,7907,177
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 19,012966 $ 59,070(5,110)
Interest on borrowed money $ 12,6811,577 $ 22,4191,764
Interest to affiliated companies
on borrowed money $ 2,160 $ 366
The accompanying notes are an integral part of these consolidated financial
statements.
- - Page 10
Kentucky Utilities Company and Subsidiary
Consolidated Statement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2002 2003 2002
Balance at beginning of period $526,916 $446,877 $502,024 $410,896
Net income 30,310 31,085 56,330 68,194
Subtotal 557,226 477,962 558,354 479,090
Cash dividends declared on stock:
4.75% cumulative preferred 237 237 711 711
6.53% cumulative preferred 327 327 981 981
Subtotal 564 564 1,692 1,692
Balance at end of period $556,662 $477,398 $556,662 $477,398
The accompanying notes are an integral part of these consolidated financial
statements.
Page 119 -
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended
Ended
September 30, September 30,March 31,
2004 2003 2002 2003 2002
Net income $30,310 $31,085 $56,330 $68,194$32,444 $11,861
Gains (losses) on derivative instruments and hedging
activities (Note 3) 303 (4,475) 303 (2,647)
Income- net of tax benefit benefit/(expense) related to
Items of
other comprehensive income (121) 1,790 (121) 1,059$(13) for 2004 13 -
Other comprehensive income, (loss),
net of tax 182 (2,685) 182 (1,588)13 -
Comprehensive income $30,492 $28,400 $56,512 $66,606$32,457 $11,861
The accompanying notes are an integral part of these consolidated financial
statements.
- - Page 1210 -
Louisville Gas and Electric Company and Subsidiary
Kentucky Utilities Company and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The unaudited consolidated financial statements include the accounts of
Louisville Gas and Electric Company and Subsidiary and Kentucky
Utilities Company and Subsidiary ("LG(each "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.LLC ("LG&E Energy"). In the opinion of management, the
unaudited interim data includesfinancial statements include 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 current reportAnnual Reports on Form 8-K dated November 12,10-K for the year ended
December 31, 2003, 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 nine
months ended September 30, 2002,March
31, 2003, have been revised to conform withto certain reclassifications in
the current three months and nine months
ended September 30, 2003.March 31, 2004. These reclassifications
had no effectimpact on the balance sheet net
income, total assets or total capital and liabilitiesnet income, as
previously reported.
2. On December 11, 2000,Mergers and Acquisitions
LG&E Energy was acquired by Powergen plc, now
known asand KU are each subsidiaries of LG&E Energy. In July 2002, E.ON
AG ("E.ON"), a German company, completed its acquisition of Powergen
Limited ("Powergen"), for cash of approximately $3.2
billion or $24.85 per share and the assumption of allformer parent company of LG&E Energy's
debt.Energy. As a
result, of the acquisition, LG&E Energy became a wholly-
owned indirect subsidiary of Powergen and LG&E and KU became indirect subsidiaries of Powergen. The utility operations (LG&E and KU) of LG&E
Energy continued their separate identities and continue to serve
customers in Kentucky, Virginia and Tennessee under their existing
names. The preferred stock and debt securities of the utility
operations were not affected by this transaction and the utilities
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.
On July 1, 2002, a German company, E.ON AG ("E.ON"), completed its
acquisition of Powergen.E.ON. E.ON had
announced its pre-conditional cash offer of 5.1 billion pounds sterling
($7.3 billion) for Powergen onin April 9, 2001.
Following the acquisition, LG&E and KU became indirect
subsidiariespurchase of Powergen by E.ON, and E.ON became a registered
holding company under PUHCA.the Public Utility Holding Company Act of 1935
("PUHCA"). As a result, E.ON, its utility subsidiaries, including LG&E
and KU, and certain of its non-utility subsidiaries are subject to
extensive regulation by the SEC under PUHCA with respect to issuances
and sales of securities, acquisitions and sales of certain utility
properties, and intra-system sales of certain goods and services.
In addition, PUHCA generally limits the ability of registered holding
companies to acquire additional public utility systems and to acquire
and retain businesses unrelated to the utility operations of the holding
company. LG&E and KU believe that they have adequate authority
(including financing authority) under existing SEC orders and
regulations to conduct their business. LG&E and KU will seek additional
authorization when necessary.
As contemplated in their regulatory filings in connection with the E.ON
acquisition, E.ON, Powergen and LG&E Energy have completed an administrative
reorganization to move the LG&E Energy group from an indirect Powergen
subsidiary to an indirect E.ON subsidiary. This reorganization was
effective in March 2003. In early 2004, LG&E Energy began direct
reporting arrangements to E.ON.
- - Page 13
No costs associated with the Powergen acquisition or the E.ON
acquisition nor any of the effects of purchase accounting have been
reflected in the financial statements11 -
The utility operations (LG&E and KU) of LG&E or KU.Energy have continued
their separate identities and continue to serve customers in Kentucky,
Virginia and Tennessee under their existing names. The preferred stock
and debt securities of LG&E and KU were not affected by these
transactions and LG&E and KU continue to file SEC reports.
Effective December 30, 2003, LG&E Energy LLC became the successor, by
assignment and subsequent merger, to all the assets and liabilities of
LG&E Energy Corp. Following the conversion, LG&E Energy became a
registered holding company under PUHCA.
3. Financial Instruments
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to the
Companies' policies, use of these financial instruments is intended to
mitigate risk, earnings and cash flow 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 designated as a cash flow hedge 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 September 30, 2003,March 31, 2004, LG&E had fixedwas party to various interest rate swaps covering $100.3
million inswap
agreements with aggregate notional amounts of variable rate debt and with$228.3 million. Under
these swap agreements, LG&E paid fixed rates ranging from 4.309% to 5.495%.averaging 4.38% and
received variable rates based on LIBOR or the Bond Market Association's
municipal swap index averaging 0.94% at March 31, 2004. The average variable rate on the debt
during the three months and nine months ended September 30, 2003 was
.93% and 1.09%, respectively. The swapsswap
agreements in effect at March 31, 2004 have been designated as cash
flow hedges and expiremature on various dates ranging from February 2005 through
November 2020.to 2033. The hedges
werehave been deemed to be fully effective resulting in a pretax gainloss of
$6.1 million for the three months and nine months ended September
30, 2003 of $3.2 million and $.7 million, respectively,March 31, 2004, recorded in
other comprehensive income. Upon expiration of these hedges, the
amount recorded in other comprehensive income will be reclassified into
earnings. The amountamounts expected to be reclassified from other
comprehensive income to earnings in the next twelve months is
immaterial due to the long-term nature of the swaps.immaterial.
As of September 30, 2003,March 31, 2004, KU had variablewas party to various interest rate swaps covering
$153.0 million inswap
agreements with aggregate notional amounts of fixed rate debt. The average$103 million. Under
these swap agreements, KU paid variable raterates based on these swaps duringeither LIBOR or
the three monthsBond Market Association's municipal swap index averaging 2.09%, and
nine months
ended September 30, 2003 was 1.76% and 1.88%, respectively. The
underlying debt hasreceived fixed rates ranging from 5.75% to 7.92%.averaging 7.74% at March 31, 2004. The swapsswap
agreements in effect at March 31, 2004 have been designated as fair
value hedges and expiremature on various dates ranging from May 2007 through Septemberto 2025. During the three months and nine
months ended September 30, 2003,For 2004,
the effect of marking these financial instruments and the underlying
debt to market resulted in aimmaterial pretax gain
of $0.8 million and a pretax loss of $1.2 million, respectively,gains recorded as a decrease/increase in interest
expense.
Interest rate swaps hedge interest rate risk on the underlying debt.
Under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, in addition to swaps being marked to market, the item being
hedged using a fair value hedge must also be marked to market.
Consequently at March 31, 2004, KU's debt reflects a $14.1 million mark-
to-market adjustment.
In February 2004, KU terminated the swap it had in place related to
the Series 9 pollution control bonds. The notional amount of the
terminated swap was $50 million and KU received a payment of $2.0
million as part of the termination.
- - Page 12 -
4. Accounts Receivable Securitization Programs
In February 2001, LG&E and KU participate inimplemented accounts receivable
securitization programs. The purpose of these programs iswas to enable
the utilitiesLG&E and KU 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 programs 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.In January 2004, 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 programs, the programs
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 theterminated their accounts receivable
securitization programs and would then be
available for use by the Companies.
As part of these programs, in February 2001,replaced them with intercompany loans from
an E.ON affiliate. 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-yearanticipate dissolving their inactive
accounts receivable securitization facilities with two financial institutionssecuritization-related subsidiaries during 2004.
5. Segment of Business
LG&E's revenues and their
Page 14
affiliates whereby LG&E R and KU R can sell, on a revolving basis, an
undivided interest in certain of their receivables and receive up to
$75 million and $50 million, respectively, from an unrelated third
party purchaser. The effective cost of the receivables programs is
comparable to the Companies' lowest 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 September 30, 2003 and December 31,
2002, LG&E's outstanding program balances were $74.8 million and $63.2
million, respectively, and KU's balance for both periods was $49.3
million. These programs expire in February 2004.
The allowance for doubtful accounts associated with the eligible
securitized receivables was $1.4 million at September 30, 2003 and $2.1
million at December 31, 2002 for LG&E, and $0.5 million for KU at
September 30, 2003 and December 31, 2002. Management believes that the
risk of uncollectibility associated with the sold receivables is
minimal.
5. External and intersegment revenues (related party transactions between
LG&E and KU) andnet income by business segment for the three and nine
months
ended September 30,March 31, 2004 and 2003, follow (in thousands of $):follow:
Three Months Ended September 30, 2003
External Intersegment
Revenues Revenues Net Income (Loss)
LG&E electric $218,194 $11,980 $41,924
LG&E gas 32,659 - (2,053)
Total $250,853 $11,980 $39,871
KU electric $224,426 $11,000 $30,310
Nine Months Ended September 30, 2003
External Intersegment
RevenuesMarch 31, 2004
(in thousands) Revenues Net Income
LG&E electric $549,630 $41,480 $69,413$198,249 $15,943
LG&E gas 213,939 - 5,478163,714 8,276
Total $763,569 $41,480 $74,891
KU electric $624,334 $33,249 $56,330
External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and nine
months ended September 30, 2002, follow (in thousands of $):$361,963 $24,219
Three Months Ended September 30, 2002
External Intersegment
Revenues Revenues Net Income (Loss)
LG&E electric $215,458 $ 4,816 $38,024
LG&E gas 22,800 - (3,820)
Total $238,258 $ 4,816 $34,204
KU electric $228,776 $ 6,283 $31,085
Page 15
Nine Months Ended September 30, 2002
External Intersegment
RevenuesMarch 31, 2003
(in thousands) Revenues Net Income
LG&E electric $538,666 $27,719 $66,774$187,020 $18,051
LG&E gas 170,856 - 3,629139,824 9,213
Total $709,522 $27,719 $70,403
KU electric $610,944 $29,159 $68,194$326,844 $27,264
6. Regulatory Assets and Liabilities
The following regulatory assets and liabilities were included in
theLG&E's balance sheet of LG&E and KUsheets as of September 30, 2003March 31, 2004 and December 31, 2002 (in thousands of $):2003:
Louisville Gas and Electric
(Unaudited)
September 30,March 31, December 31,
(in thousands) 2004 2003
2002
REGULATORY ASSETS:
Value Delivery Teamdelivery team (VDT) costs $ 75,34460,276 $ 98,044
Unamortized loss on bonds 18,004 18,84367,810
Gas supply adjustments due
from customers 29,086 13,71413,896 22,077
Unamortized loss on bonds 21,068 21,333
Earnings sharing mechanism
(ESM) provision 6,311 12,5009,327 12,359
Merger surcredit 5,874 6,220
Manufactured gas sites 1,377 1,454
Asset retirement obligation 5,772 -
LG&E/KU merger costs - 1,815
One(ARO) 6,209 6,015
Gas performance-based ratemaking (PBR) 4,502 5,480
Other 5 24
Total regulatory assets $ 122,534 $ 142,772
Accumulated cost of removal of
utility costs - 954
Manufactured gas sites 1,530 1,757
Other 3,782 5,819
Total $139,829 $153,446
REGULATORY LIABILITIES:plant $(227,187) $(223,622)
Deferred income taxes - net $ 39,191 $ 45,536(40,319) (41,180)
Gas supply adjustments due to customers 3,555 3,154
Other 969 3,734(6,397) (6,805)
ARO (107) (85)
ESM provision (16) (79)
Environmental cost recovery (ECR) (1,076) (17)
Fuel adjustment clause (FAC) (210) (1,950)
Demand side management (DSM) (2,459) (1,706)
Total $ 43,715 $ 52,424regulatory liabilities $(277,771) $(275,444)
LG&E currently earns a return on all regulatory assets except for gas
supply adjustments, ESM, gas performance-based ratemaking, and other,
- Page 13 -
all of which are separate rate mechanisms with recovery within twelve
months. Additionally, no current return is earned on the ARO
regulatory asset. This regulatory asset will be offset against the
associated regulatory liability, ARO asset, and ARO liability at the
time the underlying asset is retired.
The following regulatory assets and liabilities were included in KU's
balance sheets as of March 31, 2004 and December 31, 2003:
Kentucky Utilities
(Unaudited)
September 30,March 31, December 31,
(in thousands) 2004 2003
2002
REGULATORY ASSETS:
Value Delivery Team (VDT)VDT costs $29,389 $38,375$ 23,512 $ 26,451
Unamortized loss on bonds 8,835 9,456
Earnings sharing mechanism10,309 10,511
ESM provision 5,792 13,500
Asset retirement obligation 10,064 -
LG&E/KU merger costs - 2,046
One9,064 12,382
FAC 3,305 4,298
Merger surcredit 4,547 4,815
ARO 11,692 11,322
Post-retirement and pension 1,127 1,006
Total regulatory assets $ 63,556 $ 70,785
Accumulated cost of removal of
utility costs - 873
Other (404) (474)
Total $53,676 $63,776
REGULATORY LIABILITIES:plant $(269,127) $(266,832)
Deferred income taxes - net 19,949 28,854
Other 1,054 1,022(23,430) (24,058)
ARO (1,225) (1,162)
Spare parts (1,064) (1,055)
ECR (6,604) (9,189)
FAC (134) (1,000)
DSM (1,700) (1,563)
Total $21,003 $29,876
Merger Surcredit
As partregulatory liabilities $(303,284) $(304,859)
KU currently earns a return on all regulatory assets except for ESM and
FAC, all of which are separate recovery mechanisms with recovery within
twelve months. Additionally, no current return is earned on the LG&E Energy merger withARO
regulatory asset. This regulatory asset will be offset against the
associated regulatory liability, ARO asset, and ARO liability at the
time the underlying asset is retired.
7. Utility Plant
KU Energy in 1998, LG&E Energy
estimated non-fuel savings over a ten-year period following the merger.
Costs to achieve these savings of $50.2 million for LG&Eretired two steam generating units, Green River Units 1 and $42.3
million for KU were recorded2, in
the second quarteramount of 1998. Of these
amounts $18.1$17.2 million, for LG&Efrom its books as of March 31, 2004.
Approximately $4 million in common assets, which are shared by Green
River Units 3 and $20.5 million for KU was deferred
and amortized over a five-year period pursuant to regulatory orders.
Primary components of the merger costs were separation benefits,
relocation costs, and transaction fees, the majority of which were paid
by December 31, 1998. LG&E and KU expensed the remaining costs
associated with the merger ($32.1 million and $21.8 million,
respectively) in the second quarter of 1998.
In approving the merger, the Kentucky Commission adopted the Companies'
proposal to reduce its retail customers' bills based4, remain on one-half of the
estimated merger-related savings, net of deferred and amortized
amounts, over a five-year period.KU's books. The surcredit mechanism provided
that 50% of the net non-fuel cost savings estimated to be achieved from
the merger be provided to ratepayers through a monthly bill credit, and
50% be retained by the Companies, over a five-year period. The
surcredit was allocated 53% to KU and 47% to LG&E. In that same order,
the Kentucky Commission required LG&E and KU, after the end of the five-
year period, to present a plan for sharing with customers the then-
projected non-fuel savings associated with the merger. The Companies
submitted this filing on January 13, 2003, proposing to continue to
share with customers, on a 50%/50% basis, the estimated fifth-year
gross level of non-fuel savings associated with the merger.
On October 16, 2003, the Kentucky Commission approved a merger
surcredit settlement whereby the surcredit mechanismcommon assets will
remain in
place for an additional five-year period at a levelized amount per year
calculated fromon KU's books until the originally estimated non-fuel savings for years six
through ten. Customersfinal retirement of Green River Units 3
and shareholders will continue to equally share
merger savings on a 50%/50% basis and LG&E's customers will continue to
be allocated 47%, and KU's customers will continue to be allocated 53%,
of the customers' portion of the merger savings. As a part of the
settlement, certain customers, in lieu of receiving monthly credits,
will receive the present value of their estimated surcredits in up-
front payments. These payments, $6.9 million for LG&E and $5.3 million
for KU, will be deferred and amortized over the five-year period
starting July 1, 2003, pursuant to the order. Remaining LG&E and KU
customers will receive credits totaling $18.0 million and $17.9
million, respectively, in each of the five years beginning July 1,
2003.
7.4.
The following data representrepresents shares of jointly ownedjointly-owned additions to the
Trimble County plant for four combustion turbines as of September 30,
2003:March 31, 2004:
LG&E KU Total
Ownership % 37% 63% 100%
Mw capacity 237 403 640
Plant under construction ($mill) $63 $108 $171$73 $124 $197
Depreciation - - -
Net book value $63 $108 $171$73 $124 $197
- - Page 14 -
8. Statement of FinancialNew Accounting Standard (SFAS) No. 143, Accounting
for Asset Retirement Obligations, was issued in 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.
The effective implementation date for SFAS No. 143 wasPronouncements
In January 1, 2003
and the associated FERC final rule, Accounting, Financial Reporting,
and Rate Filing Requirements for Asset Retirement Obligations, was
issued April 9, 2003. As of September 30, 2003, LG&E recorded asset
retirement obligation (ARO) assets in the amount of $4.5 million and
liabilities of $9.8 million. LG&E recorded offsetting regulatory
assets of $5.8 million, pursuant to regulatory treatment prescribed
under SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation. As of September 30, 2003, KU recorded ARO assets in the
amount of $8.6 million and liabilities of $19.4 million. KU recorded
Page 17
offsetting regulatory assets of $10.0 million, pursuant to regulatory
treatment prescribed under SFAS No. 71. LG&E and KU AROs are primarily
related to final retirement of assets associated with 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. The Companies are in the
process of calculating the amount of the costs of removal embedded in
accumulated depreciation.
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 nine months ended September 30, 2003, LG&E
recorded ARO accretion expense of $154,000 and $462,000, respectively,
ARO depreciation expense of $29,000 and $88,000, respectively, and an
offsetting regulatory credit in the income statement of $185,000 and
$550,000, respectively. For the three months and nine months ended
September 30, 2003, KU recorded ARO accretion expense of $306,000 and
$916,000, respectively, ARO depreciation expense of $44,000 and
$131,000, respectively, and an offsetting regulatory credit in the
income statement of $350,000 and $1.0 million, respectively. The
recording of the regulatory credit is pursuant to regulatory treatment
prescribed under SFAS No. 71. SFAS No. 143 has no impact on the results
of the operation 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
- 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. 133 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. 133, Accounting for Derivative Instruments and Hedging
Activities, must be restated to historical cost through a cumulative
effect adjustment. The rescission of this standard had no impact on
financial position or results of operations of the Companies since all
contracts marked to market under EITF No. 98-10 are also within the
scope of SFAS No. 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.
Page 18
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2002 2003 2002
LG&E:
Gross electric operating revenues $230,174 $223,017 $591,110 $581,076
Less costs reclassified
from power purchased - 2,743 - 14,691
Net electric operating
revenues reported $230,174 $220,274 $591,110 $566,385
KU:
Gross electric operating revenues $235,426 $239,020 $657,583 $657,744
Less costs reclassified
from power purchased - 3,961 - 17,641
Net electric operating
revenues reported $235,426 $235,059 $657,583 $640,103
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2002 2003 2002
LG&E:
Gross power purchased $ 18,805 $ 15,322 $ 60,245 $ 60,967
Less costs reclassified to revenues - 2,743 - 14,691
Net power purchased reported $ 18,805 $ 12,579 $ 60,245 $ 46,276
KU:
Gross power purchased $ 31,702 $ 31,873 $106,550 $112,844
Less costs reclassified to revenues - 3,961 - 17,641
Net power purchased reported $ 31,702 $ 27,912 $106,550 $ 95,203
In May 2003, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51 (FIN 46). FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 was
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46
must have been applied for the first interim or annual period beginning
after June 15, 2003.
In December 2003, FIN 46 was revised, delaying the effective dates for
certain entities created before February 1, 2003, and making other
amendments to clarify application of the guidance. For potential
variable interest entities other than special purpose entities, the
revised FIN 46 (FIN 46R) is now required to be applied no later than
the end of the first fiscal year or interim reporting period ending
after March 15, 2004. For all special purpose entities created prior
to February 1, 2003, FIN 46R is now required to be applied at the end
of the first interim or annual reporting period ending after December
15, 2003. FIN 46R may be applied prospectively with a cumulative-
effect adjustment as of the date it is first applied, or by restating
previously issued financial statements with a cumulative-effect
adjustment as of the beginning of the first year restated. FIN 46R
also requires certain disclosures of an entity's relationship with
variable interest entities.
Both LG&E and KU hold investment interests in the Ohio Valley Electric
Corporation ("OVEC"), and KU holds an investment interest in Electric
Energy, Inc. ("EEI"). Neither LG&E nor KU are the primary beneficiary
of OVEC or EEI, and thus neither are consolidated into the financial
statements of LG&E or KU.
LG&E, KU and ten other electric utilities are participating owners of
OVEC, located in Piketon, Ohio. OVEC owns and operates two power plants
that burn coal to generate electricity, Kyger Creek Station in Ohio and
Clifty Creek Station in Indiana. LG&E's share is 7%, representing
approximately 155 Mw of generation capacity and KU's share is 2.5%,
approximately 55 Mw of generation capacity.
LG&E's and KU's original investment in OVEC was made in 1952. LG&E's
investment in OVEC is the equivalent of 4.9% of OVEC's common stock and
KU's investment is the equivalent of 2.5% of OVEC's common stock.
LG&E's and KU's investment in OVEC is accounted for on the cost method
of accounting. As of March 31, 2004, LG&E's and KU's investment in OVEC
totaled $0.5 million and $0.3 million, respectively. LG&E's and KU's
maximum exposure to loss as a result of their involvement with OVEC is
limited to the value of their investment. In the event of the inability
of OVEC to fulfill its power provision requirements, LG&E and KU would
substitute such power supply with either owned generation or market
purchases and would recover any associated incremental costs through
regulatory rate mechanisms. See Part II, Item 1, for further
discussion of current legal proceedings regarding LG&E's and KU's
ownership interests and power purchase rights.
KU owns 20% of the common stock of EEI, which owns and operates a 1,000-
Mw generating station in southern Illinois. KU is entitled to take 20%
of the available capacity of the station. Purchases from EEI are made
under a contractual formula which has resulted in costs which were and
are expected to be comparable to the cost of other power purchased or
generated by KU. Such power equated to approximately 9% of KU's net
generation system output in 2003.
- - Page 15 -
KU's original investment in EEI was made in 1953. KU's investment in
EEI is accounted for on the equity method of accounting. As of March
31, 2004, KU's investment in EEI totaled $11.4 million. KU's maximum
exposure to loss as a result of its involvement with EEI is limited to
the value of its investment. In the event of the inability of EEI to
fulfill its power provision requirements, KU would substitute such
power supply with either owned generation or market purchases and would
recover any associated incremental costs through regulatory rate
mechanisms.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 iswas effective immediately for financial
instruments entered into or modified after May 31, 2003, and otherwise
iswas effective for interim reporting periods beginning after June 15,
2003, except for certain instruments and certain
entities which have been deferred by the FASB. Such deferrals do not
affect LG&E and KU..2003.
LG&E has existing237,500 shares of $5.875 series mandatorily redeemable
preferred stock 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 15 of each year
commencing with July 15, 2003, and a minimum ofthe remaining 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, leaving 237,500 shares currently outstanding. Beginning with the three months ended
September 30, 2003, LG&E reclassified at fair value, its $5.875 series preferred stock
as long-
termlong-term debt with the minimum shares mandatorily redeemable within
one year classified as current portion of long-term debt.current. Dividends accrued beginning July 1,
2003 are charged as interest expense.
KU has no financial instruments that fall within the scope of SFAS No.
150.
9. Short-Term and Long-Term Debt
Under the provisions for LG&E's variable-rate pollution control bonds,
Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution
control bonds Series 10, 12, 13, 14, and 15, the bonds are subject to
tender for purchase at the option of the holder and to mandatory tender
for purchase upon the occurrence of certain events, causing the bonds
to be classified as current portion of long-term debt in the
Consolidated Balance Sheets. The average annualized interest rate for
these bonds during the three months ending March 31, 2004 was 1.10% for
the LG&E bonds and 1.07% for the KU bonds.
In October 2003, KU issuedJanuary 2004, LG&E entered into a redemption notice to holders of Series P,
8.55% first mortgage bonds ($33.0 million). These bonds will be
redeemed on November 25, 2003. The redemption will be funded with long-
term loanslong-term loan from Fidelia
Corporation ("Fidelia"), an E.ON affiliate.
On August 15, 2003, LG&E borrowedfinancing subsidiary, totaling $25
million with an interest rate of 4.33% that matures in January 2012,
and a one-year loan totaling $100 million fromwith an E.ON affiliate
for a ten-year term at 5.31%interest rate of
1.53%. The loan isloans are secured by a second lien on
substantially all of LG&E's assets.subordinated to the first
mortgage bond lien. The proceeds were used to repayfund a maturing first mortgage bond of $42.6 millionpension
contribution and to repay notesother debt obligations. In April 2004, LG&E
prepaid $50 million of the $100 million 1.53% note payable to affiliates.
Page 19
On August 15, 2003,Fidelia.
The prepayment was paid out of cash balances and there was no
prepayment fee.
In January 2004, KU borrowed $75entered into an unsecured long-term loan from
Fidelia totaling $50 million fromwith an E.ON affiliate for
a ten-year term at 5.31%. The loan is secured by a second lien on
substantially allinterest rate of KU's assets.4.39% that
matures in January 2012. The proceeds were used to fund a pension
contribution and to repay notes
payable to affiliates, some of which were the result of the repayment
of a $62 million first mortgage bond.
During July 2003,other debt obligations.
LG&E entered intomaintains five revolvingbilateral lines of credit with third-party financial institutions totaling $185 million. These
credit facilities expiremillion
that mature in June 2004, and there2004. There was no outstanding balance under any of these
facilities at September 30, 2003.
The CompaniesMarch 31, 2004. Management expects to renew these
facilities as they expire.
LG&E and KU participate in aan intercompany money pool wherebyagreement wherein
LG&E Energy canand KU make funds available to LG&E at market-based rates
(based on an index of highly rated commercial paper issues as of the
prior month end) up to $400 millionmillion. Likewise, LG&E Energy and LG&E
- - Page 16 -
make funds available to KU at market-based rates for eachup to $400 million.
LG&E had no money pool loan from LG&E Energy (shown as "Notes payable
to affiliate") at March 31, 2004, and had a balance of $248.5 million
at an average rate of 1.25% at March 31, 2003. The balance of the money
pool loans from LG&E Energy and KU.LG&E to KU (shown as "Notes payable to
affiliate") was $40.7 million at an average rate of 0.98% and $174.5
million at an average rate of 1.25% at March 31, 2004 and 2003,
respectively. The amount available to LG&E under the money pool
agreement at March 31, 2004 was $400 million. The amount available to
KU under the money pool agreement at March 31, 2004 was $359.3 million.
LG&E Energy maintains a revolving credit facility totaling $150 million
with an
E.ON affiliate to ensure funding availability for the money pool.
There
was $46.0 million outstanding under E.ON affiliates' line as of
September 30, 2003, leaving $104.0 million available. LG&E Energy had no outstanding balance under this facility as of March
31, 2004 and availability of $150 million remained.
10.Related Party Transactions
LG&E, KU, subsidiaries of LG&E Energy and other subsidiaries of E.ON
engage in related-party transactions. Prior to the termination of the
accounts receivable securitization programs at LG&E and KU in January
2004, transactions between LG&E and its accounts receivable subsidiary,
LG&E Receivables LLC ("LG&E R"), were eliminated upon consolidation
with LG&E. Transactions between KU and its accounts receivable
subsidiary, KU Receivables LLC ("KU R"), were eliminated upon
consolidation with KU. Transactions among LG&E, KU and LG&E Energy
subsidiaries are eliminated upon consolidation of LG&E Energy.
Transactions between LG&E or KU and E.ON subsidiaries are eliminated
upon consolidation of E.ON. These transactions are generally performed
at cost and are in accordance with the SEC regulations under the PUHCA
and the applicable Kentucky Public Service Commission ("Kentucky
Commission") regulations. Accounts payable to and receivable from
related parties are netted and presented as accounts payable to
affiliated companies on the balance sheets of LG&E and KU, as allowed
due to the right of offset. Obligations related to intercompany debt
arrangements with LG&E Energy and Fidelia are presented as separate
line items on the balance sheet, as appropriate. The significant
related-party transactions are disclosed below.
Electric Purchases
LG&E and KU intercompany electric revenues and purchased power expense
(including LG&E Energy Marketing Inc. ("LEM")) for the three months
ended March 31, 2004 and 2003 were as follows:
(in thousands) 2004 2003
LG&E
Electric operating revenues from KU $22,077 $16,969
Electric operating revenues from LEM 728 7,149
Purchased power from KU 21,585 14,464
KU
Electric operating revenues from LG&E $21,585 $14,464
Electric operating revenues from LEM 160 1,782
Purchased power from LG&E 22,077 16,969
Interest Charges
LG&E intercompany interest income and expense for the three months
ended March 31, 2004 and 2003 were as follows:
(in thousands) 2004 2003
Interest on money pool loans $ 48 $732
Interest on Fidelia loans 3,082 -
Interest expense paid to KU 10 3
Interest income received from KU - 4
KU intercompany interest income and expense for the three months ended
March 31, 2004 and 2003 were as follows:
(in thousands) 2004 2003
Interest on money pool loans $ 144 $373
Interest on Fidelia loans 3,403 -
Interest expense paid to LG&E - 4
Interest income received from LG&E 10 3
- - Page 17 -
Other Intercompany Billings
Other intercompany billings (including LG&E Energy Services Inc. ("LG&E
Services")) related to LG&E and KU throughfor the money pool that totaled
$75.1 millionthree months ended March 31,
2004 and $98.7 million, respectively,2003 were as of September 30,
2003. These borrowings carried a thirty-day average interest rate of
1.06% at September 30,follows:
(in thousands) 2004 2003
based on an index of highly rated
commercial paper issuers as of the prior month end. LG&E Services billings to LG&E $38,161 $26,630
LG&E Services billing to KU 30,575 21,494
LG&E billings to LG&E Services 3,035 4,862
KU billings to LG&E Services 2,818 7,094
LG&E billings to KU 16,559 18,710
KU billings to LG&E 8,663 4,664
11.Commitments and KU had
available under the money pool, $324.9 million and $301.3 million,
respectively, as of September 30, 2003.Contingencies
In AugustDecember 2003, LG&E and KU contributed an additional $6.0filed applications with the Kentucky
Commission requesting increases in LG&E's and KU's electric rates and
LG&E's gas rates. The Companies requested general adjustments in
electric rates and LG&E requested general adjustments in gas rates
based on the twelve-month test year ended September 30, 2003. The
revenue increases requested by LG&E were $63.8 million eachfor electric and
$19.1 million for gas. The revenue increase requested by KU was $58.3
million. The Kentucky Commission has suspended the effective date of
the proposed new tariffs for five months, so that the rates may go into
effect subject to refund by July 1, 2004. The Kentucky Commission
established a procedural schedule for the cases pertaining to discovery
and hearings.
The Companies filed their final 2003 ESM calculations with the Kentucky
Commission on March 1, 2004, and applied for recovery of $16.2 million
related to KU and $13.0 million related to LG&E. Based upon estimates,
the Companies previously accrued $9.3 million at KU and $8.9 million at
LG&E for the 2003 ESM as of December 31, 2003. The Companies have not
booked or accrued to date the respective pension plans.
10.Inincreases of $6.9 million and
$4.1 million, pending resolution of ongoing Kentucky Commission
proceedings regarding aspects of the ESM mechanism, including allowable
recoverable amounts. On March 31, 2004, the Kentucky Commission issued
orders consolidating the prior ESM cases into the general LG&E and KU
proceedings regarding increases in base rates.
During May 2004, the Kentucky Commission held hearings on the
applications for rate increases. On May 12, the Companies and all
intervenors filed a partial settlement agreement, stipulation and
recommendation with the Kentucky Commission providing for settlement of
all outstanding issues, except electric revenue requirements. All
intervenors except the Kentucky Attorney General entered a stipulation
on the electric revenue requirements. Testimony for the utilities and
the Attorney General was presented on electric revenues. All testimony
of all other intervenors and testimony of the Attorney General on other
issues was withdrawn. The agreement and stipulation provides for
increases in annual base electric rates of $43.4 million for LG&E and
$46.1 million for KU, and in annual gas rates of $11.9 million for LG&E
and provides for settlement of other issues such as various tariff
provisions, implementation of a pilot real-time pricing program,
implementation of a home energy assistance program and others. The
agreement provides that the rate increases would be effective
commencing July 1, 2004.
The Companies and the intervenors, including the Attorney General, also
filed proposed settlements regarding the ESM mechanisms of LG&E and KU.
Under the ESM settlements, LG&E and KU would continue to collect
approximately $13.0 million and $16.2 million, respectively, of
previously requested 2003 ESM revenue amounts through March 2005. As
part of the settlement, the parties agreed to a termination of the ESM
mechanism relating to all periods after 2003.
- - Page 18 -
The potential settlements are subject to Kentucky Commission approval.
Final Kentucky Commission orders in the rate case and related
proceedings, including the tendered settlements, are anticipated before
July 1, 2004. The Companies can provide no assurance regarding the
Commission's final decision regarding the partial agreement,
stipulation and recommendation of the parties or the ESM settlement.
Regulatory proceedings are also continuing concerning the Midwest
Independent Transmission System Operator ("MISO"). LG&E and KU
obtained membership in the MISO in 1998 in response to federal policy
initiatives. During March and April 2004, the Kentucky Commission held
hearings in the proceedings examining the cost and benefits of MISO
membership, including rate treatment of MISO costs and continued LG&E
and KU participation. A final order in the proceedings is anticipated
in mid-2004.
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 isor
other appropriate reserves are 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,Except as discussed in October 2001, approximately 30 employeesthis Quarterly Report on Form 10-Q, material
changes have not occurred in the current status of various commitments
or former employees filed a complaint against LG&E claiming pastcontingent liabilities from that discussed in the Companies' Annual
Report on Form 10-K for the year ended December 31, 2003 (including in
Notes 3 and current instances of employment discrimination. LG&E has moved the
case11 to the U.S. District Court for the Western Districtfinancial statements 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 immaterial 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 2003, additional
settlements for immaterial amounts were reached with a number of
plaintiffs, including a settlement with the lead plaintiff, which
reduced the number of remaining plaintiffs to nine. LG&E intends to
continue to defend itself vigorously in the remaining action and
management does not anticipate that the outcome will have a material
impact on LG&E's operations or financial condition.
Combustion Turbine Litigation
In October 2003, LG&E and KU contained
therein and third parties completed a settlement
agreement to dismissincorporated herein by reference).
12.Pension and Other Post-retirement Benefit Plans
The following table provides the Companies' previously reported lawsuit in the
U.S. District Courtcomponents of net periodic benefit
cost for pension and other benefit plans for the Eastern Districtthree months ended
March 31, 2004:
(in thousands) LG&E KU
Pension and Other Benefit Plans:
Components of Kentucky against Alstom
Power, Inc. (formerly ABB Power Generation, Inc.). The suit concerned
Page 20
operational deficienciesnet period benefit cost
Service cost $ 2,088 $ 2,386
Interest cost 10,524 7,650
Expected return on plan assets (9,585) (6,909)
Amortization of two combustion turbines supplied by Alstom
during 1999, installed at KU's E.W. Brown plant and jointly owned by
LG&E and KU. The settlement agreement provides for $20 million
reimbursement in two installments to be paid inprior service cost 2,003 583
Amortization of transition (asset)
or obligation (5) 319
Recognized actuarial (gain) or loss 1,105 839
$ 6,130 $ 4,868
In January and April 2004,
to LG&E and KU made discretionary contributions to their
pension plans in the amounts of $34.5 million and $43.4 million,
respectively. No contributions are required for the Companies' expenditures incurred regarding the
turbines. The parties also entered into a long-term service agreement,
whereby Alstom will provide to2004 for either LG&E
or KU and KU certain future inspections,
repairs and services for the turbines.no further discretionary contributions are planned.
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 nine month periodsperiod ended
September 30, 2003,March 31, 2004, and should be read in connection with the financial
statements and notes thereto.
- - Page 19 -
Some of the following discussion may contain forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document
by the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include:
general economic conditions; business and competitive conditions in the
energy industry; changes in federal or state legislation; unusual weather;
actions by state or federal regulatory agencies; and other factors
described from time to time in LG&E's and KU's reports to the Securities
and Exchange Commission,SEC,
including the current reportAnnual Reports on Form 8-K
dated November10-K for the year ended December 31,
2003.
Executive Summary
LG&E's net income for the three months ended March 31, 2004 was $24.2
million ($3.0 million lower than the three months ended March 31, 2003).
The decrease was primarily related to higher operation expenses (MISO-
related costs and data conversion costs), somewhat offset by higher
wholesale electric revenues. Electric sales volumes increased due to higher
wholesale sales while gas volumes decreased due to milder weather. KU's
net income for the three months ended March 31, 2004 was $32.4 million
($20.6 million higher than the three months ended March 31, 2003). The
increase was primarily due to higher electric revenues in both the retail
and wholesale sectors and lower maintenance expense (KU experienced
unusually high maintenance costs in the first quarter of 2003 due to a
major ice storm).
As regulated utilities, LG&E and KU's financial performance is greatly
impacted by regulatory proceedings. In December 2003, LG&E and KU filed
applications with the Kentucky Commission requesting an adjustment in
LG&E's electric and gas rates and KU's electric rates. LG&E applied for
revenue increases of $63.8 million for electric and $19.1 million for gas.
KU applied for revenue increases of $58.3 million.
During May 2004, the Kentucky Commission held hearings on the applications
on rate increases. On May 12, the Companies and all intervenors filed a
partial settlement agreement, stipulation and recommendation with the
Kentucky Commission providing for settlement of all outstanding issues,
except electric revenue requirements. All intervenors except the Kentucky
Attorney General entered a stipulation on the electric revenue
requirements. Testimony for the utilities and the Attorney General was
presented on electric revenues. All testimony of all other intervenors and
testimony of the Attorney General on other issues was withdrawn. The
agreement and stipulation provides for increases in annual base electric
rates of $43.4 million for LG&E and $46.1 million for KU, and in annual gas
rates of $11.9 million for LG&E and provides for settlement of other issues
such as various tariff provisions, implementation of a pilot real-time
pricing program, implementation of a home energy assistance program and
others. The agreement provides that the rate increases would be effective
commencing July 1, 2004.
The Companies and the intervenors, including the Attorney General, also
filed proposed settlements regarding the ESM mechanisms of LG&E and KU.
Under the ESM settlements, LG&E and KU would continue to collect
approximately $13.0 million and $16.2 million, respectively, of previously
requested 2003 ESM revenue amounts through March 2005. As part of the
settlement, the parties agreed to a termination of the ESM mechanism
relating to all periods after 2003. Previously, on March 31, 2004, the
Kentucky Commission had issued orders consolidating the prior ESM cases
into the general LG&E and KU proceedings regarding increases in base rates.
The potential settlements are subject to Kentucky Commission approval.
Final Kentucky Commission orders in the rate case and related proceedings,
including the tendered settlements, are anticipated before July 1, 2004.
The Companies can provide no assurance regarding the Commission's final
decision regarding the partial agreement, stipulation and recommendation of
the parties or the ESM settlement.
- - Page 20 -
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 September 30, 2003,March 31, 2004, Compared to
Three Months Ended September 30, 2002March 31, 2003
LG&E Results:
LG&E's net income increased $5.7decreased $3.0 million (17%(11%) for the three months ended
September 30, 2003,March 31, 2004, as compared to the three months ended September 30,
2002March 31, 2003,
primarily because of increased wholesale electric salesdue to higher other operation expenses and higher interest
expenses, partially offset by decreased retailhigher electric sales.revenues.
A comparison of LG&E's revenues for the three months ended September 30,
2003,March 31, 2004,
with the three months ended September 30, 2002,March 31, 2003, reflects increases and
(decreases) which have been segregated by the following principal causes (in thousands of $):causes:
Cause Electric Gas
Cause(in thousands) Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ 3,481(2,805) $ 7,17137,631
Environmental cost recovery surcharge (2,560)2,398 -
Earnings sharing mechanism 3,256 -
Demand side management cost recovery 398 (17)184 (299)
LG&E/KU merger surcredit (947)(472) -
Value delivery surcredit (1,111) (127)(181) -
Weather normalization - 2,686
Variation in sales volume and other (10,339) 2,737(1,307) (16,468)
Total retail sales (11,078) 9,764
Page 211,073 23,550
Wholesale sales 20,793 -12,116 755
Gas transportation - net - (71)(69)
Provision for rate collections (refunds) (3,999) -
Other 185 1662,039 (346)
Total $ 9,90011,229 $ 9,85923,890
Electric revenues increased $11.2 million primarily due to an increase in
wholesale sales (volumes increased 135%, resulting in $24.4 million higher revenues) and
higher fuel supply cost billed to customers, partially offset by a decrease
in retail volumes sold due to a 29% decrease in cooling degree days.of 22%. Gas revenues increased $23.9 million
primarily as a result of higherincreased gas supply costsprices billed to customers through
the gas supply clause, and increasedpartially offset by 11% lower gas sales volumes
sold.resulting from warmer weather as heating degree days declined 12.3% from
the previous year.
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. LG&E's electric and gas
rates contain a fuel adjustment clause and a gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply are reflected in retail rates, subject to the approval of the
Kentucky Public Service Commission (Kentucky Commission).Commission. Fuel for electric generation increased $2.8$3.0 million
(5%(6%) for the three months ended September 30, 2003,March 31, 2004, due to an increase7% higher megawatt
hour ("MWH") generation resulting in in the quantity of fuel consumed
for generation to supply wholesale sales ($5.0 million), partiallya $3.4 million volume variance, offset
by 1% lower fuel costs per MWH, resulting in a decrease in the cost of coal burned ($2.2 million).0.4) million price
variance. Gas supply expenses increased $8.4$24.6 million (76%(23%) due to an increase9%
higher gas prices per million cubic feet ("MCF"), resulting in net gas supply
cost ($7.8 million)a $37.0
million price variance, and an increase$0.2 million in the volume of retail gas deliveredhigher costs due to the distribution systemimpact
of the gas PBR mechanism, partially offset by 11% lower volumes, resulting
in a ($0.6 million).12.7) million volume variance.
- - Page 21 -
Power purchased increased $6.2$4.8 million (49%(20%) due to 20% higher MWH
purchases, resulting in a $5.2 million volume variance. The cost per MWH
of purchased power decreased 1% resulting in a ($0.4) million price
variance.
Other operation expenses increased purchases for$4.5 million (9%) due primarily to
higher transmission expense of $3.1 million due to increased MISO expense
resulting from higher off-system sales (49%and higher volumes resulted in a $6.2MISO administrative fees.
Electric distribution expense increased $1.4 million volume variance).
Maintenance expense decreased $6.3 million (34%)primarily due to a decrease in
expensesdata
conversion costs related to steam power production as a result of decreased plant
outages ($4.3 million) and fewer gas main repairs ($2.0 million)distribution systems project.
Variances in 2003 as
compared to 2002.
Although income tax expense increased dueare largely attributable to higher pre-tax income, prior
year adjustments bookedchanges in the third quarter of 2003 reducedpre-
tax expense in
the period and lowered the effective tax rate.income.
Three Months Three Months
Ended Ended
September 30, 2003September 30, 20
02March 31, 2004 March 31, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 4.9 5.55.6 5.6
Amortization of investment and other tax credits (1.7) (1.8)(2.7) (2.4)
Other differences (2.4) (0.1) (0.4)
Effective income tax rate 35.8% 38.6%
Interest charges37.8% 37.8%
In total, interest expense increased $.5$0.9 million (6%(13%) in 20032004. Interest
expense decreased $1.5 million due to a $2.3 million decrease in interest
expense on long-term debt related to lower variable rates (including the
$102 million Series V and $26 million Series W pollution control bonds
which were refinanced from higher fixed rates to lower variable rates in
November 2003). This decrease was partially offset by an increase of $0.9
million primarily due to $.3
million in additionalnew interest expenserate swaps related to preferred dividends
reclassified as debtthe refinancing
of Series V and W. Interest expense to affiliated companies increased $2.4
million due to $3.1 million related to new loans from Fidelia which were
only in accordance with SFAS No. 150, Accountingeffect for Certain Financial Instruments with Characteristics2004, partially offset by a decrease of Both Liabilities and
Equity.$0.7 million due
to lower borrowing levels from the money pool. The weighted average
interest rate on variable-rate bonds for the three months ended September 30, 2003,March 31,
2004, was 0.99%1.03%, compared to 1.42%1.22% for the comparable period in 2002.2003.
In total, other income (expense) - net decreased $1.5 million (143%). Mark-
to-market income from energy trading contracts was $0.6 million lower in
2004 and other non-operating expense was $1.1 million higher, offset by
taxes $0.2 million lower.
KU Results:
KU's net income decreased $.8increased $20.6 million (2%(174%) for the three months ended
September 30, 2003,March 31, 2004, as compared to the three months ended September 30,
2002.March 31, 2003. The
decreaseincrease was primarily due to decreased other income, partially
offset by decreased other operation expenses.
Page 22higher electric revenues and lower
maintenance expense.
A comparison of KU's revenues for the three months ended September 30,
2003,March 31, 2004,
with the three months ended September 30, 2002,March 31, 2003, reflects increases and
(decreases) which have been segregated by the following principal causescauses:
Cause Electric
(in thousands of $):
Electric
Causethousands) Revenues
Retail sales:
Fuel supply adjustments $ 4,1672,889
Environmental cost recovery surcharge 840451
Earnings sharing mechanism 3,909
Demand side management cost recovery (243)
LG&E/KU merger surcredit (491)(757)
Value delivery surcredit (464)(79)
Variation in sales volume and other (8,956)2,510
Total retail sales (4,904)8,680
Wholesale sales 4,1826,555
Provision for rate collections (refunds) 4,169
Other 1,0892,999
Total $ 367
Higher$22,403
- - Page 22 -
Electric revenues increased $22.4 million primarily due to increased
wholesale revenues, due toprices and 12% higher volumes, increased billings for the
earnings sharing mechanism and fuel cost recovery, increased retail sales
volumes of 2% and an increase in wholesale sales volumes,
and higher fuel costs billed to customers, were offset by lower retail
sales volumes due to a 33% decrease in cooling degree days.the provision for rate collections.
Fuel for electric generation comprises a large component of KU's total
operating expenses. KU's electric rates contain a fuel adjustment clause,
whereby increases or decreases in the cost of fuel are reflected in retail
rates, subject to the approval of the Kentucky Commission, the Virginia
State Corporation Commission, and the Federal Energy Regulatory Commission.Commission
("FERC"). Fuel for electric generation decreased $5.1increased $3.6 million (6%(5%) for the
quarter
because of a 7% decrease in the quantity of fuel consumed for generation
($6.0 million)three months ended March 31, 2004, due to 5% higher fuel costs per MWH,
resulting in a decrease$0.3 million price variance, and 0.4% higher MWH generation,
resulting in native load requirements,a $3.3 million volume variance.
Power purchased increased $0.1 million (0.3%) due to 8% higher MWH
purchases, resulting in a $3.4 million volume variance, partially offset by
an increase7% lower cost per MWH purchased, resulting in a ($3.3) million price
variance.
Maintenance expense decreased $17.1 million (59%). An ice storm in the costKU
service territory in 2003 resulted in increased expenses of coal burned ($.9 million)$15.9 million
for the three months ended March 31, 2003, for repairs to electric
distribution equipment. Steam maintenance expense was $2.6 million lower
in 2004 due to higher purchasesthe timing of compliance coal.
Power purchased increased $3.8 million (14%) due to a 34% increase in
the volume purchased ($9.5 million), partially offset by a decrease in the
price of power purchased ($5.7 million). The increase in volumes is
attributable to higher intercompany purchases from LG&E.
Other operation expenses decreased $2.5 million (7%) due primarily to a
decrease in the amortization of prior "KU/LG&E Merger"outages and "One Utility"
workforce reduction programs expenses ($1.9 million) and lower injury and
liability claims from third parties ($.6 million).other maintenance projects.
Variations in income tax expense are largely attributable to changes in
pretax income.
The change in other differences is due to the change in
KU's equity earnings from a minority interest.
Three Months Three Months
Ended Ended
September 30,March 31, 2004 March 31, 2003 September 30,2002
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of
federal benefit 5.0 4.9
Amortization of investment and
other tax credits (1.4) (1.6)
Other differences (2.9) (4.3)
Effective income tax rate 35.7% 34.0%
Other income - net decreased $3.3 million (61%) in 2003 primarily due to a
decrease in minority interest earnings, $3.8 million, partially offset by
lower taxes.
Page 23
Interest charges decreased $.8 million (15%) for the three months ended
September 30, 2003 as compared to the three months ended September 30,
2002, due primarily to lower interest rates on variable-rate debt and the
replacement of fixed-rate debt with variable-rate debt. The weighted
average interest rate on variable-rate bonds for the three months ended
September 30, 2003, was 0.91% and the corresponding rate for the three
months ended September 30, 2002, was 1.57%.
Nine Months Ended September 30, 2003, Compared to
Nine Months Ended September 30, 2002
LG&E Results:
LG&E's net income increased $4.5 million (6%) for the nine months ended
September 30, 2003, as compared to the nine months ended September 30,
2002, primarily because of an increase in wholesale electric sales and gas
retail sales partially offset by a decrease in retail electric sales and an
increase in purchased power costs.
A comparison of LG&E's revenues for the nine months ended September 30,
2003, with the nine months ended September 30, 2002, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ 8,071 $32,005
Environmental cost recovery surcharge (1,283) -
Demand side management cost recovery 1,068 380
LG&E/KU merger surcredit (1,396) -
Value delivery surcredit (2,627) (956)
Earnings sharing mechanism 972 -
Weather normalization - (2,509)
Variation in sales volume and other (16,114) 20,357
Total retail sales (11,309) 49,277
Wholesale sales 34,381 (6,141)
Gas transportation - net - (82)
Other 1,653 29
Total $24,725 $43,083
Electric revenues increased primarily due to an increase in wholesale sales
prices ($16.2 million), an increase in wholesale sales volumes ($18.2
million) and higher fuel supply costs billed to customers. Retail volumes
decreased due to a 33% decrease in cooling degree days. Gas revenues
increased primarily as a result of higher gas supply costs billed to
customers through the gas supply clause and increased volumes sold due to
an increase in heating degree days (20%), partially offset by a decrease in
wholesale sales.
Fuel for electric generation increased $3.9 million (3%) for the nine
months due to an increase in the quantity of fuel consumed for generation
($4.8 million) partially offset by a decrease in the cost of coal burned
($.9 million). Gas supply expenses increased $38.7 million (34%) due to an
increase in net gas supply cost ($33.5 million) and an increase in the
volume of retail gas delivered to the distribution system ($9.9 million),
partially offset by decreased wholesale gas expenses ($4.7 million).
Power purchased increased $14.0 million (30%) due to an increase in the
price of power purchased ($10.3 million) and an increase in the volume of
purchases ($3.7 million) related to wholesale sales.
Page 24
Other operation expenses increased $4.3 million (3%) primarily due to
higher costs demand-side management programs ($2.1 million) and increased
benefit costs ($2.2 million).
Maintenance expenses decreased $4.3 million (9%) due to a decrease in
expenses related to steam power production as a result of decreased plant
outages ($3.9 million), fewer transmission and distribution line repairs
($1.1 million), and fewer gas main repairs ($1.4 million) partially offset
by an increase in communications maintenance expense ($2.5 million).
Depreciation and amortization expense increased $6.5 million (8%) due to
additional utility plant in service.
Although income tax expense increased due to higher pre-tax income, prior
year adjustments booked in the third quarter of 2003 for reduced tax
expense in the period and lowered the effective tax rate.
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 20
02
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes
net of federal benefit 5.3 5.3
Amortization of investment
and other tax credits (2.7) (2.8)
Other differences (1.6) (0.1)
Effective income tax rate 36.0% 37.4%
Interest charges decreased $.3 million (1%) due primarily to lower interest
rates on variable-rate debt. The weighted average interest rate on
variable-rate bonds for the nine months ended September 30, 2003 was 1.12%,
compared to 1.55% for the comparable period in 2002.
KU Results:
KU's net income decreased $11.9 million (17%) for the nine months ended
September 30, 2003, as compared to the nine months ended September 30,
2002. The decrease was primarily due to an increase in operations,
maintenance, and depreciation expenses partially offset by increased sales
to retail and wholesale customers.
A comparison of KU's revenues for the nine months ended September 30, 2003,
with the nine months ended September 30, 2002, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Electric
Cause Revenues
Retail sales:
Fuel supply adjustments $17,317
Environmental cost recovery surcharge (49)
Demand side management cost recovery 350
LG&E/KU merger surcredit (856)
Value delivery surcredit (1,323)
Earnings sharing mechanism (1,901)
Variation in sales volume and other (3,296)
Total retail sales 10,242
Wholesale sales 4,693
Other 2,545
Total $17,480
Page 25
Electric revenues increased primarily due to higher fuel supply costs
billed to customers and higher wholesale sales due to 12% higher volumes
($6.0 million).
Fuel for electric generation increased $5.2 million (3%) for the nine
months ended September 30, 2003, due to an increase in the cost of coal
burned ($14.2 million), offset by a decrease in the quantity of fuel
consumed for generation ($9.0 million).
Power purchased increased $11.3 million (12%) due to an increase in the
volume purchased ($13.6 million) as a result of temporary plant outages,
partially offset by the price of power purchased ($2.3 million).
Other operation expenses increased $3.7 million (3%) due to increased
benefit costs ($2.6 million), and increased property insurance
($1.1 million).
Maintenance expenses increased $10.0 million (25%) due to repairs to
electric distribution equipment due to an ice storm ($4.1 million, net of
$8.9 million in insurance recoveries), timing of annual maintenance of
steam production equipment occurring in second quarter 2003 vs. fourth
quarter 2002 ($2.0 million), an insurance recovery in 2002 ($.9 million), a
major unit outage in 2003 ($1.0 million), and an increase in
communications maintenance expense ($2.0 million).
Depreciation and amortization expense increased $5.6 million (8%) due to
additional utility plant in service.
Variations in income tax expense are largely attributable to changes in
pretax income.
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.8 5.76.9
Amortization of investment and other tax credits (2.3) (2.6)(1.0) (3.7)
Other differences (3.6) (3.6)(1.6) (4.1)
Effective income tax rate 34.9% 34.5%
Other38.2% 34.1%
In total, other income - net decreased $0.6 million (30%) in 2004 primarily
due to lower mark-to-market income from energy trading contracts of $0.6
million and $1.0 million higher other non-operating expenses, partially
offset by a decrease in taxes ($0.6 million) and higher allowances for
funds used during construction ($0.3 million).
In total, interest expense decreased $0.6 million (13%) for the three
months ended March 31, 2004 as compared to the three months ended March 31,
2003. Interest expense to affiliated companies increased $3.4 million due
to loans from Fidelia, which were only in effect for 2004, partially offset
by a decrease of $0.2 million due to lower borrowing levels from the money
pool. Interest expense on other long-term debt decreased $1.8 million (21%) primarily due
to a decrease in minorityvariable rates, and interest earnings ($3.3 million), partially offset by higher
allowance for funds used during construction ($.9 million).
Interest chargeson interest rate swaps
decreased $2.7$1.6 million, (13%)primarily resulting from the February 2004
termination of a swap related to the Series 9 pollution control bonds. In
addition, interest decreased $0.2 million due primarily to lower
interest rates on variable-rate debt and the replacementtermination of fixed-rate debt
with variable-rate debt.the
accounts receivable securitization program in January 2004. The weighted
average interest rate on variable-
ratevariable-rate bonds for the ninethree months ended
September 30, 2003,March 31, 2004, was 1.08%1.04% and the corresponding rate for the ninethree months
ended September 30, 2002,March 31, 2003, was 1.57%1.17%.
Liquidity and Capital Resources
LG&E and KU's needs 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 and the
accounts receivable securitization programs are
- - Page 23 -
maintained to fund short-term capital requirements. LG&E and KU believe
that such sources of funds will be sufficient to meet the needs of the
business in the foreseeable future.
Construction expenditures for the ninethree months ended September 30, 2003March 31, 2004 for
LG&E and KU amounted to $153.1$27.1 million and $264$38.6 million, respectively.
Such expenditures related primarily toinclude construction to meet nitrogen oxide (NOx)
emission standards and the acquisition of combustion turbines to meet Page 26
peak
power demands. Expenditures for the ninethree months ended September 30,
2003,March 31, 2004, by
LG&E and KU for NOx construction were $23.7$1.8 million and $78.5$12.5 million,
respectively. Expenditures for the ninethree months ended September
30, 2003,March 31, 2004, for
Trimble County combustion turbines, Units 7 through 10, by LG&E and KU were
$63.5$3.3 million and $108.4$5.6 million, respectively. The expenditures were
financed with internally generated funds and intercompany loans from
affiliates, and accounts receivable securitization program
funds. See Note 4 of Notes to Financial Statements concerning accounts
receivable securitization.affiliates.
LG&E's cash balance decreased $13.6increased $26.9 million during the ninethree months ended
September 30, 2003,March 31, 2004, primarily due to aincreased borrowings from affiliated
companies, partially offset by pension contributionfunding and the
purchase of an interest in the four Trimble County combustion turbines
financed with intercompany loans.construction
expenditures. KU's cash balance increased $3.9$3.2 million during the ninethree
months ended September 30, 2003.March 31, 2004. The increase reflects cash flowsincreased borrowings
from operations and intercompany loans,affiliated companies, partially offset by pension funding and
construction expenditures, including the purchase of an interest in the
four Trimble County combustion turbines.expenditures.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of LG&E's and KU's
liquidity. Such variations are primarily attributable to seasonal
fluctuations in weather, which have a direct effect on sales of electricity
and natural gas. The decreaseincrease in accounts receivable at LG&E resultedand KU was
primarily from lower gas sales. The increase indue to the termination of the accounts receivable for KU
resulted primarily from timingsecuritization
programs in January 2004, offset by the impact of payments.decreased electric and
gas sales in March 2004 compared with December 2003. The increasedecrease in
LG&E's gas stored underground relates to higher prices on injections to inventory.seasonal uses of gas. The
decrease in the fuel inventory at bothKU was due to lower purchases due to unit
outages. The decrease at LG&E and KU resulted fromwas due to seasonal fluctuations.
On August 15, 2003,Interest rate swaps are used to hedge LG&E's and KU's underlying variable-
rate debt obligations. These swaps hedge specific debt issuances and,
consistent with management's designation, are accorded hedge accounting
treatment. As of March 31, 2004, LG&E borrowed $100had swaps with a combined notional
value of $228.3 million from an E.ON affiliate for a
ten-year term at 5.31%. The loan is secured by a second lien on
substantially all of LG&E's assets. The proceeds were used to repay a
maturing first mortgage bond of $42.6 million and to repay notes payable to
affiliates.
On August 15, 2003, KU borrowed $75 million from an E.ON affiliate for a
ten-year term at 5.31%. The loan is secured by a second lien on
substantially all of KU's assets. The proceeds were used to repay notes
payable to affiliates, some of which were the results of the repayment of a
$62 million first mortgage bond.
During July 2003, LG&E entered into five revolving lines of credit totaling
$185 million. These credit facilities expire in June 2004, and there was
no outstanding balance under any of these facilities at September 30, 2003.
The Companies participate in a money pool whereby LG&E Energy can make up
to $400 million available at market-based rates for each of LG&E and KU.
LG&E Energy maintains a facility totaling $150.0 million with an E.ON
affiliate to ensure funding availability for the money pool. There was
$46.0 million outstanding under the E.ON affiliates' line as of September
30, 2003, leaving $104.0 million available. LG&E Energy had outstanding
loans to LG&E and KU through the money pool that totaled $75.1 million and
$98.7 million, respectively, as of September 30, 2003. These borrowings
carried a thirty-day average interest rate of 1.06% at September 30,
2003, based on an index of highly rated commercial paper issuers as of the
prior month end. LG&E and KU had available, underswaps with a combined notional value of
$103 million. LG&E's swaps exchange floating-rate interest payments for
fixed rate interest payments to reduce the money pool, $324.9
million and $301.3 million, respectively, asimpact of September 30, 2003.
In October 2003, KU issued a redemption notice to holders of Series P,
8.55%interest rate changes
on LG&E's pollution control bonds. KU's swaps effectively convert fixed
rate obligations on KU's first mortgage bonds ($33.0 million). These bonds will be redeemed
on November 25, 2003.Series P and R to variable-
rate obligations.
In February 2004, KU terminated the swap it had in place at December 31,
2003 related to the Series 9 pollution control bonds. The redemption will be funded withnotional amount
of the terminated swap was $50 million and KU received a payment of $2.0
million as part of the termination.
At March 31, 2004, LG&E's and KU's percentage of long-term loans
from an E.ON affiliate.debt having a
variable rate, including the impact of interest rate swaps, was 33.2% at
$306.0 million and 43.1% at $318.0 million, respectively.
Under the provisions offor LG&E's variable-rate pollution control bonds,
totaling
$246.2 million for LG&ESeries S, T, U, BB, CC, DD and $91.9 million for KU,EE, and KU's variable-rate pollution control
bonds Series 10, 12, 13, 14, and 15, the bonds are subject to tender for
purchase at the option of the holder and to mandatory tender for purchase
upon the occurrence of certain events, causing the bonds to be classified
as current portion of long-term debt. Should anydebt in the Consolidated Balance Sheets.
The average annualized interest rate for these bonds during the three
months ending March 31, 2004 was 1.10% for the LG&E bonds and 1.07% for the
KU bonds.
- - Page 24 -
In January 2004, LG&E entered into a long-term loan with Fidelia totaling
$25 million with an interest rate of 4.33% that matures in January 2012,
and a one-year loan totaling $100 million with Fidelia. The interest rate
on the loan is 1.53%. The loans are secured by a lien subordinated to the
first mortgage bond lien. The proceeds were used to fund a pension
contribution and to repay other debt obligations. In April 2004, LG&E
prepaid $50 million of the bonds
be put$100 million 1.53% note payable to Fidelia. The
prepayment was paid out of cash balances and there was no prepayment fee.
In January 2004, KU entered into an unsecured long-term loan from Fidelia
totaling $50 million with an interest rate of 4.39% that matures in January
2012. The proceeds were used to fund a pension contribution and to repay
other debt obligations.
LG&E maintains five bilateral lines of credit totaling $185 million that
mature in 2004. There was no outstanding balance under these facilities at
March 31, 2004. Management expects to renew these facilities as they
expire.
LG&E and KU participate in an intercompany money pool agreement wherein
LG&E Energy and KU make funds available to LG&E orat market-based rates
(based on an index of highly rated commercial paper issues as of the prior
month end) up to $400 million. Likewise, LG&E Energy and LG&E make funds
available to KU fundsat market-based rates up to $400 million. LG&E had no
money pool loan from LG&E Energy (shown as "Notes payable to affiliate") at
March 31, 2004, and $248.5 million at an average rate of 1.25% at March 31,
2003. The balance of the money pool could be usedloans from LG&E Energy and LG&E to reacquireKU
(shown as "Notes payable to affiliate") was $40.7 million at an average
rate of .98% and $174.5 million at an average rate of 1.25% at March 31,
2004 and 2003, respectively. The amount available to LG&E under the bonds.
Page 27money
pool agreement at March 31, 2004 was $400 million. The amount available to
KU under the money pool agreement at March 31, 2004 was $359.3 million.
LG&E Energy maintains a revolving credit facility totaling $150 million
with an affiliate to ensure funding availability for the money pool. LG&E
Energy had no outstanding balance under LG&E Energy's facility as of March
31, 2004 and availability of $150 million remained.
In January 2004, LG&E and KU made discretionary contributions to their
pension plans of $34.5 million and $43.4 million, respectively. No
contributions are required for 2004 and no further discretionary
contributions are planned.
LG&E's security ratings as of September 30, 2003,March 31, 2004, were:
Moody's S&P Fitch
First mortgage bonds A1 A-
A+
Preferred stock Baa1 BBB-
A-
Commercial paper P-1 A-2 F-1
KU's security ratings as of September 30, 2003,March 31, 2004, were:
Moody's S&P Fitch
First mortgage bonds A1 A
A+
Preferred stock Baa1 BBB-
A-
Commercial paper P-1 A-2 F-1
These ratings reflect the views of Moody's S&P and Fitch.S&P. 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.
Fitch
withdrew its ratings on LG&E and KU securities effective October 14, 2003.- - Page 25 -
LG&E's capitalization ratios at September 30, 2003,March 31, 2004, and December 31, 2002,2003,
follow:
Sept. 30, Dec.March 31, December 31,
2004 2003 2002
Long-term debt (including current portion) 43.1% 35.5%30.9% 31.9%
Long-term debt to affiliated company
(including current portion) 16.8 10.7
Notes payable 4.1 11.1to affiliated companies - 4.3
Preferred stock 3.6 3.8 5.5
Common equity 49.0 47.948.7 49.3
Total 100.0% 100.0%
KU's capitalization ratios at September 30, 2003,March 31, 2004, and December 31, 2002,2003,
follow:
Sept. 30, Dec.March 31, December 31,
2004 2003 2002
Long-term debt (including current portion) 37.8% 34.0%23.0% 24.1%
Long-term debt to affiliated company
(including current portion) 18.9 16.8
Notes payable 6.1 8.1to affiliated companies 2.3 2.6
Preferred stock 2.5 2.72.3 2.4
Common equity 53.6 55.253.5 54.1
Total 100.0% 100.0%
New Accounting Pronouncements
SFAS No. 143, Accounting for Asset Retirement Obligations, was issued in
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.
The effective implementation date for SFAS No. 143 wasIn January 1, 2003, and
the associated FERC final rule, Accounting, Financial Reporting, and Rate
Filing Requirements for Asset Retirement Obligations, was issued April 9,
2003. As of September 30, 2003, LG&E recorded asset retirement obligation
Page 28
(ARO) assets in the amount of $4.5 million and liabilities of $9.8 million.
LG&E recorded offsetting regulatory assets of $5.8 million, pursuant to
regulatory treatment prescribed under SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation. As of September 30, 2003, KU
recorded ARO assets in the amount of $8.6 million and liabilities of $19.4
million. KU recorded offsetting regulatory assets of $10.0 million,
pursuant to regulatory treatment prescribed under SFAS No. 71. LG&E and KU
AROs are primarily related to the final retirement of assets associated
with 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. The Companies are in the process
of calculating the amount of the costs of removal embedded in accumulated
depreciation.
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
For the three months and nine months ended September 30, 2003, LG&E
recorded ARO accretion expense of $154,000 and $462,000, respectively, ARO
depreciation expense of $29,000 and $88,000, respectively, and an
offsetting regulatory credit in the income statement of $185,000 and
$550,000, respectively. For the three months and nine months ended
September 30, 2003, KU recorded ARO accretion expense of $306,000 and
$916,000, respectively, ARO depreciation expense of $44,000 and $131,000,
respectively, and an offsetting regulatory credit in the income statement
of $350,000 and $1.0 million, respectively. The recording of the
regulatory credit is pursuant to regulatory treatment prescribed under SFAS
No. 71. SFAS No. 143 has no impact on the results of the operation 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
- - 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. 133 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. 133, Accounting for Derivative Instruments and Hedging Activities, must
be restated to historical cost through a cumulative effect adjustment. The
rescission of this standard had no impact on financial position or results
of operations of the Companies since all contracts marked to market under
EITF No. 98-10 are also within the scope of SFAS No. 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
Page 29
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 Nine Months
Ended Ended
September 30, September 30,
2003 2002 2003 2002
LG&E:
Gross electric operating revenues $230,174 $223,017 $591,110 $581,076
Less costs reclassified
from power purchased - 2,743 - 14,691
Net electric operating
revenues reported $230,174 $220,274 $591,110 $566,385
KU:
Gross electric operating revenues $235,426 $239,020 $657,583 $657,744
Less costs reclassified
from power purchased - 3,961 - 17,641
Net electric operating
revenues reported $235,426 $235,059 $657,583 $640,103
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2002 2003 2002
LG&E:
Gross power purchased $ 18,805 $ 15,322 $ 60,245 $ 60,967
Less costs reclassified to revenues - 2,743 - 14,691
Net power purchased reported $ 18,805 $ 12,579 $ 60,245 $ 46,276
KU:
Gross power purchased $ 31,702 $ 31,873 $106,550 $112,844
Less costs reclassified to revenues - 3,961 - 17,641
Net power purchased reported $ 31,702 $ 27,912 $106,550 $ 95,203
In May 2003, the Financial Accounting Standards Board ("FASB") issued
StatementFinancial Accounting Standards Board Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46).
FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46 was effective immediately for all new variable interest entities created
or acquired after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN 46 must have
been applied for the first interim or annual period beginning after June
15, 2003.
In December 2003, FIN 46 was revised, delaying the effective dates for
certain entities created before February 1, 2003, and making other
amendments to clarify application of the guidance. For potential variable
interest entities other than special purpose entities, the revised FIN 46
(FIN 46R) is now required to be applied no later than the end of the first
fiscal year or interim reporting period ending after March 15, 2004. For
all special purpose entities created prior to February 1, 2003, FIN 46R is
now required to be applied at the end of the first interim or annual
reporting period ending after December 15, 2003. FIN 46R may be applied
prospectively with a cumulative-effect adjustment as of the date it is
first applied, or by restating previously issued financial statements with
a cumulative-effect adjustment as of the beginning of the first year
restated. FIN 46R also requires certain disclosures of an entity's
relationship with variable interest entities.
Both LG&E and KU hold investment interests in OVEC and KU holds an
investment interest in EEI. Neither LG&E nor KU are the primary
beneficiary of OVEC or EEI, and thus neither are consolidated into the
financial statements of LG&E or KU.
LG&E, KU and ten other electric utilities are participating owners of OVEC,
located in Piketon, Ohio. OVEC owns and operates two power plants that burn
coal to generate electricity, Kyger Creek Station in Ohio and Clifty Creek
Station in Indiana. LG&E's share is 7%, representing approximately 155 Mw
of generation capacity and KU's share is 2.5%, approximately 55 Mw of
generation capacity.
- - Page 26 -
LG&E's and KU's original investment in OVEC was made in 1952. LG&E's
investment in OVEC is the equivalent of 4.9% of OVEC's common stock and
KU's investment is the equivalent of 2.5% of OVEC's common stock. LG&E's
and KU's investment in OVEC is accounted for on the cost method of
accounting. As of March 31, 2004, LG&E's and KU's investment in OVEC
totaled $0.5 million and $0.3 million, respectively. LG&E's and KU's
maximum exposure to loss as a result of their involvement with OVEC is
limited to the value of their investment. In the event of the inability of
OVEC to fulfill its power provision requirements, LG&E and KU would
substitute such power supply with either owned generation or market
purchases and would recover any associated incremental costs through
regulatory rate mechanisms. See Part II, Item 1, for further discussion of
current legal proceedings regarding LG&E's and KU's ownership interests and
power purchase rights.
KU owns 20% of the common stock of EEI, which owns and operates a 1,000-Mw
generating station in southern Illinois. KU is entitled to take 20% of the
available capacity of the station. Purchases from EEI are made under a
contractual formula which has resulted in costs which were and are expected
to be comparable to the cost of other power purchased or generated by KU.
Such power equated to approximately 9% of KU's net generation system output
in 2003.
KU's original investment in EEI was made in 1953. KU's investment in EEI
is accounted for on the equity method of accounting. As of March 31, 2004,
KU's investment in EEI totaled $11.4 million. KU's maximum exposure to
loss as a result of its involvement with EEI is limited to the value of its
investment. In the event of the inability of EEI to fulfill its power
provision requirements, KU would substitute such power supply with either
owned generation or market purchases and would recover any associated
incremental costs through regulatory rate mechanisms.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 iswas effective immediately for financial instruments entered into or
modified after May 31, 2003, and otherwise iswas effective for interim
reporting periods beginning after SeptemberJune 15, 2003.
LG&E has existing237,500 shares of $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 15 of each year commencing with July 15,
2003, and a minimum ofthe remaining 187,500 shares on July 15, 2008 at $100 per share.
Beginning with the three months ended September 30, 2003, LG&E reclassified
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.current. Dividends
accrued beginning July 1, 2003 are charged as interest expense.
KU has no financial instruments that fall within the scope of 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 in LGE'sLG&E's and KU's
Annual Reports on Form 10-K for the year ended December 31, 2002; and
Note 11 to the financial statements contained in LG&E's and KU's
current report on Form 8-K dated November 12, 2003; and to
Part II - Item 1, Legal Proceedings herein.
Merger SurcreditElectric and Gas Rate Cases
In December 2003, LG&E and KU filed applications with the Kentucky
Commission requesting increases in LG&E's and KU's electric rates and
LG&E's gas rates. The Companies requested general adjustments in electric
rates and LG&E requested general adjustments in gas rates based on the
- - Page 27 -
twelve-month test year ended September 30, 2003. The revenue increases
requested by LG&E were $63.8 million for electric and $19.1 million for
gas. The revenue increase requested by KU was $58.3 million. The Kentucky
Commission has suspended the effective date of the proposed new tariffs for
five months, so that the rates may go into effect subject to refund by July
1, 2004. The Kentucky Commission established a procedural schedule for the
cases pertaining to discovery and hearings.
The Companies filed their final 2003 ESM calculations with the Kentucky
Commission on March 1, 2004, and applied for recovery of $16.2 million
related to KU and $13.0 million related to LG&E. Based upon estimates, the
Companies previously accrued $9.3 million at KU and $8.9 million at LG&E,
for the 2003 ESM as of December 31, 2003. The Companies have not booked
or accrued to date the respective increases of $6.9 million and $4.1
million, pending resolution of ongoing Kentucky Commission proceedings
regarding aspects of the ESM mechanism, including allowable recoverable
amounts. On March 31, 2004, the Kentucky Commission issued orders
consolidating the prior ESM cases into the general LG&E and KU proceedings
regarding increases in base rates.
During May 2004, the Kentucky Commission held hearings on the applications
for rate increases. On May 12, the Companies and all intervenors filed a
partial settlement agreement, stipulation and recommendation with the
Kentucky Commission providing for settlement of all outstanding issues,
except electric revenue requirements. All intervenors except the Kentucky
Attorney General entered a stipulation on the electric revenue
requirements. Testimony for the utilities and the Attorney General was
presented on electric revenues. All testimony of all other intervenors and
testimony of the Attorney General on other issues was withdrawn. The
agreement and stipulation provides for increases in annual base electric
rates of $43.4 million for LG&E and $46.1 million for KU, and in annual gas
rates of $11.9 million for LG&E and provides for settlement of other issues
such as various tariff provisions, implementation of a pilot real-time
pricing program, implementation of a home energy assistance program and
others. The agreement provides that the rate increases would be effective
commencing July 1, 2004.
The Companies and the intervenors, including the Attorney General, also
filed proposed settlements regarding the ESM mechanisms of LG&E and KU.
Under the ESM settlements, LG&E and KU would continue to collect
approximately $13.0 million and $16.2 million, respectively, of previously
requested 2003 ESM revenue amounts through March 2005. As part of the
LG&E Energy merger with KU Energy in 1998, LG&E Energy
estimated non-fuel savings oversettlement, the parties agreed to a ten-year period followingtermination of the merger.
CostsESM mechanism
relating to achieve these savings of $50.2 million for LG&E and of $42.3
million for KU were recordedall periods after 2003.
The potential settlements are subject to Kentucky Commission approval.
Final Kentucky Commission orders in the second quarter of 1998. Of these
Page 30
amounts $18.1 million for LG&Erate case and $20.5 million for KU was deferredrelated proceedings,
including the tendered settlements, are anticipated before July 1, 2004.
The Companies can provide no assurance regarding the Commission's final
decision regarding the partial agreement, stipulation and amortized over a five-year period pursuant to regulatory orders. Primary
componentsrecommendation of
the merger costs were separation benefits, relocation costs,
and transaction fees,parties or the majority of which were paid by December 31, 1998.
LG&E and KU expensed the remaining costs associated with the merger ($32.1
million and $21.8 million, respectively) in the second quarter of 1998.
In approving the merger, the Kentucky Commission adopted the Companies'
proposal to reduce its retail customers' bills based on one-half of the
estimated merger-related savings, net of deferred and amortized amounts,
over a five-year period. The surcredit mechanism provided that 50% of the
net non-fuel cost savings estimated to be achieved from the merger be
provided to ratepayers through a monthly bill credit, and 50% be retained
by the Companies, over a five-year period. The surcredit was allocated 53%
to KU and 47% to LG&E. In that same order, the Kentucky Commission
required LG&E and KU, after the end of the five-year period, to present a
plan for sharing with customers the then-projected non-fuel savings
associated with the merger. The Companies submitted this filing on January
13, 2003, proposing to continue to share with customers, on a 50%/50%
basis, the estimated fifth-year gross level of non-fuel savings associated
with the merger.
On October 16, 2003, the Kentucky Commission approved a merger surcredit
settlement whereby the surcredit mechanism will remain in place for an
additional five-year period at a levelized amount per year calculated from
the originally estimated non-fuel savings for years six through ten.
Customers and shareholders will continue to equally share merger savings on
a 50%/50% basis and LG&E's customers will continue to be allocated 47%, and
KU's customers will continue to be allocated 53%, of the customers' portion
of the merger savings. As a part of the settlement, certain customers, in
lieu of receiving monthly credits, will receive the present value of their
estimated surcredits in up-front payments. These payments, $6.9 million
for LG&E and $5.3 million for KU, will be deferred and amortized over the
five-year period starting July 1, 2003, pursuant to the order. Remaining
LG&E and KU customers will receive credits totaling $18.0 million and $17.9
million, respectively, in each of the five years beginning July 1, 2003.ESM settlement.
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 the
Companies' policies, use of these financial instruments is intended to
mitigate risk and earnings volatility and is not speculative in nature.
- - Page 28 -
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 associated with a 1% change in
base interest rates of LG&E's and KU's unswapped debt is estimated at $4.6$3.0
million and $5.0$3.4 million, respectively, at September 30, 2003.March 31, 2004. LG&E's exposure
to floating interest rates decreased $89.3$1.45 million and KU's exposure to
floating interest rates decreased $20.8$1.02 million during the first ninethree
months of 2003.2004.
The potential changesloss in the fair valuesvalue of the
Companies' interest-rateLG&E's interest rate swaps resulting
from changesa hypothetical 1% change in base interest rates andis estimated at
approximately $28.7 million as of March 31, 2004. The potential loss in
fair value of KU's interest rate swaps resulting from a hypothetical 1%
change in base interest rates is estimated at approximately $3.3 million as
of March 31, 2004. These estimates are derived from third-party
valuations. Changes in the yield curve also did not change materially during the first nine monthsmarket values of 2003.
Page 31these swaps, if held to
maturity, will have no affect on LG&E's or KU's net income or cash flow.
Pension Risk
LG&E's and KU's costs of providing defined-benefit pension retirement plans
areis 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 is affected by increases and
decreases in the equity market. As a result, atplan. At December 31,
2002, LG&E and KU werewas 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.income. The amount of the liabilitiesliability depended upon the
asset returns experienced in 2002 and contributions made by LG&E and KU to the
plansplan 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'plan assets exceeds the
accumulated benefit obligation, the recorded liabilitiesliability will be reduced and
other comprehensive income will be restored in the consolidated balance
sheets.
During 2002, the combination of poor market performance and historically
low corporate bond rates created a divergencesheet.
A 1% increase or decrease in the potential value ofassumed discount rate could have an
approximate $41 million positive or negative impact to the
pension liabilities and the actual value of the pension assets.
Year-to-date 2003 market performance has been favorable. Should
poor market conditions return, these conditions could result in an increase
in LG&E's and KU's funded accumulated
benefit obligations and future
pension expense. The primary assumptions that driveobligation of LG&E. A 1% increase or decrease in the value ofassumed
discount rate could have an approximate $27 million positive or negative
impact to the
unfunded accumulated benefit obligations are the discount rate and expected
return on plan assets.obligation of KU.
In January 2003,2004, LG&E and KU made contributions to their pension plans of
$83.1$34.5 million and $3.5$43.4 million, respectively. In August 2003, LG&E and KU
contributed an additional $6.0 million each to their respective pension
plans.
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 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 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 are treated as normal sales 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 LG&E's and KU's energy trading and risk
management activities for the three months ended March 31, 2004, and nine months ended September
30, 2003, and 2002(in thousands of $).2003.
Trading volumes are allocated evenly between LG&E and KU.
Three Months Nine Months
Ended
Ended
September 30, September 30,March 31,
2004 2003
2002 2003 2002(in thousands)
Fair value of contracts at beginning of
period, net asset/(liability) $318 $ 26572 $ (156) $(186)
Fair value of contracts when entered
into during the period (30) (5) 2,590 (62)- 2,620
Contracts realized or otherwise
settled during the period (356) 6 (639) 341(150) (57)
Changes in fair value due to changes
in assumptions 148 (193) (1,715) (259)181 (2,004)
Fair value of contracts at end of period,
net asset/(liability) $ 80 $(166)603 $ 80 $(166)
Page 32403
No changes to valuation techniques for energy trading and risk management
activities occurred during 20032004 or 2002.2003. Changes in market pricing,
interest rate and volatility assumptions were made during all periods. All
contracts outstanding at September 30, 2003,March 31, 2004, have a maturity of less than one
year and are valued using prices actively quoted for proposed or executed
transactions or quoted by brokers.
- - Page 29 -
LG&E and KU maintain policies intended to minimize credit risk and revalue
credit exposures daily to monitor compliance with those policies. As of
September 30, 2003,March 31, 2004, 100% of the trading and risk management commitments were
with counterparties rated BBB-/Baa3 equivalent or better.
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 KU's other service territories.
Employee and Labor Relations
In August 2003, KU and employees represented by IBEW Local 2100 entered
into a three-year collective bargaining agreement expiring August 2006,
with certain annual wage or benefit re-opener provisions. In October 2003,
LG&E and employees represented by IBEW 2100 completed primary wage and
benefits re-opener negotiations providing for certain enhanced or modified
wage and benefit provisions. The term of this collective bargaining
agreement expires in November 2005.
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 September 30, 2003,March 31, 2004, that has materially affected, or is
reasonably likely to materially affect, the Companies' internal control
over financial reporting.
- - Page 3330 -
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, 2002:2003: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations;Operations, and (B) current report on Form 8-K
dated November 12, 2003: Notes 3 and 11 of LG&E's Notes toItem 8, Financial Statements under Item 8 and
Notes 3 and 11 of KU's Notes to Financial
Statements under Item 8; and (BC) respective combined Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003: Item 1 of Part II Legal
Proceedings.Supplementary Data. 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.
LG&E Employment Discrimination Case
As previously reported, in October 2001, approximately 30 employees or
former employeesElectric and Gas Rate Cases
During May 2004, the Kentucky Commission held hearings on the applications
filed a complaint against LG&E claiming past and current
instances of employment discrimination. 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 immaterial 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 2003, additional settlements for immaterial amounts were
reached with a number of plaintiffs, including a settlement with the lead
plaintiff, which reduced the number of remaining plaintiffs to nine. LG&E
intends to continue to defend itself vigorously in the remaining action and
management does not anticipate that the outcome will have a material impact
on LG&E's operations or financial condition.
Combustion Turbine Litigation
In October 2003, LG&E and KU and third parties completed a settlement
agreement to dismiss the Companies' previously reported lawsuit in the U.S.
District Court for the Eastern District of Kentucky against Alstom Power,
Inc. (formerly ABB Power Generation, Inc.). The suit concerned operational
deficiencies of two combustion turbines supplied by Alstom during 1999,
installed at KU's E.W. Brown plant and jointly owned by LG&E and KU. The
settlement agreement provides for $20 million reimbursement in two
installments to be paid in January and April 2004 to LG&E and KU for increases in base rates. For a description of
developments in these cases, see Note 11 of the Companies' expenditures incurred regardingNotes to Consolidated
Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-
Q. Final orders in the turbines. The parties also
entered into a long-term service agreement, whereby Alstom will provide toproceedings are expected before July 2004.
MISO
During March and April 2004, the Kentucky Commission held hearings in the
proceedings examining the cost and benefits of MISO membership, including
rate treatment of MISO costs and continued LG&E and KU participation. A
final order in the proceedings is anticipated in mid-2004.
OVEC Power Agreement and Related Matter
On April 30, 2004, OVEC and its shareholders, including LG&E and KU,
entered into an Amended and Restated Inter-Company Power Agreement, to be
effective beginning March 2006, upon the expiration of the current power
contract among the parties. Under the new contract, which has a 20-year
term from its effective date, LG&E and KU have purchase rights for 5.63%
and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E
and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the
current contract.
In addition, LG&E will purchase from American Electric Power Company Inc.
("AEP") an additional 0.73% interest in OVEC for a purchase price of
approximately $104,000, resulting in an increase in LG&E ownership in OVEC
from 4.9% to 5.63%. The share purchase transaction is anticipated to be
completed during 2004, subject to receipt of certain future inspections, repairs and services for the
turbines.regulatory approvals.
Item 6. Exhibits and Reports on Form 8-K.
6(a) 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 X31.1X Certification of Chairman of the Board, President and Chief
Executive Officer, pursuant to Section 302 of the Sarbanes-OxleySarbanes-
Oxley Act of 2002
31.2 X31.2X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Page 34
31.3 X Certification of Chairman of the Board, President and Chief
Executive Officer, pursuant to Section 302203 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
- - Page 31 -
Certain instruments defining the rights of holders of certain long-term
debt of LG&E and KU have not been filed with the SEC but will be furnished
to the SEC upon request.
6(b). Reports on Form 8-K.
NoneNone.
- - Page 3532
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: November 12, 2003May 13, 2004 /s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
(On behalf of the registrant in his
capacities as Principal Financial Officer
and 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: November 12, 2003May 13, 2004 /s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
(On behalf of the registrant in his
capacities as Principal Financial Officer
and Principal
Accounting Officer)
Page 36
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: November 12, 2003
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
Page 37
Exhibit 31.2
Louisville Gas and Electric Company
I, S. Bradford Rives, 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: November 12, 2003
/s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
Page 38
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: November 12, 2003
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
Page 39
Exhibit 31.4
Kentucky Utilities Company
I, S. Bradford Rives, 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: November 12, 2003
/s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
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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 September 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.
November 12, 2003
/s/ Victor A. Staffieri
Chairman of the Board, President
and Chief Executive Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
/s/ S. Bradford Rives
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.
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